How to manage a FMCG distributor

19 May, 2022

Halima

Marketing Analyst

Introduction - what is a FMCG Distributor ?

FMCG refers to consumer products that are purchased frequently, quickly moving in and out the retailer shelves. They are at low cost, are sold at a low margin, but on high volumes. 

A  distributor is a private company mandated by the manufacturer to distribute a range of products in a defined geographic location. This mandate can be exclusive or not. It can also be called a channel partner, an agent, a franchisee or an aggregator. There can in fact be several levels of distributors or differentiations between distributors. You can find wordings, such as master distributor, super distributor, key distributor, etc to differentiate them from the smaller distributors.

It needs to be differentiated from a wholesaler, which is a private company with no direct contract with the manufacturer but who has the purchasing power to stock large quantities of the products and who can passively supply smaller retailers. He will not invest in a dedicated sales force, but retailers can come over to him to purchase. There can even be in the market sub wholesalers, or “semi grossistes” in French, whose roles is to resell to the long tail of small traditional trade shops. It can also be called a stockist. Its purpose is essentially to supply the long of retailers that will never get serviced directly by the sales representatives or if one retailer has an urgent need to restock, and is willing to close his shop to go and buy.

1. What are the key responsibilities of a distributor

The distributor can be specialized by:

  • Geographical areas

  • Type of customers (for example focused on supermarkets or restaurants, etc)

  • Product ranges (cold product for example if he has specific chilling equipment)

The manufacturer will expects the distributor to:

  • Purchase the products from the manufacturer (primary sales) and resell to retailers (secondary sales). It is key to measure the secondary sales, as they might not be equal to primary sales, and give you an indication on your product performance or necessary action:

  • if primary sales are bigger than secondary sales, it means the distributor struggles to sell the products in the market, he piles up stock, and will reduce his next order.

  • if on the contrary demand from the market (secondary sales) is higher than supply, it means there is out of stock situation in the stores, and there is a risk that customers move to another brand. The manufacturer needs to align its production and sales to distributor accordingly.

  • Take orders from large accounts like modern trade and fulfill them

  • Maintain stock and ensure availability of stock downstream to wholesalers and retailers

  • Manage the sales force to on board new retailers, ensure presence and correct display of the products and merchandising

  • Run some trade marketing activities to develop the territory, recruit new outlets, and customers. That can take the form of conducting Bottom the Line / street marketing activities, with promoters in the markets engaging with customers, promotional events, sponsoring, etc based on what is relevant for the business. Distributors might actually get some commission / budget from the manufacturer that are supposed to be allocated to that.

2. Why the relationship with a FMCG distributor can be complicated

Indirect distribution presents the benefit of allowing the manufacturer to focus on the production and marketing, and give the hard operational work of distribution to a dedicated entity. If this model is chosen, it is a long term relationship that is strategic and requires to be well thought, and monitored to be successful. Note that there can be an asymmetry of information between the two parties, and the interests might be misaligned. The relationship will be formalized through a proper legal agreement, which will cover the following dimensions.

Exclusivity

If the distributor is exclusive, it means that:

  • the manufacturer does not allow the distributor to store and sell any other directly competing products than his

  • The manufacturer grants an exclusive right for the distributor to sell on a particular territory, assuring him that he won’t contract other distributors there.

While it presents the advantage of having a focus from the distributor, in practice it can only work if :

  • the manufacturer has a large enough size to represent an interesting value proposition for the distributor.

  • The manufacturer can control what is sold in each territory, otherwise the distributor might complain that there is dumping from other distributors, destroying its profitability, and causing him to stop investing in the distribution.

