Published in franchise India
With growing consumer awareness, companies in the Perishable Goods industry are finding it increasingly difficult to live with the problem of low freshness of stocks at the point of Sale. Companies in Pharma, Food and Beverages sector are facing non negligible bottom-line erosion due to the need for discounting to get rid of near-expiry stocks as well as write-offs of expired stocks.
Even though, freshness impacts a company in a multitude of ways, Industry is still not clear how to correct the mess, one which has been created by the industry itself!
Let us understand how freshness impacts the business of a company, what is at the root of this problem, why actions taken by companies do not solve the problem and most importantly, is there a WAY OUT?
- Loss of Sale/ Customer: A 2010 study by Asian Food Information Centre (AFIC) reveals that 67% of Indian Consumers actively consider expiry date before buying perishable goods. It is therefore, highly likely that when the stocks on shelf are even near-expiry, the customer will either postpone the buy or will switch to a competing product leading to a loss of sale. Also if a customer experiences similar experience multiple times, there is high likelihood of losing that customer forever.
- Loss of Profit: Since write-off due to stock getting expired has a direct impact on the profitability, companies adopt the practice of monitoring stock ageing on a regular basis. As the stock ageing goes beyond an internal threshold, actions are taken to get rid of the stocks by pushing it forward into the supply chain. Distributors & Retailers are also afraid of getting stuck with the near expiry stocks, hence they agree to take up stocks (which they are reasonably sure of selling, before expiry) only at a high discount. This results into a significant erosion of company’s profitability.
- Hampers New product launch: The extent of forecasting errors is very high in case of New Product launch, hence there is greater likelihood of distributors/ Retailers getting stuck with stocks of products that don’t click. Since in perishable goods industry, distributor/retailer has a limited window of time to sell the stocks, he is more cautious of accepting stocks of new products. This slows down the launch, and therefore in a number of cases, new products are termed ‘Failure’ even before getting adequately tested at the point of sale.
The stocks which company is unable to push need to be written-off as per statutory norms, leading to a further erosion of profitability.
The write-offs due to obsolescence in the industry vary from 1% to 5% of the Net Sales Value. Add to this the impact of discounting and the cost of delay in launching new products, the profit erosion becomes significant. As per our conservative estimates, the erosion is about 10% of sales for most companies. Hence, it behooves us to examine where this problem comes from.
Foundation of the problem
Freshness deteriorates when an SKU is not sold to the end consumer for a period which is closer to its shelf life. This period can be divided into two parts:
a) Time taken for the SKU to reach the Point of Sale after production.
b) Time for which the SKU waits at the Point of Sale
Companies tend to attribute the loss of freshness to the latter part with the justification that it depends on a number of sales pull factors like strength of the brand, motivation of the seller, consumer preference etc. However, as per our experience, if the first part of the problem is taken care of and there is a non-zero sale rate for the product, the issue of loss of freshness is resolved. Therefore, let us focus on the former part and delve deeper into it.
Consider the case of a company which sells products with statutory shelf life of 9 months from the month of manufacturing. Theoretically, after production, time taken for any SKU to reach Point of Sale anywhere in India should not be more than 15-20 days. It will be interesting to understand why some stocks don’t reach the POS even after 5-6 Months. The supply chain of any company is a variant of the one shown below. There are a number of intermediate stocking points in the chain.