Effectiveness and Efficiency of Distribution Channels In FMCG

Fast Moving Consumer Goods popularly known FMCG is as the name suggests is the most demanded products in the market. It includes everything from food items like flour, biscuits, ice creams, etc to body products soaps, face creams to cigarettes to beverages, etc. consumers need these things in their everyday life so they invests

a good portion of there income in these things. There are so many companies which are dealing in FMCG products like HUL, Dabur, Cavin Care, AMUL dealing in dairy products, etc. By the vary nature of the product the companies are seeing this as a great source of income. As large number of companies are looking this sector as a profitable venture, so for sustaining there position and gain new market they have to bring some thing unique in their products or services to gain position in the market or to sustain there.

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In modern business distribution network has a great impact on the success of any business. In the FMCG segment the role of a excellent distribution channel becomes even more crucial because the delivery of FMCG Product is confined to day to day basic. Hence in order to survive and thrive in a highly competitive market you have to have a distribution channel which has no problem at any point of the distribution channel.

The factor which is of crucial importance to survive in any business is the understanding of the mind of the individual consumers. What are main characteristics which consumer consider while making a purchasing decision regarding FMCG Product.

In order to make right decision regarding all these aspects the company requires a complete knowledge of the problems faced in distribution channel and what should be done in order to overcome all these problems.

Better infrastructure facilities will improve their supply chain. FMCG sector is also likely to benefit from growing demand in the market. Because of the low per capita consumption for almost all the products in the country, FMCG companies have immense possibilities for growth. And if the companies are able to change the mindset of the consumers, i.e. if they are able to take the consumers to branded products and offer new generation products, they would be able to generate higher growth in the near future.

Table of Contents

Introduction

A Distribution Channel is a set of interdependent organizations (intermediaries) involved in the process of making a product or service available for use or consumption by the consumer or business user.

Channel decisions are among the most important decisions that management faces and will directly affect every other marketing decision.

Functions of Distribution Channel

All Use Up Scarce Resources

All May Often Be Performed Better Through Specialization

All Can Often Be Shifted Among Channel Members

Types of Distribution Channel

A channel of distribution or trade channel is the path or route along which goods move from producers to ultimate consumers or industrial users. In other words, it is the distribution network through which a producer puts his product in the hands of actual users. The channel of distribution includes the original producer, the final buyer and any middlemen-either wholesaler or retailer. The term middleman refers to any institution or individual in the channel which either acquires title to the goods or negotiates or sells in the capacity of an agent or broker. But facilitating agencies that perform or assist in marketing function are not included as middlemen in the channel of distribution.

This is because they neither acquire title to the goods nor negotiate purchase or sale. Such facilitating agencies include banks, railways, roadways, warehouses, insurance companies, advertising agencies, etc.

The following diagram (chart) is illustrative of the channel of distribution which may exist in a market:

The above chart indicates that the number of middlemen may vary. If there is direct sale by the produce to the consumers then there is no middleman. But that is very rare. As the chart shows the producer may sell goods to retailer who may then sell the same to consumers. The producer may sell goods to wholesalers who may inturn sell to retailers and the retailer may sell to consumers. The fourth alternative channel of distribution is when any agent/dealer intervenes between the producer and retailers and acts as a middlemen. The agent is appointed by the producer for the sale of goods to the retailers. Another alternative channel is there when producer’s agent sells goods to wholesalers who sell to retailers. Agent/dealer is an independent person/firm buying

goods and selling them to retailers. Agent/dealer may also sell to wholesalers who may then sell to retailers and goods are thus made available to consumers. In the channel of distribution there may be more than one agent/dealer and wholesaler.

A brief explanation of different channels of distribution is given below:

Manufacturer ƒ Customer: This is also known as direct selling because no middlemen are involved. A producer may sell directly through his own retail stores, for example, Bata. This is the simplest and the shortest channel. It is fast and economical. Small producers and producers of perishable commodities also sell directly to the local consumers. Big firms adopt direct selling in order to cut distribution cost and because they have sufficient facilities to sell directly to the consumers. The producer or the entrepreneur himself performs all the marketing activities.

