Effectiveness and Efficiency of

Distribution Channels In FMCG

Fast Moving Consumer Goods popularly known FMCG is as the name suggests is the most
demanded products in the market. It includes everything from food items like flour, biscuits, ice
creams, etc to body products soaps, face creams to cigarettes to beverages, etc. consumers need
these things in their everyday life so they invests
a good portion of there income in these things. There are so many companies which are dealing in
FMCG products like HUL, Dabur, Cavin Care, AMUL dealing in dairy products, etc. By the vary
nature of the product the companies are seeing this as a great source of income. As large number of
companies are looking this sector as a profitable venture, so for sustaining there position and gain
new market they have to bring some thing unique in their products or services to gain position in the
market or to sustain there.
In modern business distribution network has a great impact on the success of any business. In the
FMCG segment the role of a excellent distribution channel becomes even more crucial because the
delivery of FMCG Product is confined to day to day basic. Hence in order to survive and thrive in a
highly competitive market you have to have a distribution channel which has no problem at any point
of the distribution channel.

The factor which is of crucial importance to survive in any business is the understanding of the mind
of the individual consumers. What are main characteristics which consumer consider while making a
purchasing decision regarding FMCG Product.
In order to make right decision regarding all these aspects the company requires a complete
knowledge of the problems faced in distribution channel and what should be done in order to
overcome all these problems.
Better infrastructure facilities will improve their supply chain. FMCG sector is also likely to benefit
from growing demand in the market. Because of the low per capita consumption for almost all the
products in the country, FMCG companies have immense possibilities for growth. And if the
companies are able to change the mindset of the consumers, i.e. if they are able to take the
consumers to branded products and offer new generation products, they would be able to generate
higher growth in the near future.

Table of Contents
Introduction
A Distribution Channel is a set of interdependent organizations (intermediaries) involved in the
process of making a product or service available for use or consumption by the consumer or
business user.
Channel decisions are among the most important decisions that management faces and will directly
affect every other marketing decision.
Functions of Distribution Channel
All Use Up Scarce Resources
All May Often Be Performed Better Through Specialization
All Can Often Be Shifted Among Channel Members

Types of Distribution Channel

A channel of distribution or trade channel is the path or route along which goods move from
producers to ultimate consumers or industrial users. In other words, it is the distribution network
through which a producer puts his product in the hands of actual users. The channel of distribution
includes the original producer, the final buyer and any middlemen-either wholesaler or retailer. The
term middleman refers to any institution or individual in the channel which either acquires title to the
goods or negotiates or sells in the capacity of an agent or broker. But facilitating agencies that
perform or assist in marketing function are not included as middlemen in the channel of distribution.
This is because they neither acquire title to the goods nor negotiate purchase or sale. Such
facilitating agencies include banks, railways, roadways, warehouses, insurance companies,
advertising agencies, etc.
The following diagram (chart) is illustrative of the channel of distribution which may exist in a market:
The above chart indicates that the number of middlemen may vary. If there is direct sale by the
produce to the consumers then there is no middleman. But that is very rare. As the chart shows the
producer may sell goods to retailer who may then sell the same to consumers. The producer may
sell goods to wholesalers who may inturn sell to retailers and the retailer may sell to consumers. The
fourth alternative channel of distribution is when any agent/dealer intervenes between the producer
and retailers and acts as a middlemen. The agent is appointed by the producer for the sale of goods

to the retailers. Another alternative channel is there when producers agent sells goods to
wholesalers who sell to retailers. Agent/dealer is an independent person/firm buying
goods and selling them to retailers. Agent/dealer may also sell to wholesalers who may then sell to
retailers and goods are thus made available to consumers. In the channel of distribution there may
be more than one agent/dealer and wholesaler.
A brief explanation of different channels of distribution is given below:
Customer: This is also known as direct selling because no middlemen are involved. A producer may
sell directly through his own retail stores, for example, Bata. This is the simplest and the shortest
channel. It is fast and economical. Small producers and producers of perishable commodities also
sell directly to the local consumers. Big firms adopt direct selling in order to cut distribution cost and
because they have sufficient facilities to sell directly to the consumers. The producer or the
entrepreneur himself performs all the marketing activities.Manufacturer
Customer: This is one stage distribution channel having one middleman, i.e., retailer. In this channel,
the producer sells to big retailers like departmental stores and chain stores who in turn sell to
customer. This channel is very popular in the distribution of consumer durables such as refrigerators,
T V sets, washing machines, typewriters, etc. This channel of distribution is very popular these days
because of emergence of departmental stores, super markets and other big retail stores. The
retailers purchase in large quantities from the producer and perform certain marketing activities in
order to sell the product to the ultimate consumers.RetailerManufacturer

