ROLE OF DISTRIBUTION CHANNEL IN FMCG

• Distribution channel (also known as marketing channel)

Distribution (or placement) is one of the four aspects of marketing. A distributor is the middleman
between the manufacturer and retailer. After a product is manufactured, it may be warehoused or
shipped to the next echelon in the supply chain, typically either a distributor, retailer or consumer.
The other three parts of the marketing mix are product management, pricing, and promotion.

Frequently there may be a chain of intermediaries, each passing the product down the chain
to the next organization, before it finally reaches the consumer or end-user. This process is
known as the 'distribution chain' or the 'channel.' Each of the elements in these chains will
have their own specific needs, which the producer must take into account, along with those
of the all-important end-user.

Channels
A number of alternate 'channels' of distribution may be available:

Selling direct, such as via mail order, Internet and telephone sales Agent, who typically sells
direct on behalf of the producer Distributor (also called wholesaler), who sells to retailers
Retailer (also called dealer or reseller), who sells to end customers Advertisement typically
used for consumption goods Distribution channels may not be restricted to physical
products alone. They may be just as important for moving a service from producer to
consumer in certain sectors, since both direct and indirect channels may be used. Hotels, for
example, may sell their services (typically rooms) directly or through travel agents, tour
operators, airlines, tourist boards, centralized reservation systems, etc. There have also been
some innovations in the distribution of services. For example, there has been an increase in
franchising and in rental services - the latter offering anything from televisions through
tools. There has also been some evidence of service integration, with services linking
together, particularly in the travel and tourism sectors. For example, links now exist between
airlines, hotels and car rental services. In addition, there has been a significant increase in
retail outlets for the service sector. Outlets such as estate agencies and building society
offices are crowding out traditional grocers from major shopping areas.

Channel members
Distribution channels can thus have a number of levels. Kotler defined the simplest level,
that of direct contact with no intermediaries involved, as the 'zero-level' channel.

The next level, the 'one-level' channel, features just one intermediary; in consumer goods a
retailer, for industrial goods a distributor. In small markets (such as small countries) it is
practical to reach the whole market using just one- and zero-level channels.

In large markets (such as larger countries) a second level, a wholesaler for example, is now
mainly used to extend distribution to the large number of small, neighborhood retailers.

In Japan the chain of distribution is often complex and further levels are used, even for the
simplest of consumer goods.

In Bangladesh Telecom Operators are using different Chains of Distribution, especially

'second level'.

In IT and Telecom industry levels are named "tiers". A one tier channel means that vendors
IT product manufacturers (or software publishers) work directly with the dealers. A one
tier / two tier channel means that vendors work directly with dealers and with distributors
who sell to dealers.But the most important is the distributor or wholesaler.

The internal market

Many of the marketing principles and techniques which are applied to the external
customers of an organization can be just as effectively applied to each subsidiary's, or each
department's, 'internal' customers.

In some parts of certain organizations this may in fact be formalized, as goods are
transferred between separate parts of the organization at a `transfer price'. To all intents and
purposes, with the possible exception of the pricing mechanism itself, this process can and
should be viewed as a normal buyer-seller relationship. The fact that this is a captive
market, resulting in a `monopoly price', should not discourage the participants from
employing marketing techniques.

Less obvious, but just as practical, is the use of `marketing' by service and administrative
departments; to optimize their contribution to their `customers' (the rest of the organization
in general, and those parts of it which deal directly with them in particular). In all of this, the
lessons of the non-profit organizations, in dealing with their clients, offer a very useful
parallel.

Channel Decisions
Channel strategy
Product (or service)- Cost- Consumer location

Channel management
The channel decision is very important. In theory at least, there is a form of trade-off: the
cost of using intermediaries to achieve wider distribution is supposedly lower. Indeed, most
consumer goods manufacturers could never justify the cost of selling direct to their
consumers, except by mail order. In practice, if the producer is large enough, the use of
intermediaries (particularly at the agent and wholesaler level) can sometimes cost more than
going direct.
Many of the theoretical arguments about channels therefore revolve around cost. On the
other hand, most of the practical decisions are concerned with control of the consumer. The
small company has no alternative but to use intermediaries, often several layers of them, but
large companies 'do' have the choice.

However, many suppliers seem to assume that once their product has been sold into the
channel, into the beginning of the distribution chain, their job is finished. Yet that
distribution chain is merely assuming a part of the supplier's responsibility; and, if he has
any aspirations to be market-oriented, his job should really be extended to managing, albeit
very indirectly, all the processes involved in that chain, until the product or service arrives
with the end-user. This may involve a number of decisions on the part of the supplier:

Channel membership
Channel motivation
Monitoring and managing channels

Channel membership
Intensive distribution - Where the majority of resellers stock the 'product' (with convenience
products, for example, and particularly the brand leaders in consumer goods markets) price
competition may be evident.
Selective distribution - This is the normal pattern (in both consumer and industrial markets)
where 'suitable' resellers stock the product.
Exclusive distribution - Only specially selected resellers or authorized dealers (typically
only one per geographical area) are allowed to sell the 'product'. Often this form of
distribution stipulates the contracted resellers cannot offer competing products.

Channel motivation
It is difficult enough to motivate direct employees to provide the necessary sales and service
support. Motivating the owners and employees of the independent organizations in a
distribution chain requires even greater effort. There are many devices for achieving such
motivation. Perhaps the most usual is `incentive': the supplier offers a better margin, to
tempt the owners in the channel to push the product rather than its competitors; or a
competition is offered to the distributors' sales personnel, so that they are tempted to push
the product. At the other end of the spectrum is the almost symbiotic relationship that the all
too rare supplier in the computer field develops with its agents; where the agent's personnel,
support as well as sales, are trained to almost the same standard as the supplier's own staff.

Monitoring and managing channels

In much the same way that the organization's own sales and distribution activities need to be
monitored and managed, so will those of the distribution chain.

In practice, many organizations use a mix of different channels; in particular, they may
complement a direct salesforce, calling on the larger accounts, with agents, covering the
smaller customers and prospects.
Vertical marketing
This relatively recent development integrates the channel with the original supplier -
producer, wholesalers and retailers working in one unified system. This may arise because
one member of the chain owns the other elements (often called `corporate systems
integration'); a supplier owning its own retail outlets, this being 'forward' integration. It is
perhaps more likely that a retailer will own its own suppliers, this being 'backward'
integration. (For example, MFI, the furniture retailer, owns Hygena which makes its kitchen
and bedroom units.) The integration can also be by franchise (such as that offered by
McDonald's hamburgers and Benetton clothes) or simple co-operation (in the way that
Marks & Spencer co-operates with its suppliers).

Alternative approaches are 'contractual systems', often led by a wholesale or retail co-
operative, and `administered marketing systems' where one (dominant) member of the
distribution chain uses its position to co-ordinate the other members' activities. This has
traditionally been the form led by manufacturers.

The intention of vertical marketing is to give all those involved (and particularly the
supplier at one end, and the retailer at the other) 'control' over the distribution chain. This
removes one set of variables from the marketing equations.

Other research indicates that vertical integration is a strategy which is best pursued at the
mature stage of the market (or product). At earlier stages it can actually reduce profits. It is
arguable that it also diverts attention from the real business of the organization. Suppliers
rarely excel in retail operations and, in theory, retailers should focus on their sales outlets
rather than on manufacturing facilities ( Marks & Spencer, for example, very deliberately
provides considerable amounts of technical assistance to its suppliers, but does not own
them).

Horizontal marketing
A rather less frequent example of new approaches to channels is where two or more non-
competing organizations agree on a joint venture - a joint marketing operation - because it is
beyond the capacity of each individual organization alone. In general, this is less likely to
revolve around marketing synergy.

• FMCG
What are Fast Moving Consumer Goods (FMCG)?
Products which have a quick turnover, and relatively low cost are known as Fast Moving Consumer
Goods (FMCG). FMCG products are those that get replaced within a year. Examples of FMCG
generally include a wide range of frequently purchased consumer products such as toiletries, soap,
cosmetics, tooth cleaning products, shaving products and detergents, as well as other non-durables
such as glassware, bulbs, batteries, paper products, and plastic goods. FMCG may also include
pharmaceuticals, consumer electronics, packaged food products, soft drinks, tissue paper, and
chocolate bars.
A subset of FMCGs are Fast Moving Consumer Electronics which include innovative electronic
products such as mobile phones, MP3 players, digital cameras, GPS Systems and Laptops. These
are replaced more frequently than other electronic products.

White goods in FMCG refer to household electronic items such as Refrigerators, T.Vs, Music
Systems, etc.

In 2005, the Rs. 48,000-crore FMCG segment was one of the fast growing industries in India.
According to the AC Nielsen India study, the industry grew 5.3% in value between 2004 and 2005.

HISTORY OF FMCG IN INDIAN CONTEXT

Through the nineties, the FMCG markets grew at almost 15% per annum in value. Suddenly, in
2000

FMCG market growth stalled and then declined for the next four years. The rapid opening up of the
economy resulted in many new avenues of expenditure for the consumer’s growing income. A sharp
drop in interest rates from 18% to 8% led to explosive demand for consumer durables like white
goods, two wheelers and automobiles. Mobile phone ownership and usage exploded due to its
amazing lifestyle and convenience benefits as well as lower prices. Entertainment, leisure and travel
sectors also boomed.
The lure of new avenues of expenditure in products and services led to consumers restricting their
spending on FMCG. Consumers’ downgraded to lower priced substitutes from higher quality
brands. As a result of this shift in spending patterns, the FMCG market declined in value in the last
four years creating a major challenge for growth.

The FMCG sector has had a much better time in recent months, with market showing signs of broad
revival. It accounts for about 6.4% of total market capitalisation, and is up, compared to 6.1% in
December’04. The situation continues to be tough in the home and personal care segments. Rising
raw material costs in the petro-based intermediaries used in shampoos and detergents have resulted
in cost pressures and a competitive market means companies have not been able to pass on these
costs fully to consumers through price hikes. The FMCG sector is witnessing demand growth again,
driven by improving reach, organized retail and innovative channels, higher usage – driven by
affordability and rising incomes driving aspiration levels. As a result, we see an improvement in
sales growth for the FMCG industry.

Consumer Demographics & Buying Patterns of Indian Consumers

FMCG is one sector which caters to the daily and more basic needs of consumers and therefore
don’t have a chance to run out of focus. From oral care products to packed food to detergents,
soaps, mosquito coils, etc, are the various categories of products that FMCG market makes
available to lakhs of consumers across the country.
Initially, Indian buyers were a bit conservative partly due to lesser disposable income and partly due
to fewer competitive and more variety of products. But since almost a decade, brands like
Pepsodent, Pepsi, Coke, Mortein, various ITC brands, Dabur products, P & G products, etc, have
made a stern attempts in providing higher quality products with relatively competitive prices,
making Indian consumer enjoy brands which deliver high quality and adhere to global standards.
The plethora of such brands was thrown open to Indian consumers during 1990s which witnessed a
rise and growth in the FMCG industry. But from 2000 onwards a there has been a negative growth
of this industry. The reasons are manifold; firstly, yesteryears’ amenities started becoming
necessities like, mobile phones, cars, branded clothes, accessories, etc. Secondly, the disposable
income of average Indian consumer rose sharply within the past 5 year and finally, availability of
various financial aides made every reasonable and expensive purchase, easy thereby giving the
Indian consumers an unlimited exposure to experience the same. But since December’04, the sales
of various brands belonging to key players and the overall FMCG industry performance have
picked up and the intense sales promotional efforts, cut throat competitive strategies, stronger
distributional efforts have helped various brands penetrate deeper into the markets
and increased sales. Today, rural Indian consumers market has by far become the highest revenue
generator for many of the FMCG product companies and availability of a wide variety of range has
allowed today’s Indian consumer to analyze and judge each product accurately and make an ideal
purchase decision.