In practice, non exclusive relationships are more operationally viable and demanding in terms of control. There are two potential drawbacks however to keep in mind:

  • the distributor might not be focused on pushing the manufacturer brand, especially if the share of business is below a certain threshold

  • Any investment from the manufacturer to the distributor in the form of the deployment of a sales force automation software, field force training, etc. might benefit the other manufacturers being sold, which can be frustrating

Credit limits and repayment terms

When running a beauty contest to choose a distributor, one of the most important factor is its financial strength, meaning the amount of capital he can devote to this distribution business in the form of either proper investment in fixed assets, such as a warehouse, shops, sales vehicles, etc and working capital to purchase stock.

That being said, the distributor will benefit from the bank of a revolving credit line to cover the purchase of goods, typically on a 30 days basis. A bad surprise can come from the manufacturer when it realizes that the distributor that had pledged to commit a lot of financial resources to the business actually has pulled out the money after getting the distribution mandate. It can be because:

  • He does not perceive a sufficient return on investment on the distribution business, and as such wants to employ its capital to a more profitable allocation

  • He has losses in other parts of his financial portfolio that he needs to cover

  • He does not have strong enough operational capacity to manage a larger business size. While the owner might be of good faith, he himself also faces agency challenges, whereby his staff might fraud him on the cash reconciliation or else. Typically in the absence of well trained staff or proper information systems, the distributor might prefer to stay at a small, manageable scale, rather than expanding too much and blowing up. Practically that means, managing for example no more than 500 retailers, and not taking over half the country.

As companies, distributors are often business men with stakes in various businesses, and as such, it is not rare to find them losing focus, or making default.

That scenario can have a large impact on the manufacturer, on top of the financial loss, if it has not invested in a SFA system, that allows him to know all the customers / retailers, to give it to another distributor.

Margins

The distributor purchases the product with a front margin, a discount on their price. If the commission is at 10%, you purchase at 100, something you can resell at 110. The front margin will depend on the speed at which the products rotate. Its purpose is to cover the logistics costs.

The manufacturer can also determine a back margin for the distributor based on certain quantitative and qualitative criteria. Ideally the front margin should be lower than the back margin. For the case of mobile operators for examples, the back margin will be set based on these parameters:

  • Quantitative such as volume purchased over the period of time,

  • Qualitative such as the new client acquired, the number of active agents, the revenue generated on the territory, respect of the territory boundaries, etc

If the commissions are only set on primary, there is a risk of dumping, where the distributor will purchase a lot and resell outside his territory the products, sometimes at a loss, killing the value proposition that the other distributors are supposed to make.

These margin parameters need to be formalized on a monthly or quarterly basis through a letter that is signed by both parties.

Territories definition and how to develop it

The contract might specify the exact territory he is authorized to sell into, which leads to these considerations:

  • Enforcing that implies the brand actually is able to control it..While it is easy for electronic products such as credit airtime, it is much more difficult for physical products, unless you use a SFA system where each sales recorded is geo tagged with the GPS. Sales could even be blocked if the sales man is outside his territory.

  • What you want to avoid is the “dumping / bulk selling” behavior, whereby a distributor to hit his purchase target with the manufacturer and get a back margin commission will get rid of the products to wholesaler in another territory of his, that is already saturated. Some distributors might even sell at a loss these products because they know they will make money on the overall purchase target margin. That has a the consequence of killing the value proposition for the other distributors in the territories where there is dumping, as they have to compete against products sold at a lower margin to wholesalers/retailers, meaning that they are not able to supply their usual customers in the territory. That can lead to a destructive price war and a toxic ecosystem. All in all, seeing dumping evidence should lead to formal warning to the offendor distributor and eventually termination of contract.

  • Be careful about defining the territories boundaries. Everyone must be clear on where they stop. It is usually easier if they match existing administrative / political boundaries, so that field users have some knowledge on where they can go and not go. It might not be the best in terms of sales optimization, but the benefit of intimate knowledge is high.

In defining the territories, the distributor has essentially a portfolio of customers / retailers to serve. It might be that he brings his own knowledge of the area, and his customers, or that the manufacturer already has done some mapping and provide him with the portfolio to serve. That option is better as it means the manufacturer has compiled a key asset with the database of the retailers, and does not depend on the distributor to sell the products. For best practices on how to identify the retailers, see our blog post.

