AN ANALYSIS OF THE

DISTRIBUTION CHANNEL OF
NESTLE-INDIA

SUBMITTED BY
BIBHUTI BHUSAN H MISHRA
TARAKA RAJESH DASARI
VIDYA KP
About NESTL

NESTL India is a subsidiary of NESTL S.A. of Switzerland. With eight factories and a large number
of co-packers, Nestl India is a vibrant Company that provides consumers in India with products
of global standards and is committed to long-term sustainable growth and shareholder
satisfaction.

The Company insists on honesty, integrity and fairness in all aspects of its business and expects
the same in its relationships. This has earned it the trust and respect of every strata of society
that it comes in contact with and is acknowledged amongst India's 'Most Respected Companies'
and amongst the 'Top Wealth Creators of India'.

NESTL's relationship with India dates back to 1912, when it began trading as The NESTL Anglo-
Swiss Condensed Milk Company (Export) Limited, importing and selling finished products in the
Indian market.

After India's independence in 1947, the economic policies of the Indian Government emphasized
the need for local production. NESTL responded to India's aspirations by forming a company in
India and set up its first factory in 1961 at Moga, Punjab, where the Government wanted NESTL
to develop the milk economy. Progress in Moga required the introduction of NESTL's
Agricultural Services to educate, advise and help the farmer in a variety of aspects. From
increasing the milk yield of their cows through improved dairy farming methods, to irrigation,
scientific crop management practices and helping with the procurement of bank loans.

NESTL set up milk collection centers that would not only ensure prompt collection and pay fair
prices, but also instill amongst the community, a confidence in the dairy business. Progress
involved the creation of prosperity on an on-going and sustainable basis that has resulted in not
just the transformation of Moga into a prosperous and vibrant milk district today, but a thriving
hub of industrial activity, as well.

NESTL has been a partner in India's growth for over a century now and has built a very special
relationship of trust and commitment with the people of India. The Company's activities in India
have facilitated direct and indirect employment and provides livelihood to about one million
people including farmers, suppliers of packaging materials, services and other goods.

The Company continuously focuses its efforts to better understand the changing lifestyles of India
and anticipate consumer needs in order to provide Taste, Nutrition, Health and Wellness through
its product offerings. The culture of innovation and renovation within the Company and access
to the NESTL Group's proprietary technology/Brands expertise and the extensive centralized
Research and Development facilities gives it a distinct advantage in these efforts. It helps the
Company to create value that can be sustained over the long term by offering consumers a wide
variety of high quality, safe food products at affordable prices.

NESTL India manufactures products of truly international quality under internationally famous
brand names such as NESCAF, MAGGI, MILKYBAR, KIT KAT, BAR-ONE, MILKMAID and NESTEA
and in recent years the Company has also introduced products of daily consumption and use such
as NESTL Milk, NESTL SLIM Milk, NESTL Dahi and NESTL Jeera Raita.

NESTL India is a responsible organization and facilitates initiatives that help to improve the
quality of life in the communities where it operates.

Presence Across India

After more than a century-old association with the country, today, NESTL India has presence
across India with 8 manufacturing facilities and 4 branch offices.

NESTL India set up its first manufacturing facility at Moga (Punjab) in 1961 followed by its
manufacturing facilities at Choladi (Tamil Nadu), in 1967; Nanjangud (Karnataka), in 1989;
Samalkha (Haryana), in 1993; Ponda and Bicholim (Goa), in 1995 and 1997, respectively; and
Pantnagar (Uttarakhand), in 2006. In 2012, Nestl India set up its 8th manufacturing facility at
Tahliwal (Himachal Pradesh).

The 4 Branch Offices located at Delhi, Mumbai, Chennai and Kolkata help facilitate the sales and
marketing activities. The NESTL Indias Head Office is located in Gurgaon, Haryana.
Brands

Milk Products and Nutrition

Beverages

Prepared Dishes and Cooking Aids

Chocolates and Confectionery

Distribution Structure of Nestle

Stocks manufactured at the factories and co-packers reach the C&S through mother Godowns.
The stocks stored at C&S are the property of Nestle. Encashment of stocks are done through
Invoicing to Cash Distributors C&S as per the guidelines given to them. They also receive and
store support materials like give away s, stickers and complementary items etc.
Logistics Structure

