Fast-moving Consumer goods (FMCGs) also called Consumer Packaged goods (CPG), refer to the products used in day to day lives. It consists of durable goods, nondurable goods, and services with higher consumer demand and relatively lower margins. FMCGs have a short shelf life and perishable nature.
In India, the FMCG market has a remarkable impact on the economic structure. As the name suggests, the demand for these goods is steeply rising giving opportunities to most of the companies to invest in it. Every next item sold or service provided via online platforms such as Amazon, Flipkart, or any other e-commerce platforms also belong to FMCG such as skincare products, beverages, and other categories.
With most of the companies betting a larger portion of their incomes on these ventures, it is important to differentiate your product from varieties of products out there competing to sustain. A strong and well-built sales channel plays a vital role in the case of FMCGs to provide adequate provision to customers.
The distribution channel involves independent businesses or organizations to carry out the process from manufacturing to supplying the products to consumers.
Elements of Sales channel
Sales channel consists of independent organizations aligned to the company to distribute products or services from source to consumers. The channel of distribution includes the producer, the ultimate consumer, and any middlemen. To understand the working of the sales channel, it is important to understand the crucial entities.
Manufacturers – There are companies or unit responsible for the production of goods.
Distributors simply buy the products from manufacturers and sell them to wholesalers or retailers. Usually, a company has its distributor to sell its product to other outlets.
Merchants such as retailers, wholesalers buy and stock the products in bulk amount and then sell them to other retailers or sometimes directly to the final buyer. Merchants can be independent companies or sometimes a manufacturing unit has its retail or wholesale division.
Facilitators ease the transportation of manufactured goods. It includes logistic services, warehouse owners responsible for transportation and storage not trading of goods.
Consumers– They are the final user of manufactured goods or services.
Need for sales channel
A channel involves various levels that break down the process of buying and selling making it easy and manageable. What is the company sells directly to the consumer? Will it be cost-efficient?
Companies with incompetent sales channel but the efficient quality of the product will fail to handle all the necessary functions themselves. So the independent company’s involvement will carry out the work of transporting and trading effectively.
A geographically strong and wide-ranged channel for FMCGs help to
- Cover a large market of customers.
- FMCGs have perishable nature and immense demand making them a necessity.
- High profitability can be achieved through high sales volume.
- Minimize inventory cost.
Types of distribution channels-
- Manufacturer to Customer
- Manufacturer to Retailer to Customer
- Manufacturer to Wholesaler to Retailer to Customer
Manufacturer to Customer– This is the direct selling process with no middlemen involved. A manufacturer sells directly to the buyer through its retail units, for example, Bata. The network is fast, economical, and the shortest. Small producers and producers of perishable items sell through a direct network to local consumers. Big firms equipped with sufficient facilities also adopt this technique to cut distribution costs.
Manufacturer to Retailer to Customer– This channel involves one middleman that is the retailer, and is therefore called one stage distribution channel. Manufacturers supply the products to big retailers like departmental stores and chain stores. These retailers acquire goods in large quantities and perform marketing activities on their own to sell them to the final buyer. This network is very common for purchases such as TV sets, refrigerators, washing machines, and other durable products.
Manufacturer to Wholesaler to Customer– This channel is widely used for an extensively circularized market for eg: drugs, groceries, etc. It is the traditional channel of distribution with wholesalers and retailers. This channel is used by small producers with a narrow product line. The advantage of this network is the sales and promotional support by the wholesalers.
Selection of distribution channel
The selection of a suitable channel for a company should be based on a comparison of sales volume, profits, and cost from the various alternative channels. Factors to be considered for determining the network-
- The size of the potential customer decides the involvement of retailers and wholesalers. If the market is limited to a small area, then direct selling is simplest and economical. Products such as cosmetics, health care brands. Amway is India’s largest direct-selling business. Its products are also available online but are kept out of traditional retail stores to provide maximum customer satisfaction and interaction with Amway business owners.