In a scientific distribution mindset, the next step would be to have routes designed by territories. That further frames the action of the distributor which does not have to think on how to start selling the product. That means the manufacturer has compiled a list of optimal circuits for each sales representative to follow, based on the segmentation of shops, the ideal visit frequency, dynamic criteria such as their sales, etc.

Distributor review and assessment

As mentioned above, there must be an attractive business case for the distributor in running this business. On the manufacturer side, what matters is to make sure, there is no “easy money” to be done by the distributor that sells products already well established in the market and does not do his share of investments or does not develop his territory.

That implies running frequent reviews of the distributor capabilities on these dimensions:

  • Sales assets in place: facilities, vehicles, motorbikes, trucks, etc

  • Level of training of the sales force

  • How is the sales force paid ? Do they have incentives?

  • Is there enough sales force ?

  • How are the visits planned ? What is the frequency of visits?

  • Compliance with security standards

  • Compliance with warehousing standards, critical for food products.

  • And any other criteria seemed relevant..

Enforcing this agreement and as a whole managing the relationship is a full role that needs to be done on the side of the manufacturer.

Control on the Sales Force

One benefit for the brand is to outsource the contracting of the sales force to the distributor. In practice, some brands who are more involved operationally will directly manage these field force, even though they are paid by the distributor or by an outsourcing agency.

Different distributor roles

Choosing a distributor is a very difficult task. What helps is to clarify what is expected from it. Is it just trading with the ability to import goods in the country through the customs and then be destocked by others? Or should he actively manage the end to end distribution ? There are various hybrid models, where the distributor is more or less actively involved. Whether a company needs to embark on direct or indirect distribution depends on several factors.

The consultancy Boston Consulting Group has published an interesting framework for comparing the different options: Drawing a Route to Market for Multinationals in Africa There are plenty of reasons for companies to be intrigued by the consumer economies of Africa, and they can be summed - www.bcg.com

To quote the BCG article, 4 main types of distributors can be differentiated:

“Pure traders offer the basics: stock points and logistics capabilities. They have good access to capital and often trade significant volumes, but they don’t help develop the market. Suppliers can find themselves in a power battle with these companies, many of which have strong market positions.

Large established distributors are typically the go-to organizations for MNCs entering a new market. They represent a large basket of brands and have significant capabilities and capital backing, but they do not devote particular attention to each individual brand in their portfolio. They are most likely to focus on what sells.

Small but focused distributors handle a limited number of brands. These distributors can be a good alternative if the supplier has capacity to grow and develop a brand with them, because they are often highly motivated. On the downside, they have limited access to capital and infrastructure and frequently require significant support.

Niche distributors focus on certain types of products or channels, such as hotels and cafeterias. They are not likely to move significant volumes, but they do have strong networks in their dedicated channels. Many suppliers use niche distributors along with other types of distribution to build coverage and visibility across channels.”

3. Why a Distributor Management System can help

Typical features of a DMS are:

  • Capture Distributor Information and Details:  Name, Location, contacts, volume targets and GPS Location.  

  • MAP Retailers and Kiosks to Distributors and Capture Full Details: Name, Location, contacts, volume targets and GPS Location.

  • Automate customer orders – Distributor and Sales Rep should track respective orders.  

  • Generate Distributor Orders and Prompt re-ordering levels. 

  • Distributor weekly closing stocks and weekly sales to trade – Alerts and Reports. 

  • Credit Control Management: A Distributor or Sales Rep should be able to send the request to credit control for clearance.  

  • Manage customer Credit limits as configured in the ERP. 

  • Manage Distributor Promotion and Incentives. 

See how all our DMS features can be efficient for your distribution and field operations.

You want to learn more about our solutions? Contact us in [email protected]

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