Logistics comprise of Road Transportation through Container trucks

From the factory to the distributor stage the company ensures that there is availability of
cool chain for transportation. At the mother godown (Located at Sahibabad) there is
temperature control by hired cold storage.
For the purpose of transporting chocolates from the mother godown to the Cash
Distributor Dedicated Air Conditioned Vans are used (especially for the summer seasons).
Distribution from point of Distributor warehouse to Retailer shops / Modern trade shops
is handled by Distributor
Distributor has fleet of mix of transport vehicles right from refrigerated vans to small
tempos to supply to Pan shops
Company is connected to Distributor / Super Stockist through SAP for online order
booking and processing
Stock in Transit module is installed at Distributors network systems for tracking the
supply of goods
Transportation system followed by Nestle

Moga Factory

By Rail By Road

Direct Trucks

Sahibabad Mother
Godown

Delhi-UP border
Direct by rail containers

Transhipment Godown
Indore

Hyderabad

Mostly by
Patna/ Calcutta Road :
Containers
/ trucks

Guwahati

By trucks

C&S C&S C&S C&S

By Canters / Vns

C.D. C.D. C.D. C.D. C.D. C.D. C.D.

Companys Distribution Guidelines

The company has created two kinds of distributors, namely Trade and Chocolate. The
former deals with the Maggie range, Nestle dahi, Aquafina etc. Chocolate deals with all
confectionery items like chocolates, sweets etc.
 A representative of each distributor goes to the various outlets, once or twice a week
(depending upon the area), takes the order and then either delivers the goods there and
then, or on the same day.
It has been realized that a retailer has a limited pocket for a days purchase. If one sales
representative goes for an order with 50 SKUs the retailer will only buy what his pocket
allows, for a one-time purchase. Whereas, if two different sales people go, representing
different distributors there is a possibility both will get an order and the company will
witness better sales.
The company has also taken an initiative for deeper reach and penetration into the
market with its operation STING. Whereby the sales representatives on the company
go on bicycles and try to fulfill the order of small ignored and unserved outlets. For
example, the panwallas, the kirana stores etc.

Selection of Distributors

Capital investment-
This is dependent not only on the present required turnovers but also on the
estimated future capital investments that will be required by the distributor (based
on companys growth plans in the area). Amounts required vary from area to area and
markets to markets.
Relevant experience-
It is imperative that the distributor has had some prior experience as a channel
member in the FMCG sector so that no training is required to be imparted to him on
aspects of the business. The distributor should not be dealing in competitors products
and should be able to function as a dedicated channel for Nestle. For example, while
deciding on a distributor for chocolates, an obvious preference would be an existing
distributor for other products of Nestle This is because he will pay attention to the
entire range of the chocolates and not focus on any particular SKU only.
Infrastructure-
Appropriate infrastructure (depending on the market served and overall volumes)
 o Godowns / storage space. For chocolates, air conditioned godown space (with
wooden padding will be required).
o Delivery vehicles
o Salesmen

Counter Analysis

Types of Counter

Supermarket
Small Grocery Store
Big Grocery Store
Convenience Store
Local paan store
Chemist

Incentives to the distributors

1) Margins
2) Schemes spread over 2-3 months. These schemes encourage specific target achievements.
Targets are given as indexed growth rates based on weights. For example, the meaning of 10%
growth for a distributor having sales of Rs.20000 will have a different meaning from one having
sales of Rs.1 lac.

The prizes in the schemes can be monetary- for example additional 2% margin on turnover

Or non-monetary for example, free T.V. sets on achievement of targets. It is attempted to keep
in mind the monetary benefit to distributor in case he sells the gift given in kind.

Secondary schemes: Promotional schemes to consumers & Trade Partners such as free packs for
Consumers, gifts, bundling, price off etc.

For retailers: Coupon, Bulk discount, Additional Margin, Free packs

3) Certificates-

Certificates of acknowledgement for achieving the targets for a name like Nestle are priced by
the distributors. They frame them and display them in their offices.

