Consumer products companies have been forced to take a hard look at their distribution strategies amongst the disruption brought on by the pandemic and the lockdown. All of these companies are now looking at a digital-first strategy, which will not only make their products available to consumers through platforms like Swiggy or Zomato, but will also enable them to create a parallel system to their traditional distribution system.
Recent headlines have been made by Tata Consumer Products (TCPL) after it tied up with Flipkart. The idea is that its distributors would register themselves as sellers on the marketplace, while still remaining traditional distributors. With the Flipkart tie-up, TCPL will ensure that they fulfil the last mile in a far more effective manner. It has been considered as a smart move, especially in these times when brick and mortar retail has been impacted severely.
TCPL has also laid off several distributors in an attempt to embrace a fully digital distribution system. It has been seen that FMCG (Fast Moving Consumer Goods) companies like Coca-Cola, Emami, etc, have also tied up with third-party distribution companies in the last one month for mainstream distribution. This has been done to put in place an alternative platform, which also has a digital backbone. So, such third-party distributors enable a retailer to order his inventory online, which will save the salesperson from going to shop multiple times to first take the order and then deliver it. Developing such a system will surely change the number of traditional distributors a company needs to have. At the same time, it will give an opportunity to traditional distributors to target a new set of stores. This will even allow brands to have better control and visibility of where their products are being sold. Over 30 national brands have made use of online distribution platforms recently.
Due to COVID, large FMCG companies are increasingly feeling the need to make their distribution system more efficient. These companies used to have large and layered distribution systems, since there was no data available. Now, they've been forced to invest in data-driven distribution systems to have better control.
However, some fresh-food manufacturer companies, with goods that have an average shelf life of about two-three days, have always had a direct distribution model. Now, they've gone a step forward during lockdown by doing direct to home distribution. This bypassed the retailers, as most of them were shut. Customers were personally contacted and were provided with door-step deliveries, supported by online payment methods, therefore making them feel safe and secured.
But obviously, the ecosystem of traditional distributors will not vanish completely. Built over decades, distribution is the competitive edge of companies. For example, a large company having a portfolio of 400-500 products, only has about 20% products with a natural velocity. Meaning, a Rin soap might find its way into a shop, but who is going to sell the lesser popular lot of products into that store? That's where the distributor comes in. He goes and sells and convinces the retailer and offers him certain credits and cesses against buying certain products. If we take that out of a company, then the company will be left selling only up to 30% of its products. Therefore, it is observed that operating efficiencies may get disrupted, but the traditional distributors will continue to be relevant. There may be a consolidation of deliveries and transportation, but visiting and servicing of the merchant will not cease.
TCPL's move of getting rid of some of its distributors must be seen as more of a consolidation exercise, post its merger with a division of Tata Chemicals. TCPL has designed its distribution into the standard FMCG two-tier model. This may have been necessitated because pre-merger they had different entities with different distribution systems: Tata Chemicals, Tata Salt business, Tata Tea's coffee and tea business and Himalayan Water business. Now, it has consolidated these into a classic, two-tiered, company-stockist-retailer distribution system, that will make the distribution far more efficient and effective.