Mechanics of Distribution Channels of Sector

The supply chain of products in the FMCG market in India is one of the longest supply chains an
industry could really have. There are as many as 5 levels of intermediaries involved in the entire
supply chain through which a product passes before reaching the end consumer.
What has been observed is that even though these FMCG companies are big multinationals and
Indian but face a major challenge of making their products available in the market in the right
quantities and in the right time. This is simply because these companies don’t really have a wide
network of sales agents and other force which is required and is ideal for catering their products to
the markets. This aspect is taken over by distributors, wholesalers and retailer whose margins on
these products actually double the price of these products when a final consumer buys it. The
margins kept by these intermediaries range from 2% to 5%. The products in this industry are
transported from manufacturing units via c & f agencies or warehouse to distributors who further
sell the same to wholesalers or stockiest who finally sell it to the retailers in the market. These
products are transported either via roadways or railways within the domestic markets and normally
don’t take more than a week to reach the retailers. FMCG products are normally a high
volume ball game and products have to essentially be available in the market at all given points of
time and at all given points of purchase and therefore the distribution activities are highly volatile
and dynamic. The supply of products takes place virtually on a daily basis in fixed quotas or
otherwise, to retailers as per their requisitions and the anticipation of demand and the performance
of products in the recent past. All such criteria are taken into consideration before the quantum of
products being dispatched to the next level of intermediary. Since it’s a volume game,
manufacturers make all possible efforts to boost sales and promote their distributors to earn more
and more orders from the retailers and wholesalers. A close check is maintained on the flow of the
products on a daily, weekly, fortnightly and monthly basis to determine the trend in the business and
flow of products and consumption. This activity also helps to find out drawbacks of the distribution
system, if any, and rectify them within time.

List of FMCG Companies in India

A
ADF Foods Ltd
Agro Dutch Inds. Ltd
Agro Tech Foods Ltd
Ajanta Soya Ltd
Amar Remedies Ltd
Anik Industries Ltd
ANS Ltd
Arcuttipore Tea Company Ltd
Assam Company India Ltd.
AVT Natural Products Ltd

B
Bajaj Hindusthan Ltd.
Balrampur Chini Mills Ltd.
Bambino Agro Inds. Ltd
BCL Industries & Infrastructures LtD
Beeyu Overseas Ltd
Bio Whitegold Farms Ltd
Britannia
Britannia Industries Ltd

C
Camson Bio Technologies Ltd
CCL Products (India) Ltd.
Chaman Lal Setia Exports Ltd
Chordia Food Products Ltd
Colgate-Palmolive (India) Ltd

D
Dabur India Ltd
Darshan Oils Ltd
DCM Shriram Inds. Ltd
DFM Foods Ltd
Dhampur Sugar Mills Ltd.
Dhampure Specialty Sugars Ltd
DHP India Ltd.
Dhunseri Tea & Inds. Ltd
Diana Tea Company Ltd
Dollex Industries Ltd

E
EID-Parry (India) Ltd.
Emami Ltd
Empee Distilleries Ltd
Empee Sugars & Chemicals Ltd.
Energy Products (India) Ltd.

F
Flex Foods Ltd
Freshtrop Fruits Ltd
G
Gayatri Sugars Ltd
GlaxoSmithKline Consumer Healthcare Ltd
GMR Industries Ltd
Godfrey Phillips India Limited
Godrej Consumer Products Limited
Gokul Refoils and Solvent Ltd
Goodricke Group Ltd
GRM Overseas Ltd
Gujarat Ambuja Exports Ltd
Gujarat Aqua Inds. Ltd

H
Harrisons Malayalam Ltd
Hatsun Agro Products Ltd
Henkel India Ltd
Heritage Foods (India) Ltd
Hillock Agro Foods (India) Ltd
Himalya International Ltd
Hind Industries Ltd
Hindustan Unilever Limited

I
IB Infotech Enterprises Ltd
Indage Restaurants and Leisure Ltd
Indian Extractions Ltd
Indian Sucrose Ltd
Indo Biotech Foods Ltd
ITC Limited

J
Jay Shree Tea & Inds. Ltd
Jayant Agro-Organics Ltd
Jeypore Sugar Company Ltd.
JK Sugar Ltd
Joonktollee Tea & Industries Ltd
JVL Agro Industries Ltd

K
Kashipur Sugar Mills Ltd.
Kohinoor Foods Ltd
Kothari Products Ltd
KRBL Ltd
KSE Ltd
L
Longview Tea Company Ltd
Longview Tea Company Ltd
Lotte India Corpn. Ltd.
Lotus Chocolate Company Ltd

M
Madhur Industries Ltd
Madhusudan Industries Ltd
Mahaan Foods Ltd
Marico Ltd
Mawana Sugars Ltd. [Merged]
Mihijam Vanaspati Ltd
Modern Dairies Ltd
Mohan Meakin Ltd
Moneshi Agro Industries Ltd
Mount Everest Mineral Water Ltd
Muller & Phipps (India) Ltd.
Murli Industries Limited

N
Naraingarh Sugar Mills Ltd
Natraj Proteins Ltd
NEPC Agro Foods Ltd
Nestle India Ltd
Nijjer Agro Foods Ltd
Nirma Ltd

P
Piccadily Agro Inds. Ltd
Pioneer Agro Extracts Ltd
Ponni Sugars (Erode) Ltd
Poona Dal & Oil Inds. Ltd
Prime Industries Ltd
Procter & Gamble Hygiene and Health Care Limited
Prudential Sugar Corpn. Ltd

R
Radico Khaitan Limited
Rajshree Sugars & Chemicals Ltd
Rasoya Proteins Ltd.
Rattan Vanaspati Ltd
Rei Agro Ltd
Riverdale Foods Ltd
RT Exports Ltd
RTCL Ltd
Ruchi Soya Inds. Ltd

S
Saboo Sodium Chloro Ltd
Sampre Nutritions Ltd
Sanwaria Agro Oils Ltd
SBEC Sugar Ltd
Simran Farms Ltd
Sir Shadi Lal Enterprises Ltd
Sita Shree Food Products Ltd
SKM Egg Products Export (India) Ltd
Spectrum Foods Ltd
Srinivasa Hatcheries Ltd
Sunil Agro Foods Ltd
Super Bakers (India) Ltd

T
T&I Global Ltd
Tarai Foods Ltd
Tasty Bite Eatables Ltd
Tata Coffee Ltd
Tata Tea Limited
Temptation Foods Ltd
Terai Tea Company Ltd
Tezpore Tea Company Ltd
Triveni Engineering & Inds. Ltd
Tyroon Tea Company Ltd

U
Ugar Sugar Works Ltd
Umang Dairies Ltd
Unique Organics Ltd
United Breweries Limited
United Spirits Limited
Upper Ganges Sugar & Inds. Ltd

V
Vadilal Enterprises Ltd
Venky'S (India) Ltd
Vijay Solvex Ltd
Vimal Oil & Foods Ltd
Volga Air Technics Ltd.
W
Weikfield Products Company India Private Limited
Wellwin Industry Ltd.

Z
Zicom Electronic Security Systems Ltd.
Zydus Wellness Ltd

The companies mentioned in Exhibit I, are the leaders in their respective sectors. The personal care
category has the largest number of brands, i.e., 21, inclusive of Lux, Lifebuoy, Fair and Lovely,
Vicks, and Ponds. There are 11 HLL brands in the 21, aggregating Rs. 3,799 crore or 54% of the
personal care category. Cigarettes account for 17% of the top 100 FMCG sales, and just below the
personal care category. ITC alone accounts for 60% volume market share and 70% by value of all
filter cigarettes in India.

The foods category in FMCG is gaining popularity with a swing of launches by HLL, ITC, Godrej,
and others. This category has 18 major brands, aggregating Rs. 4,637 crore. Nestle and Amul slug it
out in the powders segment. The food category has also seen innovations like softies in ice creams,
chapattis by HLL, ready to eat rice by HLL and pizzas by both GCMMF and Godrej Pillsbury. This
category seems to have faster development than the stagnating personal care category. Amul, India's
largest foods company, has a good presence in the food category with its ice-creams, curd, milk,
butter, cheese, and so on. Britannia also ranks in the top 100 FMCG brands, dominates the biscuits
category and has launched a series of products at various prices.

In the household care category (like mosquito repellents), Godrej and Reckitt are two players.
Goodknight from Godrej, is worth above Rs 217 crore, followed by Reckitt's Mortein at Rs 149
crore. In the shampoo category, HLL's Clinic and Sunsilk make it to the top 100, although P&G's
Head and Shoulders and Pantene are also trying hard to be positioned on top. Clinic is nearly
double the size of Sunsilk.

Dabur is among the top five FMCG companies in India and is a herbal specialist. With a turnover of
Rs. 19 billion (approx. US$ 420 million) in 2005-2006, Dabur has brands like Dabur Amla, Dabur
Chyawanprash, Vatika, Hajmola and Real. Asian Paints is enjoying a formidable presence in the
Indian sub-continent, Southeast Asia, Far East, Middle East, South Pacific, Caribbean, Africa and
Europe. Asian Paints is India's largest paint company, with a turnover of Rs.22.6 billion (around
USD 513 million). Forbes Global magazine, USA, ranked Asian Paints among the 200 Best Small
Companies in the World

Cadbury India is the market leader in the chocolate confectionery market with a 70% market share
and is ranked number two in the total food drinks market. Its popular brands include Cadbury's
Dairy Milk, 5 Star, Eclairs, and Gems. The Rs.15.6 billion (USD 380 Million) Marico is a leading
Indian group in consumer products and services in the Global Beauty and Wellness space.

Outlook
The Indian market is so vast that anything and everything can be marketed here. This is what gives
the FMCG sector an immense growth prospects. more and more companies are entering this
emerging sector with better products. sooner or later candy market will also be associated with
FMCG sector as Merisant, the $400-million US-based table sweetener maker, plans to enter the
sugar-free confectionery market in India.

There is a huge growth potential for all the FMCG companies as the per capita consumption of
almost all products in the country is amongst the lowest in the world. Again the demand or prospect
could be increased further if these companies can change the consumer's mindset and offer new
generation products. Earlier, Indian consumers were using non-branded apparel, but today, clothes
of different brands are available and the same consumers are willing to pay more for branded
quality clothes. It's the quality, promotion and innovation of products, which can drive many
sectors.

