5 REASONS WHY TECH WILL DISRUPT THE MULTI-LAYERED DISTRIBUTION MODEL

The hugely successful and far-reaching distribution networks that consumer product companies like Unilever, P&G and Nestle have built through the last few decades, have been the pillars of growth for them in emerging economies. However, not much has changed about these distribution models in the last so many years. Even today the consumer product companies continue to have thousands of distributors across the country to service millions of retail outlets. Distributors employ several salesmen who reach out to these retail outlets to gather orders from them physically, collect payments in cash or cheques and deliver the inventory is mid-sized commercial vehicles.

 I believe several processes on which this distribution model works will eventually become redundant with the advent of technology. Some of the key reasons why this will happen are as follows:

• Technology will connect the retailer and the distributor.

 The current process of 1 salesman handling around 200 retailer outlets and collecting orders from them every week will, very soon, be a thing of the past. Ordering will increasingly happen on online tech platforms, just the way consumers order online.

The convenience of ordering online, with access to real-time inventory, product information, supply notifications etc will be realized by the channel of retailers.

• Payments in cash are not sustainable

 Given the size of transactions and the risks involved, cash payments will be rendered unviable shortly. Today an average of 70% of payments made my retailers to their distributors are in cash and the rest in cheque.

 The primary responsibility of collecting this cash rests with the distributors’ salesmen. This leads to several leakages due to miscounting; counterfeit currency or salesmen going absconding with the cash that they collected from the retailers.

 The adoption of electronic payments through inexpensive methods such as RTGS, IMPS, NEFT or payment wallets will take shape eventually.

• Aggregated delivery of multiple brands

 Input costs of distribution operations have increasingly been rising. This includes warehousing costs, vehicle rental and fuel costs. YoY these costs have been rising at an average of nearly 10-12%. However the distributor margins have remained the same in percentage terms for a while now.

24% ROI, which is typically the annual return that MNC firms have offered historically are becoming difficult to maintain. Also, distributors have more promising investment options these days, which offer a higher return.

 In light of the above, MNCs will find it difficult to continue with their structure of exclusive distributors. Under this current model, brands typically restrict their distributors from taking up distributorship of related or competition brands.

 Eventually, there will be consolidation and aggregated deliveries will become the norm. The same distributor would be delivering multiple brands to a set of retailers in an area.

• The power of information will drive growth

 The next delta of growth will come from higher productivity through better information dissemination on retailer schemes, real-time inventory visibility, demand capture etc. between retailer-distributor.

 Currently, information flow between the distributor and retailer is one of the major challenges. This is especially due to the geographical fragmentation of the retail universe. In India, two-thirds of the 15 million retail outlets universe are in non-metro geographies.

 As of today, the retailer has no or limited visibility to the distributors’ inventory. He rarely has clarity on the profitability at a product level, due to poor or delayed communication of schemes. Reconciliation of accounts is an even more challenging area. The retailers place orders to their distributors in absence of any technological aids to suggest appropriate order quantities. This often leads to damages and product expiry, due to over-ordering.

 With the advent of tech platforms to connect the distributor and retailer, one of the biggest advantages would be the mitigation of information flow challenges. Imagine a future when brands would be able to roll out and communicate trade schemes in hours instead of weeks!

• Hyper-local and retailer technology adoption

 There are two trends that are bound to have an impact on the channel ecosystem. One is the growth of hyper-local ecommerce and the spread of retailer automation/POS products.

 As hyper-local ecommerce grows and the adoption of technology by small retailers increases, they will expect their backend processes to be also integrated. The retailer will find it very difficult to upload his inventory, product specs, pricing etc regularly unless his backend is well integrated with the distributor. That is the criticality of the tech platform, which will connect the distributor and retailer.