Motivation of Channel Partners Proud to be Nestle

The company consistently comes up with schemes for it channel partners to motivate them. One
of their successful schemes was Proud to be Nestle Supper awards for super achievers! This
contest was open for the following:

i. Area Sales Managers

 ii. Sales Officers

iii. Cash Distributors

iv. Pallet Salesmen (a S.O. may have 2-3 Pallet salesmen reporting to him to enable
him cover a wider territory.)

v. Distributor Salesmen (These salesmen are the employee of the distributor, but are
under indirect pay roll of Nestle, since their salary is reimbursed by the company.)

vi. Merchandisers

The top ranked ASMs (Nos. as fixed by the Branch) and their teams take home the following
prizes:

RDBM T/O SO CD PS DS Merchandisers

growth
achieved
20% + 5500 3500 2300 2000 1200
15-19.99% 4500 2500 1800 1500 1100

10-14.99% 3500 1800 1300 1000 1000

The Top ranked ASM team also wins a TEAM TROPHEY and certificates.

Evaluation

Once a distributor is appointed the company generally does not take away business from him,
except when the underperformance has been observed over long periods.

While evaluating his performance, his targets performance is studied relative to that of other
distributors in the nearby area (because growth patterns may vary by region)
Distribution in Practice (DIP) Training

There are proper training programs for the C&S agents as well as distributors. Following are the
modules included in the program:

- Nestle Quality System

- Good Warehousing Practices (GWP)

- Good Distribution Practices.

Major aspects of the program include:

1. Stacking as per norms:

FIFO basis of Inventory management is used.

Stocks are kept in pallets away from the walls. Godown. Stacking is done in an orderly fashion
and the different batches are visible. There must be moving space between various stacks.

2. Good Warehousing Practices

Security

Fire Fighting: Appropriate provisions are made to handle emergency caused due
to breakage of a fire.

Cleanliness

Pest Control

Temperature record and maintenance at A.C. Godown

Proper ventilation

The required Licenses as per the local laws have been obtained. For Eg. Sales tax
etc.

Transportation: Effective, reliable and quick transport is available to and from the
warehouse.
 Proper Loading / unloading: The labours have been properly trained to ensure that
no damage to the goods take place at the time of loading / unloading.

Remittance: Timely deposits of remittances are ensured.

Proper records are maintained with regard to Sales tax and exemption certificates.

3. Accounting

A stock register is maintained to record receipts and dispatches with detail of accompanying
documents. Shortages (if any) are accounted for separately. Sales tax and Octroi are handled by
C&S. A separate register is maintained for materials which are meant for free distribution. All the
related expenses that are incurred are paid by C&S and are subsequently reimbursed by the
company.

4. Handling of Bad Goods:

The bad goods are separated and marked saleable or unsaleable appropriately.

5. Temperature control for chocolates: is ensured not only at the time of storage but also
at the time of transit.

Forecasting and target setting

Target setting is a result of negotiation between the distributor and the company.

Mid-month targets for the next month are given by the company at around 5th -10th of a month.
These are set for the Sales officers, ASMs and Branch Managers in the hierarchy and driven down
by them.

At the month end the distributor can negotiate these targets in the range of +/- 10%.

The branch manager is responsible for coordinating targets of the factories and the targets of the
individual product managers.
For a sales officer, the focus is the redistribution targets, also called as secondary invoicing (from
cash distributor to the redistributors)

For an ASM, primary invoicing (From C&S to cash distributor) is more relevant.

For the company as a whole, primary as well as secondary invoicing as adjusted against back is
important.

The company is now moving on to a statistical tool called Winters model for demand
forecasting. This is done by the SCM and the inventory managers at the corporate levels along
with interactions with the sales and senior sales officers.

Under the winters model, the baseline demand curve is worked out, that is remove the effects
of other factors like sales promotions, unexpected variations like wars etc. on sales. This is done
by the sales officer by preparing a monthly log and writing against each month the reason for any
exceptional variation in sales, if any.

After negating from the past sales, the effect of these exogenous variances, trends are calculated
and sales of the next year are calculated. On these figures, the effects of any planned promotions,
any foreseeable variations etc., are imposed to get the approximate forecasts. For example,
normally the effect of a TPP (Temporary Price Promotion) on sales is that of a 150% sales. That is
sales of 6 weeks are achieved in 4 weeks.