 HOW DISTRIBUTION CHANNEL PLAYING A MAJOR

ROLE IN FMCG SECTOR?
The fast moving consumer goods (FMCG) industry is posed to grow dramatically. To leverage
opportunities, FMCG manufacturers and retailers will have to develop and implement deliberate
strategies for gaining market access. This paper provides an in-depth look at the strategic role of
distribution channels in the FMCG industry. Specifically, it surveys the state of current distribution
channels in India and identifies four archetypes that FMCG firms can use as a starting point to
develop their distribution strategy. With a population in excess of 1 billion and current annual GDP
growth of 9% (Vietor and Thompson 2007), India is a major player in the world economy. Not
surprisingly, by 2050 the country is projected to become the third largest economy after China and
the United States (Hawksworth 2006). India's economic prowess is being driven by the purchasing
power of a burgeoning middle class as wealth steadily trickles down to the bottom of the economic
pyramid. Given this brisk growth, domestic industries are in a race against time to ramp up capacity,
increase production, and achieve market access via channels of distribution. One sector that is
expected to bear the brunt of this demand is the fast moving consumer goods (FMCG) industry with
retail sales expected to top $40 billion by 2015 (India Brand Equity Foundation 2008). FMCG's
encompass a wide range of products such as toiletries, soap, cosmetics, toothpaste, shaving cream,
and detergents (Coulthart 2006). Multinationals with a significant FMCG presence in India are
Unilever, Procter and Gamble, Nestle, and Cadbury. Despite its potential, the FMCG industry faces
several significant marketing constraints. First, manufacturers and retailers have to grapple with
fragmented markets and a plethora of channel forms in a constant state of flux. In particular,
numerous street-side vendors, hawkers, and roughly 12 million unregulated neighborhood mom-
and-pop or kirana stores create strong institutional forces that cannot be ignored. Second, frequent
regulatory changes affect channel structure and exacerbate adaptation challenges. For example, in
2006 the government allowed direct foreign entry by single brand retailers (Lakshman 2007).
Consequently, firms scampered for upscale retail space in a hypercompetitive real estate market
while domestic manufacturers faced a multitude of challenges in the areas of new product
introduction, line stretching, and branding. Given the importance of distribution channels to the
Indian economy, one would expect a considerable body of relevant academic research to be readily
available. However, a careful appraisal of extant research belies this expectation. While India has
garnered much attention, the focus has primarily been on general topics pertaining to the socio-
economic, political, and business environments (Basu 2008; Khanna 2008; Vietor and Thompson
2007). In recent years, the emphasis has shifted to include research on other topics like entry modes
(Johnson and Tellis 2008), and outsourcing (Marshall 2002). However, there remains a paucity of
systematic work on the impact of distribution on the Indian economy in general and the FMCG
industry in particular. This study attempts to bridge the gap in our understanding of FMCG
distribution channels in India.

 ANALYSIS & EVALUATION OF DISTRIBUTION

CHANNELS IN FMCG SECTOR:
The supply chain of products in the FMCG market in India is one of the longest supply chains an
industry could really have. There are as many as 5 levels of intermediaries involved in the entire
supply chain through which a product passes before reaching the end consumer. What has been
observed is that even though these FMCG companies are big multinationals and Indian but face a
major challenge of making their products available in the market in the right quantities and in the
right time. This is simply because these companies don’t really have a wide network of sales agents
and other force which is required and is ideal for catering their products to the markets. This aspect
is taken over by distributors, wholesalers and retailer whose margins on these products actually
double the price of these products when a final consumer buys it. The products in this industry are
transported from manufacturing units via c&f agencies or warehouse to distributors who further sell
the same to wholesalers or stockiest who finally sell it to the retailers in the market. These products
are transported either via roadways or railways within the domestic markets and normally don’t take
more than a week to reach the retailers. FMCG products are normally a high volume and products
have to essentially be available in the market at all given points of time and at all given points of
purchase and therefore the distribution activities are highly volatile and dynamic. The supply of
products takes place virtually on a daily basis in fixed quotas or otherwise, to retailers as per their
requisitions and the expectation of demand and the performance of products in the recent past. All
such criteria are taken into consideration before the quantum of products being dispatched to the
next level of intermediary. Since it’s a volume game, manufacturers make all possible efforts to
boost sales and promote their distributors to earn more and more orders from the retailers and
wholesalers.

This activity also helps in finding out drawbacks of the distribution system. Rediscovering of
distribution means re-designing of distribution process in a better way. As the market grows need
for efficiency and viability increases. Given an existing distribution process of a product, the need
to rediscover it in e-tailing way would lead to man Need of e-tailing · What would happen to current
distribution process .Benefit among existing distribution or e-tailing The need for e-tailing is to
provide better entrée to customer along with the instant order placement and convenience for the
same. Traditional distribution process can even exist after rediscovering. as an alternative both the
distribution model would exist in the product market adding to higher sale by company.

Traditional Distribution

Traditional distribution process normally consists of manufacturer, wholesaler, and retailer

Reaching towards final consumers. Such type of distribution was essential due to lack of
Technology , better connectivity and wide reach. With the increasing consumer base the need for e-
tailing starts generating more income to the organization.
Manufacturer Wholesaler Retail Consumers

There are certain advantages in Traditional distribution

• Reduction in setup cost as company can use the retailers to sell the product.

• Understanding customer demand and behavior in a better way with the help of retailer.

• Easy access to rural areas with the help of small retailers located there.

• Consumers have easy availability of product with the help of retailers.

E-Tailing

E-tailing means selling of goods and service through online process with the use of internet.
It’s an advanced version of distribution. E-tailing basically deals with retailing that takes place on
internet Eg; Dell. It succeeded success fully in on line distribution channel.
Model of E-Tailing:

Manufacturer Internet Consumer

There are many advantages in E- tailing.

An e-tailing does not have to wait for customers because it virtually operates globally.

• Companies have cost leadership with the elimination of middlemen.

• Products can be ordered all-round the clock.

• Chances of product shortage are minimized.

In the current scenario where the market is growing and world is shrinking due to better
connectivity, need of e-tailing is highly looked upon. There is huge potential in the world market as
the spending of consumer is increasing

WHAT IS A DISTRIBUTION CHANNEL?

The route by which a product or service is moved from a producer or supplier to customers. A
distribution channel usually consists of a chain of intermediaries, including wholesalers, retailers,
and distributors, that is designed to transport goods from the point of production to the point of
consumption in the most efficient way.

Complicated Success Factors for distribution:

The distribution strategy also needs the support and encouragement of top management to succeed
Some of the CSFs could be: Clear, transparent and unambiguous policy and procedure should
require of Serious commitment of the channel partners
 • Fairness in dealings
• Clearly defined customer service policy
• High level of integrity
• Equitable distribution at times of shortage
• Timely compensation channel partners

Channel functions:

• Information gathering
• Consumer motivation
• Bargaining with suppliers
• Placing orders
• Financing
• Inventory management
• Risk bearing
• After sales support
• Financial support
Distribution Channels

Distribution channels should take care of the following 'discrepancies.

• Spatial
• Temporal Discrepancy
• Breaking bulk
• Assortment
Spatial

In this channel system helps reduce the distance between the producer and the consumer of his
products. Consumers are spotted Have to be reached cost effectively.
Example: companies produce products in one location even for global needs. MICO makes fuel
injection equipment, spark plugs etc in different plants but its dealer will sell the entire products.
Temporal Discrepancy

The channel system helps in speeding up in meeting the requirement of the consumers
Time when the product is made and when it is consumed it is different.
Example:

Maruti plant in Gorgon - cars and spares are available when the consumer wants

Breaking Bulk

The channel system reduces large quantities into consumer acceptable lot sizes Production has to
be in large quantities to benefit from economies of scale Consumption is necessarily in small lot
sizes .
Eg; India is ultimate example in breaking bulk you can buy one cigarette, one Annacian.
Need for Assortment

The channel system helps aggregate a range of products for the benefit of the consumer - t could
be made by one company or several of them. For the same product, it could be a variety of brands
and package sizes.
Channel Flows :

Forward flow - company to its customers - goods and services , products,

Backward flow - customers to the company – payment for the goods. Returned goods.

Flows both ways - information

Channel Levels:

Zero level - If the product or service is provided to the end user directly by the company. Used
mostly by companies delivering service like health, education, banking (also known as service
channels)

One level - consists of one intermediary.

Two level - consists of two intermediaries and is the most common for FMCG products.

Marketing channel system:

1. Vertical

2. Horizontal

3. Multi channel

1. Vertical Marketing system:

Various parties like producers, wholesalers and retailers act as unified system to avoid conflicts.
Improves operating efficiency and marketing effectiveness.

3types

 Corporate

 Administrated
  Contractual

1. Horizontal:
Two or more unrelated companies join together to pool resources and exploit an emerging market
opportunity
Eg:
Retail out lets in petrol bunks
Coffee day outlets in airports
Multi channel Distribution:

Used in situations where

 Same product but different market segments

 Size of buyers varies

 Geographic concentration of potential consumers varies

 Reach is difficult

Expectations from channel:

 Variety and assortment at one location

 Bulk breaking

 Close to customer location

 Speed of Delivery

 Additional services

Distribution organization Functions:

• Primary aim: determine who will do what Major Decision points.

• Extent of company support and outsourcing to be decided Budget for the cost of the

distribution effort

• Select suitable channel partners - C&FAs, and distributors

• Setting clear objectives for the partners

• Agree on level of financial commitments by the channel partners.

TYPES OF INTERMEDIARIES

There is a variety of intermediaries that may get involved before a product gets from the original
producer to the final user, they are
Retailers:

Retailers operate outlets that trade directly with household customers. Retailers can be classified in

several ways:

 Type of goods being sold( e.g. clothes, grocery, furniture)

 Type of service (e.g. self-service, counter-service)

 Size (e.g. corner shop; superstore)

 Ownership (e.g. privately-owned independent; public-quoted retail group

 Location (e.g. rural, city-centre, out-of-town)

 Brand (e.g. nationwide retail brands; local one-shop name)

Wholesalers

Wholesalers stock a range of products from several producers. The role of the wholesaler is to sell
onto retailers. Wholesalers usually specialize in particular products.
Distributors and dealers

Distributors or dealers have a similar role to wholesalers – that of taking products from producers
and selling them on. However, they often sell onto the end customer rather than a retailer. They also
usually have a much narrower product range. Distributors and dealers are often involved in
providing after-sales service.

Franchises
Franchises are independent businesses that operate a branded product (usually a service) in
exchange for a license fee and a share of sales.

Agents
Agents sell the products and services of producers in return for a commission

Role of Intermediaries in Distribution channel:

• Greater efficiency in making goods available to target markets.

• Intermediaries provide

 Contacts

 Experience

 Specialization

 Scale of operation

 Match supply and demand.

