Consumer Goods Distributors Are In Distress. But There’s Hope

Companies are directly supplying to supermarket chains that are setting up stores across big and small cities. Mom-and-pop stores in bigger cities are buying from cash-and-carry companies that offer more discounts. Lured by discounts, consumers in the metros are increasingly buying everything online. And Indians are spending less in a slowing economy.

All that has culminated into a crisis for more than four lakh distributors that are the conduit between millions of local stores and manufacturers. BloombergQuint found that about 5,000 such large bulk suppliers have shut down. Worried, the All India Consumer Goods Distributors Association threatened to halt stocking products if manufacturers didn’t ensure uniform pricing across channels.

That would make companies consider their demand as they contribute 90 percent of the industry’s revenue. But the disruption set in by changing buying preferences and technology is expected to alter how the channel evolves.

Expanding Modern Retail

Growing share of hypermarkets and supermarkets in the revenue of fast-moving consumer goods makers is hurting distributors. That’s because manufacturers are directly supplying to the modern trade by cutting out middlemen.

Fast-moving consumer goods companies now get 9 percent of their sales from modern retail, according to Nielsen India.

For some large companies, the share is higher.

• Hindustan Unilever Ltd. saw about 15-17 percent of its revenue come from modern trade as of September, the management said in an investor call.
• Marico Ltd. and Dabur India Ltd. get about 15 percent revenue from modern trade, according to their investor presentations.
• For Godrej Consumer Products Ltd., according to its investor call, modern trade contributed 15 percent to its revenue in 2017-18. The company hasn’t disclosed the number since then.

That growth comes as the number of hypermarkets and supermarkets has steadily risen in the last four years. Big Bazaar’s owner Future Retail Ltd., and D-Mart operator Avenue Supermarts Ltd., and Reliance Retail Ltd. have expanded outside metros in tier two and three cities.

• D-Mart’s store count increased from 55 in FY16 to 189 as of September 2019.
• Big Bazaar outlets in India rose from 218 as of March 2016 to 293 in September.
• The number of Reliance Retail grocery stores rose from 566 in March 2016 to 600 stores as of September.

Barring a couple of quarters during the ongoing slowdown, modern trade revenues of FMCG companies grew at a much faster pace than the overall industry. According to Nielsen India, the channel grew at 13 percent in the quarter ended September, picking up pace from the previous three months. And the growth is 1.9 times of traditional or general trade and compares with 7.3 percent average growth across channels, it said.

Continuous increase in store universe and revival in throughput are key drivers of modern trade, it said. A sustained growth in smaller towns and a revival in metro cities, driven by increasing importance of Big Days-- key occasions when retailers offer discounts and freebies--are key factors behind the modern trade revival this festive season, it said.

E-commerce, too, doesn’t require companies to route their products through distributors. While it just contributes 2 percent of the FMCG industry, according to Nielsen India, the share is expected to grow to 5 percent by 2022.

Still, online retail is disrupting the supply chain in large cities as companies try to tap young consumers who are increasingly shopping online. What’s luring buyers are deep discounts offered by online sellers. Mom-and-pop stores are already protesting against online retailers. Distributors BloombergQuint spoke with said it’s not possible for them to offer similar discounts so that small stores could pass these on to consumers.

Technology Disruption

Armed with data insights, India’s largest consumer goods maker is rethinking the role of distributors in its supply chain. HUL reaches 90 lakh stores through 3,500 distributors.

In the last decade, the company used digital data to take products to retailers within 48 hours, with virtually zero inventory and holding costs at the distributor level, Srinivas Phatak, chief financial officer at HUL, told BloombergQuint in the CFO Leaders show. It now plans to bring it down to 24 hours.

Today, a distributor unboxes products supplied in bulk and pushes those down the supply chain to stores on credit, Phatak said, explaining how things work. But the company now uses an app to gauge the requirement of retailers in real time. This supplements the digitised order-taking by distributors and their sales staff.

“…You take the app, you will get the orders, and the full algos that you conduct at the back end,” he said. “You can almost decide not to go to a distributor point to do this changing of trucks. It could be anywhere else and you make sure you take the stock directly into the stores.”

Still, only large companies like HUL will have the ability to spend so much on supply chain and sell directly to outlets. Technology and data, however, is creating a new breed of distributors that are channel agnostic. Aggregators like Stellar Value Chain Solutions Pvt. Ltd. and VS Omnitrade India Pvt. Ltd. help companies supply to retailers across urban and rural markets and also to online sellers.

Anshuman Singh, chairman and managing director at Stellar Value Chain Solutions, sees multiple opportunities. “There is a possibility over the next couple of years that retailers and distributors of all consumer goods companies getting on one app which will manage all orders done by one formal player, bringing in formalisation into the trade,” he said.

According to Mihir Mehta, managing director of VS Omnitrade, only the stronger players will survive. But distributors will remain important for smaller or regional companies as they don’t have the muscle power or the capital to deploy to push their products through all channels of distribution, he said.

Agrees Mayank Shah, category head at Parle Products Pvt. Ltd. No company can neglect distributors and they will remain the formidable part of the supply chain. While wholesalers struggled to adjust to the goods and services tax, he said distributors have adjusted to the new tax regime and will continue to dominate.