Manufacturer ƒ Retailerƒ Customer: This is one stage distribution channel having one middleman, i.e., retailer. In this channel, the producer sells to big retailers like departmental stores and chain stores who in turn sell to customer. This channel is very popular in the distribution of consumer durables such as refrigerators, T V sets, washing machines, typewriters, etc. This channel of distribution is very popular these days because of emergence of departmental stores, super markets and other big retail stores. The retailers purchase in large quantities from the producer and perform certain marketing activities in order to sell the product to the ultimate consumers.

Manufacturer ƒ Wholesalerƒ Retailerƒ Customer: This is the traditional channel of distribution. There are two middlemen in this channel of distribution, namely, wholesaler and retailer. This channel is most suitable for the products with widely scattered market. It is used in the distribution of consumer products like groceries, drugs, cosmetics, etc. It is quite suitable for small scale producers whose product line is narrow and who require the expert services and promotional support of wholesalers.

Selection Criteria of a Distribution Channel

While selecting a distribution channel, the entrepreneur should compare the costs, sales volume and profits expected from alternative channels of distribution. In order to select the right channel for distributing his product, a small-scale manufacturer should keep in mind the following considerations:

Market Considerations: The nature of the market is a key factor influencing the choice of channels of distribution. The following features of the market should be considered to determine the channels:

Consumer or Industrial Market: If the product is meant for industrial users, the channel of distribution will be a short one. This is because industrial users buy in a large quantity and the producer can easily establish a direct contact with them. But in case for goods meant for consumers, retailers may have to be included in the channels of distribution.

Number and location of buyers: When the number of potential customers is small or the market is geographically located in a limited area, direct selling is easy and economical. In case of large number of customers, use of wholesalers and retailers becomes necessary.

Size of order: Direct selling is convenient and economical where customers place order in big lots as in case of industrial goods. But where the product is sold in small quantities, middlemen are used to distribute such products. A manufacturer may use different channels for different types of buyers. He may sell directly to big retail stores and may use wholesalers to sell to small retailers.

Customers buying habits: The customer buying habits like the time he is willing to spend, the desire for credit, the preference of personal attention and one stop shopping significantly affect the choice of distribution channels.

Product Considerations: The type and nature of the product influence the number and type of middlemen to be chosen for distributing the product. The important factors with respect to the product are as follows:

Unit value: Products of low unit value and common use are generally sold through middlemen, as they cannot bear the cost of direct selling. On the other hand, expensive consumer goods and industrial products are sold directly by the producers.

Perishability: Perishable products like vegetables, fruits and bakery items have relatively short channels, as they cannot withstand repeated handling. Goods, which are subject to frequent changes in fashion and style, are generally distributed through short channels, as the producer has to maintain close and continuous touch with the market.

Bulk and weight: Heavy and bulky products are distributed directly to minimize handling costs. Coal, bricks, stones, etc., are some examples.

Standardisation: Custom-made and non-standardised products usually pass through short channels due to the need for direct contact between the producer and the consumers. Standardized and mass-made goods can be distributed through middlemen.

Technical nature: Industrial products requiring demonstration, installation and aftersale service are often sold directly. The consumer products of technical nature are generally sold through retailers.

Product line: An entrepreneur producing a wide range of products may find it economical to set up its own retail outlets. On the other hand, firms with one or two products find it profitable to distribute through wholesalers and retailers.

Age of the product: A new product needs greater promotional effort and few middlemen may like to handle it. As the product gains acceptance in the market, more middlemen may be employed for its distribution.

Middlemen Considerations: The cost and efficiency of distribution depend largely upon the nature and type of middlemen as given in the following factors:

Availability: When middlemen as desired are not available, an entrepreneur may have to establish his own distribution network. Non-availability of middlemen may arise when they are handling competitive products, as they do not like to handle more brands.

Attitudes: Middlemen who do not like a firm’s marketing policies may refuse to handle its products. For instance, some wholesalers and retailers demand sole selling rights or a guarantee against fall in prices.

Services: Use of those middlemen is profitable who provide financing, storage, promotion and aftersale services.

