India briefing: The challenge of distribution
By Raghavendra Verma | 31 October 2013
India is a country of markets within markets, involving numerous languages, varying tastes and cultural preferences - posing challenges to nationwide advertising and marketing and hindering pan-Indian distribution. Such problems are hindering growth but, as Raghavendra Verma writes from New Delhi, there are solutions for FMCG companies.
International and major domestic food companies who want a share of India's growing consumer markets face a number of challenges but one stands out - dealing with the country's under-developed and fragmented distribution networks.
These are especially complex given India's cultural diversity. It is a country of markets within markets, involving numerous languages, varying tastes and cultural preferences. They do not just pose serious challenges to nationwide advertising and marketing, they make it harder to organise pan-Indian distribution.
Combined with the still under-developed state of organised retail, the continued preponderance of small neighbourhood shops also makes distribution hard to control. Manufacturers and suppliers offering high margins are preferred by small retailers, rather than them buying the best quality and value-for-money products – such practices make sales to retailers hard to predict – and such instability works its way up the distribution chain. Furthermore, continued power cuts – or "load shedding" – across India to deal with endemic electricity shortages further restrict the delivery and storage of cold stored perishable products.
As Tarun Jain, vice president of the food services and agriculture division of New Delhi-based consulting firm, Technopak, says: "Coke, Pepsi and Hindustan Unilever have been operating in India for decades, but still have not achieved full penetration."
Jain says the biggest challenge for the industry is how to organise distribution in a market where only 3% of food sales happen through organised channels. "In the United States, if you approach Wal-Mart Stores, you can reach a major section of the market; but here, you have to approach it state by state and region by region," he explains.
Yet, a careful and slow construction of an independent distribution chain within India is probably the best way for a brand to establish itself. Relying on existing retail networks leaves brands in a weak position when negotiating sales terms or on deciding where a product should be sold, says Piruz Khambatta, chairman of the Confederation of Indian Industry's national food processing committee.
For this reason, Khambatta notes, foreign food manufacturers often want to launch their products through buying established brands, who have their own distribution networks in place. "They are ready to pay five to ten times ... annual sales as a price for an established food brand as food has more brand loyalty in India." For example, Bangalore-based ready-to-eat food brand MTR Foods, what was then, claims Khambatta, not a very big company, was bought for US$100m by Norwegian group Orkla in 2007. Khambatta considered the price to be a "very high value".
Another advantage of course is the purchase of brand loyalty, which does not just buy customers, but credibility amongst distributors. Dairy is a case in point. Dominated by regional milk co-operatives, brands such as Amul, Mother Dairy, Saras, Vijaya, Nandini, Gokul, and Verka can spend less on marketing and more on distribution. Rupinder Singh Sodhi, managing director of the Gujarat Co-operative Milk Marketing Federation, which owns Amul, has said the company spends only 1% of its total sales revenue on advertising.
According to Khambatta, Amul can do this because the brand in India is as synonymous with butter (as the nation's top seller) as vacuum cleaners in the UK are with Hoover. It is far different for value-added milk products such as milkshakes and ice cream, he notes, where brands have to spend 7% to 10% on total sales revenue on publicity and sometimes up to 20%.
A senior executive of a major European retail chain in India, however, argues India-based retailers would be happy to work with brands - helping newcomers facing such costs bring their product to market. Requesting anonymity, he tells just-food: "It is one of the bigger challenges that modern retail in India currently faces that there are not enough brands to stock on the stores."
This lack of critical mass can make sales too poor to invest in packaging that would help logistics and distribution, extending product life, Technopack's Jain says. This is especially the case for some discretionary items outside basic necessities such as milk. He argues ice cream and yoghurt, for instance, have huge potential in India, but there are too few brands to create a mass market. "Yoghurt sells at a premium, has better perishability, but still there are not many established players in the category," he says.
Some smaller brands are also failing to invest in efficient packaging. This means some discretionary products such as yoghurt are still sold and transported in plastic bags, risking early spoilage in India's hot climate. But the message that good packaging works is getting through, including in branded versions of traditional health drinks such as lassi and chach, which are a growth area for Sweden-based food packaging giant Tetra Pak. "We are seeing an annual growth of 20% in most segments, while in white milk it is even more," says Jaideep Gokhale, communications and environment director at Tetra Pak India. He argues cost should not deter brands from using Tetra Pak, because it helps them save on distribution and spoilage costs. "Tetra Pak packaging offers convenience to the Indian distribution trade as it do not need refrigerated transporting or storage."
Indeed, investment into supply chains and streamlining distribution networks must be a high priority for any new entrant in the Indian food market, stresses Jain. "Long distribution channels increase procurement costs," he says.
However, a senior executive at a key food industry body in New Delhi, who also did not want to be named, tells just-food, building such networks was tough, because of transport and warehousing infrastructure weaknesses, the high cost of raising capital and skilled labour shortages. That is compounded by India's ever shifting regulations – including regular changes to labelling laws, licensing procedures, product approvals and guidance relating to packaging and ingredient controls.
Nevertheless, according to Khambatta, weak growth in many developed markets is pushing foreign food companies to consider the Indian market. "I am getting more and more requests from foreign companies who want to discuss their distribution strategies and approach us to distribute their products."
Despite significant challenges in the supply chain and distribution, the prize of serving India's 1.2bn population is too great to ignore for big brands, including those from abroad.
Sectors: Baby food, Bakery, Canned food, Cereal, Chilled foods, Condiments, dressings & sauces, Confectionery, Dairy, Dried foods, Emerging markets, Fresh produce, Frozen, Ice cream, Meat & poultry, Natural & organic, Private label, Retail, Seafood, Snacks, World foods
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India briefing: The challenge of distribution