When Kellogg's Went Missing

My family had gone to their native place. Every year they plan this trip and I am the one who stays back and work. This is the time when I have to plan my food in a way that:

• It is not difficult to make
• It is healthy

Therefore, from the last many years whenever they are out, I switch over to a wide array of easy to prepare products. I have a selective list and one of the products on the list is Kellogg's Cornflakes.

After my family left, I went to the nearby retailer looking for Kellogg’s Cornflakes. I did not find one. I made the other purchases and left. I visited the next day looking for Cornflakes and still did not find one. I spoke to the retailer, 'why are you not stocking Kellogg’s?' He said that it will come tomorrow. As needed for the next day breakfast, I went to the next retailer, he too did not have the stock. With limited options left I had to wait until the next day. The next day I was at the store again, but the stocks had not arrived. As a single person at home who does not have high skills of cooking I was dependent on Kellogg’s and on not getting what I wanted, I got serious and had a strong discussion with the retailer. Since the retailer knew me, he said, 'Sir, there is some problem with Kellogg distribution. They have reduced the distribution margins to 3%. It is not a viable proposition as the overheads of distribution is so high that a distributor cannot survive on 3%. They are on a strike.

Yes, Kellogg’s is a very large company. Yes, the product is very good. Yes, there is a demand in the market. This does not give it or for that matter, any other company to dictate the terms. It is not the loss of business that matters most, it the loss of trust. Many distributors have stayed long with the company and built the business. Some of them are fully dependent on Kellogg’s. When this incident occurred, I was asked to understand through some of my sources that there is an agitation between the company and the distribution partners. A strike is called and there are no supplies of Kellogg’s.

There are many implications that are going to happen because of this:

1. The entire distribution fraternity will now lose the trust of the company
2. All those who will not get the products on the shelves will shift to the competition. They may have never tried a competitor's product in the past but due to non-availability, they will now try another product. If they like it then there is a good chance that they may not come back to Kellogg’s.
3. This will allow other people to come to the Cornflakes market. An unwanted competition

On the other hand, I also thought that what was the need to cut the distributor margins. It is a retail-driven product and increase in cost are extended to the end consumer by increasing the MRP. Reducing distributor margin does not make sense, unless:

1. The company is looking to earn more
2. The company is reducing the MRP
3. Working on a different distribution model, altogether

However. when large companies want to reduce distributor margin or increase the price of a product they create a DECOY. Let me explain this by giving an example. Suppose a company has a distributor margin of 7.45% and wants to reduce the margins to 5%. It will state the distributor that we are cutting down your margins to 3% (internally that targeted margin should be at 5%.) There is hue and cry in the market. Under this situation, there is a huge possibility that the company and the distributor association will negotiate at 5%, which is most likely an agreeable number as the distributors think they have won by taking up the margin by 2%. But the company knows that it has done what it wanted. In the entire episode, the company has still saved 2.45% of the distribution cost. The 3% in the entire episode is a DECOY. While the distributors would be contented with the 5% margins, the entire team of the company would get a sponsored tour to Bangkok; and celebrate over many bottles of Champagne.

People with big muscles of marketing don’t have distributors, they have investors. They want people who have deep pockets and are willing to invest in their product. Other aspects don’t play a major role. The top companies run the business for the distributor and they control the entire business. One of my close business associates, who happens to be a distributor of one of the largest companies in India, says, 'the company people have full control of my business. They calculate my ROI and if they find my earnings are more than the CEO of the company, they will make me invest more. In no case, they don’t want the distributor to earn more than the CEO.'

I have, in my earlier blog mentioned why we must christen the word distributor with business-partner. It is only when we treat them as a part of the business, will they take ownership and make an extra effort to achieve the business target. (https://www.dhirubhai.net/pulse/distribution-fmcg-distributors-today-vijay-sokhi) 

I don’t know what would be the outcome of this situation in the market, but I do know that Kellogg’s will find difficult to find business partners. Yes, they will find ample investors.

( Disclaimer: These are my views based on my interaction with a few of the retailers.)

Vijay Singh Sokhi

Consultant and Implementor

Sharp Consulting and Implementing Company