Functions of Intermediaries

 Information

 Promotion

 Contact

 Matching

 Negotiation

 Physical Distribution

 Financing

 Risk taking

Channel Levels
  Manufacturer

 Wholesaler

 Retailer

 Consumer

 Channels of Distribution

A brief explanation of different channels of distribution is given below:

1. Manufacturer _ Customer:

This is also known as direct selling because no middlemen are involved. A producer may sell
directly through his own retail stores, for example, Bata. This is the simplest and the shortest
channel. It is fast and economical. Small producers and producers of perishable commodities also
sell directly to the local consumers. Big firms adopt direct selling in order to cut distribution cost
and because 274 they have sufficient facilities to sell directly to the consumers. The producer or the
entrepreneur himself performs all the marketing activities.
2. Manufacturer _ Retailer _ Customer:

This is one stage distribution channel having one middleman, i.e., retailer. In this channel, the
producer sells to big retailers like departmental stores and chain stores who in turn sell to customer.
This channel is very popular in the distribution of consumer durables such as refrigerators, T V sets,
washing machines, typewriters, etc. This channel of distribution is very popular these days because
of emergence of departmental stores, super markets and other big retail stores. The retailers
purchase in large quantities from the producer and perform certain marketing activities in order to
sell the product to the ultimate consumers.

3. Manufacturer _ Wholesaler _ Retailer _ Customer:

This is the traditional channel of distribution. There are two middlemen in this channel of
distribution, namely, wholesaler and retailer. This channel is most suitable for the products with
widely scattered market. It is used in the distribution of consumer products like groceries, drugs,
cosmetics, etc. It is quite suitable for small scale producers whose product line is narrow and who
require the expert services and promotional support of wholesalers.

Channel Design Decision

Analyzing consumer service needs.

Setting channel objectives and

constraints
 Identify Major alternatives

Intensive Selective Exclusive

distribution distribution distribution
Evaluating major alternatives

Intensive distribution

• Distribution through every reasonable outlet available - FMCG

• Strategy is to make sure that the product is available in as many outlets as possible ,
Preferred for consumer, pharmaceutical products and automobile spares

Selective distribution

Multiple, but not all outlets in the market a few select outlets will be permitted to keep the
Products Outlets selected in line with the image the company Wants to project Preferred for high
value products Tanishq jewelry Keeps distribution costs lower .

Exclusive Distribution

Highly selective choice of outlets - may be even one outlet in an entire market - car dealers
Could include outlets set up by companies - Titan, Bata Producer wants a close watch and control
on the distribution of his products.

Channel Management Decision

Selecting

Motivating
Evaluating
India’s top 10 FMCG companies:
FOLLOWING ARE THE TOP 10 FMCG COMAPANIES IN INDIA:

Exhibit ITHE TOP 10 COMPANIES IN FMCG SECTOR

S. NO. Companies
1. Hindustan Unilever Ltd.
2. ITC (Indian Tobacco Company)
3. Nestlé India
4. GCMMF (AMUL)
5. Dabur India
6. Asian Paints (India)
7. Cadbury India
8. Britannia Industries
9. Procter & Gamble Hygiene and Health Care
10. Marico Industries
Source: Naukrihub.com

 FURTHER WE WILL STUDY ROLE OF DISTRIBUTION

CHANNEL IN FMCG VIA ANALYSING ROLE
DISTRIBUTION CHANNEL IN INDIA’S TOP MOST FMCG
COMPANY WHICH IS HINDUSTAN UNIILEVER
LIMITED(HUL).

Hindustan Unilever Limited

INTRODUCTION
Hindustan Unilever Limited (‘HUL’), formerly Hindustan Lever Limited (it was renamed in
late June 2007 as HUL), is India's largest Fast Moving Consumer Goods company, touching the
lives of two out of three Indians with over 20 distinct categories in Home & Personal Care
Products and Foods & Beverages. These products endow the company with a scale of combined vol
umes of about 4 million tonnes and sales of nearly Rs. 13718 crores. HUL is also one of the country
's largest exporters; it has been recognised as a Golden Super Star Trading House by the
Government of India. The mission that inspires HUL's over 15,000 employees, including over
1,300managers, is to "add vitality to life." HUL meets everyday needs for nutrition, hygiene, and
personal care with brands that help people feel good, look good and get more out of life. It
is a mission HUL shares with its parent company, Unilever, which holds 52.10% of the equity.
The rest of the shareholding is distributed among 360,675 individual shareholders and financial inst
itutions. HUL's brands ‐ like Lifebuoy, Lux, Surf Excel, Rin, Wheel, Fair & Lovely,
Pond's, Sunsilk, Clinic, Pepsodent, Close‐up, Lakme, Brooke Bond, Kissan, Knorr‐
Annapurna, Kwality Wall's – are household names across the country and span many
categories ‐ soaps, detergents, personal products, tea, coffee, branded staples, ice cream and
culinary products. These products are manufactured over 40 factories across India. The
operations involve over 2,000 suppliers and associates. HUL's distribution network
comprises about
4,000 redistribution stockists, covering 6.3 million retail outlets reaching the entire urban
population, and about 250 million rural consumers. We have analyzed the distribution network of
HUL from the following aspects:
1. Evolution of HUL’s distribution network
2. Transportation & Logistics
3. Channel Design
4. Initiatives taken for channel member management.
5. Field force management
6. Analytical Framework
7. Financial Analysis

Distribution Network of HUL

Evolution over Time

The HUL’s distribution network has evolved with time. The first phase of the HUL distribution
network had wholesalers placing bulk orders directly with the company. Large retailers also placed
direct orders, which comprised almost 30 per cent of the total orders collected. The company
salesman grouped all these orders and placed an indent with the Head Office. Goods were sent to
these markets, with the company salesman as the consignee. The salesman then collected and
distributed the products to the respective wholesalers, against cash payment, and the money was
remitted to the company. The focus of the second phase, which spanned the decades of the
40s, was to provide desired products and quality service to the company's customers. In order
to achieve this, one wholesaler in each market was appointed as a "Registered Wholesaler," a stock
point for the company's products in that market. The company salesman still covered the market,
canvassing for orders from the rest of the trade. He then distributed stocks from the Registered
Wholesaler through distribution units maintained by the company. The Registered Wholesaler
system, therefore, increased the distribution reach of the company to a larger number of customers.
The highlight of the third phase was the concept of "Redistribution Stockist" (RS) who
replaced the RWs. The RS was required to provide the distribution units to the company
salesman. The second characteristic of this period was the establishment of the "Company Depots"
system. This system helped in transshipment, bulk breaking, and as a stockpoint to minimise stock‐
outs at the RS level. In the recent past, a significant change has been the replacement of the
Company Depot by a system of third party Carrying and Forwarding Agents (C&FAs). The C&Fas
act as buffer stock‐points to ensure that stock‐outs did not take place. The C&FA system has also
resulted in cost savings in terms of direct transportation and reduced time lag in delivery. The most
important benefit has been improved customer service to the RS. The role performed by the
Redistribution Stockists includes: Financing stocks, providing warehousing facilities, providing
manpower, providing service to retailers, implementing promotional activities,
extending indirect coverage, reporting sales and stock data, demand simulation and screening for
transit damages.
Detail Overview
The distribution network of HUL is one of the key strengths that help it to supply most
products to almost any place in the country from Srinagar to Kanyakumari. This includes,
maintaining favorable trade relations, providing innovative incentives to retailers and
organizing demand generation activities among a host of other things. Each business of
HUL portfolio has customized the network to meet its objectives. The most obvious
function of providing the logistics support is to get the company’s product to the end customer.

Distribution System of HUL

HUL’s products, are distributed through a network of 4,000 redistribution stockists, covering
6.3 million retail outlets reaching the entire urban population, and about 250 million rural
consumers. There are 35 C&FAs in the country who feed these redistribution stockists
regularly. The general trade comprises grocery stores, chemists, wholesale, kiosks and
general stores. Hindustan Unilever provides tailor made services to each of its channel
partners. It has developed customer management and supply chain capabilities for
partnering emerging self‐service stores and supermarkets. Around 2,000 suppliers and associates ser
ve HUL’s 40 manufacturing plants which are decentralized across 2 million square miles of territory
.

HUL

Redistribution stockists
C&F Agents

Wholesalers

Rural retailers Urban retailers

Consumers

(Fig. 1 – Schematic of HUL’s Distribution Network)

Distribution at the Villages:
The company has brought all markets with populations of below 50,000 under one rural sales
organisation.The team comprises an exclusive sales force and exclusive redistribution stockists.The
team focuses on building superior availability of products. In rural India, the network directly cover
s about 50,000 villages, reaching 250 million consumers, through 6000 sub‐stockists.

PHASE 1 PHASE 3
 Van based fixed route Shakti Entreprenurs
coverage 50% Rural population
25% Rural pop (target)

Based Distributor SS

PHASE 2
SS-Star seller
Distributor based in the
village Hub& spoken
Model
37% Rural population .

(Fig. 2 – Rural Distribution Model of HUL)

HUL approached the rural market with two criteria ‐ the accessibility and viability. To service this
segment, HUL appointed a Redistribution stockist who was responsible for all outlets and
all business within his particular town. In the 25% of the accessible markets with low business pote
ntial, HUL assigned a sub stockist who was responsible to access all the villages at least once in a f
ortnight and send stocks to those markets. This sub‐stockist distributes the company's products to o
utlets in adjacent smaller villages using transportation suitable to interconnecting roads, like cycles,
scooters or the age‐old bullock cart. Thus, Hindustan Unilever is trying to circumvent the barrier of
motorable roads. The company simultaneously uses the wholesale channel, suitably
incentivising them to distribute company products. The most common form of trading remains the g
rassroots buy‐and‐sell mode. This enables HUL to influence the retailers stocks and quantities sold t
hrough credit extension and trade discounts. HUL launched this Indirect Coverage (IDC) in
1960s.Under the Indirect Coverage (IDC) method, company vans were replaced by vans
belonging to Redistribution Stockists, which serviced a select group of neighbouring markets.
Distribution at the Urban centres: Distribution of goods from the manufacturing site to
C & F agents take place through either the trucks or rail roads depending on the time
factor for delivery and cost of transportation. Generally the manufacturing site is located
such that it covers a bigger geographical segment of India.
From the C & F agents, the goods are transported to RS’s by means of trucks and the products
finally make the ‘last mile’ based on the local popular and cheap mode of transport.

BUSINESS MODEL OF HUL:

\

• Direct marketing means selling products by dealing directly with consumers rather than
through intermediaries.

• Traditional methods include mail order, direct-mail selling, cold calling, telephone selling,
and door-to-door calling. More recently telemarketing, direct radio selling, magazine and
TV advertising, and on-line computer shopping have been developed.

• The main advantages of selling direct are that there is no need to share profit margins and
the producer has complete control over the sales process. Products are not sold nearby those
of competitors either.

• There may also be specific market factors that encourage direct selling:

• There may be a need for an expert sales force, to demonstrate products, provide detailed pre-
sale information and after-sales service

• Retailers, distributors, dealers and other intermediaries may be unwilling to sell the product

• Existing distribution channels may be owned by, or linked to, competing producers (making
it hard to obtain distribution by any other means than direct)

• However, there are significant costs associated with selling direct which may be higher than
the costs associated with using an intermediary to generate the same level of sales. There are
several potential advantages of using an intermediary.

