DISTRIBUTION CHANNELS FOR CONSUMER GOODS IN INDIA: PAST, PRESENT,

AND FUTURE DIRECTIONS

Debi P. Mishra
State University of New York
Binghamton, NY 13902
mishra@binghamton.edu

COPYRIGHT 2009

Electronic copy available at: http://ssrn.com/abstract=2260181

 DISTRIBUTION CHANNELS FOR CONSUMER GOODS IN INDIA: PAST, PRESENT,
AND FUTURE DIRECTIONS

Abstract

Indias economy is projected to grow at a fast clip over the next few years. With increasing
purchasing power and a rising middle class, the fast moving consumer goods (FMCG) industry is
posed to grow dramatically. To leverage opportunities, FMCG manufacturers and retailers will
have to develop and implement deliberate strategies for gaining market access. This paper
provides an in-depth look at the strategic role of distribution channels in the FMCG industry.
Specifically, it surveys the state of current distribution channels in India and identifies four
archetypes that FMCG firms can use as a starting point to develop their distribution strategy in
the future.

Keywords: Channels of Distribution, Indian Economy, Market Entry

A related paper appears as: Mishra, Debi P. (2010), FMCG Distribution Channels in India:
Challenges and Opportunities for Manufacturers and Retailers, Journal of Global Business
Issues, 2 (2), 175-182. (To obtain a copy, please email me at mishra@binghamton.edu).

Electronic copy available at: http://ssrn.com/abstract=2260181

 DISTRIBUTION CHANNELS FOR CONSUMER GOODS IN INDIA: PAST, PRESENT,
AND FUTURE DIRECTIONS

INTRODUCTION

With a population in excess of 1 billion and current annual GDP growth of 9% (Vietor

and Thompson 2007), India is a major player in the world economy. Not surprisingly, by 2050

the country is projected to become the third largest economy after China and the United States

(Hawksworth 2006). Indias economic prowess is being driven by the purchasing power of a

burgeoning middle class as wealth steadily trickles down to the bottom of the economic pyramid.

Given this brisk growth, domestic industries are in a race against time to ramp up capacity,

increase production, and achieve market access via channels of distribution. One sector that is

expected to bear the brunt of this demand is the fast moving consumer goods (FMCG) industry

with retail sales expected to top $40 billion by 2015 (India Brand Equity Foundation 2008).

FMCGs encompass a wide range of products such as toiletries, soap, cosmetics, toothpaste,

shaving cream, and detergents (Coulthart 2006). Multinationals with a significant FMCG

presence in India are Unilever, Procter and Gamble, Nestl, and Cadbury.

Despite its potential, the FMCG industry faces several significant marketing constraints.

First, manufacturers and retailers have to grapple with fragmented markets and a plethora of

channel forms in a constant state of flux. In particular, numerous street-side vendors, hawkers,

and roughly 12 million unregulated neighborhood mom-and-pop or kirana stores create strong

institutional forces that cannot be ignored. Second, frequent regulatory changes affect channel

structure and exacerbate adaptation challenges. For example, in 2006 the government allowed

direct foreign entry by single brand retailers (Lakshman 2007). Consequently, firms scampered

1
for upscale retail space in a hypercompetitive real estate market while domestic manufacturers

faced a multitude of challenges in the areas of new product introduction, line stretching, and

branding.

Given the importance of distribution channels to the emerging Indian economy, one

would expect a considerable body of relevant academic research to be readily available.

However, a careful appraisal of extant research belies this expectation. While India has garnered

much attention, the focus has primarily been on general topics pertaining to the socio-economic,

political, and business environments (Basu 2008; Khanna 2008; Vietor and Thompson 2007).

In recent years, the emphasis has shifted to include research on other topics like entry modes

(Johnson and Tellis 2008), and outsourcing (Marshall 2002). However, there remains a paucity

of systematic work on the impact of distribution on the Indian economy in general and the

FMCG industry in particular.

This study attempts to bridge the gap in our understanding of FMCG distribution

channels in India. More specifically, the objectives of this research are: a) to appraise

distribution channel structure and management challenges for FMCG products, b) to delineate

variations in channel forms across markets, and c) to outline the strategic role of FMCG

distribution channels in gaining market access and achieving competitive advantage.

The paper is organized in the following manner. First, I discuss the impact of changes in

the regulatory environment on the FMCG industry in India. The next section assesses the

heterogeneous nature of supply and demand by outlining and discussing a framework for

classifying consumer markets given myriad market variations. This is followed by a discussion

of specific channel archetypes that collectively describe variations in channel forms across

markets. This section also describes the marketing implications of channel archetypes for

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FMCG manufacturers and retailers. I conclude by highlighting the contribution of this study to

marketing practice.

THE REGULATORY ENVIRONMENT

India gained independence from the British in 1947 and decided to create an egalitarian

society by adopting the Soviet model of centralized economic planning. The hallmarks of this

command and control economy were: a) the primacy of the public sector or government

enterprises in core sectors, b) import substitution and protection of domestic firms, and c) tighter

control of economic activity via a license and permit regime. Over time, this system engendered

a colossal, insular, and highly inefficient bureaucracy which could not replicate the free market.