Customer: This is the traditional channel of distribution. There are two middlemen in this channel of
distribution, namely, wholesaler and retailer. This channel is most suitable for the products with
widely scattered market. It is used in the distribution of consumer products like groceries, drugs,
cosmetics, etc. It is quite suitable for small scale producers whose product line is narrow and who
require the expert services and promotional support of
wholesalers.RetailerWholesalerManufacturer

Selection Criteria of a Distribution Channel

While selecting a distribution channel, the entrepreneur should compare the costs, sales volume and
profits expected from alternative channels of distribution. In order to select the right channel for
distributing his product, a small-scale manufacturer should keep in mind the following
considerations:
Market Considerations: The nature of the market is a key factor influencing the choice of channels of
distribution. The following features of the market should be considered to determine the channels:

Consumer or Industrial Market: If the product is meant for industrial users, the channel of distribution
will be a short one. This is because industrial users buy in a large quantity and the producer can
easily establish a direct contact with them. But in case for goods meant for consumers, retailers may
have to be included in the channels of distribution.
Number and location of buyers: When the number of potential customers is small or the market is
geographically located in a limited area, direct selling is easy and economical. In case of large
number of customers, use of wholesalers and retailers becomes necessary.
Size of order: Direct selling is convenient and economical where customers place order in big lots as
in case of industrial goods. But where the product is sold in small quantities, middlemen are used to
distribute such products. A manufacturer may use different channels for different types of buyers. He
may sell directly to big retail stores and may use wholesalers to sell to small retailers.
Customers buying habits: The customer buying habits like the time he is willing to spend, the desire
for credit, the preference of personal attention and one stop shopping significantly affect the choice
of distribution channels.
Product Considerations: The type and nature of the product influence the number and type of
middlemen to be chosen for distributing the product. The important factors with respect to the
product are as follows:
Unit value: Products of low unit value and common use are generally sold through middlemen, as
they cannot bear the cost of direct selling. On the other hand, expensive consumer goods and
industrial products are sold directly by the producers.
Perishability: Perishable products like vegetables, fruits and bakery items have relatively short
channels, as they cannot withstand repeated handling. Goods, which are subject to frequent
changes in fashion and style, are generally distributed through short channels, as the producer has
to maintain close and continuous touch with the market.
Bulk and weight: Heavy and bulky products are distributed directly to minimize handling costs. Coal,
bricks, stones, etc., are some examples.
Standardisation: Custom-made and non-standardised products usually pass through short channels
due to the need for direct contact between the producer and the consumers. Standardized and
mass-made goods can be distributed through middlemen.
Technical nature: Industrial products requiring demonstration, installation and aftersale service are
often sold directly. The consumer products of technical nature are generally sold through retailers.

Product line: An entrepreneur producing a wide range of products may find it economical to set up its
own retail outlets. On the other hand, firms with one or two products find it profitable to distribute
through wholesalers and retailers.
Age of the product: A new product needs greater promotional effort and few middlemen may like to
handle it. As the product gains acceptance in the market, more middlemen may be employed for its
distribution.
Middlemen Considerations: The cost and efficiency of distribution depend largely upon the nature
and type of middlemen as given in the following factors:
Availability: When middlemen as desired are not available, an entrepreneur may have to establish
his own distribution network. Non-availability of middlemen may arise when they are handling
competitive products, as they do not like to handle more brands.
Attitudes: Middlemen who do not like a firms marketing policies may refuse to handle its products.
For instance, some wholesalers and retailers demand sole selling rights or a guarantee against fall
in prices.

Services: Use of those middlemen is profitable who provide financing, storage, promotion and
aftersale services.
Sale Potential: An entrepreneur generally prefers a dealer who offers the greatest potential volume
of sales.
Costs: Choice of a channel should be made after comparing the costs of distribution through
alternative channels.
Company Considerations: The nature, size and objectives of the business firm also play an
important role in the selection of distribution channel. It includes financial resources, market
standing, volume of production, desire for control of channel, services provided by manufacturers',
etc. For example a company with substantial financial resources need not rely too much on the
middlemen and can afford to reduce the levels of distribution. Similarly a company desiring to
exercise greater control over channel will prefer a shorter channel.
After deciding the number of middlemen, an entrepreneur has to select the particular dealers
through whom he will distribute his products. While selecting a particular wholesaler or retailer, the
following factors should be taken into consideration:
a. Location of dealers business premises;
b. Financial position and credit standing of the dealer;

c. Knowledge and experience of the dealer;

d. Storage and showroom facilities of the dealer
e. Ability of the dealer to secure adequate business and to cover the market;
f. Capacity of the dealer to provide aftersale service;
g. General reputation of the dealer and his sales force;
h. Willingness of the dealer to handle the entrepreneurs products;
i. Degree of co-operation and promotion service he is willing to provide;
j. Nature of other products, if any handled by the dealer.