• More efficient distribution logistics

 • Overall costs (even taking into account the intermediaries’ margin or commission) may be
lower

• Consumers may expect choice (i.e. the products and brands of many producers) at the point
of sale

• Producers may not have sufficient resources or expertise to sell direct.

In indirect distribution

It is the system the marketer reaches the intended final user with the help of others. These resellers
generally take ownership of the product, though in some cases they may sell products on a
consignment basis (i.e., only pay the supplying company if the product is sold). Under this system
intermediaries may be expected to assume many responsibilities to help sell the product.

Indirect methods include:

Single-Party Selling System - Under this system the marketer engages another party who then
sells and distributes directly to the final customer. This is most likely to occur when the product is
sold through large store-based retail chains or through online retailers, in which case it is often
referred to as a trade selling system.

Multiple-Party Selling System

This indirect distribution system has the product passing through two or more distributors before
reaching the final customer. The most likely scenario is when a wholesaler purchases from the
manufacturer and sells the product to retailer
New distribution channels

Project Shakti
This model creates a symbiotic partnership between HUL and its consumers. Started in the
late 2000, Project Shakti had enabled Hindustan Lever to access 80,000 of India's 638,000
villages .HUL's partnership with Self Help Groups(SHGs) of rural women, is becoming an
extended arm of the company's operation in rural hinterlands. Project Shakti has already
been extended to about 12 states ‐ Andhra Pradesh, Karnataka, Gujarat, Madhya Pradesh,
Tamil Nadu, Chattisgarh, Uttar Pradesh, Orissa, Punjab, Rajasthan, Maharashtra and West
Bengal. The respective state governments and several NGOs are actively involved in the
initiative. The SHGs have chosen to partner with HUL as a business venture, armed with
training from HUL and support from government agencies concerned and NGOs. Armed
with micro‐credit, women from SHGs become direct‐to‐home distributors in rural markets.
The model consists of groups of (15‐20) villagers below the poverty line (Rs.750 per
month) taking micro‐credit from banks, and using that to buy our products, which they
will then directly sell to consumers. In general, a member from a SHG selected as a
Shakti entrepreneur, commonly referred as 'Shakti Amma' receives stocks from the HUL rural
distributor. After being trained by the company, the Shakti entrepreneur then sells those goods
directly to consumers and retailers in the village.
Each Shakti entrepreneur usually service 6‐10 villages in the population strata of 1,000‐
2,000. The Shakti entrepreneurs are given HUL products on a `cash and carry basis.'
The following two diagrams show the Project Shakti model as initiated by HUL.

PROJECT STREAMLINE / STREAM LINE DISTRIBUTION:

To improve the efficiency of a process, business organization by simplifying or eliminating

unnecessary steps, using modernizing techniques, or taking other approaches. To cater to the
needs of the inaccessible market with high business potential HUL initiated a Streamline
initiative in 1997. Project Streamline is an innovative and effective distribution network for
rural areas that focuses on extending distribution to villages with less than 2000 people
with the help of rural sub‐stockists/Star Sellers who are based in these very
villages. As a result, the distribution network directly covers as of now about 40 per cent of the rura
lpopulation. Under Project Streamline, the goods are distributed from C & F Agents to
Rural Distributors (RD), who has 15‐20 rural sub‐stockists attached to him. Each of these
sub‐stockists / star sellers is located in a rural market. The sub‐stockists then perform the role
of driving distribution in neighboring villages using unconventional means of transport such
as tractor and bullock carts. Project Streamline being a cross functional initiative, the Star
Seller sells everything from detergents to personal products. Higher quality servicing, in
terms of frequency, credit and full‐line availability, is to be provided to rural trade as part of the new
distribution strategy.

Hindustan Lever Network (HLN)

It is the company's arm in the Direct Selling channel, one of the fastest growing in India
today. It already has about several lakh consultants ‐ all independent entrepreneurs, trained
and guided by HLN's expert managers. HLN has already spread to over 1500 towns and
cities, covering 80% of the urban population, backed by 42 offices and 240 service centres
across the country. It presents a range of customised offerings in Home & Personal Care and Foods.

The New Compensation plan for HLN partners provides new exciting ways of earning
substantial income in addition to offering rewards like revenue sharing through the
innovative concept of “pools” Mother Depot and Just in Time System In order to
rationalise the logistics and planning task, an step has been the formation of the Mother Depot and J
ust in Time System (MD‐JIT). Certain C&FAs were selected across the country to act as mother
depots. Each of them has a minimum number of JIT depots attached for stock requirements.
All brands and packs required for the set of markets which the MD and JITs service in a
given area are sent to the mother depot by all manufacturing units.

The JITs draw their requirements from the MD on a weekly or bi‐weekly basis. Leveraging Inform
ation technology HUL customers are serviced on continuous replenishment. This is possible becaus
e of IT connectivity across the extended supply chain of about 2,000 suppliers, 80 factories
and 7,000 stockists. This sophisticated network with its voice and data communication
facilities has linked more than 200 locations all over the country, including the head office, branch o
ffices, factories, depots and the key redistribution stockists. They have also combined backend
processes into a common Shared Service infrastructure, which supports the units across the
country. All these initiatives together have

enhanced operational efficiencies, improved the service to the customers and have brought
us closer to the marketplace. RS Net Initiative: The RS Net initiative, launched in 2001, aims
at connecting Redistribution Stockists (RSs) through an internet based system. It now
covers stockists of the Home & Personal Care business and Foods & Beverages in close
to 1200 towns and cities. Together they account for about 80% of the company's turnover.
RS Net is one of the largest B2B e‐commerce initiatives ever undertaken in India.
It provides linkages with the RSs’ own transaction systems, enables monitoring of stocks
and secondary sales and optimises RS’s orders and inventories on a daily basis through online intera
ction on orders, despatches, information sharing and monitoring. The IT‐powered system
has been implemented to supply stocks to redistribution stockists on a continuous
replenishment basis. Today, the sales system gets to know every day what HUL stockists
have sold to almost a million outlets across the country. Information on secondary sales is now avail
able on RS Net every day. RS Net is part of Project Leap. Project Leap begins with the
supplier runs through the factories and depots and reaches up to the RSs. This ensures
HUL’s growth by ensuring that the right product is
available at the right place in the right quantities and at the right time in the most cost
effective manner. Leap also aims at reducing inventories and improving efficiencies right
through the extended supply chain. RS Net has come as a force multiplier for HUL Way,
the company's action‐plan to not only maximise the number of outlets reached but also to
achieve leadership in every outlet. RS Net has enabled stockists to place orders on a
Continuous Replenishment System. This in turn has unshackled the field force to solely
focus on secondary sales from the stockists to retailers and market activation. It has also
enabled RSs to provide improved service to retail outlets. Simultaneously, HUL is servicing
the rural market, key urban outlets, and the modern trade as a single concern. Adexa iCollaboration
suite In 2000, HUL identified improved supply chain management as a critical business
priority and launched a comprehensive initiative, “Project Leap,” tasked with increasing
supplier/distributor responsiveness, reducing inventory buffers, and optimizing planning and
scheduling. HUL chose the Adexa iCollaboration suite for facilitating centralized monitoring
of the SCM, live customer /supplier collaboration, and integrating demand and distribution
planning with production scheduling.
With the aggregated view of data provided by the iCollaboration suite, HUL was able to combine sa
les and distribution efforts on the diverse product lines, which resulted in significant savings on the
cost side for inventories and distribution. HUL updates inventory positions, shipments and customer
orders on a daily basis with these software packages and can get a pulse on the market real time.

3. Channel Design
Hindustan Lever Limited (HUL) has two types of channel selling ‐
i. Regular (traditional) retail channel,
ii. Direct Selling Channel in the name of Hindustan Lever Network (HLN).

HUL has a well entrenched high distribution model which comprises of C&FAs,
Redistribution
Stockists, wholesalers and retailers (as shown earlier). Hindustan Unilever's distribution network is
recognized as one of its key strengths. Its focuses on Product availability, Brand communication,
and
higher levels of brand experience.

HUL’s Sales Break up through different channels:

Sales Break-up Through Different Channels

7%
60%
33%
Modern Retail Urban General Trade Rural Areas

Channel Structure (Special Focus is on Jamshedpur) Typically, the goods produced in each of the H
UL's 40 factories are sent to a depot with the help of a carrying and forwarding agent (C&FA). The
company has its depot in every state of the country. The C&FA is a third party and gets servicing fe
e for stock and delivery of the products. In each town, there is at least a redistribution stockist (RS)
who takes the goods from the C&FA and sells them to retail outlets. In Jharkhand the C&FA is in R
anchi and Jamshedpur is serviced by 3 Redistribution Stockists at Sakchi (M/s Om Prakash Agarwa
l), Bistupur and Parsudih.

The HUL management realized certain problems with the existing sales model. First, the model was

not viable for small towns with small population and small business. HUL found it expensive to
appoint one stockist exclusively for each town. Secondly, the retail revolution in the country has
changed the pattern the customers shop. Large retail self service shops are becoming commonplace.
In response of these problems, HUL redesigned its sales and distribution channel and the
new system is known as 'diamond model' in the company. At the top end of the diamond,
there are the self service retail stores which constitute 10% of the total FMCG market.
The middle, fatter part of the diamond represents the profit‐center based sales team. In the bottom o
f the pyramid is the rural marketing and distribution which accounts for 20% of the
business. As a result of the new distribution plan the company has planned to reduce the number of
RS in small towns.

Redistribution Stockists:
Total number of RS in Jamshedpur = 3 (at Sakchi, Bistupur, Parsudih). This is going to
be reduced to
only one with effect from next month of this year. Sales Margin: 4.76% which includes
cash discount, ntal expenses. Modes of transport used: Rickshaw, tempo. Incentive schemes:
Before 2000 holiday packages and tours but after 2000 no non‐monetary incentive for RS.
Software systems and Information System: UNIFY 8.3 (Developed by IBM & CMC). This
software needs to be synchronized daily and the system updates any information/ incentive
schemes / sales figures etc to and from the common shared platform. Areas of Operations: Marked f
or each of the RS. Selling Operations: RSs sells the goods toWholesaler (gets 1.5 % max. discount
from RS) Retailers (gets 1.0% max. discount from RS)

Wholesaler:
Gets cash discounts and other schemes promoted by HUL (gets points under Vijeta Scheme).

Retailers:
Total retailer base in Jamshedpur: Approximately 1070.
Sales Margin: Depends on the product
o Soap, detergents ‐ 8% on MRP
o Cosmetics ‐ 10% on MRP
o Food items ‐ 8% on MRP

Incentive schemes:
Company programs (Scheme Discounts + Cash Discounts)
TPR schemes based on Sales (1 % to 4 %)
Vijeta scheme is not for retailers.

