How Does FMCG Distributor Channels Work In India? – A Beginners Guide
Indian FMCG market is 4th largest sector in the Indian economy and its growth has a significant impact on the economic structure of the country. With India being a wide country geographically, the distribution networks form a complex structure and it gets difficult for must of us to understand its hierarchy.
In a country like India, where the majority of people who consume FMCG goods live away from the source of production. The distribution network forms an important part of our economy and can also prove as a strategic advantage for most FMCG companies.
What Is FMCG Distribution?
FMCG distribution channels are pathways along which the FMCG products travel from manufacturers to consumers. They are channels along which the goods, information and finance flow in the system. While some FMCG manufacturers prefer dealing directly with consumers, most manufacturers use a distribution network to transfer goods to their consumers.
Thorough planning, effective thought process, effort and investment is required to set up a distribution channel. Distribution channel margin and the expense occurred in managing the distribution channels forms a substantial part of overall marketing cost.
Even from a public perspective, setting up a distribution channel opens new job opportunities for labors and also helps in making FMCG products available to people with a wide socio-economic spectrum.
From a competitive perspective, having a robust distribution network gives manufacturing companies an edge over their competitors. Therefore, channel management and distribution form an important element in a company’s business strategy.
In India, most manufacturing companies face the problem of designing, constructing and effectively managing the distribution channel.
Understanding The FMCG Distribution Channels
Distribution channels can be understood by studying the elements that form these distribution channels. Distribution channels consist of different independent businesses which are aligned with the manufacturing companies to distribute the products from the source to the ultimate customer.
FMCG distribution channels consist of three important entities: agents, merchants and facilitators.
- Agents generate sales by promoting a company’s product but they never stock or buy the product themselves. An agent can be an independent person or a member of the company itself.
- Merchants such as retailers, wholesalers or stockists buy and stock the products in bulk and them supply them to other retailers or sometimes directly to the consumer. Merchants are usually independent but sometimes a manufacturing unit has their own wholesale or retail departments.
- Facilitators, as the name indicates, facilitates the transportation of goods manufactured from one place to another. Facilitators include logistic services, warehouse owners, independent distributors who are just involved in storing and transporting the manufactured product and not promoting or trading them.
FMCG distribution channels are designed using these three entities depending on the market needs, type of product and by also considering the competitive strategy.
Structure Of FMCG Distribution Channels
The FMCG channel structure varies across countries but all channels can be described using simple concepts such as directness, levels, density, variety, novelty.
- Directness refers to the transactions occurring between the manufacturers and customers without the aid of the intervening member. Indirect distribution occurs when the manufacturer uses distribution channels to supply products to the consumer.
- The concept of level refers to the number of channels involved in transferring the product from the manufacturer to the ultimate consumer. In the automobile sector, manufacturers are involved with franchise dealers who in turn supply the products to the end consumer. This is one level channel. In the FMCG industry, manufacturers often sell the goods to wholesalers, who sell it to the retailers, who in turn sell it to the consumers. This is a two level channel.
- Density refers to the number of outlets available within a particular area. Depending on the number of outlets, a distribution channel is considered as exclusive or intensive. The distribution of automobiles have fewer outlets in a city and is considered ass exclusive while the distribution of soaps with hundreds of outlets including wholesalers, supermarkets, grocery stores is considered as intensive.
- Variety refers to the various type of outlet a product is sold. Biscuit distribution may exhibit high variety since they are sold at various outlets including paan shops, grocery store, canteens, supermarket, general stores and even online etc. While the distribution of sarees may exhibit low varieties since they are sold only at particular stores.
- Novelty refers to the new channels utilized by manufacturing companies to distribute their product. Like online sales and vending machines is relatively new to India and considered as a novelty.
Structure Of Distribution Channels In India
The structure of the distribution channel in India is very traditional and unique
- The major components in the Indian distribution channel include – retail network, wholesale network and logistics infrastructure.
- The consumer majorly interacts with retail outlets. India has over 9 million retail outlets in the distribution channel. These include grocery stores, paan shops, supermarkets etc.
- India has only 8% of the organized retail distribution penetration.
- Traditional retail in India offers consumers a number of advantages like convenience, home delivery, credit, and personalised service.
- On the other hand, modern retail offers periodic promotional offers, lower prices, wider assortment, a better ambience, and higher quality brands.
- The reason for such widespread existence of the traditional market is due to the availability of lower rentals, cheap labour cost, credit from suppliers, fewer tax duties and a legal framework which prevented the Foreign Direct Investment (FDI) until recently.
Factors Affecting The Indian Distribution System
- Modernization in Indian FMCG has picked up some sectors like apparels, footwear, textile, watches etc.
- The change is been witnessed on both the supply and demand side. Towards Supply end, factors supporting modernization are the large investments in retail made by brand owners in watches, textiles, and footwear; development of malls and shopping centers; and the entry of large Indian business groups into grocery and electronics retailing. Demand-side factors include increased disposable income among consumers, greater brand consciousness, a greater appreciation of ambiance and air conditioning, and the perception of shopping as a rewarding leisure activity.
- The popularity of traditional retail in India could be explained by the presence of a largely rural and BOP consumer segment which does not have access to modern food retail outlets.
With a large geographical area, India has a very complex FMCG distribution channel and it needs some study and practical experience to understand the depths of this complex network. The structure mentioned above will give you a basic understanding of the distribution channel and help you build a more solid foundation.
Disclaimer – “Views expressed in the blogs, are exclusive thoughts of the author and are not necessarily aligned to Parakh Group’s policies”.