Inventory holding: on an average 3 weeks of inventory is held

Channel Conflicts

Earlier large areas used to be assigned to the distributors and there used to be some scope for
confusion or conflict due to overlapping. However, now the number of distributors have
increased and there is clear earmarking of the areas as well as markets for each distributor by
the company and there is hardly any scope for conflicts based on areas.
Wholesalers

Wholesalers are not a part of the formal structure of Nestle Indias distribution
network
Make bulk purchases from the distributors directly thereby leveraging on the margins
Typically, the wholesaler gets a margin of about 2%-3% from the distributor, of this
he retains 1 % and passes on the remaining 2% as discount to the retailer
This discount induces the retailers to buy from wholesalers

Sales Officers

Account of invasion of anothers sales area by a companys sales officer under pressure
of sales target

Credit Policy

Nestle India Limited: The distributors are termed as Cash Distributors because the company
charges the distributors before the stock is delivered; the company has connected the distributor
online and the transactions happen online.

The Distributor: The distributor sells goods on credit; the period of credit ranges from 1-2 week.
The wholesaler allows discount of 1% on cash payment (policy followed by the wholesaler).

Stock Policy:

As per the company regulations the distributor is supposed to maintain a stock of 3 weeks; the
distributor maintains a stock of 3 to 3.5 weeks in monetary terms it equals to Rs.30 lacs for the
distributor.

The stock is formalized by the company; the dealer can negotiate on 3-4 end days; the stock
policy is formed for the month.

The distributor, to push in slow moving SKUs, clubs them with fast moving SKUs for the retailers.

DUMPING: The company dumps significantly on the distributors, the distributor has to manage
the supply by the company. The distributor has some resentment on the issue but has to be
content with it, the result is, the stock gets blocked and distributor stores it till the expiry and
then return it; result: cash crunch for the distributor and loss for the company in the long run.

Lead Period

Wholesaler: The lead periods in providing stocks to the dealers differs from the SKU and quantity
ordered; some SKUs are delivered correspondingly with taking order but some are sent from the
warehouses. A higher quantity ordered has to be replenished from the warehouse.

Company: The stock from the company is provided every month but company keeps replenishing
stocks at the requests of the distributors. It takes 2 days for company to replenish stocks.

Return Policy

The company follows a policy of return when the product has passed its expiry date, damaged or
has a defect; the replenishment is done with cash and happens at the end of every six months.

Return On Investments

The company does not give any guarantee to the distributor with regard to returns on his
investment which is in line with the market credentials of the company.

Storage Policy

The distributor maintains Cold Storages and Deep Freezers for the storage of the products; the
investment in infrastructure is considerable for the company to provide such infrastructure.

Sales Force

The company does not have a policy to train the staff of the distributor, the distributor trains his
own sales force. The remuneration and all other expenses are borne by the distributor.

Promotion Policy

The company follows a policy for consumer promotions but as regard the trade promotions they
are scant rather negligible, the promotions put in extra pressure to push more quantity. The
problem of maintenance of the promotional item is considerable and takes in huge energies and
money.

Issues & Recommendations with Nestls Channel

Distributor Salesman Workload

Problem: On an average, the number of active Stock Keeping Unit (SKU) is approximately 130
SKUs/outlet. Also, the average outlets in market beat plan of a distributor salesman are 35
outlets/day with the range being between 20 and 40 depending upon the kind of market he is
given. From this information, the DS workload turns out to be around 4550 SKUs per day, which
means that he has to read out 4550 SKUs from the dealer card to the retailers. This results in the
DS being overloaded with work which shifts his focus on the products with a pull from the market,
rather than products requiring push as that would take more effort and time, without any
benefits for the salesman.

Recommendation: Company has a large number of SKUs. It may have separate salesman for
different products. It may sell Cerelac, Nescafe etc. through one distributor salesman and Maggi,
chocolates through another distributor. In this manner, the salesman will have lower number of
SKUs to cover and may concentrate more on his SKUS. The salesman may cover more number of
retailers per day. This may help to improve the efficiency of the distributor salesman. Increased
number of beats also helps in greater push.

Issues in implementation: The costs will increase for the company with two salesmen instead of
one. The increased number of salesman will squeeze the margins of the company.

Tackling of Issues: The SKUs should be divided for distribution through separate salesmen such
that the efficiency of distribution is optimized. The increase in sales should more than offset the
increase in the costs. It is important that marginal benefit is more than the marginal cost incurred.

