Today’s post is about the two channels in India’s retail environment – Traditional / General Trade & obviously, Modern Trade.
The reason for choosing this particular topic is well, a little personal and professional. Having worked in the FMCG sector managing the Modern trade business, I have seen little understanding, and even condescension, from peers and seniors, who normally would consider a Modern Trade posting as a “promotion” or a sinecure.
Given the current scale of MT in India, its quite normal that a channel which contributes nearly 5% to overall industry turnover is less understood and lesser planned for.That it is a different eco system, with its own set of challenges and requirements, is another story !
But to understand why things are the way they are, we must take a look at how the traditional trade business works.
Traditional trade is the industry term for the maze of small. unorganized retailers that span the length and breadth of the country.
Typical features of a “TT” outlet are –
1) Small shop area
2) Low operating costs (no fancy fixtures, lighting, sales staff !)
3) Easy consumer relationships, conveniently accessible, and offer value added services as well (home deliver, order on phone, credit)
In short, your neighbourhood kirana store !
Nearly all FMCG companies utilize the services of a private individual known as a distributor to service this environment. The distributor essentially is a third party who takes care of the operational side of the business – selling the product to retailers, collecting cash, managing bad debts et cetera. He does this for a return on his investment, which is ideally supposed to higher than what a bank / stock market / financial instrument can give him.
Do refer to Ketan Joshi’s book, What They Don’t Teach You About Marketing to understand the finer points about how and why this system works.
Note very well here that technically, the bulk of liabilities for the company end with the banking of the distributor’s cheque for stocks.
A sub channel through which the distributors service the smaller / marginal retailers is the wholesale channel. Unlike retailng, which requires door to door outlet coverage, wholesaling is about fewer, larger volume transactions with faster rotation of money.
Distribution therefore, becomes the most critical agenda that this entire system is supposed to deliver, the hypothesis being availability = offtake, or as is often said , “Jo dikhta hai, woh bikta hai”.
Success or failure of this agenda is measured by third parties like AC Nielsen, which are appointed to audit selected stores and gauge whether measures of distribution are getting impacted or not.Eventually, increase in distribution is supposed to impact Market Share, which is what all companies are slugging it out for in the environment.
Distribution again has two imperatives – Higher Reach or greater depth. Companies would tend to shape their distribution strategy basis product type / category – for example – batteries / pens would follow a “greater reach” approach, whereas cold drinks would prefer to drive higher sales from a smaller, but high salience – outlet universe.
Hence, the key priorities for the traditional trade system can be summarized as –
1) Ensuring greater coverage of the outlet universe
2) Making products available across most of them.
3) Management of channel partners to ensure ROI & hence stability (through increased turnover, lower operating costs etc)
Next week : A similar analysis of the Modern Trade business.
PS: Apologies to Charles Dickens for the post title !