Case study | Balancing Act: How Dabur plans to correct its Supply Chain
Context: In mid-2024, Dabur India one of the country’s largest fast-moving consumer goods (FMCG) companies, faced a supply chain challenge in its general trade (GT) distribution channel. With the rapid growth of modern trade (MT) and e-commerce channels, Dabur found that its GT partners were being overstocked, creating a mismatch between supply and demand. Distributors, particularly in smaller, local retail stores, struggled with slow-moving inventory, negatively impacting their Return on Investment (RoI).
This issue was compounded by adverse weather conditions, such as heavy rains and floods, which reduced out-of-home consumption, especially for products like beverages. Recognizing the need to correct this imbalance, Dabur embarked on a strategic plan to realign its supply chain by reducing inventory levels in the GT channel, even though this led to a temporary dip in revenue. However, the proactive decision ensured long-term sustainability and better distributor satisfaction.
Timeline: Dabur began recognizing the inventory imbalance issue during the early months of 2024 and initiated its correction in Q2FY25. By October 2024, the company aimed to revive growth across all its channels, driven by a more balanced supply chain.
Challenges
Dabur encountered multiple challenges while addressing its general trade supply chain issues. These challenges emerged as the company worked to realign its distribution network and correct inventory levels, which impacted both short-term performance and long-term business health.
General Trade vs Modern Trade dynamics
The imbalance in Dabur's supply chain stemmed from the disproportionate growth in modern trade and e-commerce channels compared to general trade. As consumer preferences shifted toward the convenience of organized retail and online shopping, demand in general trade, particularly in rural and semi-urban areas, slowed down. Distributors in GT were burdened with excess inventory, which affected their RoI, as stock turnover was significantly slower compared to MT.
In the MT channel, better forecasting tools, a wider range of products, and consumer promotions allowed for higher turnover rates, driving faster sales. Meanwhile, kirana stores, which operate on smaller profit margins, were unable to clear stock as quickly, leading to a bottleneck in Dabur’s GT supply chain.
Impact of weather on sales
Adverse weather conditions, such as heavy rains and floods across parts of India in mid-2024, exacerbated the inventory imbalance by reducing consumer offtake. Out-of-home consumption, especially in the beverages category, was severely affected, as fewer consumers ventured out to make purchases in local stores.
This further contributed to the slower movement of products, leading to greater overstocking in the general trade channel, while urban consumers continued to rely on modern trade and e-commerce for their FMCG needs.
Distributor and retailer profitability
With excess stock accumulating in the GT channel, distributors found themselves in a tough spot. Their working capital was tied up in unsellable inventory, reducing their ability to reinvest in new products or promotions.
Kirana store owners were also struggling with limited liquidity, as unsold goods sat on shelves, forcing them to either discount products or return them. This situation had the potential tension between distributors and Dabur, risking long-term relationships.
Temporary revenue decline
Dabur faced the challenge of balancing short-term and long-term goals. The decision to reduce shipments to correct overstocked inventories in the GT channel led to a mid-single-digit decline in consolidated revenue during the September quarter.
While this correction was necessary to restore balance in the supply chain, it meant accepting a temporary dip in revenue, which could have affected the company's performance in the eyes of investors and shareholders.
Pressure on operating margins
Dabur also experienced pressure on operating margins as a result of the inventory correction. The company anticipated a decline in operating margin to the mid-to-high teens during Q2FY25, caused by both the inventory correction and ongoing investments in brand building and distribution infrastructure.
This put further financial strain on the company during the corrective period, even though these efforts were aimed at improving long-term business health.
Regional consumption patterns
Due to the diversity of consumer behavior across different regions in India, Dabur had to manage its supply chain with great care. While urban consumers were quickly adopting modern trade and e-commerce platforms, rural and semi-urban areas remained more reliant on general trade channels.
This created a challenge in managing inventory levels across regions, as Dabur had to cater to varying demand patterns and ensure that both channels received the appropriate stock levels without overburdening any single distribution network.
Solution
Dabur implemented a comprehensive strategy to address the imbalance in its supply chain, focusing on correcting excess inventory and improving distributor efficiency.
The company took several measures to realign its distribution network, ensure healthier stock levels, and support its distributors while maintaining investments in brand growth and infrastructure. These actions were aimed at restoring long-term sustainability, even at the cost of short-term revenue dips.
Inventory correction
Dabur took a proactive approach to address the supply chain imbalance by initiating an inventory correction. The company reduced shipments to the general trade (GT) channel, allowing distributors to clear excess stock. This temporary reduction in shipments was expected to cause a mid-single-digit decline in revenue for the quarter, but it was deemed necessary for maintaining long-term business health.