Need for Distribution Channel

Why are all these layers needed in distribution ? Why cant a producer simply sell to a retailer, who
sells to a consumer? Its a fair question, and in some cases, that is exactly how it happens. But the
fact is that many producers are either too small or too large to handle all the necessary functions
themselves to get
their products to market.
Consider the small, specialty manufacturer who is terrific at making fine leather handbags but may
not have the expertise to market its products as well as it makes them, or they may not have the
money to hire a team of full-time salespeople to court the customers and secure the orders. An
intermediary
who works for several small, noncompeting firms can easily handle those functions cost-effectively.
An intermediary who specializes in importing and exporting can handle the intricacies of customs
paperwork, overseas shipping, and foreign markets, too.
Conversely, large companies need intermediaries because they are also in the business of
manufacturing, not marketing. Turning out tens of thousands of cases of soft drinks, for instance, do
you think Pepsi has time to take and fill individual orders from households? Channel members like
wholesalers and retailers
are useful because they are best at specific aspects of sales in their markets, leaving the
manufacturers to do what they do bestwhich is turn out the best possible product.

Having a distribution channel breaks the whole buying and selling process and all its related
negotiations into manageable tasks, each performed by companies that specialize in certain skills.
Using an import wholesaler, for example, can be handy because they know the laws and customs of
the suppliers nations; and they generally offer their own lines of credit so the retailer wont have to
deal with currency exchange or negotiate payment terms with a bank in another country.
Another advantage of the distribution channel is its ability to even out the natural ebbs and flows of a
supply chain. This comes from the ability of some channel members to store excess goods until they
are needed, and to stockpile goods in anticipation of seasonal sales peaks. Depending on how close
their relationships, channel members may also work together to purchase goods or services in
greater quantity at discounts, passing the savings on to customers.
Even for consumers, the distribution chain is handybeyond handy, in fact! It has become a
necessity in our society. What if there were no supermarkets, for instance? Can you imagine how
much more time and money you would spend having to buy every item at its source? How practical
would it be to run out to the nearest farm to pick up a quart of milk and some salad ingredients on
your way home from work?

Overview
FMCG is an acronym for Fast Moving Consumer Goods, which refer to things that we buy from local
supermarkets on daily basis, the things that have high turnover and are relatively cheaper. Products
which have a quick turnover, and relatively low cost are known as Fast Moving Consumer Goods
(FMCG). FMCG products are those that get replaced within a year. Examples of FMCG generally
include a wide range of frequently purchased consumer products such as toiletries, soap, cosmetics,
tooth cleaning products, shaving products and detergents, as well as other non-durables such as
glassware, bulbs, batteries, paper products, and plastic goods. FMCG may also include
pharmaceuticals, consumer electronics, packaged food products, soft drinks, tissue paper, and
chocolate bars.
A subset of FMCGs is Fast Moving Consumer Electronics which include innovative electronic
products such as mobile phones, MP3 players, digital cameras, GPS Systems and Laptops. These
are replaced more frequently than other electronic products.
White goods in FMCG refer to household electronic items such as Refrigerators, T.Vs, Music
Systems, etc.
These types of goods are required frequently by consumers and so a large part of the monthly salary
or income will be spent on buying all the goods listed on the consumers shopping list. New players
keep joining the FMCG circles but find the going tough unless they have a well planned strategy
along with large cash reserves for their product promotion. A particular FMCG company might be a

strong urban market leader, but will still find it tough to enter the rural markets or a new Indian state
or area.
Although FMCG companies generate a large volume of sales and money, they are always under
pressure as they keep facing a lot of competition from their fellow competitors. Due to this, the
FMCG companies try to do their level best in maintaining a fine balance in their profits and the
product price. Thus they keep facing new challenges on their margins month after month.
One of the key factors for an FMCG company to do well is a proper distribution network. If a
distribution network of a particular FMCG company is well oiled, then that particular FMCG Company
will definitely find the going much easier in the market. But companies have to allot a large chunk of
their finances in developing and fine tuning their distribution networks.
The promotion of a product of an FMCG company too is considered very crucial for its success. The
market has many players. Every FMCG company has to fight for its space and audience in the
Indian market. Thus, when a multinational company enters the Indian market, it creates an even
bigger challenge to the existing players on the FMCG scene. If the promotion is done well, then the
manufacturing of the product can even be outsourced. This can save valuable finance for a
company. This in turn will help the company to utilize their energies on other aspects of their product.
Some of the top players on the FMCG scene in India are Hindustan Unilever Ltd., ITC (Indian
Tobacco Company), Nestl India and Dabur India.
So, we can say that FMCG are the products which are:
Sold quickly at relatively low cost
Sold in large quantities
Have low absolute profit but high cumulative profit

