Analyzing FMCG distribution end in Pakistan

FMCG consumer end distribution

FMCG is over a 150 billion dollar industry in Pakistan with a y-o-y growth of 8–9 percent and is served by big names like Unilever, Nestle and P&G. I was hoping that I will be able to find some points of interceptions on the distribution side considering it is very operational and human resource intensive and there is a kiryana store at every corner of the street, but the reality is more complex than it seems to be on the outlook.

I wanted to explore opportunities in technological and operational enhancement that enables real time visibility into the inventory in each region which will assist distributors to optimize their delivery operations and for FMCG to analyze market demand. Besides that, my aim was to look into the prospects of digital payments between retailers and distributors and a digitalized B2B market place to place order through a digital interface.

I, along with a friend (Kamil Hamad), took out some precious time from my lockdown engagements and decided to analyze the market by collecting data and information from retailers, distributors and fellows working with FMCGs. I will be dumping my research, takeaways and thoughts in the following paragraphs but to sum it up; the market is highly competitive, margins on the distribution end are divided among multiple stake holders and are thus are very thin and there are little to no entry barriers on retail side.

A visual of the flow of goods from manufacturers to customers is given below, more on in later.

Stakeholders

At the top of the funnel are manufacturers like Unilever, National and Engro. Below them are contracted distributors which distribute the goods to retailers and small wholesalers like in akbari mandi or dal bazar. Besides distributors, manufacturers also sale directly to big wholesalers like Metro and Hyperstar. The small wholesalers are go-to market place for very small retailers that are not worth the time for distributors. There is another group called mobilizers that act as independent distributors. They buy goods from small wholesalers and distribute to very small retailers.

Distributors
Most of the manufacturers have outsourced their distribution channels. Large scale manufacturers have stringent policies for quality control, sales targets and fulfilment periods. Distributors manage their own inventory and sales force which makes it very operational and human resource intensive job. Distributors have segmented retailers into medium and small business. A small business would be one with daily gross sales of 30k or less which constitutes more than 70pc of the retail market.

The job of a distributor is to reach out, on board and deliver. The process for goods delivery is covered in 3 steps. A sales rep goes to the retailer once a week and takes order on his register or tab and takes payment. The goods are delivered next day by delivery van. The delivery guys also stacks the goods in racks or shelves. A merchandizer who is an employee of the distribution goes once a month for any merchandize delivery and other cosmetic work.

The size of distributors varies and depends upon the policies of the manufacturer. Some manufacturers like P&G and Coca-Cola have only one authorized distributor for the whole country or city while some manufacturers have divided their eggs into multiple baskets.

Wholesalers

Wholesalers are a go to market place for very small retailers who are not served by distributors as well as consumers looking to buy in bulk. Wholesalers sell at a better price than retailers and at times than official distributors due to the volume of good involved. These guys buy directly from distributors. They usually have a limited range of goods, for instance a wholesaler might only just deal in biscuits and cakes, but there are wholesale markets in each city where buyers can find all sorts of goods. Many low end small companies who don’t have the resources to develop distribution channels also sale goods directly through wholesale markets. Many of the counterfeit products you see in the market are sourced directly from wholesale markets most of the time.

Mobilizers

These are independent distributors who buy goods from wholesalers and sell to very small retailers that for some reason cannot go to market to source goods. They are usually one-man army. You might have seen them on their motorbikes with goods stacked on the back. This model is rather common in smaller cities.

Retail sector

This is your street corner shop or grocery shop in every small market. No barriers to entry, range of products vary. Many small retailers are not a concern to distributors due to small volumes. Many medium sized retailers who are even approached by distributors choose to buy from wholesalers on better price and margins which can sometimes be based on consumer relationship. The bigger retailers can negotiate better prices with distributors owing to high volumes. Many a times retailer owners have to go to wholesale market for products like pulses, flour, sugar and other products for which the distribution channels are not well developed.

Kiryana Store

Margins
Jackpot question. Margins made by manufacturers is undisclosed and is none of our concern here. However, the distribution guys only get 3–5 pc of the trade. Retailers on the other hand are rather free to play their market and make an average 8–10 pc over an item and this can go up or down depending upon the type of item. So retail guys are the winners here. Mobilizers have a game plan of their own. They usually sale to stores that sale counterfeits like shampoo, cold drinks and water which do not have a standard market price and thus have a space for margins.

Technical Interceptions
What if we can have a visibility into the inventory of all the stores in a city, district or region. Its going to be a game changer for distributors and help manufacturer analyses market demand on the go. Lol, not so easy.

Besides the low technical literacy, using supporting tech is beyond the financial ambits of most of the retailers. A small store I reviewed with volumes of around 50k/day and 2 full time workers invested in setting up a POS but it was hard to keep it updated due to the wide range of products and pace of orders. There has to be a dedicated resource with some technical literacy over the counter to register each in and out which is out of question for small mom and pop stores. Interestingly the shop I was interviewing got their machine stolen few days after setting it up.

The distribution guys use digital media for order taking and processing. Almost all of the trade is done in cash or cheques which are settled over a week’s time. Giants like Unilever have their own apps that gives them an insight into weekly sales per region.

Operational Interceptions
Absence of any supportive tech makes it a highly human resource intensive business. The distributors go to retailers every week and at times there are no orders but they have to meet their targets and have a pitch ready for every situation to maximize their sales. This on the other hand can’t be done over an app or phone call. Since retailers make their earnings in cash thus they payout in cash as well so someone has to go to the shop nonetheless. The delivery man does displaying and stacking goods in the shop as well which is a sort of incentive for driving sales.

Solution Providers
There are a couple solution providers working in the market on B2B sales and distribution. One of them is the Tajir app, who made it to Y-combinator on this idea, and the other and latest entrant is the Bazaar Tech. It’s a wholesale market place for retailers who are not connected to distributors or prefer pricing and model. The apps allow them to order via app and the goods are delivered next day.

I looked for solution providers on the distribution end and could barely find any entities working on it. My guess is that the fast movement of goods inhibits the FMCG’s or distribution’s options to outsource any part of the supply chain. In developed countries most of the manufacturers manage the distribution end themselves as well to ensure quality and fulfillment time but in Pakistan, a low income country, the retail is a big fragmented and undocumented sector and it makes more sense for the manufacturer to outsource this operational and HR intensive job.

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