More than 400 products and variants are launched every year in the FMCG industry in India from just the top 20 FMCG players. These launches are visible on three fronts.

Existing players introducing newer variants, price points or benefit segments: With consumers looking for choice, many categories are seeing the phenomenon of ‘varianting’, for example, there are 60-90 SKUs (stock keeping units) of biscuits at a kirana store today, up 85 per cent from 2010.

New players entering existing categories

Emergence of new categories, led by the consumer movement from unbranded to branded (pulses, for example) or adoption of developed market/modern trade categories (such as oats, handwash, UHT milk)

A typical high-throughput kirana store today stocks around 1,100-1,200 branded SKUs, and many more unbranded staples. At the current rate of new launches, the shop owner will be pressured to stock almost double the number in the same space over 3-5 years. With store sizes of the grocery outlets remaining the same, proliferation of SKUs presents a huge challenge. To manage this, the shop owner reallocates space between categories, brands and variants, to the extent of dropping a few, if necessary.

This phenomenon makes it extremely challenging for any new SKU to enter the outlet. In fact, the fourth and fifth brands in many categories/ segments slowly move out of the store. Existing SKUs may witness stock-outs due to lower replenishment quantities.

Addressing the challenge Currently, many FMCG players are adopting several levers at the point of sale to address this challenge:

1. Buy shelf space and visibility (see Box in the next column)

2. Extend available space through point of sale assets

3. Link range objectives with outlet incentives

However, these steps are not enough in a highly competitive market where each player is vying for space using the same levers. Tata Strategic’s research has identified two unique approaches that FMCG firms can adopt to manage this complexity.

1. Free shelf space from core SKUs by increasing distribution intensity: A kirana owner typically allocates 60-70 per cent shelf space within a category to fast moving or ‘core’ SKUs. Non-core SKUs put pressure on shelf space due to slower rotations.

Reducing shelf space of core SKUs helps utilise space better for a wider portfolio. To do this, the current norm of weekly servicing needs to be converted to bi-weekly for high throughput outlets, thus reducing inventory on shelf. The resulting freed-up space (15-20 per cent) should be retained within the company to push other brands/variants. Core SKUs would also see an uplift due to the additional billing cycle driving share gain and arresting lost sales. This enhanced servicing calls for reorganising the way the distributor reaches the market today, by choosing any of the models below

A. Two “order taking with next day delivery” cycles per week. The first cycle of order beat and delivery beat is retained. Additionally, another mid-week order beat is repeated only for high throughput outlets, followed by a delivery beat.

B. One “order delivery” cycle and one “pure delivery” cycle per week: A mid-week delivery without a separate order taking beat through:

Tele-calling from the distributor point

Fixed or historical retailer pattern-based drop size

C. Beat reorganised for ready stock, twice a week: Combine order and delivery cycles into two ready stock beats

Players can choose an appropriate model depending on SKU range, volume/weight drop size, monthly throughput per outlet and distributor size/capabilities.

To profitably execute these models, the higher costs would need to be offset through both sales uplift (10-15 per cent over baseline) as well as cost efficiencies in the order-taking and/or delivery processes. For instance, pre-arranging daily orders to enable higher number of outlet deliveries per day as well as reducing order-taking frequency of low throughput outlets to fortnightly instead of weekly would reduce cost to serve. See Box titled 'Segmentation'.

2. Driving category exclusivity at outlet

In certain commoditised or nascent categories, the retailer can switch brands by stating non-availability of alternatives to the shopper. A player with a dominant market share in these categories can push the retailer for category/ segment exclusivity with its brand. A drop in category sales needs to be compensated by additional incentives to ensure that the retailer’s absolute take-away is marginally higher than before. See box 'Category Exclusivity'.

For the distributor, the sales uplift results in higher retained margins thus improving his ROI. For the company, additional sales uplift of 25-30 per cent can be obtained from these outlet types, which can be partly shared with the retailer. This also helps the company actively consolidate its market share position in the geography and thwart any attempts from competition.

Shelf space would be a critical challenge as newer categories, brands and variants enter the traditional grocery channel. Actively addressing it is the only way to ensure retention and outlet share gain, for both large and small players. Choice of an approach is dependent on categories present, trade margins, SKU complexity, outlet PDO and player market share, as well as distributor’s size and capabilities. This has to be achieved by simultaneously ensuring profitability for the retailer, distributor and company.

(Deepak Himan is an Engagement Manager with Tata Strategic Management Group (TMSG). Seshadri Narasimhan is a Project Leader and Bhoomika Goyal is an Associate Consultant, both with TSMG. All three specialise in the FMCG field.)

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