For example, political considerations forced bureaucrats to subsidize and administer prices in

key infrastructure industries such as construction, electricity, and water thereby discouraging

private investment. Not surprisingly, overall economic growth stalled, the rich-poor chasm

worsened, and the government faced a severe balance-of-payment crisis in 1991 with foreign

reserves enough to last just two weeks. At the behest of the International Monetary Fund, the

government ushered in economic reforms by opening up the economy to foreign and domestic

private investment. As reforms accelerated, multinational firms such as Procter and Gamble

entered the FMCG market. At the same time, a number of domestic retailers such as Pantaloon

and Reliance opened up western style retail channels in the major urban centers of the country.

Almost three fourths of Indias population or approximately 700 million people live in

rural areas (Rangan and Rajan 2006) which lack basic infrastructure such as roads,

transportation, electricity, water, health, and education. Under centralized planning the rural

3
population languished at the bottom of the economic ladder with meager discretionary

purchasing power. For decades, the average rural person had to sustain his family on a wage of

less than one dollar a day. Given the lack of roads and viable means of transportation, FMCG

firms had to navigate through a labyrinthine maze of fragmented, improvised, long, and

inefficient channels for gaining access to rural markets. To overcome infrastructure bottlenecks,

a multitude of regional manufacturers serving a narrow geographical market cropped up. The

mushrooming of local production and ensuing brand clutter created differentiation challenges for

national firms which were further exacerbated by widespread production and marketing of

copycat products and fake brands.

In contrast to rural areas, urban markets with well developed distribution channels offer

relatively seamless market access to FMCG firms. For the most part, these channels are the

ubiquitous small kirana or mom and pop stores employing fewer than four people and selling a

narrow range of products. Customers value these outlets because of their convenient location

within walking distance of home or work, free home delivery, familiarity, and the provision of

credit. In recent years, with economic liberalization, private firms such as Big Bazaar,

Subhiksha, Reliance Fresh and Vishal Mega Mart, all employing western style retailing formats

have entered urban markets in a major way. Of late, the rate of growth of western style retailing

outlets has accelerated with the Indian government paving the way for foreign direct investment

in shopping malls and warehouses (Baijal and Mardsen 2005). Kirana stores, fearing a direct

threat to their livelihood have secured the backing of trade unions and rabble-rousing politicians

to stage massive protests against organized retail (Lakshman 2007). Realizing the opportunity

to benefit from a captive and disgruntled vote-bank, some political parties have promised to

change laws favoring organized retail. The present government is treading gingerly on this issue

4
and as a sop to kirana stores has allowed only single brand retailers to enter the country, which

in effect has locked out behemoths like Wal-Mart and Carrefour from the market.

CLASSIFYING CONSUMER MARKETS IN INDIA

The task of classifying the consumer market in India into a meaningful and useful

taxonomy is challenging given the perplexing linguistic, cultural, political, geographical, and

economic diversity of the country. Unlike China, where Mandarin is the main language, there

are sixteen official languages and more than 500 dialects spoken in India. English, a legacy of

the British rule, remains a link language and the major means of communication in government,

commerce, and law. Hinduism, with a pantheon of gods at its core is the dominant faith.

However, in practice, numerous variations of gods, goddesses, deities, temples, and an almost

endless potpourri of festivals, beliefs, rituals, and customs characterize the religious milieu.

India is a federation of states with the federal government in charge of significant national

matters like currency, defense and foreign affairs. The Congress party, which was at the

vanguard of Indias freedom movement, ruled the country for more than four decades after India

gained independence from the British in 1947. The party was wedded to socialism and state

control of the economy and during its rule, private business could not thrive. Today there are

hundreds of political parties split along narrow caste, geographic, economic, and religious lines

which clutter the political scene. While national parties like the Congress and the Bharatiya

Janata Party (BJP) still exist, they have to rely on support from several smaller parties to remain

in power. A direct consequence of these fluid political alliances is that businesses have to

contend with federal and state laws that are in a constant state of flux.

5
 Given environmental diversity and its impact on consumer supply and demand,

developing a parsimonious taxonomy involving multiple dimensions such as religion, culture, etc.

will become a complex undertaking. However, recall from an earlier discussion that the main

consequences of inefficient central control have been lack of infrastructure and uneven economic

growth. Translated to the present context, the major implications for the FMCG industry are: i) a

lack of infrastructure and the means to access far-flung rural markets, and b) the yawning gap in

purchasing power between the rich and poor. The taxonomy is presented in Figure 1.

