Distribution is the backbone of Indian market. It ensures smooth passage of a product from factory gate to retailers across India. No matter how good a product or how competitive the pricing – it’s unlikely to grow big and reach sizeable market without distribution support. Its comparatively easy to drive marketing campaign and create awareness/demand through large spending in Electronic And Print Media – but sales is unlikely to grow if consumers do not find the product in nearby retail store. Online is surely an alternative – but is still in its infancy – accounting for only 2% of total Indian retail market.
So, how does one plan for distribution ? Ensuring a product reaches large number of consumers across a vast country like India using poor infrastructure (transportation, warehouse, cold chain etc.) is a challenge. The challenge gets even more difficult given huge diversity of language, custom and local regulations. Indian distribution industry is highly fragmented – to get products to all corners of the country, the manufacturer has to manage large number of small and medium intermediaries. In summary – unlike developed countries, India does not have a national network for manufacturers to distribute products across India.
To be successful in India – companies have no option but to build distribution network bottom up. Some multinationals like Coca Cola tried to circumvent this tedious process by buying Indian company. However, such companies are usually not available for sale. Successful Indian companies like Hindustan Unilever, Asian Paints, Pidilite, ITC, Maruti, Tata etc. are known for huge distribution networks spanning all corners of India. Building pan-India distribution is one reason why big brands with deep pockets like Coke and Pepsi took so long to reach profitability and scale. On the flip side, gaps in distribution present opportunities for new entrants. For example, in bottled water industry, many small companies have built strong local businesses, by focusing on small towns where national brands like Bisleri or Kinley are not available easily. Similarly, in mobile handset industry, local Indian brands like Micromax initially gained significant traction by targeting customers in tier II and tier III cities.
Its clear that manufactures have no option but to have a quality distribution network for its products. Since this is not available off-the-shelf, it must be built (and maintained) slowly, brick by brick.
To reach consumers across the length and breadth of the country – Indian products often have to take long path through multiple intermediaries. The path a product takes to reach its target market is called channel. A channel is a chain of intermediaries – called channel partners. Selling through a single channel is considered risky – so manufacturers usually select multiple channels to reach market. Its extremely important for every entrepreneur to assess and understand number ofchannels available for his/her product, their composition, nature of channel partners, margins, credit policy etc. Based on this information, manufacturers select best combination of channels.
There are broadly 9 main channels available for entrepreneurs to reach market. Apart from these, there may be few sector-specific ones – depending upon product.
1. Direct To Customer (Using Own Sales Force)2. E-Commerce (B2C And B2B)3. Wholesale4. Distribution5. Other Channels (Dealers, Stockists, Sales Agents, VAR etc.)6. Organized Retail (Modern Trade)7. Direct To Business – OEM Supply / 3rd Party Manufacturing / White Label Etc8. Govt Sourcing9. Export To Overseas Market
Let us explore each of these channels
1. Direct To Customer
Most companies start with this channel. Effective and reliable for local market – this channel gives manufacturers a ‘direct feel’ of market and customer response/feedback. However, its expensive and tedious to maintain, may not be sustainable for non-local markets. All manufacturers/producers must plan ahead for other channels if aim is to reach larger markets, faster growth.
2. E-Commerce (B2C And B2B)
B2C E-Commerce is the easiest option to reach larger market. There are many online platforms like Amazon, Flipkart etc. who facilitate online market entry smooth and inexpensive. However, this channel suits only entry level players as bulk sale is not permitted on these platforms. All sales are direct to consumers. Profit margin may be high but volume remains low. Online players end up selling single items which is tiresome. Besides, there are few other hassles like returns etc. All in all – reliable channel to start with but plan must be to break out sooner.
B2B E-commerce is ideal for easy and convenient market entry as it encourages bulk sales. However, there are very few b2b e-com platforms in India. Besides, entry of new sellers is restricted in many cases.
A wholesaler buys in bulk from manufacturer or its representative and sells in small quantities to retailers or resellers. Most important point about a wholesaler is that – he/she is independent. The wholesaler is free to buy products from any manufacturer and free to sell to anyone. Products sold to a wholesaler enters a black box – manufacturer has no way of knowing how many got sold, to whom, at what price, customer feedback etc. Often, B2B relationship starts with wholesaling as its flexible arrangement between two businesses with little commitment towards each other.