By preventing further overstocking, Dabur ensured that its distributors wouldn’t face cash flow problems caused by unsold inventory.
This step could also prevent potential price cuts or discounting in the GT channel, preserving Dabur’s brand value.
领英推荐
Leveraging real-time demand data
To avoid future supply-demand mismatches, Dabur emphasized the importance of data-driven decisions. The company utilized real-time demand data from various channels, allowing them to better align shipments with actual consumer needs.
By integrating demand forecasting tools, Dabur could adapt its production and distribution strategies dynamically. This demand-based supply chain model reduced the risk of overstocking, improving overall efficiency and keeping distributors’ stock levels healthy.
Improving distributor RoI
Dabur focused on enhancing distributor RoI (Return on Investment) by addressing the core issue of slow-moving inventory. By reducing stock levels, the company helped distributors achieve faster inventory turnover.
Additionally, Dabur worked on optimizing the product mix, ensuring that distributors were receiving products with higher demand that could sell faster in the GT channel. This strategic shift could improve distributor cash flow, and increase their confidence in continuing to invest in Dabur’s products.
Product mix adjustment
Recognizing that certain product categories were more affected by slower sales in general trade, Dabur adjusted its product mix strategy. For example, products like beverages, which are more weather-dependent and often rely on out-of-home consumption, were particularly slow-moving due to the adverse weather conditions.
Dabur focused on reducing stock in these slower-moving categories and shifting focus toward higher-demand products in the GT channel, thus improving sales velocity and stock rotation.
Collaboration with distributors and retailers
To ensure the success of the inventory correction, Dabur collaborated closely with its distributors and retailers. The company worked with them to develop joint sales strategies that would help clear old inventory more efficiently.
This collaboration could further foster trust between Dabur and its distribution network, ensuring that distributors understood the long-term benefits of inventory correction and remained committed to the brand.
Dabur could also provide targeted incentives to encourage distributors to clear stock, improving their profitability and strengthening the overall partnership.
Continued investment in brand and infrastructure
Even during the correction phase, Dabur maintained its focus on the future by continuing to invest in its distribution infrastructure and brand-building efforts. This meant that, despite the temporary dip in sales, Dabur was preparing itself for revenue growth as the supply chain became more balanced.
Investments in marketing and promotions would help ensure strong brand visibility, especially in modern trade and e-commerce channels, where demand was growing steadily.
Concept: General Trade vs. Modern Trade supply chain imbalance
To better understand Dabur’s challenges, let’s consider an alternate example involving a hypothetical bottled water company in a developing country with a similar distribution dynamic.
In rural and semi-urban areas, bottled water is typically sold through general trade channels like local grocery stores and roadside vendors. These small businesses rely on traditional demand patterns and have limited storage space, meaning they often carry smaller inventories.
However, in urban centers, modern trade channels such as supermarkets, organized retail chains, and online delivery services have gained traction due to their ability to cater to a more price-sensitive and convenience-driven consumer base.
Demand imbalance
In this scenario, the bottled water company faces a challenge: in urban areas, consumers prefer modern trade outlets because of the convenience and competitive pricing. The company sees rapid growth in e-commerce platforms and supermarkets, where turnover is high due to impulse purchases and seasonal promotions. However, demand in general trade stalls, as rural and semi-urban consumers are slower to adopt bottled water as a staple purchase due to cost concerns, and excess inventory begins to build up in kirana stores.
Over time, local store owners find their cash flow drying up as their shelves are filled with unsold stock. Meanwhile, distributors are hesitant to invest more in bottled water due to poor RoI, and they are forced to discount their products to clear stock, eroding the brand’s market value.
Balancing the supply chain
To correct this imbalance, the bottled water company must act swiftly, much like Dabur. The first step is to reduce shipments to general trade channels to avoid further overstocking. This allows distributors and retailers to clear out existing inventory without further burdening their resources. The company also leverages real-time sales data to optimize its distribution, ensuring that urban outlets receive higher stock levels while rural and semi-urban areas are supplied based on actual demand.
Next, the company invests in targeted marketing campaigns in rural areas to educate consumers on the benefits of bottled water, creating new demand in these slower-moving markets. By improving its distribution network and using better forecasting tools, the bottled water company successfully realigns its supply chain, ensuring that both general and modern trade channels are served efficiently, leading to a healthier business.
In this way, balancing supply and demand between traditional and modern channels becomes crucial for FMCG companies as they navigate the ever-changing landscape of consumer preferences and retail dynamics.
Sources: