FMCG companies go for direct distribution in a move away from wholesaler traders

| Updated on: Jan 10, 2018

New forms such as B2B, cash & carry are costlier but more efficient

FMCG companies are reducing their dependence on wholesale trade as a medium of distribution despite it being the strongest link to retailers.

Companies such as Marico, Dabur, Britannia and Godrej Consumer Products are seen to focus on direct distribution channels and even cash-and-carry accounts to bypass wholesale traders who are yet to adopt GST norms, or are yet to start making non-cash transactions.

This will lead to FMCG companies incurring higher direct distribution costs in the near term, till such time as the wholesale traders fall in line and get organised, according to industry observers.

“FMCG companies are trying to prevent revenue loss in the short term. They realise that the cost of doing business will go up due to direct distribution,” observed Himanshu Nayyar, Consumer Analyst, Systematix Shares & Stocks. “While wholesale may have been a preferred and significant channel, there is no option but to turn to direct distribution, and gradually, most of the FMCG companies are going to reduce their dependence on wholesale channels.”

Structural shifts

Marico is already making structural changes in its distribution, moving to new forms such as B2B and cash-and-carry.

“In the long term, direct distribution will replace the traditional wholesale channels. Our endeavour is to increase direct reach for channels such as chemists, cosmetics and specialised food outlets across the six metros,” Saugata Gupta, Marico’s MD & CEO, had said at the firm’s Q1 earnings call.

Dabur CEO Sunil Duggal gave a similar guidance to analysts during the company’s Q1 earnings call. “We will definitely move ahead till the time the spike in (direct distribution) cost becomes prohibitive. But the cost becomes higher as we go down from retailers to small-volume retailers. The retailer is willing to pick up larger and larger quantities from us, and as the size of the business to that last mile grows, we can think of increasing it further. So it is a moving target,” he said.

Godrej Consumer Products too would rather depend on its own distribution channels than resort to wholesale trade. “Wholesale trade does not account for a large part of our sales; most of it is done through our own distributors and we believe in doing our own retail,” said Adi Godrej, the company’s Chairman Emeritus.

Alternative channels

However, the wholesale channel retains its advantages such as providing easy reach and credit terms. FMCG majors such as Dabur and Britannia have 35 per cent of their sales coming from wholesale and expect this channel to remain relevant even while increasing their efforts to increase direct distribution.

“We will continue to have about 35 per cent of sales from wholesalers. But, while doing direct sales is expensive, we expect to have a better payback from every outlet that we reach out to. We have been building direct distribution for the past five years and today reach out to 15 lakh outlets directly,” said Ali Harris Shere, Vice President - Marketing, Britannia.

Going forward, FMCG companies are also likely to change their priorities towards relatively new distribution channels such as cash-and-carry.

“For FMCG firms, about 35 per cent of the distribution currently comes from the wholesale channels. But we expect the share of new distribution channels to go up exponentially in future, though it may not necessarily lead to higher revenues,” observed Kaustubh Pawaskar, FMCG analyst at Sharekhan Securities.

Published on September 01, 2017
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