Distributor, like wholesaler, buys in bulk from manufacturer and sells in small lots to retailers or wholesalers. The similarity ends there. Unlike wholesaler, distributors are not independent, rather they act as representative of manufacturer. They enter into legal contract with manufacturers and can’t do something that might be detrimental to manufacturer’s interest (e.g. selling competitor’s product). In fact, distributors are extended sales arm of manufacturer. Often, a manufacturer may appoint distributors and also maintain a small sales team to support distributors. Distributor keeps manufacturer informed about details of sales, market trend, customer feedback, competitor activity etc. They also support manufacturer’s promotion campaigns, incentive schemes, new product launch etc. Manufacturers, in return, helps distributors by taking back defective products, offer after sales service, give training to distributor’s staff etc. Distributors are considered valuable assets of any company – lifelong asset if maintained properly.
5. Other Channels (Dealers, Stockists, Sales Agents, VAR etc.)
Dealers are kind of retailers – but with exalted status. They are actively managed by manufacturers and play key role in few industries like automobiles, white goods etc. Sales Agents do not stock products but book order on behalf of manufacturers. They perform very important role in high value products requiring specialised knowledge like industrial machinery, scientific equipment, medical devices etc. Stockists play very important role in rural markets where retail shops are scattered over large territory, making traditional distribution ineffective. Value Added Reseller (VAR) – as the name implies – adds additional value and customize the product for end user. Mostly used in technology field – here’s example of how VARs work. Let’s say a VAR company is selling software on behalf of its principal. The VAR may offer the software to end-user, installed in a computer/network as ‘turn-key’ solution. Here, the VAR is providing hardware, networking, training etc. as value added feature to sell as customized solution. There may be few other channels dedicated to special products. 6. Organized Retail
Retail chains – also called Modern Trade or MT – as a sector is growing fast in India. Presently it accounts for 8 percent of total retail market – about 4 times bigger than online. Big Bazaar, Dmart, Vishal Megamart, ValueMart etc. are examples of large format retail chains. They dominate the Modern Trade and destined to play important role in future Indian retail.
Along with large format retail chains – emergence of small format, city based retail chains are going to play important role in future. These are aspiring retailers who want to grow fast through inorganic route by acquiring other retail stores in same city and creating mini retail chains. At Vanik.com – we found this section to be most lucrative for SMEs. They are eager to act as super stockist of lesser known brands and may even sell under their own brand name.
7. Direct To Business – OEM Supply / 3rd Party Manufacturing / White Label Etc
In direct to business mode – manufacturers sell their entire product line to a bigger business. Automobile industry is a notable example where large number of ancillary industries supply automobile components to single automobile manufacturer. Garment industry is another example. Most large multinationals use OEM route for sourcing components. Big retailers like Walmart commission factories for manufacturing specially designed products for entire consumption of Walmart stores across the world. 3rd Party manufacturers offer their production facility to businesses who want to outsource production. This route is mostly used in chemicals and pharmaceutical industries. White Label is another channel where a company sources unbrandedproducts from a manufacturer and rebrand it to sell under its own brand name. 8. Govt Sourcing
Govts – Central, State, PSU, Govt owned institutions etc. use a special way for buying product or service from market – called Tendering. Its a huge market – some companies work dedicatedly round the year for govt supply only. Now, the concept has been further enhanced by introducing a huge E-Commerce marketplace called GeM (Government e-Marketplace). Govt organizations use GeM for sourcing daily use items such as office supplies, consumables etc. Any SME can register at GeM and sell through this channel
9. Export To Overseas Markets
Overseas could be very lucrative market for several sectors. Earning in foreign currency, no taxation, no hassle of inter state trade, direct bank payment, export promotion incentive schemes etc. are some of the attractions of this channel. However, not all products are exportable. Besides, this channel demands special expertise.
Are You Ready ?
Before using any of the channels described above – considerable home work is necessary. Have you invested in a professional website to display detail product and company information ? Have you prepared e-brochures, proposals etc. ? Have you worked out intermediary commissions ? In case you are going to use distribution channel – is your distribution contract ready ? Issue of credit will inevitably arise in case you have decided to use intermediaries. Are you ready with an acceptable credit policy ? What is your plan for locating channel partners ? I shall write another article on this topic soon.
Setting up a B2B channel that works, is an asset for any company. It may take time and demand extra efforts and resources. But once it gets going – the company is on growth path. Entrepreneurs should set target on channel building early on, rather than as afterthought during recession.