Credit sales within the FMCG space in Sub Saharan Africa

In most developing economies, be it be in Sub Saharan Africa, Latin America or even Asia, credit is used as a weapon by Fast Moving Consumer Good (FMCG) companies to increase their sales revenue.

The clear understanding is that whilst the primary sales is a credit transaction between the FMCG company and the distributor, the secondary sales too will be a credit transaction between the distributor and the retailer.

In Sub Saharan Africa, across the FMCG space, credit is a double-edged sword.

Whilst the distributor demands for credit, he does not always pass on the credit to the next level in the value chain, that is the wholesaler or retailer.

Weaker the brand, obviously stronger is the negotiation power of a distributor.

Irrespective of whether one is a Sales Head of a confectionery company in Kenya or a Sales Head of a culinary products company in Nigeria, the quantum of credit sales is inversely proportional to the brand equity.

So, a super strong brand like Dettol (of Reckitt Benckiser) sells on advance cash and carry in Nigeria whereas a fresh start up in the confectionery business of Kenya, obviously needs to dole out credit to ensure the initial market penetration.

It always remains a challenge for the Sales Head.

How much credit to offer? How long will the credit period be? Whom to offer credit and whom to refuse? Most critically, what action to take once credit norms are violated?

Whilst each FMCG company, irrespective of being based out of East Africa or West Africa, will set its own credit norms, some basic guidelines need to be universally followed by the Sales Head.

• Corporate Credit Limits, be it be in Kenyan Shillings or in Nigerian Naira, needs to be frozen for the corporate entity itself, depending on their Working Capital position. This is actually a corporate call between the Business Head, the Finance Head and the Sales Head.
• Distributor Credit Limits, for individual distributors, need to be very carefully arrived at between the Sales Head and his immediate subordinate(s) depending on territory potential, distributor's financial strength, competitive landscape etc.
• It is critical to set the Distributor Credit Limits on two parameters. Absolute value as well as number of days. The impact of long-standing credit even for relatively small amount of money can be debilitating for any FMCG company in Africa.
• The entire process for Credit Management is dependent on serious and objective analysis of the FMCG market. Some categories within FMCG are more prone to credit sales and some are less. Needless to mention, strong brands can get away with either no credit or at worst, low credit. On the other hand, newly launched brands or relatively weaker brands need the support of the FMCG company in terms of credit sales.
• The role of the Field Sales Representative in the FMCG company cannot be overemphasized. It is his preliminary report (post market scanning) that will ensure a win-win situation. The Sales Head in Sub Saharan Africa, especially in the FMCG companies, must always be on a sharp look out for judgmental errors as well as clear cases of nepotism / favoritism by members of his sales team.
• Once credit limit is approved in writing, it needs to be monitored separately by the Sales Head and Finance Head, as per a fixed weekly / fortnightly routine.
• One effective way of ring fencing is to link the incentives for the sales team not just on value sales but concurrently also on reduction of credit sales. To wean away distributors from credit purchases, a system of cash discounts can be introduced too.
• Credit norm violation is an age-old problem within the FMCG space of East Africa and West Africa. My personal recommendation, after experiencing it for nearly two decades here in Africa, is to set the organization culture right. Once the Business Head, the Finance Head, and the Sales Head are in synch, that no matter what, any credit norm violation is unacceptable and will be dealt with severely, then both the company salesperson as well as the distributor will be careful. The opposite is equally true. Any laxity on the part of the Sales Head, can and does open the floodgates for bad debts and even fraud, leading to Working Capital challenges and even litigation costs.

To conclude, the credit conundrum within the FMCG space in East Africa and West Africa is real and something that the Sales Head needs to approach with a fine balance of common sense and corporate discipline.

Disclaimer: All views expressed in this article by the author are entirely personal and do not reflect the views of any of his employers, previous and present.