Sale Potential: An entrepreneur generally prefers a dealer who offers the greatest potential volume of sales.

Costs: Choice of a channel should be made after comparing the costs of distribution through alternative channels.

Company Considerations: The nature, size and objectives of the business firm also play an important role in the selection of distribution channel. It includes financial resources, market

standing, volume of production, desire for control of channel, services provided by manufacturers’, etc. For example a company with substantial financial resources need not rely too much on the middlemen and can afford to reduce the levels of distribution. Similarly a company desiring to exercise greater control over channel will prefer a shorter channel.

After deciding the number of middlemen, an entrepreneur has to select the particular dealers through whom he will distribute his products. While selecting a particular wholesaler or retailer, the following factors should be taken into consideration:

a. Location of dealer’s business premises;

b. Financial position and credit standing of the dealer;

c. Knowledge and experience of the dealer;

d. Storage and showroom facilities of the dealer

e. Ability of the dealer to secure adequate business and to cover the market;

f. Capacity of the dealer to provide aftersale service;

g. General reputation of the dealer and his sales force;

h. Willingness of the dealer to handle the entrepreneur’s products;

i. Degree of co-operation and promotion service he is willing to provide;

j. Nature of other products, if any handled by the dealer.

Need for Distribution Channel

Why are all these layers needed in distribution ? Why can’t a producer simply sell to a retailer, who sells to a consumer? It’s a fair question, and in some cases, that is exactly how it happens. But the fact is that many producers are either too small or too large to handle all the necessary functions themselves to get

their products to market.

Consider the small, specialty manufacturer who is terrific at making fine leather handbags but may not have the expertise to market its products as well as it makes them, or they may not have the money to hire a team of full-time salespeople to court the customers and secure the orders. An intermediary

who works for several small, noncompeting firms can easily handle those functions cost-effectively. An intermediary who specializes in importing and exporting can handle the intricacies of customs paperwork, overseas shipping, and foreign markets, too.

Conversely, large companies need intermediaries because they are also in the business of manufacturing, not marketing. Turning out tens of thousands of cases of soft drinks, for instance, do you think Pepsi has time to take and fill individual orders from households? Channel members like wholesalers and retailers

are useful because they are best at specific aspects of sales in their markets, leaving the manufacturers to do what they do best-which is turn out the best possible product.

Having a distribution channel breaks the whole buying and selling process and all its related negotiations into manageable tasks, each performed by companies that specialize in certain skills. Using an import wholesaler, for example, can be handy because they know the laws and customs of the suppliers’ nations; and they generally offer their own lines of credit so the retailer won’t have to deal with currency exchange or negotiate payment terms with a bank in another country.

Another advantage of the distribution channel is its ability to even out the natural ebbs and flows of a supply chain. This comes from the ability of some channel members to store excess goods until they are needed, and to stockpile goods in anticipation of seasonal sales peaks. Depending on how close their relationships, channel members may also work together to purchase goods or services in greater quantity at discounts, passing the savings on to customers.

Even for consumers, the distribution chain is handy-beyond handy, in fact! It has become a necessity in our society. What if there were no supermarkets, for instance? Can you imagine how much more time and money you would spend having to buy every item at its source? How practical would it be to run out to the nearest farm to pick up a quart of milk and some salad ingredients on your way home from work?

FMCG Sector

Overview

FMCG is an acronym for Fast Moving Consumer Goods, which refer to things that we buy from local supermarkets on daily basis, the things that have high turnover and are relatively cheaper. Products which have a quick turnover, and relatively low cost are known as Fast Moving Consumer Goods (FMCG). FMCG products are those that get replaced within a year. Examples of FMCG generally include a wide range of frequently purchased consumer products such as toiletries, soap, cosmetics, tooth cleaning products, shaving products and detergents, as well as other non-durables such as glassware, bulbs, batteries, paper products, and plastic goods. FMCG may also include pharmaceuticals, consumer electronics, packaged food products, soft drinks, tissue paper, and chocolate bars.

A subset of FMCGs is Fast Moving Consumer Electronics which include innovative electronic products such as mobile phones, MP3 players, digital cameras, GPS Systems and Laptops. These are replaced more frequently than other electronic products.

White goods in FMCG refer to household electronic items such as Refrigerators, T.Vs, Music Systems, etc.

These types of goods are required frequently by consumers and so a large part of the monthly salary or income will be spent on buying all the goods listed on the consumer’s shopping list. New players keep joining the FMCG circles but find the going tough unless they have a well planned strategy along with large cash reserves for their product promotion. A particular FMCG company might be a strong urban market leader, but will still find it tough to enter the rural markets or a new Indian state or area.

Although FMCG companies generate a large volume of sales and money, they are always under pressure as they keep facing a lot of competition from their fellow competitors. Due to this, the FMCG companies try to do their level best in maintaining a fine balance in their profits and the product price. Thus they keep facing new challenges on their margins month after month.

One of the key factors for an FMCG company to do well is a proper distribution network. If a distribution network of a particular FMCG company is well oiled, then that particular FMCG Company will definitely find the going much easier in the market. But companies have to allot a large chunk of their finances in developing and fine tuning their distribution networks.

The promotion of a product of an FMCG company too is considered very crucial for its success. The market has many players. Every FMCG company has to fight for its space and audience in the Indian market. Thus, when a multinational company enters the Indian market, it creates an even bigger challenge to the existing players on the FMCG scene. If the promotion is done well, then the manufacturing of the product can even be outsourced. This can save valuable finance for a company. This in turn will help the company to utilize their energies on other aspects of their product. Some of the top players on the FMCG scene in India are Hindustan Unilever Ltd., ITC (Indian Tobacco Company), Nestlé India and Dabur India.

So, we can say that FMCG are the products which are:

Sold quickly at relatively low cost

Sold in large quantities

Have low absolute profit but high cumulative profit

Sector Performance

FMCG is one of the few sectors that has been unscratched and has shown consistent growth despite economic recession and this can be proved by some of the leading magazines articles like:

According to Business Standard-“FMCG resilient to the economic slowdown and dip in consumer sentiment”.

According to Economic times it is one of the very few sectors undergoing M&A in recent times.

Economic times also comment that Indian rural market in untapped and unpenetrated.

The growth in this sector is also evident from the fact that many FMCG companies are planning to foray into West Asia, South Africa and Egypt.

FMCG industry provides a wide range of consumables and accordingly the amount of money circulated against FMCG products is also very high. The competition among FMCG manufacturers is also growing and as a result of this, investment in FMCG industry is also increasing, specifically in India, where FMCG industry is regarded as the fourth largest sector with total market size of US$13.1 billion. FMCG Sector in India is estimated to grow 60% by 2010. FMCG industry is regarded as the largest sector in New Zealand which accounts for 5% of Gross Domestic Product (GDP).

Some of the merits of FMCG industry, which made this industry as a potential one are low operational cost, strong distribution networks, presence of renowned FMCG companies. Population growth is another factor which is responsible behind the success of this industry.

Some of the well known FMCG companies are :

Sara Lee

Nestlé

Reckitt Benckiser

Unilever

Procter & Gamble

Coca-Cola

Carlsberg

Kleenex

General Mills

Pepsi

Mars etc.

FMCG industry creates a wide range of job opportunities. This industry is a stable, diverse, challenging and high profile industry providing a wide range of job categories like sales, supply chain, finance, marketing, operations, purchasing, human resources, product development, and general management.

Indian FMCG Sector

FMCG is the fourth largest sector in the Indian Economy with a total market size of Rs. 60,000 crores. FMCG sector generates 5% of total factory employment in the country and is creating employment for three million people, especially in small towns and rural India.

The FMCG sector in India is a sector which is dominated by a high level competition between all the players. This particular sector includes MNC’s as well as local Indian companies. Certain companies are leaders in a particular state or area. While some of the companies are very strong in the rural areas compared to the urban areas. Some of the most powerful companies in the FMCG sector are: Hindustan Unilever Ltd., ITC (Indian Tobacco Company), Nestlé India, GCMMF (AMUL), Dabur India, Asian Paints (India), Cadbury India, Britannia Industries, Procter & Gamble Hygiene and Health Care and Marico Industries. All these companies have a proper distribution network along with proper product promotion tools which have helped them to regularly increase their sales and visibility on the Indian scene.

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Well-established distribution networks, as well as intense competition between the organised and unorganised segments are the characteristics of this sector. FMCG in India has a strong and competitive MNC presence across the entire value chain. It has been predicted that the FMCG market will reach to US$ 33.4 billion in 2015 from US $ billion 11.6 in 2003. The middle class and the rural segments of the Indian population are the most promising market for FMCG, and give brand makers the opportunity to convert them to branded products. Most of the product categories like jams, toothpaste, skin care, shampoos, etc, in India, have low per capita consumption as well as low penetration level, but the potential for growth is huge.

The Indian Economy is surging ahead by leaps and bounds, keeping pace with rapid urbanization, increased literacy levels, and rising per capita income.

The big firms are growing bigger and small-time companies are catching up as well. According to the study conducted by AC Nielsen, 62 of the top 100 brands are owned by MNCs, and the balance by Indian companies. Fifteen companies own these 62 brands, and 27 of these are owned by Hindustan Lever. Pepsi is at number three followed by Thums Up. Britannia takes the fifth place, followed by Colgate (6), Nirma (7), Coca-Cola (8) and Parle (9). These are figures the soft drink and cigarette companies have always shied away from revealing. Personal care, cigarettes, and soft drinks are the three biggest categories in FMCG. Between them, they account for 35 of the top 100 brands.

Hindustan Unilever Limited has been operating in India from a long time. They are India’s largest FMCG Company and are also one of India’s largest exporters. The list of their popular products is a very large one. Some of their popular products are Lifebuoy, Rexona, Lux, Liril, Lipton Tea, Brooke Bond Tea, Bru Coffee, Pepsodent, Surf, Rin, Wheel Laundry Detergent and Kissan. The company has an excellent research centre which was established in 1958 and has a strong team of highly qualified scientists. Recently they have launched new projects like Ayush Ayurvedic Products & Services and Pureit Water Purifiers.

ITC which was set up in 1910 in India was earlier known as Imperial Tobacco Company of India Limited. ITC has a vast presence in wide array of products and some of them are greeting cards, cigarettes, paperboards, packaging, branded apparel, foods & confectionery and FMCG products. ITC has proved its worth by being one of India’s biggest foreign exchange earners. Although it already has many leading products from a long time, it is recently wooing over successfully new customers in its businesses of branded apparel, packaged foods & confectionery and greeting cards & stationery.

Nestlé first made its presence in India in 1912. It has always managed to get itself listed in India’s ‘Most Respected Companies’. This has been possible due to its practice of producing products of a global standard in India. It has also been able to provide customer satisfaction to the consumers of its products.

The success of Gujarat Cooperative Milk Marketing Federation (GCMMF) has proved that a cooperative too can grow into a top class company if it is backed by proper vision, hard work and a quality product. This has helped it to become the largest food product marketing organization in India. Some of its popular products are Amul Ice cream, Amul Milk, Amul Butter, Amul Shrikhand, Amul Milk Powder, Amul Ghee and Amul Cheese.

Thus the above four examples show a variety of factors which are responsible for turning a company into a leading FMCG company.

The top 10 companies in India are as follows:

The FMCG sector can be sub classified into:

Personal Care: The personal care category has the largest number of brands, i.e., 21, inclusive of Lux, Lifebuoy, Fair and Lovely, Vicks, and Ponds.  There are 11 HLL brands in the 21, aggregating Rs. 3,799 crore or 54% of the personal care category. Cigarettes account for 17% of the top 100 FMCG sales, and just below the personal care category. ITC alone accounts for 60% volume market share and 70% by value of all filter cigarettes in India.

Foods: The foods category in FMCG is gaining popularity with a swing of launches by HLL, ITC, Godrej, and others. This category has 18 major brands, aggregating Rs. 4,637 crore. Nestle and Amul slug it out in the powders segment. The food category has also seen innovations like softies in ice creams, chapattis by HLL, ready to eat rice by HLL and pizzas by both GCMMF and Godrej Pillsbury. This category seems to have faster development than the stagnating personal care category. Amul, India’s largest foods company, has a good presence in the food category with its ice-creams, curd, milk, butter, cheese, and so on. Britannia also ranks in the top 100 FMCG brands, dominates the biscuits category and has launched a series of products at various prices.

