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.

ChannelsA number of alternate 'channels' of distribution may be available:

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

Channel membersDistribution 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 marketMany 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 DecisionsChannel strategyProduct (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 membershipChannel motivationMonitoring and managing channels

Channel membershipIntensive distribution - Where the majority of resellers stock the 'product' (with convenienceproducts, for example, and particularly the brand leaders in consumer goods markets) pricecompetition 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 (typicallyonly one per geographical area) are allowed to sell the 'product'. Often this form ofdistribution stipulates the contracted resellers cannot offer competing products.

Channel motivationIt 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 channelsIn 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 marketingThis 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 marketingA 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 IndiaAADF Foods LtdAgro Dutch Inds. LtdAgro Tech Foods LtdAjanta Soya LtdAmar Remedies LtdAnik Industries LtdANS LtdArcuttipore Tea Company LtdAssam Company India Ltd.AVT Natural Products Ltd

B

Bajaj Hindusthan Ltd.Balrampur Chini Mills Ltd.Bambino Agro Inds. LtdBCL Industries & Infrastructures LtDBeeyu Overseas LtdBio Whitegold Farms LtdBritanniaBritannia Industries Ltd

CCamson Bio Technologies LtdCCL Products (India) Ltd.Chaman Lal Setia Exports LtdChordia Food Products LtdColgate-Palmolive (India) Ltd

DDabur India LtdDarshan Oils LtdDCM Shriram Inds. LtdDFM Foods LtdDhampur Sugar Mills Ltd.Dhampure Specialty Sugars LtdDHP India Ltd.Dhunseri Tea & Inds. LtdDiana Tea Company LtdDollex Industries Ltd

EEID-Parry (India) Ltd.Emami LtdEmpee Distilleries LtdEmpee Sugars & Chemicals Ltd.Energy Products (India) Ltd.

FFlex Foods LtdFreshtrop Fruits Ltd

GGayatri Sugars LtdGlaxoSmithKline Consumer Healthcare LtdGMR Industries LtdGodfrey Phillips India LimitedGodrej Consumer Products LimitedGokul Refoils and Solvent LtdGoodricke Group LtdGRM Overseas LtdGujarat Ambuja Exports LtdGujarat Aqua Inds. Ltd

HHarrisons Malayalam LtdHatsun Agro Products LtdHenkel India LtdHeritage Foods (India) LtdHillock Agro Foods (India) LtdHimalya International LtdHind Industries LtdHindustan Unilever Limited

IIB Infotech Enterprises LtdIndage Restaurants and Leisure LtdIndian Extractions LtdIndian Sucrose LtdIndo Biotech Foods LtdITC Limited

JJay Shree Tea & Inds. LtdJayant Agro-Organics LtdJeypore Sugar Company Ltd.JK Sugar LtdJoonktollee Tea & Industries LtdJVL Agro Industries Ltd

KKashipur Sugar Mills Ltd.Kohinoor Foods LtdKothari Products LtdKRBL LtdKSE Ltd

LLongview Tea Company LtdLongview Tea Company LtdLotte India Corpn. Ltd.Lotus Chocolate Company Ltd

MMadhur Industries LtdMadhusudan Industries LtdMahaan Foods LtdMarico LtdMawana Sugars Ltd. [Merged]Mihijam Vanaspati LtdModern Dairies LtdMohan Meakin LtdMoneshi Agro Industries LtdMount Everest Mineral Water LtdMuller & Phipps (India) Ltd.Murli Industries Limited

NNaraingarh Sugar Mills LtdNatraj Proteins LtdNEPC Agro Foods LtdNestle India LtdNijjer Agro Foods LtdNirma Ltd

PPiccadily Agro Inds. LtdPioneer Agro Extracts LtdPonni Sugars (Erode) LtdPoona Dal & Oil Inds. LtdPrime Industries LtdProcter & Gamble Hygiene and Health Care LimitedPrudential Sugar Corpn. Ltd

RRadico Khaitan LimitedRajshree Sugars & Chemicals LtdRasoya Proteins Ltd.Rattan Vanaspati LtdRei Agro LtdRiverdale Foods Ltd

RT Exports LtdRTCL LtdRuchi Soya Inds. Ltd

SSaboo Sodium Chloro LtdSampre Nutritions LtdSanwaria Agro Oils LtdSBEC Sugar LtdSimran Farms LtdSir Shadi Lal Enterprises LtdSita Shree Food Products LtdSKM Egg Products Export (India) LtdSpectrum Foods LtdSrinivasa Hatcheries LtdSunil Agro Foods LtdSuper Bakers (India) Ltd

TT&I Global LtdTarai Foods LtdTasty Bite Eatables LtdTata Coffee LtdTata Tea LimitedTemptation Foods LtdTerai Tea Company LtdTezpore Tea Company LtdTriveni Engineering & Inds. LtdTyroon Tea Company Ltd

UUgar Sugar Works LtdUmang Dairies LtdUnique Organics LtdUnited Breweries LimitedUnited Spirits LimitedUpper Ganges Sugar & Inds. Ltd

VVadilal Enterprises LtdVenky'S (India) LtdVijay Solvex LtdVimal Oil & Foods LtdVolga Air Technics Ltd.

WWeikfield Products Company India Private LimitedWellwin Industry Ltd.

ZZicom 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 retailerReaching 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 betterconnectivity, 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 opportunityEg:Retail out lets in petrol bunksCoffee day outlets in airportsMulti 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

Setting channel objectives and constraints

Analyzing consumer service needs.