Sector Performance
FMCG is one of the few sectors that has been unscratched and has shown consistent growth
despite economic recession and this can be proved by some of the leading magazines articles like:
According to Business StandardFMCG resilient to the economic slowdown and dip in consumer
sentiment.
According to Economic times it is one of the very few sectors undergoing M&A in recent times.
Economic times also comment that Indian rural market in untapped and unpenetrated.

The growth in this sector is also evident from the fact that many FMCG companies are planning to
foray into West Asia, South Africa and Egypt.
FMCG industry provides a wide range of consumables and accordingly the amount of money
circulated against FMCG products is also very high. The competition among FMCG manufacturers is
also growing and as a result of this, investment in FMCG industry is also increasing, specifically in
India, where FMCG industry is regarded as the fourth largest sector with total market size of
US$13.1 billion. FMCG Sector in India is estimated to grow 60% by 2010. FMCG industry is
regarded as the largest sector in New Zealand which accounts for 5% of Gross Domestic Product
(GDP).

Some of the merits of FMCG industry, which made this industry as a potential one are low
operational cost, strong distribution networks, presence of renowned FMCG companies. Population
growth is another factor which is responsible behind the success of this industry.
Some of the well known FMCG companies are :
Sara Lee
Nestl
Reckitt Benckiser
Unilever
Procter & Gamble
Coca-Cola
Carlsberg
Kleenex
General Mills
Pepsi
Mars etc.
FMCG industry creates a wide range of job opportunities. This industry is a stable, diverse,
challenging and high profile industry providing a wide range of job categories like sales, supply

chain, finance, marketing, operations, purchasing, human resources, product development, and
general management.

Indian FMCG Sector

FMCG is the fourth largest sector in the Indian Economy with a total market size of Rs. 60,000
crores. FMCG sector generates 5% of total factory employment in the country and is creating
employment for three million people, especially in small towns and rural India.
The FMCG sector in India is a sector which is dominated by a high level competition between all the
players. This particular sector includes MNCs as well as local Indian companies. Certain companies
are leaders in a particular state or area. While some of the companies are very strong in the rural
areas compared to the urban areas. Some of the most powerful companies in the FMCG sector are:
Hindustan Unilever Ltd., ITC (Indian Tobacco Company), Nestl India, GCMMF (AMUL), Dabur
India, Asian Paints (India), Cadbury India, Britannia Industries, Procter & Gamble Hygiene and
Health Care and Marico Industries. All these companies have a proper distribution network along
with proper product promotion tools which have helped them to regularly increase their sales and
visibility on the Indian scene.
Well-established distribution networks, as well as intense competition between the organised and
unorganised segments are the characteristics of this sector. FMCG in India has a strong and
competitive MNC presence across the entire value chain. It has been predicted that the FMCG
market will reach to US$ 33.4 billion in 2015 from US $ billion 11.6 in 2003. The middle class and the
rural segments of the Indian population are the most promising market for FMCG, and give brand
makers the opportunity to convert them to branded products. Most of the product categories like
jams, toothpaste, skin care, shampoos, etc, in India, have low per capita consumption as well as low
penetration level, but the potential for growth is huge.
The Indian Economy is surging ahead by leaps and bounds, keeping pace with rapid urbanization,
increased literacy levels, and rising per capita income.
The big firms are growing bigger and small-time companies are catching up as well. According to the
study conducted by AC Nielsen, 62 of the top 100 brands are owned by MNCs, and the balance by
Indian companies. Fifteen companies own these 62 brands, and 27 of these are owned by
Hindustan Lever. Pepsi is at number three followed by Thums Up. Britannia takes the fifth place,
followed by Colgate (6), Nirma (7), Coca-Cola (8) and Parle (9). These are figures the soft drink and
cigarette companies have always shied away from revealing. Personal care, cigarettes, and soft
drinks are the three biggest categories in FMCG. Between them, they account for 35 of the top 100
brands.
Hindustan Unilever Limited has been operating in India from a long time. They are Indias largest
FMCG Company and are also one of Indias largest exporters. The list of their popular products is a