Household care: In the household care category (like mosquito repellents), Godrej and Reckitt are two players. Goodknight from Godrej, is worth above Rs 217 crore, followed by Reckitt’s Mortein at Rs 149 crore. In the shampoo category, HLL’s Clinic and Sunsilk make it to the top 100, although P&G’s Head and Shoulders and Pantene are also trying hard to be positioned on top. Clinic is nearly double the size of Sunsilk.

Herbal care: Dabur is among the top five FMCG companies in India and is a herbal specialist. With a turnover of Rs. 19 billion (approx. US$ 420 million) in 2005-2006, Dabur has brands like Dabur Amla, Dabur Chyawanprash, Vatika, Hajmola and Real.

Paint: Asian Paints is enjoying a formidable presence in the Indian sub-continent, Southeast Asia, Far East, Middle East, South Pacific, Caribbean, Africa and Europe. Asian Paints is India’s largest paint company, with a turnover of Rs.22.6 billion (around USD 513 million). Forbes Global magazine, USA, ranked Asian Paints among the 200 Best Small Companies in the World

Chocolates/Confectionary: Cadbury India is the market leader in the chocolate confectionery market with a 70% market share and is ranked number two in the total food drinks market. Its popular brands include Cadbury’s Dairy Milk, 5 Star, Eclairs, and Gems. The Rs.15.6 billion (USD 380 Million) Marico is a leading Indian group in consumer products and services in the Global Beauty and Wellness space.

Outlook for FMCG Sector:

There is a huge growth potential for all the FMCG companies as the per capita consumption of almost all products in the country is amongst the lowest in the world. Again the demand or prospect could be increased further if these companies can change the consumer’s mindset and offer new generation products. Earlier, Indian consumers were using non-branded apparel, but today, clothes of different brands are available and the same consumers are willing to pay more for branded quality clothes. It’s the quality, promotion and innovation of products, which can drive many sectors.

Methodology

Exploratory research:

The exploratory research design is appropriate for any any problems in which a very little knowledge is available. An Exploratory study is in the nature of a preliminary phase and is absolutely essential in order to obtain a proper definition of problem in hand. So it is helpful in breaking broad and vague problems into smaller, more precise sub problem statements, hopefully, in the form of specific hypothesis.

In this study the exploratory research has been used to frame structure questionnaires, individuals with knowledge and ideas have been interviewed to get the idea to frame structure questionnaire. A part from books and journals has been used to gather information about the insurance and the insurance industry.

Data Collection:

In this study internal and external source for data collection had been used. In the internal and external sources of data collection these two types of data comes into picture:

Primary Data

Secondary Data

Primary Data

All the primary data for the purpose of the study were obtained by interviewing the retailers with the help of a questionnaire. Questionnaires were framed on the basis of product & its competition. The questions were designed in such a way as to elicit maximum information and data.

Secondary Data

Secondary data has been collected from books and websites.

Internet websites:

www.google.com,

www.Coca-Cola.com,

www.wikipedia.com,

www.coca-colaindia.com

Magazines – Business World Management and Technology

Questionnaire

There can be two types of questionnaire.

Questionnaire for Whole sellers:

Name: ……………………………………………… Age: ……………………..

Area: …………………………………………………. Years in the Business:. …..

Date………………………………………………………….

http://2.bp.blogspot.com/_STNJ3qjC9Nk/SX30qf_Ve3I/AAAAAAAAAcU/P3nV5aXUBdY/s320/Coca-Cola_logo5.jpg

Q1. Which coca cola cold drink brand sells the most?

Coke b. ThumsUp c.Limca d. Sprite e. Fanta f. Maaza g.Others

Q2. Which mineral water sells the most?

Kinley b. Aquafina c. Bisleri d. Local brands

Q3. What type of package cold drinks sells the most?

300ml bottle b. 600 ml pet bottle c.