ARTICLE on Study of Sales & distribution network of leading FMCG companies in rural India

Submitted In Partial fulfillment of Applied Management Research Project

By Swarnabha Shankar Ray (10BM60092) Under the guidance of Prof. Kalyan K Guin
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Study the distribution network & strategy of leading FMCG companies in rural India and suggest the best distribution model to increase J&Js product availability in the remotest corners of India

The study, hence has been taken up to understand the distribution channels of a few of companies (HUL, ITC, P&G and J&J in the local region (Kharagpur) with a focus on J&J (which has weaker reach in the rural market) in order to study their distribution channels in detail and identify loopholes/problems at distributor as well as retailer level that hamper the sale and suggest solution mix based on the leading FMCGs distribution model to improve J&Js product availability to the customer so as to increase penetration in the rural market. Distribution channel is defined as a chain of intermediaries through which the product is passed down the chain to the next organization viz. distributor & retailer, before it finally reaches the consumer or end-user. The distribution network plays a vital role in maximizing sales and market share of any FMCG company as a result of deeper market penetration, efficient product availability and promotion. In case of fast moving consumer goods, the total demand for any particular product (physical offering satisfying a particular need) in the market is constant which is met by all the competitors which are functional in that market corresponding primarily to their efficiency of distribution achieved through establishing policies favorable to channel members, other factors being less important. The reason for this is that fast moving consumer goods are low involvement products which are easily purchased by the customers interchangeably as per their convenience. Brand switching is very common, that is if a product is not available in one brand, the consumer would conveniently purchase the same product of another brand. The penetration efficiency of distribution channel is largely governed by the distributors & retailers. Well managed distribution channels ensure timely availability of forecasted quantities of goods, lower inventory holding costs, minimized lost sales, high substitution sales (sale of own product as a substitute in case competitors products are not available in the market). This ultimately increases the total sales figure of the company and hence ensures higher market shares. Apart from this, promotional support viz. higher retailer margins, incentives during promotional events, provision of display racks etc. by the supplier are amongst other factors which affect the sale of a product. The local distributors of HUL, P&G,ITC and J&J have been interviewed so as to understand the practices being followed and the replenishment policies on which the distribution system operates, modes of logistics used, size of their market. It may be inferred from the responses during the interview that one of major pain area for the distributor is very low or negative cash flow with which it is very difficult for him to continue the business. Some of the key findings of this study were:

The HUL process of taking back damaged/expired goods is longer(1.5 -2 months) compared to that of P&G, ITC. As a consequence of this, retailers are sometimes hesitant in purchasing goods in sufficient quantities. They usually purchase goods in quantity equivalent to 70-80% of the actual demand. On an average 80-95% of unsold (damaged/expired) goods are returned to HUL,P&G or ITC. Due to this strong value addition retailers are willing to even operate on lower margins compared to un-established brands Where utility is a criterion for the consumer, retailer promotes items of greater utility and with higher margins. (e.g. Local toilet cleaner sells better than HULs Domex to families seeking utility). Credit period varies from 1 week to 4 weeks. Payments to distributors are made in installments. If a particular supplier does not take return of unsold expired/damaged goods, the retailer does not purchase enough quantity of the product fearing excess quantity would go unsold and get wasted thus causing loss. The retailer, in general, purchases only about 70 -80% of the actual demand of the product. This shows that absence of goods return policy affects the product availability and hence cause situation of lost sales. ITCs rural distribution model is based on its tobacco business which is more than 65% of its total turnover from the rural market. They have distributors and whole sellers in rural market. All transactions for tobacco business are in-cash at all level. P&G has a golden distributorship system in every state of India. In West Bengal there is a single distributor who manages Kolkata circle and 1 more who manages rest of West Bengal. Thus the bargaining power of the distributor is high but channel motivation is very high. P&G focuses more on forward integration and is doing well in the rural business HUL has been the most effective in selecting its distribution channel. None of the distributors or wholesalers of HUL product are unique thus more and more distributors take up HUL products. For micro rural penetration HUL has a separate management distribution wing Project IShakti an initiative to empower the grass root level families especially women with amenities to do business(micro dealership of HUL products). They are given special discounts and gifts time to time to support their business and livelihood. Hence more and more families from extreme corners of rural India are coming up to take HULs rural distributorship

J&J on the other hand provides better margin for its retailers and distributors along with swift replenishment and reimbursement of damaged goods policies. But the product lines and pricing are not in line with the needs of rural India

Keeping the findings and the present channel parameters in mind, due to higher margin and reimbursement policy for damaged goods J&Js product lines should have been the obvious choice for any business person taking up FMCGs distributorship. But due to the less movement of its products, especially in rural parts of India distributors investment on J&J products are less. HULs distribution strategy proves to be the most efficient and robust distribution network in the studied region. Further, their CSR initiative Project I-Shakti serves a dual purpose. On one hand it satisfies the CSR need by empowering rural women and on the other hand it creates many micro distribution channels that spread far and wide in the rural and semi rural areas. This is a highly innovative model worth emulating.