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

Identify Major alternatives

Intensive distribution

Selective distribution

Exclusive distribution

Evaluating major alternatives

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 SECTORS. NO. Companies1. Hindustan Unilever Ltd.2. ITC (Indian Tobacco Company)3. Nestlé India4. GCMMF (AMUL)5. Dabur India6. Asian Paints (India)7. Cadbury India8. Britannia Industries9. Procter & Gamble Hygiene and Health Care10. Marico IndustriesSource: 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 INTRODUCTIONHindustan 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 volumes 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 theGovernment 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 institutions. 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 urbanpopulation, 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 fortransit 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 serve HUL’s 40 manufacturing plants which are decentralized across 2 million square miles of territory.

(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 covers about 50,000 villages, reaching 250 million consumers, through 6000 sub stockists.‐

PHASE 1 PHASE 3

HUL

C&F Agents Redistribution stockists

Wholesalers

Rural retailers Urban retailers

Consumers

PHASE 2

(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 potential, HUL assigned a sub stockist who was responsible to access all the villages at least once in a fortnight and send stocks to those markets. This sub stockist‐ distributes the company's products to outlets 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 grassroots buy and sell‐ ‐ mode. This enables HUL to influence the retailers stocks and quantities sold through 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

Van based fixed route coverage25% Rural pop

Shakti Entreprenurs50% Rural population (target)

Based Distributor

SS

SS-Star sellerDistributor based in the village Hub& spoken Model 37% Rural population .

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 ruralpopulation. 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 newdistribution 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 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. Leveraging Information technology HUL customers are serviced on continuous replenishment. This is possible because 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 offices, 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 interaction 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 available 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 sales 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 HUL'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 fee 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 Ranchi and Jamshedpur is serviced by 3 Redistribution Stockists at Sakchi (M/s Om Prakash Agarwal), 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 of 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 for 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 continuous daily replenishment. Leveraging scale and building expertise to service Modern Trade and Rural 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 alsoincludes a back end‐ system connecting suppliers, all company sites and stretching right up tostockists. 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 invillages. HUL has also included several NGOs and state governments as the initiative helpsrural 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 the 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 components 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 scores 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. Each 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 affect 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 network 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 situation 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 many FMCG segments like Soaps, Detergents, Personal Care products etc with strong brands with continuous “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 the same reach as HUL has (e.g., ITC as it’s eating into HUL’s market share continuously since it entered 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 share, 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 products like shampoos, soaps, detergents may fall in a basket. Efficient distribution network of HUL ensures 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 takingtendency of the consumer will be lower or consumer will be more risk adverse. In such situation, channel members can “unsell” a brand by giving explicit or implicit suggestions. Thisimplies that in such a case, selling depends on many cases how the company is taking care ofchannel members (“keeping them happy”) such that they are not lured by other competitors ordirected by grievances so as to unsell 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 stoks 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 geared 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 lower 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 HUL “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&Lcost per unit volume transported for the company and greater ROI per unit of shelf space for theretailer. implication for HUL In general for FMCG goods and for HUL as well, value density is relatively lower. In addition to this fact, increasing trend towards using smaller pack sizes increases the packaging 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 higher 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 contractedmanufacturing 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, toilet 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‐ tobacco 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 & distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of 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 included 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 significantly, though. In the following pages advertising, marketing & distribution expenses of major FMCG goods (in HUL’s category mostly) are being shown. It is to be understood here that marketing expenses 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”), consderable 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, Coke 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 second 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 high rotations. Also, ITC mostly deals with small retailers and distributors (‘paan cigarette‐ shops owners’) who have marginal bargaining power. Another revelation is that Henkel, which has zero advertising expenditure, has the highest marketing 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) compared 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 companies have some of the lowest marketing expenses (as percentage to sales) in the group, as shown in the chart. Distribution Expenses Distribution expenses include the outward freight cost to the company. 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 variable. 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 group 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-MixFMCG

CigarettesFoodsLifestyle retailingPersonal CareStationerySafety MatchesAgarbattiHotelsAgri-businessPaperboard and PackagingInformation Technology

The CompositionManufacturing UnitSeparate for each product lineContract ManufacturingBackward IntegrationE-ChaupalStorage HubsStores all the products

DistributorsExclusive based on populationNeeds to stock all FMCG products( Except Stationery)WholesalersRetailersPaanwalasDeepest penetration possible

SuitabilityPerishable

Short SpanCustomers prefer fresh productsLot SizeSmaller Lot sizesConvenienceWaiting TimeProduct Assortment

Channel ObjectivesConsumer BehaviorQuality ConsciousConvenience goods, Needs Intensive distributionDemands varietyVery less waiting timeCompany ObjectivesReach massesRural penetrationDiversificationCompetitive advantageAlternativesSell ready to eat products through sweet shops like bikanerwalaShowrooms for High-End productsE-Chaupal

FeaturesSelectionDistributor is selected based onInfrastructures, Delivery Van, Computer, Warehouse, Sales Force Population based (1 Distributor per 20-25 thousand)ControlUses Coercive powerTo deal in Cigarettes, it is must to deal in Other goodsTerms and ConditionsPrice, Selling Condition, Godown Condition etc…

FunctionsManpowerPromotionCreditInfrastructureStocking

Benefitsrarely 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

ANALYSISITC 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