The General Trade sales and distribution channel has stagnated.
In this article the author argues that the General Trade is critical to the success of manufacturers – but that it is massively under performing. The problems can be overcome and the General Trade revived, but only if manufacturers are willing to break with tradition and fundamentally restructure their distribution networks.
Fast Moving Consumer Goods (FMCG) manufacturers reach the consumer through 2 main channels:
- Modern Trade – international and local supermarkets or convenience chains
- General Trade – local retailers serviced by territorial distributors with agency rights
As modern retailers have grown their market share, they are increasingly flexing their muscles and driving down manufacturer margins. Looking to resist this margin squeeze, there is growing consensus among manufacturers that maintaining a vibrant General Trade is the only sustainable defence against this Modern Trade squeeze.
This is not just a defensive move. Across Asia, hundreds of millions of people are gaining disposable income and an appetite for packaged products. General Trade sales and distribution networks are the natural conduit to reach these ‘new’ consumers.
So where’s the problem?
Until now, lack of urgency on the part of the manufacturers has meant that General Trade distributor networks have hardly evolved in the past 50 years. A few computers and smartphones have been thrown at the problem……… but no fundamental upgrades have been attempted.
Today, the typical sales and distribution network looks something like the depiction in Diagram 1.
Distributors are contracted to hold inventory. This adds cost (warehousing and working capital) to the network, makes planning prone to the ‘whiplash effect’ – reducing product availability for sale. The preoccupation becomes inventory (too much; too little; wrong product; aging; damage; returns) rather than the selling of fresh product.
In our experience, these General Trade networks usually:
- Hold up to 45% more inventory than required
- Incur 15% higher operating costs than required
- Deliver low product availability – rarely exceeding 80% (when measured objectively)
- Blur the true demand picture – making planning a hit & miss affair
In short – these networks are approaching obsolescence.
So, what’s the solution?
Imagine that you are appointed Country Manager of an FMCG manufacturer. Your customers and current market share already exist, but you are magically granted a clean slate to create the optimal sales and distribution infrastructure to underpin sustainable sales growth.
We believe that you would end up selecting something like the depiction in Diagram 2. We’ve termed this the Clockwork Model (because it operates exactly the same way, everyday, minimizing opportunity for error):
Inventory is centralized and only sold on to the distributors once they have made a retail sale. This increases product availability and simplifies planning processes. It also allows the distributors to focus on their real purpose – selling product. Penetration can be enhanced by opening (stockless) sales offices with better proximity to the customers.
You’d choose this infrastructure because it:
Lifts sales through:
- Consistently making 98% of your product range available for sale
- The servicing of more outlets from more sales points
- Distributor relationships focused solely on sales effectiveness
- Mobile technology driving the right behavior at the point-of-sales
Reduces operating costs through:
- Stockless distributors accepting reduced margins
- Reduced pipeline inventory
- Lower logistics costs (transport costs may rise, but are offset by lower costs elsewhere)
Protects your brand through:
- A high degree of product care, rotation and traceability – from factory to retail shelf
- Facilitating new product launches or the phase-in/phase out of re-launches
- Maximizing your flexibility to adapt the network to serve the evolving market
So, if the Clockwork model is so good, why has it not taken root?
The first reason is that the technology required to support such a highly responsive network is only newly available/affordable. With mobile technology having progressed massively in the past few years, it is now possible to geo-code every outlet, optimize the salesman’s route, track his movements, enhance his performance at the outlet (Notes) and upload his orders in time for evening picking and overnight dispatch from the DC.
The second reason is that to eradicate inventory at the distributors means taking an equivalent hit on sales. This is something that is difficult to justify to shareholders during a global economic downturn. However, a new option may be emerging. By transferring ownership of the centralized inventory (housed in the Distribution Centre) to a third-party investor, the manufacturer can avoid taking the sales hit while removing a substantial amount of working capital off the books.
The third reason is simply lack of management bandwidth. Businesses run leaner now, and few manufacturers have the in-house skills and resources available to visualize plan and implement such a transformation.
The fourth reason is the good, old-fashioned, “Let’s wait for someone else to do it first”. This reason is the sad one – as it is gifting market domination to the modern trade retailers and condemning Asia to homogeneous chains of branded outlets. The General Trade can still be reinvigorated now – but if it is allowed to wither, there will be a point of no return.
Every time that we’ve compared the Clockwork model to either current or alternative route-to-market models, it has won hands-down – delivering consistently better service at a lower cost. This has been the case whether we were dealing with high or low value goods, ambient or temperature controlled, regulated or non-regulated.
And it is WIN-WIN for all parties in the chain:
- Manufacturers increase sales though better product availability and market penetration
- 3PLs get to add value – running mission-critical, fast-response Distribution Centres
- Distributors get to reduce their working capital and work their assets harder (Notes)
- Local retailers are better serviced and they stay competitive with the Modern Trade
We predict that first movers to the Clockwork model will certainly gain competitive advantage that will drive growth. However, there are no major barriers to entry (outside of people’s perception) so within 5-6 years we believe that almost everyone will have moved across to this model.
The author is a Partner with Logistics Consulting Asia.
Logistics Consulting Asia works with FMCG manufacturers and distributors in the development of supply chain capabilities and technologies to serve emerging markets.
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