Field Sales Force:

To meet the ever‐changing needs of the consumer, HUL has set up a distribution network
that ensures availability of all their products, in all outlets, at all times. This includes,
maintaining favourable trade relations, providing innovative incentives to retailers and
organizing demand generation activities among a host of other things.

The important activities that HUL field sales force does are (i) target chasing and (ii)
reporting on a daily basis. Account information is maintained on palmtops given by HUL.
During our research and informal survey of HUL field sales force, we came to know that
for the last two years, training is not being given at all to the sales force.

HUL has limited the network channel selling to categories of Home & Personal Care
(HPC) and Food products with exclusive brands for this channel. That is, these particular
brands (products) are all exclusive to HLN, specifically developed for the Direct Selling
channel, and not available in the retail channel. The general trade comprises grocery stores,
chemists, wholesaler, kiosks andgeneral stores. Hindustan Unilever services each with a tailor
made mix of services.

4. Initiatives taken to Improve the Distribution Network

HUL has taken the following initiatives to improve its distribution network: Setting up of a full
scale sales organisation comprising key account management and activation to impact, fully engage
and service modern retailers as they emerge. Servicing Channel partners and customers with contin
uous daily replenishment. Leveraging scale and building expertise to service Modern Trade and Ru
ral Markets. Delayering of sales force to improve response times and service levels. Revamping
of its sales organisation in the rural markets to fully meet the emerging needs and
increased purchasing power of the rural population. HUL’s distribution network in rural
India already directly covers about 50,000 villages, reaching about 250 million consumers
through about 6,000 sub stockists.
Implementation of supply chain system that connects stockists across the country, and also
includes a back‐end system connecting suppliers, all company sites and stretching right up to
stockists. IT tools have been deployed for connectivity across the extended supply chains.
Backend processes have been combined into a common Shared Service infrastructure.
Launching of Project Shakti through which the company is able to extend its operations in
villages. HUL has also included several NGOs and state governments as the initiative helps
rural women to improve their financial position.
Launching of HUL Network to leverage the channel of direct selling by presenting customised
offerings in 11 home and personal care and food categories. Started in 2003, it already has a
base of 300,000 consultants across the country.
Starting of franchised Lakme Beauty Salons and Ayush Therapy centres to offer standardised
services, in line with the strategy to leverage the equity of its brands through relevant
services.
Finding out Innovative ways to reach out to its consumers, particularly in rural areas by
leveraging non‐conventional media like wall paintings, cinema vans, weekly markets (haats),
fairs and festivals.
Initiating the concept of Super Value Stores (SVS) in urban areas to partner traditional stores
to provide a range of services ranging from managing their inventory to setting up POS
(point of sale) banners. In addition to this, to boost up traditional retail in the face increasing
in‐roads made by large, modern retailing chains like Spencer’s, Reliance Fresh etc (where
HUL is squeezed harder for discounts), HUL started restructuring some of the selected SVSs
into the form of self‐service retail shops a la modern retails. This is to protect & maintain the
competitive advantage that HUL has over its biggest competitors in the other markets (e.g.,
P&G), with its very deep distribution reach through traditional retail.
Launching the Unicare scheme with upmarket pharmacies and retailers to sale its premium
brands.
Undertaking several initiatives for traditional channels in order to improve its capabilities at
the front‐end by developing skills for stockists' sales force. Under 'Project Dronacharya', the
FMCG major continuously imparted training to over 10,000 stockist salesmen.
Launching of several promotional schemes for existing wholesalers and distributors. For
instance, it has started the ‘Vijeta ‐ Rishta Jeet Ka’ scheme last year to provide a platform for
the wholesaler and HUL to grow the business by earning points and redeeming them.

5. Field Force Management

The working cycle of a typical HUL field force member is from 21st of every month to the 20th of t
he next month. During this period he is given various targets that helps to achieve
company objectives and gives him a chance to prove his performance relative to other.
To start with the field force member is given a particular area and his responsibility is to
cater to all the retailers in that area. While deciding the area for each member of the field
force, the company makes sure that the operating area of each field member doesn't
overlap with his other colleagues. There are various methods used by the company to
iMonetary.
In HUL, the field force is evaluated using QOC (Quality of Contribution). It consists of 4 compone
nts
1. Secondary Sale (Max points = 2.5)
2. Eco (Max points = 0.5)
3. Focus (Max points = 0.5)
4. FCS (Max Points = 0.5)
ECO
SECONDARY
FCS
FOCUS
QOC

Secondary Sale Based on the operating area, each member is given a specific target in
terms of value (e.g., Rs. 15 lacs) for the operating month (21st – 20th of next month). If
he achieves 100% of the target he gets 2.5 points, if he achieves 95% target he gets 1.5
points. These points are used to add to the total QOC score as well as linked to monetary incentive.

ECO / Width pack Target – This is used for the penetration/reach of certain products
in the existing market. The following is a typical ECO target assigned to a field force agent:
Lux International – 105 outlets x 1 SKU Pears Soap 135 outlets x 1 SKU Rin
104 outlets x 1SKU Breeze Soap 100 outlets x 1 SKU

The outlets mentioned are within the operating area of the person and 1 SKU = Rs. 27/‐.
Based on this the Field person calculates number of packs he should sell to the retailers.
The concerned agent receives this target around 25th of each month and has to complete
this target within the 5th day of next month. Upon completion he gets additional 0.5
points added to his QOC score along with monetary incentive associated with it. However
if this is not met within 5th, he looses the opportunity.

Focus / Depth Pack target – This is mainly used to increase the sales volume of certain
products. A typical ‘Focus’ target is given below:
Lux International – Rs 20,640 /‐ @ Rs 6/‐ per unit
Life Buoy ‐ Rs 70,220 /‐ @ Rs 10/‐ per unit
Wheel ‐ Rs 99,000 /‐ @ Rs 10/‐ per unit
Breeze Soap ‐ Rs 27,000 /‐ @ Rs 10 /‐ per unit
This target needs to be achieved within 20th of next month. Upon achieving the target the
field
person is awarded 0.5 points which is then added to his overall QOC score.

Field Capability Score (FCS) ‐ In this component, the field force persons are required to
ensure that the scheduled visit/outlet billing is such that at least 15 items are demanded
per order. If this is achieved the retailer gets a discount of 1% on the billed amount and
on the other hand the field person gets an additional score of 0.5 which is added to his
QOC score. Each scheduled visit per outlet is one per week. For example if there are 100
outlets within the operating area of a field person then the number of visit per week is
100 and total number of visit per month = 100x4 = 400.

The sales person is required to achieve 90% success rate to get 0.5 points for his QOC score and at
least 65% for a satisfactory performance. Non Monetary Methods The other purpose of the QOC sc
ores is to highlight the performance of the field person among his peers. Based on the QOC various
awards are distributed to the field persons at the end of every month. These awards are also known
as ‘MOC Star’ awards. MOC stands for Monthly operating Cycle.
If QOC score > 4.5 – The person is eligible for 7 star award
If QOC score > 4 – The person is eligible for 5 star award
If QOC score > 3.5 – The person is eligible for 3 star award
In the event of exceptional performance, management representatives from the regional office
come to the zonal office to distribute the awards. The photograph of the award winners is displayed
in the office as a source of inspiration for other sales person.

Target Setting Mechanism and monitoring

The regional office monitors the performance of various zones. A thorough analysis is done at the
end of each month and based on that the weak products are identified or those for which the
demand has weakened. This is the basis of setting ECO and FOCUS targets for the field persons. Ea
ch
field person is given a palmtop wherein he can feed the entries on the spot where the transaction is
done. This solves basically the two purposes ‐
a) The field person is freed from the tedious task of maintaining cumbersome records and can then
concentrate on the job (thus IT is replacing some of the field force or other channel members),
b) The sold item is immediately updated in the company information system.

6. Analytical Framework
We tried to analyze HUL’s distribution network in the light of 20 most significant variables that affe
ct
the distribution part of channel management for any organization in the business of marketing &
selling of goods. The variables, their explanations and their impact on the HUL’s distribution netwo
rk
are given below –
1. Number of Consumers
In retail business dominated by traditional stores like Kirana Stores etc (Indian retail business falls
in this category), higher the no. of consumers, higher will be the no. of channel
intermediaries. The implication of this is that there will be many layers in the channel in such a situ
ation and managing such a complex distribution network by keeping tabs on every player will be
a huge task. Moreover, Transport & Logistics (“T&L”) support provided by the
organization needs to be well organized. Implication for HUL
HUL’s key strength lies in managing its distribution network in India. HUL is India’s
largest FMCG company with unmatched distribution network, which is built over a century
focusing on traditional retail. HUL's distribution network comprises about 4,000
redistribution stockists, covering about 6.3 million retail outlets reaching the entire urban
population, and about 250 million rural consumers in India. It’s said that HUL is able to
touch the lives of about 2 out of every 3 Indian consumers. This achievement is due to
the sheer strength of its distribution network (products should be
good as always, otherwise they will find no buyers in the long run). For a comparison, P&G,
world’s largest FMCG major, does not find its name in the list of top 5
FMCG majors in India as its strength lies in managing modern retail (biggest example, Wal Mart),
but not traditional retail.
2. Geographic Dispersion of Consumers
Again, this is closely related with the previous variable, more so in a large, geographically diverse
country like in India. With the increase in this dispersion level, more intermediaries and
more
layers are required in the distribution network so as to effectively reach the length &
breadth of
the country. Obviously the T&L management for such an organization would be critical to
accomplish this.
Implication for HUL
For a country as geographically diverse as India, pan‐Indian presence & market leadership
can
only be possible when products reach even the remotest parts of the country. HUL is very
successful in achieving and maintaining this reach due to its distribution network.
3. Frequency of Purchase
If the frequency of purchase is high, then transport intensity in “the last mile” (i.e., from
distributor to retailers) increases manifold. For FMCG products, as a thumb rule we can take that
the mean time between two purchases is ~ 90 days. With the introduction of smaller form factor
packaging for FMCG goods (Re.1 /‐ shampoo sachets being a very good example), the
transport
intensity increased further.

Implication for HUL

HUL has about 4000 redistribution stockists, who supply to approx. 6.3 million outlets
across India. Since manufacturing is done at 40 plants around the country, rationalizing the logistics
and planning is a huge task. An innovative step in that regard has been the formation of
the Mother Depot and Just in Time System (MD‐JIT). Certain C&FAs were selected across
the country to act as mother depots. Each of them has a minimum number of JIT depots
attached for stock requirements. All brands and packs required for the set of markets
which the MD and JITs service in a given area are sent to the mother depot by all
manufacturing units. The JITs draw their requirements from the MD on a weekly or bi
weekly basis and supply to stockists in that area, who, in turn, supply to retailers.

4. Tendency to Postpone Purchase

If the tendency to postpone purchase is lesser, then the product will be easier to distribute.
For example, products/services like Fire Extinguishers, Life Insurance etc. are such that though
these are needed, the overall tendency for the consumers is to postpone the purchases –
these products/services can be termed as “necessary evil”. For this kind of products,
regular reinforcement in the minds of consumers becomes necessary, sales field force
becomes critical and use of “expert” field force is commonplace. Implication for HUL
Since FMCG products are used regularly and these products are not “necessary evils”,
distribution network of HUL does not require any expert field force to sell its products.
Only the recent diversification of HUL into Home Water Purification business (“Pure It”
brand) needs dedicated field sales force.

