Small is Big

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Published by Economic Times May 23, 2014

India’s population follows a long tail distribution – 15% of the total districts (640) are occupied by 35% of the total population.The remaining 65% of the population is spread across the larger number of remaining districts. The size of the population in the “tail” is bigger than that under the “head”. Assuming every district has a representation of various socioeconomic classes, the sales data of distributors of a consumer goods company with a pan India presence should ideally mirror the long tail population distribution curve. However if one looks at the sales data of a consumer goods company across distributors, most of them have a much bigger “head” – 70-80% of the sales will come from 20 to 25% of the distributors or in other words – a few distributors or wholesalers contribute to a lion’s share of the total sales of the company.

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Despite the contradicting demand and sales curve, these companies strongly believe that they do not have a reach problem due to the presence of a few large wholesalers who buy in bulk and are supposed to reach out to the vast population of small retailers.

Myth of reach through wholesaling
By design, wholesalers are meant to service the markets where a company’s distributor is unable to reach. However most wholesalers do not service the tail because:

  • Wholesalers operate with wafer thin margins and hence cannot invest in physical infrastructure to service small retailers there by resorting to passive selling- they do not go out to sell, instead, wait for retailers to buy.
  • At the same time, the need for collections bandwidth and the risk of default also forces them to limit credit (to avoid hassles of follow up with many retailers).

The above factors limit the number of retailers buying from the wholesalers – only those who can buy on cash and are willing to invest time and effort to physically get the products from the wholesalers. At the same time, to reduce risks, most wholesalers limit their portfolio to the few fast movers, resulting in limited penetration of the range of company’s products, amongst wide population of small retailers.

Surprisingly, the phenomenon of wholesaling is not only seen in rural areas but also in urban areas for many companies. It is not uncommon to find wholesalers in many metros of the country across various consumer brands, when such areas have adequate distributors. The presence of wholesalers in prime metros is a phenomenon created by Brand Company.

The pressure of primary sales target forces sales team to nurture distributors who are willing to buy in huge lots, much more than their immediate requirement. When the distributors are saddled with large stocks, they use the bait of high volumes and deep discounts to liquidate – this limits the number of parties who buy from them. These parties turn out to be wholesalers. (Some companies even deal directly with wholesalers in their prime territories as a mechanism to get easy sales for their targets). Having liquidated most of his stock to the wholesaler and few large retailers, the distributor does not have material (or even motivation) to do the difficult job of actively servicing small retailers in his area. This leaves vacant a large market, where no-one is working proactively to secure shelf space – the large number of small retailers. The above phenomenon of “wholesale driven sales” strategy creates not only a large head of distribution sales amongst distributors but also for SKUs. 20%-30% of SKUs (or product categories) contribute to 70-80% of the sales. This forces companies to critically look at trimming their product range. Even though a dysfunctional distribution setup prevents an SKU from being present in all shops and expose itself to real demand.

Living with the penetration gap
Brand companies and distributors have learnt to live with this penetration gap justifying it as “cost inefficient” to try to plug the penetration gap directly using a distribution structure. They assume that the gains will not commensurate with the costs required to do the same and that the retailers and customers will find out a way to get to the brand. This logic holds good when the brand is near monopoly, and consumers will put up with the purchase inconvenience. Not many brands in the Indian market enjoy that iconic status. This means, one cannot assume that all potential customers will seek those limited retail points, serviced by the distributor based on his business considerations.

It is safer to assume that one does not know where one’s potential customers will walk-in to buy the product. If we assume this, then it becomes imperative to be present (with adequate range) in all potential retail points where one’s customer is likely to walk in. This means one needs to develop a distribution method, which is cost efficient to directly service frequently the long tail of smaller retailers. In order to develop such a distribution structure, one needs to understand why companies have not been able to do so.

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