REACH of FMCG COMPANIES IN INDIA:

Fast moving consumer goods (FMCG), as the name suggests, are goods consumed on a daily basis. Thus consumer
goods companies have to ensure their availability in the markets at all times. The distribution network of a company
bridges the gap between the factory and the consumer. A well spread network plays a vital role in growth of an FMCG
company.
According to a Nielsen report (2012), there are roughly eight million stores covering 8,000 towns and 6.3 lakh villages
in India. The table below shows the distribution reach of the various FMCG companies.
Distribution network, the backbone for FMCG sales
Company name

Retail outlets (in m

nos)

HUL

6.5

ITC

6.0

Marico

4.8

Godrej Consumer
Products

4.6

Nestle

3.7

Britannia

3.6

Dabur

3.4

Glaxo SmithKiline
Consumer

0.8

Source: Annual Reports & Company press release

A look at the chart below shows that large companies like Hindustan Unilever (HUL) and ITC have the largest
distribution networks covering at least three-fourth of the retail landscape of the country. Even mid-sized FMCG
companies like Marico and Godrej Consumer Products have a presence in more than half of the retail outlets.
Companies such as Nestle, Britannia and Dabur have expanded their reach to more than two-fifth of the existing
network. However, Glaxo SmithKline Consumer Healthcare (GSKCH) has the lowest reach of a mere 10%. This is
because the company's products are more concentrated in the eastern and southern India.

Source: Annual Reports & Nielsen

Note: Coverage calculated assuming total reach to be 8 m outlets total

Other than the retail outlet model

Although urban India consumes 64% of FMCG goods, rural India has been witnessing a faster rise in sales. However,
rural India has fewer retail outlets due to infrastructure constraints. Companies, therefore, have a different distribution
model in villages. For example, FMCG major HUL has been operating Project Shakti to widen its rural reach. Under
this initiative, village women are designated as Shakti Ammas and drive home-to-home sales. At the same time, men
from the Shakti Amma families known as Shaktimaans distribute HUL products to the adjoining villages. The company
uses digital technology to track villages around the Shakti families. Using this information, Shaktimaans are allotted
five to six villages. They go on company-provided bicycles to these villages and sell products to small retail outlets.
HUL currently has 30,000 Shaktimaans across India.
ITC through its 'Choupal Sagar' initiative has set up rural malls next to its warehouses. The rural malls not only sell
company products but consumer goods of other companies as well. Additionally, the rural mall enables ITC to procure
agri-commodities at competitive prices. Dabur recently doubled its direct rural reach to 27,000 villages. This was
implemented through a parallel network of substockists and outsourced sales personnel.
Distribution costs still not optimal
After the initial investment in setting up a network, the FMCG company has to regularly incur distribution costs. These
costs arise in the transfer goods from the company's depots and warehouses to the retail outlets. An efficient
distribution system is one where the depots are set up such that it optimizes distribution costs for the company.
However in order to save inter-state sales tax (CST), FMCG companies are often forced to set-up depots in distant
locations that push up overall distribution costs.
For FMCG companies, distribution costs constitute a sizeable 2-6% of sales. The Goods and Service Tax (GST) will
eliminate CST and introduce a uniform tax rate. FMCG companies, as a result, can set up depots based on logistic
ease and not tax benefits. This is expected to reduce their distribution costs in relation to sales.

Source: Annual Reports

On account of differences between the Centre and States over the tax structure of GST and with constitutional
amendments pending, the implementation of GST is getting delayed.
In a nutshell
Distribution reach is one of the pillars of growth for an FMCG company. While urban India is well-connected, rural
India has been lagging in retail outlets. With a pick-up in sales momentum, companies have been increasing their
reach in villages to benefit from the demand potential. However, distribution costs borne by FMCG companies remain

sub-optimal due to non-uniform sales tax rates across states. The implementation of GST will bring a unified and
centralized system for taxation. This is expected to reduce overall tax rates and minimize distribution costs for FMCG
companies.