very large one. Some of their popular products are Lifebuoy, Rexona, Lux, Liril, Lipton Tea, Brooke
Bond Tea, Bru Coffee, Pepsodent, Surf, Rin, Wheel Laundry Detergent and Kissan. The company
has an excellent research centre which was established in 1958 and has a strong team of highly
qualified scientists. Recently they have launched new projects like Ayush Ayurvedic Products &
Services and Pureit Water Purifiers.
ITC which was set up in 1910 in India was earlier known as Imperial Tobacco Company of India
Limited. ITC has a vast presence in wide array of products and some of them are greeting cards,
cigarettes, paperboards, packaging, branded apparel, foods & confectionery and FMCG products.
ITC has proved its worth by being one of Indias biggest foreign exchange earners. Although it
already has many leading products from a long time, it is recently wooing over successfully new
customers in its businesses of branded apparel, packaged foods & confectionery and greeting cards
& stationery.

Nestl first made its presence in India in 1912. It has always managed to get itself listed in India's
'Most Respected Companies'. This has been possible due to its practice of producing products of a
global standard in India. It has also been able to provide customer satisfaction to the consumers of
its products.
The success of Gujarat Cooperative Milk Marketing Federation (GCMMF) has proved that a
cooperative too can grow into a top class company if it is backed by proper vision, hard work and a
quality product. This has helped it to become the largest food product marketing organization in
India. Some of its popular products are Amul Ice cream, Amul Milk, Amul Butter, Amul Shrikhand,
Amul Milk Powder, Amul Ghee and Amul Cheese.
Thus the above four examples show a variety of factors which are responsible for turning a company
into a leading FMCG company.
The top 10 companies in India are as follows:
The FMCG sector can be sub classified into:
Personal Care: The personal care category has the largest number of brands, i.e., 21, inclusive of
Lux, Lifebuoy, Fair and Lovely, Vicks, and Ponds. There are 11 HLL brands in the 21, aggregating
Rs. 3,799 crore or 54% of the personal care category. Cigarettes account for 17% of the top 100
FMCG sales, and just below the personal care category. ITC alone accounts for 60% volume market
share and 70% by value of all filter cigarettes in India.
Foods: The foods category in FMCG is gaining popularity with a swing of launches by HLL, ITC,
Godrej, and others. This category has 18 major brands, aggregating Rs. 4,637 crore. Nestle and
Amul slug it out in the powders segment. The food category has also seen innovations like softies in

ice creams, chapattis by HLL, ready to eat rice by HLL and pizzas by both GCMMF and Godrej
Pillsbury. This category seems to have faster development than the stagnating personal care
category. Amul, India's largest foods company, has a good presence in the food category with its icecreams, curd, milk, butter, cheese, and so on. Britannia also ranks in the top 100 FMCG brands,
dominates the biscuits category and has launched a series of products at various prices.
Household care: In the household care category (like mosquito repellents), Godrej and Reckitt are
two players. Goodknight from Godrej, is worth above Rs 217 crore, followed by Reckitt's Mortein at
Rs 149 crore. In the shampoo category, HLL's Clinic and Sunsilk make it to the top 100, although
P&G's Head and Shoulders and Pantene are also trying hard to be positioned on top. Clinic is nearly
double the size of Sunsilk.
Herbal care: Dabur is among the top five FMCG companies in India and is a herbal specialist. With a
turnover of Rs. 19 billion (approx. US$ 420 million) in 2005-2006, Dabur has brands like Dabur Amla,
Dabur Chyawanprash, Vatika, Hajmola and Real.
Paint: Asian Paints is enjoying a formidable presence in the Indian sub-continent, Southeast Asia,
Far East, Middle East, South Pacific, Caribbean, Africa and Europe. Asian Paints is India's largest
paint company, with a turnover of Rs.22.6 billion (around USD 513 million). Forbes Global magazine,
USA, ranked Asian Paints among the 200 Best Small Companies in the World
Chocolates/Confectionary: Cadbury India is the market leader in the chocolate confectionery market
with a 70% market share and is ranked number two in the total food drinks market. Its popular
brands include Cadbury's Dairy Milk, 5 Star, Eclairs, and Gems. The Rs.15.6 billion (USD 380
Million) Marico is a leading Indian group in consumer products and services in the Global Beauty
and Wellness space.

Outlook for FMCG Sector:

There is a huge growth potential for all the FMCG companies as the per capita consumption of
almost all products in the country is amongst the lowest in the world. Again the demand or prospect
could be increased further if these companies can change the consumer's mindset and offer new
generation products. Earlier, Indian consumers were using non-branded apparel, but today, clothes
of different brands are available and the same consumers are willing to pay more for branded quality
clothes. It's the quality, promotion and innovation of products, which can drive many sectors.
Methodology