Distributor Salesman Incentives

Problem: Currently, each Cash Distributor receives an input sheet from the sales officer which
specifies the incentives to be given to the Distributor salesman. Currently, Nestle has incentive
of Rs.250 for volume achievement for 4 products each month. They are not given any incentives
for the overall sales achievement or on the basis of their evaluation by the sales officer. These
incentives are presently being given in many states such as Delhi and UP but not present in many
other places. DS are not motivated enough to push the sales of the whole range of products of
Nestle and are concentrating on the products which have incentive in that particular month. The
incentive schemes for other competing FMCG companies had a component for the total turnover
as well as number of bills generated by the company.

Recommendation: Company should provide similar incentives in Gurgaon as in other states. Also,
there need to be incentives based on total sales and number of bills per month. A component of
incentive should also be based on the total number of outlets from which order is taken. This will
provide an incentive for all salesmen to perform better. Also, the better salesman will be able to
get higher compensation.

Issues in implementation: All territories are not same or equivalent. There may be more
opportunities in some territories for higher sales as compared to others. Therefore, incentives
based on sales are not sufficient alone. Other important parameters need to be accounted for
such as the penetration level of salesman.

Tackling of Issues: The sales manager should also look at the penetration level of salesman and
the number of new accounts added during a period. The market share in a particular territory is
also an important parameter in judging the performance and efficiency of a salesperson. A sales
manager should also have some room for subjective analysis of the performance of salesman.

Complaint from Retailers about expiry of goods and payments

Problem: Retailer drives the growth for Nestle as he is the seller to the customer. This makes
focus on the retailer very critical. There seems to be considerable complaints about retailers
expired and damaged goods were not returned timely at various retailers. The main reason cited
by them was that low expired goods translate to a good performance for Sales Officer, which
drove them to reduce the expired goods taken back by the salesman. Also, the merchandising
display payments to retailers were delayed at several outlets. This was mainly due to the fact that
distributors claims were not being cleared timely which was in effect, delaying payments to the
retailers.

Recommendation: Nestle should stress on maintaining a healthy relationship with the retailer,
hence it should encourage Sales Officers to concentrate in timely return of expiry goods as well
as payments. To ensure that, a window should be provided to the retailers as well as distributors
for their inquiries, claims and complaints to the company. Also, Nestle can have frequent audits
of the certain markets each month to prevent such incidences.

Issues in Implementation: The issue with a window to retailers would be that there could be
instances of retailers complaining incessantly and for petty issues rather than for the intended
purpose of tackling genuine retailer relationship issues. Also, such system would incur a cost to
the company which affects its profitability.

Tackling implementation issues: To ensure that the window to the retailer serves the right
purpose, the complaints can be filtered at the distributor level before being passed on the
company. This would ensure that certain petty and insignificant problems can be solved at the
distributor level only and the processing at the company is reduced.

Lowest Margin in the industry

Problem: Nestle gives out the lowest margins to the distributor in the industry.

Hence, the margins to the retailers are also reduced. If we consider the motivation of the
retailers to keep Nestles products, the throughput or off take of Nestles products is very high
and most retailers would be keen to maintain their baskets of goods, the low margins are a
dampening factor, as mentioned by a few retailers in our interactions.

Recommendation: Considering the low motivation of the Nestle retailers, due to lower margins
on products sold by them, company should try to compensate them or give them an opportunity
to increase their profits by extending better percentage incentive schemes on purchase in bulk.
Instead of harming the profitability of the company by extending greater margins, these schemes
would lead to high volume purchase by retailer, thereby increasing the profitability of the
company.

Issues in implementation: The problem which could emerge while extending greater percentage
schemes are that once the retailers get used to higher schemes on a particular product, it
becomes very difficult for the company to change/ reduce the scheme on the product. Apart
from that, profitability of the company is definitely affected if the scheme is extended in an
unplanned manner.

Tackling Implementation issues: These schemes should not be extended on the products
haphazardly. In order to implement the schemes, company needs to identify on which products
is the scheme suitable. The products which already have a very good pull effect like Maggi need
not be given higher schemes. The products which majorly require pull effect like Everyday tetra
pack milk, coffee etc should be a part of such incentive schemes. In order to have better control
over the channel and prevent retailers resistance while changing/reducing the scheme, company
should device a strategy of rotation of scheme among the various products in portfolio, e.g. for
Jan-Mar Company could go for higher schemes on Everyday tetra pack milk, for April- Jul it should
reduce the scheme on Everyday and increase the scheme on Coffee packs. The company can
further decide upon which products it wants to push for a particular time period.