HUL’s rejigged rural distribution network

There was a news item, sometime in January 2009 about HUL (Hindustan Unilever) rejigging it’s rural distribution network.

Distribution networks are modified and tweaked to be in line with the market reality and company goals. When growth in urban areas was tapering, FMCG companies started concentrating on rural markets. In line with this, FMCG companies modified their distribution structure to be in line with this strategy and increase rural distribution.
Similarly, when Modern Retail chains were setting up shop in India companies modified their distribution strategy to serve them.
Companies will modify their distribution channels when VAT is implemented and CST% goes below 2%. When CST is reduced the necessity of maintaining a depot in each state vanishes. Companies will then rejig their distribution networks.

This latest change by HUL, in my view is to make the distribution channel more efficient and reduce costs.
HUL has removed one layer called the Star Stores.
HUL has also reduced the margins of the Rural Distributors by 2% from 6.76% to 4.76%.

What is the change in the distribution network.

Before the change the distribution network might have worked like this.
The RDs would have placed orders on depots and would have been delivered stocks from the depots. The RDs would have then supplied the Star Sellers based on a fixed route schedule. The Star Sellers in turn would have serviced the retail outlets in each village.
What will now happen is that the RDs will have to service the retail outlets previously serviced by the Star sellers.

How will the RDs cope the situation?

Here is how the RDs will cope with the situation.

  • RDs will start milk runs: What this means is that the RDs vans will start from a base town (the town in which the RD is located) loaded with stock. It will travel on a particular route selling to retail outlets on that route (these retails outlets would earlier have been serviced by the Star Sellers). The route will typically end at the base town itself.
  • For village clusters that are faraway from the base town, the RD may retain the Star Seller, replenishing the Star Seller’s stocks on a regular basis (once a week or once a fortnight). The Star Seller would continue to service the retailers as before.
  • Wholesellers might be appointed. Instead of Star Sellers, the RD may sell to wholesellers in that area. The retail outlets would come to the wholeseller to buy their stocks/supplies.
  • The RD may have his seller who takes visits retail outlets for 3-4 days and takes orders. These orders are conveyed to the RD who despatches to the seller, the stocks. The seller then spends the balance of the week 2-3 days supplying the stocks and collecting the cash.
  • Some retail outlets will be dropped from coverage. The dropped outlet will have to depend on the wholeseller and buy from him.

Where and how is the value being unlocked in this whole rejig of HUL’s rural distribution network?

How will the RDs manage with lower margins?

  • It can be reasonable assumed that the RDs will give a better quality of coverage to the rural outlets. This is because they would be covering the outlets directly. The calls on the retail outlets will be more reliable (i.e. same day every week), credit would be given to the retail outlets, quality of execution of promotions will improve and visibility and stock weights will improve. With better coverage, business will increase. This will help the RD get more margin money (on an absolute sense) and reduce the fixed costs per call.
  • Also, RDs will have a larger area and hence the fixed cost of distribution will be distributed over a larger number of stores. This would reduce the cost of coverage per store.

One thing you can be sure of.. this is not the last distribution rejig you have seen!