5. Level of Familiarity/Knowledge (of consumer) about the Product

If the level of familiarity of consumer with the product is higher, lower will be the
importance of field sales force and higher will be the importance of channel.
Implication for HUL Since FMCG goods are very much familiar to consumers, channel and
its different members are very much important to HUL and field sales force’s function is
mostly limited to channel management and ensuring availability of products.

6. Degree of Brand Loyalty

If the consumers are more brand loyal, then less “push” will be required from the channel
members to sell the products as there will be sufficient “pull” or demand from the consumers.
This implies that for products with loyal customer base, efforts from the channel members can
be much lesser for final off‐take to happen which in turn leads to lesser margins to the channel
members for those products. For faster moving products (mostly due to brand pull), retailers
may not be averse to slightly lesser margins as rotation of the products is high and thus his/her
ROI is protected.
Retailer’s ROI =
Investment
Rotation
in
M×
arg

For a FMCG player with a non‐established brand, margins to channel members and point of sale
(POS) advertising are both important. Implication for HUL As HUL enjoys leadership position in m
any FMCG segments like Soaps, Detergents, Personal Care products etc with strong brands with co
ntinuous “pull”, HUL has less to worry about margins to channel members or POS advertising. But
this situation can change considerably in the face of rise of a significant competitor having almost t
he same reach as HUL has (e.g., ITC as it’s eating into HUL’s market share continuously since it ent
ered FMCG segment).
7. Purchased on Impulse

The impulse purchase products like chocolates, toffees, colas, ice creams etc. follow Say’s Law
which states that “Supply Creates Demand”, implying availability of these products are the most
critical aspect for these to be sold and consumed. This stresses on the fact that T&L for these
products becomes very important.
Implication for HUL HUL has only one product in this impulse purchase category ‐ Kwality Walls (
ice cream). HUL is #2 after Amul in this FMCG segment. To increase this brand’s sale & market sh
are, availability, visibility and consumer mind share has to be increased and improved as well.
8. Level of Involvement (LOI)
Level of involvement (i.e., time & effort spent by the consumer) generally depends on the
product cost. If LOI is higher, lower is the importance of availability and more critical is the
22
supply of information as consumer decision process depends more on elaborate information
search.
Implication for HUL
As FMCG products are generally Low Involvement Products, HUL has to bother more on ensuring
availability of the products, rather than supply of information.
9. Purchased as a Basket of Goods

The products which are generally bought together by consumers as a basket of goods (e.g., Rice,
Flour powder, Cooking oil etc at the beginning of the month) are to be made available together
for final offtake. Implication for HUL This aspect partly applies to HUL’s products as some product
s like shampoos, soaps, detergents may fall in a basket. Efficient distribution network of HUL ensur
es availability of all such products at each selling point (individual retailer).
10. Speed & Complexity of Decision Making Process
If the speed is low, then the complexity of the decision making process is higher and greater is
the importance of field sales force and the salespersons’ skill, knowledge and quality.
Implication for HUL
For FMCG products, complexity of decision making process is not there and so, speed of decision
making is high. This means that for HUL, field sales force is of limited functional usage.
11. Present of Expert Influencer in the Decision Making Process
Roles of sales field force vary depending upon whether expert influencer (e.g., doctors) is
present in the process or not. If present, then consumer buying behavior may become
subcontracted and the expert influencer becomes another customer of the network, apart from
the end user. In that situation two groups of sales force are needed to cater to both the
segments.
Implication for HUL
For FMCG goods, role of expert influencer is limited. But companies try to associate brands with
regulatory bodies/authorities and show advertising with experts commenting upon superior
virtues of a product in an attempt to make the buying behaviour shift from picking/variety‐
seeking to subcontracted and make consumers more loyal to the brand. These are true for HUL also
(e.g., Pond’s Intitute).

12. Element of Crisis Purchase Exists

If element of crisis purchase exists in the buying decision of a product (for example, bulbs &
tubes), then its availability becomes critical. Implication for HUL None of the products of HUL fall
under this category. Nevertheless, availability of products of HUL is necessary for other reasons.

13. Element of Risk Aversion Exists

If the level of involvement of the consumer in buying decision process is higher, risk takingtendenc
y of the consumer will be lower or consumer will be more risk adverse. In such situation, channel m
embers can “unsell” a brand by giving explicit or implicit suggestions. Thisimplies that in such a ca
se, selling depends on many cases how the company is taking care ofchannel members (“keeping th
em happy”) such that they are not lured by other competitors ordirected by grievances so as to unsel
l the brand. This situation is prevalent mostly in ConsumerDurables (like TV, Refrigerators etc.). In
FMCG goods, the situation does not exist per se.
Implication for HUL

HUL is not affected for its FMCG products by this variable. For water purifier “Pure It”, this can
have considerable impact if its sale starts to happen through channel members rather than by
field sales force as is happening now.
14. Perishability of the Product

If the product is perishable (having small shelf life; examples – newspaper, milk, fruits etc), then
the dimension of “speed” in reaching the end consumers becomes critical & T&L assumes great
significance for the company.
Implication for HUL
The FMCG products that HUL sells are not perishable by nature, but have limited life. So this
aspect is not critical for HUL.

15. Time Band Associated with the Purchase of the Product

If there is seasonality/cyclicity for the demand or purchase of the product (examples –

newspaper, milk are most on demand in the 1st three hours of the day; cooking oil, rice etc
grocery items are most on demand in the 1st week of the month), then high T&L and
infrastructural requirements are needed for the “last mile” for the time band when demand
is maximum. It is possible to have idle capacity in the areas mentioned above outside the
peak required time band. Implication for HUL For some of the products of HUL, the above
stated variable is significant. For example, in Food segment, Branded Atta – ‘Annapurna’;
in segments like Laundry Detergents, Shampoo & Hair Oil etc. this element of demand
time band exist to a certain extent. This underscores the importance of T&L for HUL as
the transport intensity between distributors and retailers increases in the 1st & 4th week of
a month for the products mentioned above. This is over and above the regular replenishment of stok
s at retailers done by distributors. Festivals like Holi etc. may also increase the demand for
personal care items like soaps, shampoos etc for a short period and distribution network should be g
eared up not to miss any such opportunity.
16. Fungibility

Fungibility is the property of a good or a commodity whose individual units are capable
of mutual substitution. Examples of highly fungible commodities are crude oil, wheat, orange
juice, precious metals, and currencies. Fungibility has nothing to do with the ability to
exchange one commodity for another different commodity. It refers only to the ease of substitution
of one unit of a commodity with another unit of the same commodity for all intents and purposes.
Fungibility is different from liquidity. A good is liquid and tradable if it can be
easily exchanged for money or for another different good. A good is fungible if one unit
of the good is substantially equivalent to another unit of the same good of the same
quality at the same time and place. It is said that commodities are fungible, goods
tangible, services intangible, experiences memorable & transformations are effectual1. As an
example, one Rs. 100/‐ bank note is interchangeable with another. Cash is fungible. A
barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another
barrel of the same crude oil. Oil (of the same type) is fungible.
Fungibility does not imply liquidity, and liquidity does not imply fungibility. Jewels can be
readily bought and sold (the trade is liquid), but individual diamonds, being unique, are
not interchangeable (diamonds are not fungible). Indian rupee bank notes are interchangeable
in London (they are fungible there), but they are not easily traded there (they are not
liquid in London). In contrast to diamonds, gold coins are fungible. They are also liquid, especially
under a gold standard. The combination of fungibility and liquidity is one of the reasons
why gold has successfully served as money for thousands of years. Further, a fungible thing
can become non‐fungible under some circumstances. For example, an old coin or
a currency note may assume a value which is way above its ‘face value’ due to historical
reasons or due to some defects in it which makes it unique from others from a
viewpoint which sees it differently than its intended purpose. The outcome of product
fungibility is that the more fungible a product becomes, higher is the chance that parts of
the distribution channel it can be replaced by IT. A good example of this is dematerialization
(Demat) route for share trading now where there is no physical existence of shares.
Implication for HUL
As branded FMCG goods are not fungible per se (branding is done to “decommoditize” &
differentiate the product), the importance of channel members will continue.

17. Degree of Customization Possible

Degree of customization directly affects economies of scale; higher the customization, lesser the
economies of scale. Also, criticality of sales field force increases with customization levels
of the offering. Implication for HUL For FMCG products of HUL, which are mass
produced, such customizations are not possible and hus with higher economies of scale,
lower criticality of field forces from the standpoint of customization of product offerings, costs are l
ower in these respects with HUL.

18. Negative or Positive Reinforcing Product

Negative reinforcing products are those which are bought to avoid/reduce the problem (ex.
insurance, washing machine, car battery etc). Positive reinforcing products are those which
gratify the senses (ex. – Perfumes, Chocolates, Vacation etc). Shopping experience becomes
a critical aspect for positive reinforcing products to reaffirm the positive feelings. Implication for H
UL “Axe” & “Rexona” deodorants are distinctly positive reinforcing products from HUL,
others like Lux, Lakme etc. So these are seen in most shopping malls etc. with high
visibility displays to reaffirm the feelings. Consumers are willing to pay higher for these brands.

19. Value/Volume Ratio (Value Density) of the Product

This ratio is very important for both the company and the retailer for its two critical aspects –
T&L cost and retailer ROI/sq. cm (retailers are actually in real estate business in true sense).
Higher the ratio, better it is for both company and the retailer as higher ratio signifies lesser T&L
cost per unit volume transported for the company and greater ROI per unit of shelf space for thereta
iler. implication for HUL In general for FMCG goods and for HUL as well, value density is relativ
ely lower. In addition to this fact, increasing trend towards using smaller pack sizes increases the pa
ckaging density (increased packaging density increase cost to some extent, but favours mechanized
handling greatly, reducing handling costs). Since value density is less, transportation costs will be hi
gher and thus it is of economic sense to have manufacturing plants located closure to major markets
. This is the reason HUL has various manufacturing plants (40 in totality) located across India. This
is a pointer to the fact most of the major FMCG players (including HUL) use contracted
manufacturing dispersed across the geographic spread so as to lower transportation cost
component.

