Joining the dots on the wholesale trail
Wholesalers can help consumer goods companies expand sales and reach, leverage the country’s 10-million strong kirana network: Nielsen
If consumer goods companies pay more attention to the indirect channels of trade, they can significantly expand sales, reach and brand footprint, a new report by Nielsen India points out. A better wholesale strategy can sharply push up the contribution that this channel makes to overall sales, a figure that currently stands anywhere between 40 to 60 per cent.
While a post-demonetised world has seen most of the country’s top firms push direct distribution rather than indirect distribution, Nielsen says that identifying the right bunch of wholesalers as well as wholesale markets could unlock tremendous value in terms of new markets and provide companies with a deeper imprint in the hinterland.
“There are mainly two parts to distribution within traditional trade, direct and indirect. Direct distribution is when a company directly services retail outlets, taking care of their assortment, needs and requirements. Indirect distribution, on the other hand, is via wholesalers, who replenish stock for a bunch of retail shops in the vicinity,” says Richard Thomas, director, Nielsen India.
The Nielsen report says that the wholesale trade holds out two big advantages: one is that it links companies with the 10-million strong kirana network and small time retailers that are not on the national radar and secondly, it is a far more inexpensive route when compared to setting up direct channels of contact.
To many, the wholesaler is the bulk distributor, invisible to consumers, who liaises largely with retailers. His universe revolves around retailers and reaching them is his top priority. Experts have described the wholesale channel as the backbone of a company’s distribution network when it comes to reaching traditional trade or kirana shops. Wholesalers, say experts, virtually take up from where firms leave when targeting these stores.
The reason why wholesalers gain importance for domestic consumer goods companies is because they are an inexpensive mode of reaching retailers. While direct distribution, says Nielsen, allows a company to manage inventory better, resource constraints prevent a firm from using direct distribution beyond a point.
Typically, only a fraction of a company’s overall retail reach would be serviced directly by it. Hindustan Unilever, the country’s largest consumer goods company, for instance, has a total retail reach of around 7 million outlets, the highest in the domestic consumer goods market, of which an estimated 2-3 million outlets are serviced directly by it. Nestle India reaches around 4.5-5 million outlets in the country, with a base of around 1.5 million outlets targeted directly by it.
Leverage, reach and footprint
For an understanding of the full potential of the wholesale trade, consider the numbers that the study provides. The report says that there are nearly 0.33 million wholesalers in India, 50 per cent of which are semi-retailers. These wholesalers, in other words, sell directly to consumers in addition to addressing needs of their core kirana and smallretailer clientele.
Nielsen says that this consumer leg of the wholesale business can be exploited by companies by pushing the right assortment of products after verifying the kind of shoppers that frequent these stores.
“The sales contribution by these wholesalers who double up as semi-retailers is almost nine per cent of total sales for a consumer goods company. Modern trade as a channel on an average contributes the same amount for a firm. Yet, there is more attention given to the latter than former. If some energy is also directed towards these semi-retailers, the (sales) picture could change for companies,” says Thomas.
The Nielsen study also highlights where wholesalers are based: One in two wholesalers in the country are located in urban areas. And these wholesalers contribute to nearly 86 per cent of total sales coming from this channel. A closer analysis throws up even more interesting findings.
One is that these urban wholesalers also feed rural retailers. That is, their coverage area is wide, including both urban as well as rural retailers from adjoining small towns and villages. Nielsen says that the percentage of sales by these urban wholesalers to rural retailers is higher than the percentage of sales to neighbouring urban shops. The ratio is almost 55:45, pointing to the dependence of rural retailers, say experts, to urban wholesalers. Urban retailers, on the other hand, have more options available to them when it comes to replenishing stock (they can approach companies directly, for instance) reducing their dependence on wholesalers.
Amplified impact Traditionally wholesalers operate in urban pockets that become ‘feeder markets’ for retailers in the region. Thomas says that there are nearly 760 such towns or feeder markets in the country that account for nearly 70-80 per cent of all wholesale activity.
“This is a remarkable concentration given that there are over 7,000 towns in India,” he says and adds that reaching any of these wholesale feeder markets can help companies extend their retail coverage by over 6,500 stores. This is important at a time when pressure to improve sales is only growing.
Rural markets, say experts, are slowly but steadily coming out of the disruptions witnessed in the past including drought, demonetisation and a new indirect tax regime (GST). Reaching rural consumers then through an evolved wholesale network may just hold the key to unlocking the potential in these areas.