The global FMCG market has a direct and significant impact on the economic structure of any country. With diversity and geographic boundaries (defined/undefined), the distribution networks form a complex structure, and it gets difficult for most of us to understand its hierarchy.
In countries, like India, China, America, and likewise where the majority people who consume FMCG goods on daily basis live far away from the source of production. The distribution network forms an important part of our economy and, can also prove as a strategic advantage for most FMCG companies.
Defining FMCG Distribution.
In order to understand FMCG distribution, we first need to understand FMCG products. Fast Moving Consumer Goods (FMCG) or Consumer Packaged Goods (CPG) are consumer goods (durable and non-durable) that are required every day in human life. These goods are consumed by every section of society and contribute largely to a country’s economy.
FMCG distribution can be seen as a path or channel through which these products move from a manufacturer to the ultimate consumer. In some cases, the manufacturers directly deal with the end consumers but, in major cases, a systematic distribution channel is followed to transfer the goods to the consumers.
From a competitive perspective, having a robust distribution network gives manufacturing companies an edge over their competitors. Therefore, channel management and distribution form an important element in a company’s business strategy. However, it requires a substantial expense and adds up to the overall cost to the market.
Globally most manufacturing companies face the problem of designing, constructing, and effectively managing the distribution channel, thereby increasing the cost of their product and service.
Understanding the FMCG Distribution Channel
Distribution channels highly depend on the products and elements which are involved in the transit facility. Distribution channels consist of different independent businesses which are aligned with the manufacturing companies to distribute the products from the source to the ultimate customer.
Agent, Merchant and Facilitators are the 3 main entities that drives FMCG distribution channel.
- Agents generate sales by promoting a company’s product but they never stock or buy the product themselves. An agent can be an independent person or a member of the company itself.
- Merchants such as retailers, wholesalers, or stockists buy and stock the products in bulk and supply them to other retailers or sometimes directly to the consumer. Merchants are usually independent but sometimes a manufacturing unit has its own wholesale or retail departments.
- Facilitators, as the name indicates, facilitates the transportation of goods manufactured from one place to another. Facilitators include logistic services, warehouse owners, independent distributors who are just involved in storing and transporting the manufactured product and not promoting or trading them.
FMCG distribution channels are designed using these three entities depending on the market needs, type of product, and also considering the competitive strategy.
What does the FMCG distribution channel make of?
An FMCG channel varies in different countries/states but every model can be distilled down to its directness, level, density, variety, and novelty.
- Directness refers to the transactions occurring between the manufacturers and customers without the aid of the intervening member. Indirect distribution occurs when the manufacturer uses distribution channels to supply products to the consumer.
- The concept of level refers to the number of channels involved in transferring the product from the manufacturer to the ultimate consumer. In the automobile sector, manufacturers are involved with franchise dealers who in turn supply the products to the end consumer. This is one level channel. In the FMCG industry, manufacturers often sell the goods to wholesalers, who sell it to the retailers, who in turn sell it to the consumers. This is a two-level channel.
- Density refers to the number of outlets available within a particular area. Depending on the number of outlets, a distribution channel is considered exclusive or intensive. The distribution of automobiles has fewer outlets in a city and is considered as exclusive while the distribution of soaps with hundreds of outlets including wholesalers, supermarkets, grocery stores is considered intensive.
- Variety refers to the various type of outlets a product is sold. Biscuit distribution may exhibit high variety since they are sold at various outlets including paan shops, grocery stores, canteens, supermarkets, general stores, and even online. While the distribution of sarees may exhibit low varieties since they are sold only at particular stores.
- Novelty refers to the new channels utilized by manufacturing companies to distribute their product. Like online sales and vending machines is relatively new to India and considered a novelty.
Geographical area has a very diverse and complex effect on the FMCG distribution channel and it needs some study along with practical experience to understand the depths of this complex network. The structure mentioned above will give you a basic understanding of the distribution channel and help you build a more solid foundation.
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