- For industrial goods and orders of larger quantities, direct selling is convenient. However, for items sold in small quantities, middlemen are involved.
- Products of lower margin but higher demand in the market are sold through middlemen for cost-effectiveness, for example, companies like Coca- Cola, Gillette, while expensive consumer goods such as appliances and electronics are sold straight to the buyer.
- Perishable products have the simplest and shortest channel to avoid repeatedly handling. For example, milk, bread, and other dairy products.
- Items that vary closely with changing market trends use the shortest and direct selling for eg: products of fashion as the seller has to keep up with changing market demand.
- For new products in the market, the involvement of a few middlemen will support the promotional as well as a sales strategy. Channel partners will increase with the rising demand and popularity of products.
Look at the growth of India’s largest brand of consumer products, HINDUSTAN UNILEVER LIMITED with the presence of over 20 consumer categories such as soaps, tea, detergents, and over 700 million Indian consumers using its products.
The company has 100 factories across India with over 18,000 workers and indirectly helping to facilitate the employment of over 65,000 people. The distribution is carried out through a network of 4,000 redistribution stockists covering 6.3 million retail outlets in urban areas and 250 million rural consumers. There are a total of 35 C&FAs (Carrying and Forwarding agents) feeding these redistribution stockists.
Distribution at Rural Areas– All markets with a population below 50,000 comes under one rural sales organization. The team comprises of the exclusive sales force and redistribution stockists. For building superior availability of products, the network directly covers 50,000 villages through 6000 sub-stockists. The sub-stockist distributes the company’s products to smaller markets with low potential.
“Project Shakti”– HUL’s symbiotic partnership with Self Help Group’s (SHGs) of rural women enabled the company to access 80,000 of India’s villages. The model consists of 15- 20 villagers below the poverty line taking micro-credits from banks. The money is used to buy HUL products and is sold directly to the consumers by them. The rural distributor provides stocks to selected members of SHG called Shakti entrepreneur, which are trained by the company. Theese shakti entrepreneurs sell the products to consumers or retailers in the village. Each shakti entrepreneur is responsible for 6-10 villages in the population strata of 1000-2000.
Distribution at Urban Areas- The products are moved from manufacturing sites to C&F agents. From C&F agents goods are distributed to redistribution stockists which pass these products to wholesalers and retailers. The final member of the chain can access the products from these wholesalers and retailers.
In India, the biggest multinational confectionery Cadbury owned by Mondelez International is the market leader in the confectionery business with 70% shares. The company does not sell the products to the consumer, the process includes the participation of several intermediaries with various function.
The company owns a total of 5 manufacturing units: 2 units in Maharashtra (Thane & Induri) 1 unit in Madhya Pradesh (Malanpur) 1 unit in Karnataka (Bangalore) 1 unit in Himachal Pradesh (Baddi).
It further has 4 sales offices in Mumbai, Delhi, Kolkata, and Chennai respectively.
Cadbury uses intensive distribution methods in an attempt to maximize the establishments at supermarkets, convenience stores, small retailers, wholesalers. The size of the chocolate market in India is about 4,000 tonnes and is valued at Rs 6500 million. To serve this market Cadbury runs a distribution network of around 2100 distributors and 450000 retailers.
The distribution network work with wholesalers which contacts retailers directly including grocery stores, panwallas, Newsagents shops, and other convenience stores.
Indian FMCG sector
There is a huge growth potential for all the FMCG companies in rural as well as urban areas. The biggest FMCG companies are HUL, Nestle, Dabur, Pepsi. These companies are expanding their reach to consumers through e-commerce platforms also. Earlier the model was simple, the company needed stronger relationships with retailers, mass marketing, and quality products. But now growing channels of e-commerce, small disruptors are changing the game. Prospects of the company can be increased further by changing the customer’s mindset by maintaining quality, promotion, and innovation of products.