7. Financial Analysis

We have taken data from CMIE database while analyzing the performance of marketing & sales
(including distribution) functions of HUL and comparable companies. By ‘comparable‘, we mean
those companies whose main economic activity, as defined in the CMIE database, is the same as
HUL’s. For example, main economic activity of HUL as defined in that database is ‐ “Cosmetics, to
ilet preparations, soap & washing prep”. Obviously, one major FMCG company in India, ITC, does
not come under this purview as its major economic activity is Tobacco business which is nearly 85
% of its total revenue. But for the sake of comparison, we have included ITC also as its non‐ tobacc
o FMCG business revenue in FY ‘08 was Rs. 2511 Cr., nearly as high as Nirma, the second largest
player after HUL in HUL’s chosen category. But the figures for advertising, marketing & distributio
n expenses of ITC as percentages to its total sales may not be directly comparable to those figures o
f HUL as product categories are different and the impact of above mentioned variables on
thestwo company’s sales & distribution function is dissimilar. Other major FMCG players not inclu
ded in the analysis are Nestle, Amul, Britannia & Tata Tea, which are mostly into the Food
& Beverages

segment where HUL has relatively lesser presence (Processed Foods & Ice‐cream segments
together constitute only approximately 5% of HUL’s total sales). In Tea, HUL is present significantl
y, though. In the following pages advertising, marketing & distribution expenses of major FMCG g
oods (in HUL’s category mostly) are being shown. It is to be understood here that marketing expens
es here include commissions, rebates, discounts, sales promotional, expenses on direct selling
agents & entertainment expenses whereas distribution expenses include outward freight. Exhibit 1:
Annual Spend in Advertising, Marketing & Distribution functions in FY ‘08 Annual expences

We can see here that Nirma, Godrej & Henkel (ITC also) have less advertising expenses
(as % to sales) than HUL. Importantly, Henkel has zero advertising expenses in
2008, which may explain the fact that awareness level in consumers for Henkel brands
is low. HUL advertising is done mainly in case of soaps (for example – “Dove”;
done mainly to reaffirm that it’s not a soap!), shampoos, deodorants (“Axe”), laundry
detergents (“Surf Excel”, “Rin”) etc. With the introduction of home water purifier (“Pure It”), consd
erable advertising & promotional expenses have gone into it.Of late, we see very little of Nirma
advertisements. This is apparent from its advertising expense as % to sales, which is very
low (only 1.54%). ITC is altogether a different story. Cigarettes & other tobacco related
products which constitute approx. 85% of its sales, all relate to “intoxication” or
habitual consumption patterns having intensely brand loyal consumers and thus almost no
advertising (surrogate advertising is done) is needed either to reaffirm the brands or
introduce new consumers to the brands (there is regulatory angle as well).
Current consumers of these tobacco products are the biggest advertising agents that ITC has
and of course, they do it voluntarily and without knowing what they’re doing. But while
moving faster into non‐tobacco FMCG business riding high on its strength of distribution
network matching or surpassing in some cases that of HUL, ITC has started aggressive
advertising campaigns (“Fiama Di Wills” shampoo, “Vivel” soap, “Sunfeast” biscuits,
“Bingo” snacks etc), directly focusing on marquee brands of HUL snacks and chips from Pepsi, Co
ke and others. Advertising expenses as percentage to sales is highest for Emami,
which owns brands such as Navratna hair oil & talc, Boroplus cream & talc, Himani Fast
Relief, Fair & Handsome, Sona Chandi Chawanprash, Menthoplus etc, each of which is
advertised heavily in the mass media (e.g., TV) with famous & expensive celebrity
endorsers like Amitabh Bachchan, Kareena Kapoor, Govinda etc. On the other hand, we
see regular advertising streams for Colgate toothpastes and other oral care products, in
which category Colgate‐Palmolive is the market leader. Reckitt‐Benckiser advertises
considerably for its brands like Herpic, Mortein, Vanish, Clearasil, Dettol, Strepsils etc,
which is the
reason for its high advertising cost as percentage of sales.

Marketing Expenses
As stated earlier also, marketing expenses here include the following – commissions rebates
discounts sales promotional expenses on direct selling agents entertainment expenses etc.

Exhibit 3: Marketing Expenses as percentage of Sales

Marketing Expenses as % to Sales
0.04
2.71
1.01
0.00
0.70
4.10 4.59 4.68
7.35
9.51
15.71
0.32
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
HUL Nirma Dabur Colgate-
Palmolive Reckitt
Benckiser P&G
Home Godrej Emami P&G
Hygiene &
Health
Here we see that the marketing expenses of HUL are among the lowest in the market (only the seco
nd lowest after Colgate – Palmolive which has very good brand pull for its “Colgate”
toothpastes). This proves that HUL is able to maintain considerable brand pull through advertising.
ITC again comes among the lowest its tobacco products require very little ‘push’ and have very hig
h rotations. Also, ITC mostly deals with small retailers and distributors (‘paan‐cigarette shops owne
rs’) who have marginal bargaining power.
Another revelation is that Henkel, which has zero advertising expenditure, has the highest marketin
g expenses among all others. But this strategy to ‘push’ the products through the channel partners
may not be a good one for Henkel as it might be losing out for the lack of visibility and thus
consumer mind share and brands such as Margo, Fa, Neem toothpaste etc are losing out in the
market. Further, it is also a pointer to the fact that Henkel’s largest business share is in industrial

chemicals (adhesives, sealants – e.g., popular brand “Loctite”; this segment constitute ~44%
of worldwide sales of Henkel) and for B2B, advertising per se is not that much important.
For B2B , important is direct‐selling approach, which generally requires negotiations,
volume discounts etc, which are reflected in highest marketing expenses (as percentage to sales) co
mpared to others. P&G is in between the extremes and with considerable advertising
expenses also, it is unable to create sufficient pull for its products in India (as evidenced
by the fact that marketing expenses are also relatively higher) or it’s getting stuck for the
lack of sufficient distribution muscle a la HUL
in traditional retail in India and suffers from lack of reach and availability at the end consumer level
. As mentioned earlier, both Colgate‐Palmolive and Reckitt‐Benckiser both enjoys very
good brand loyalties and market leadership for their key brands like Colgate toothpastes
and Dettol (#1 in antiseptics), Herpic, Mortein etc. This is corroborated by the fact that these compa
nies have some of the lowest marketing expenses (as percentage to sales) in the group, as shown in t
he chart. Distribution Expenses Distribution expenses include the outward freight cost to the compa
ny. Exhibit 4: Distribution Expenses as percentage of Sales
Distribution Expenses as % to Sales
4.90 5.16
3.14
2.21
4.19
6.53
3.50
2.53
6.70
3.81
4.22
2.55
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
HUL Ni rma Dabur Col gate-
Palmoli v e Reckitt
Benckiser P&G
Home Godrej Emami P&G
Hygiene &
Heal th
Henkel Henkel
Marketing ITC

Distribution Exp as% to Sales

We have seen that T&L plays a very important role for HUL & others who have pan‐
Indian presence in FMCG business. Colgate‐Palmolive, Emami & ITC has some of the
lowest distribution expenses (as % to sales figures) & P&G
has the highest. HUL is lower in this respect than Nirma & P&G, but higher
than Henkel. This can be explained somewhat from the impact of the variable, Time Band
of purchase, on the increased transport intensity for HUL in the last mile for some of the
products like household personal care, laundry detergent, branded atta etc in the first &
last week of the
moth. ITC (tobacco), Henkel (largely B2B) are mostly protected from this implication of the variabl
e. Another important thing to remember that value density of FMCG goods is relatively
lower, causing share of transportation costs in the overall cost structure to be relatively
higher. This implies
dispersed manufacturing, locating manufacturing plants nearer to major markets. So one
location manufacturing to get higher economies of scale and on the other hand, trying to
serve geographically diverse markets may not be economically attractive for FMCG sector.
Compared to HUL’s 40 manufacturing plants across India, Nirma, the 2nd largest FMCG
major in soaps and detergents category, has 6 manufacturing plants, all located in and
around Gujarat. So, transportation cost of Nirma, if it tries to cater to pan‐Indian market will be
higher. This is supported by the fact that Nirma’s higher distribution cost percentage than
HUL. For P&G, the same reasons significantly affect its distribution cost which is highest for the gr
oup analyzed.

ITC
ITC is one of India's foremost private sector companies with a market capitalisation of nearly US $
19 billion and a turnover of over US $ 5 billion ITC has a diversified presence in Cigarettes,
Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business, Packaged Foods &
Confectionery, Information Technology, Branded Apparel, Personal Care, Stationery, Safety
Matches and other FMCG productsITC's diversified status originates from its corporate strategy
aimed at creating multiple drivers of growth anchored on its time-tested core competencies:
unmatched distribution reach, superior brand-building capabilities, effective supply chain
management.

The Product-Mix
FMCG
Cigarettes
Foods
Lifestyle retailing
Personal Care
Stationery
Safety Matches
Agarbatti
Hotels
Agri-business
Paperboard and Packaging
Information Technology

The Composition
Manufacturing Unit
Separate for each product line
Contract Manufacturing
Backward Integration
E-Chaupal
Storage Hubs
Stores all the products

Distributors
Exclusive based on population
Needs to stock all FMCG products( Except Stationery)
Wholesalers
Retailers
Paanwalas
Deepest penetration possible

Suitability
Perishable
Short Span
Customers prefer fresh products
Lot Size
Smaller Lot sizes
Convenience
Waiting Time
Product Assortment

Channel Objectives
Consumer Behavior
Quality Conscious
Convenience goods, Needs Intensive distribution
Demands variety
Very less waiting time
Company Objectives
Reach masses
Rural penetration
Diversification
Competitive advantage
Alternatives
Sell ready to eat products through sweet shops like bikanerwala
Showrooms for High-End products
E-Chaupal

Features
Selection
Distributor is selected based on
Infrastructures, Delivery Van, Computer, Warehouse, Sales Force
Population based (1 Distributor per 20-25 thousand)
Control
Uses Coercive power
To deal in Cigarettes, it is must to deal in Other goods
Terms and Conditions
Price, Selling Condition, Godown Condition etc…

Functions
Manpower
Promotion
Credit
Infrastructure
Stocking

Benefits
rarely Cash gifts (linked with performance), Others, Order Distributors- Weekly, Retailers- Twice a
week, Paanwalas- daily,Online order is placed by distributor,The periodical order from wholeseller ,
retailer, paanwalas is collected by staff of distributor Payment.Mostly on Cash-Basis; sometimes
post dated cheques, Very rarely Credit is allowed on cigarettes. TransportationUses delivery van,
Rickshaw, Cycles, Autos.Higher margins, No Credit- Only Cash Payments, No Freebies, Paid
Vacations Gifts etc..,Very

ANALYSIS
ITC has the most popular brands of cigarettes in India. The sale takes place from the largest of
retailers like Big Bazaar, Spencers to the smallest of paanwalas at every nook and corner in India.
Thus, ITC has deeply penetrated the Indian cigarette market. With an already established
distribution channel for cigarettes, ITC is also selling safety matches, which is complementary to
both the cigarettes and agarbattis. The retailers and paanwalas are also ready to stock ITC’s candies,
potato chips and finger snacks because of the higher margin as compared to Frito lays, which is its
biggest rival in potato chips and finger snacks By entering into the branded Indian biscuit industry
there was a business synergy. ITC was already value-adding to wheat with its branded atta presence.
By entering the biscuits segment, it improved its bottom-line further. The company used its existing
network of convenience stores -- the company’s name for the hole-in-the-wall pan-beedi shops-- for
Sunfeast. The company says the brand is now available in nearly 1.8 million outlets. Sunfeast
captured around 7% in mere 3 years since its launch in 200