Figure 1 about here

As depicted in Figure 1, FMCG firms face challenges in accessing markets with different

degrees of economic potential. In cell 1, firms cater to markets with reasonably high purchasing

power and consumer demand. These urban and semi-urban markets also have access to

relatively efficient channels of distribution. Emerging markets depicted in cell 2 provide easy

market access but the purchasing power of consumers is low. These markets are satellite towns

and cities which develop gradually around a major metropolitan area. For example, the town of

Gurgaon in the state of Haryana was an appendage of Delhi that supplied cheap migrant labor to

nearby farms and cities. Over time, Gurgaon has grown into a booming metropolis with a

proliferation of shopping malls, call centers, and modern retail stores. Cell 3 represents a

sizeable portion of the countrys rural bottom of the pyramid (BOP) population without access

to roads and infrastructure. While per capita demand is low, the sheer size of this market

estimated at between 250 million and 300 million people offers tremendous business potential.

Finally, cell 4 is an oasis market where purchasing power is relatively high but market access is

poor. In some south Indian states like Kerala and Andhra Pradesh there are many remote

6
villages with high purchasing power due to currency remittances by large groups of expatriate

Indians working in Middle Eastern countries. Despite the economic bonanza, these villages lack

proper roads and infrastructure.

Using the taxonomy of Figure 1 as a starting point, in the next section I describe the

distribution channel archetype in each cell labeled as A, A1, A2, A3, and B. The structural

elements of these channel archetypes are outlined in Figure 2. I provide a discussion of each

channel archetype followed by implications for FMCG manufacturers and retailers.

Figure 2 about here

DISTRIBUTION CHANNEL ARCHETYPES

Channel Archetypes A, A1

Most large Indian FMCG firms are organized around profit centers comprising groups of

brands belonging to related product lines. Over time, incumbent firms have reacted to

competitive pressures by stretching their existing brands and creating numerous variants. In the

absence of proper management, the sheer number of branded variants or SKUs (stock keeping

units) creates the potential for inefficiencies such as brand dilution and contamination. In most

firms, the profit center is responsible for brand management decisions involving resource

allocation, product improvement, new product introduction, line stretching, and market share

growth. As an organizational unit, a firms profit center also makes decisions in the area of sales

promotion, distribution channels, advertising, and pricing.

Archetype A in Figure 2 is the most common channel structure in urban and semi-urban

markets. Typically, firms ship products from their manufacturing facilities to carrying and

7
forwarding agents (CFA) located in each state. CFAs are atypical channel members since they

do not take title to goods and are not customers of the firm. On the other hand, CFAs collect

taxes from the manufacturer and remit proceeds to the government. The CFAs charge a small

fee to firms and dispatch products to redistribution stockists or wholesalers located in different

parts of a state. Wholesalers, in turn, ship products to numerous retail or neighborhood kirana

stores which serve end customers.

In recent years the advent of modern retailing formats and chain stores has led to

variation in this channel as depicted in archetype A1 of Figure 2. Specifically, in urban markets

wholesalers have to sell products to chains which use central ordering and processing systems.

Small wholesalers often lack the capacity to meet the demand of large retail chains. In such

situations, firms augment the channel effort by using additional mechanisms for satisfying the

needs of large retailers.

The advent of modern retailing in urban and semi urban areas has significantly altered the

marketing approaches of FMCG firms. In the conventional archetype A channel form, sales

teams dedicated to individual profit centers call on wholesalers and carry out important channel

functions such as negotiating terms of trade, fulfilling demand, obtaining customer feedback, etc.

Since each profit center is responsible for its own set of brands, different sales teams belonging

to different profit centers may call on the same wholesaler. Firms have realized that instead of

duplication and dilution of sales effort, such a multi-pronged approach preserves brand equity

and leads to superior channel outcomes.

While dealing with wholesalers via multiple sales teams works well in archetype A, such

an approach has severe limitations when FMCG firms deal with modern retail chains. This is

because individual stores belonging to a chain rarely negotiate terms of trade directly with a

8
FMCG manufacturer. On the other hand, most buying decisions are made by a centralized

procurement and purchasing department. Deploying multiple sales force teams is highly

ineffective since each team has to individually negotiate terms of trade with the centralized

purchasing department. As such, many FMCG firms have to reorganize their sales force by

developing negotiating teams comprising members from different profit centers. Such a team

can showcase the entire range of a companys product portfolio and is better positioned to

negotiate with modern chain retailers. The solid lines in Figure 2 denote how FMCG firms may

reorganize their profit centers and sales teams to meet the needs of modern organized retailers. It

is important to note that creating new sales teams across multiple profit centers is not an easy

task. First, organized retailers are more powerful vis--vis smaller wholesalers. Salespeople

who have previously dealt with smaller and less powerful wholesalers face steep learning hurdles

and adaptation challenges in dealing with organized retailers. Second, firms have to develop

appropriate incentive and monitoring schemes to ensure that members of a team work towards a

common goal instead of maximizing the objectives of an individual profit center.

The main challenge for modern FMCG retailers is to position their offering as a superior

alternative to the neighborhood kirana store that has historically offered a familiar and

convenient shopping option to customers. Customers in India are often skeptical of large retail

stores and feel that they have to pay a high price at modern stores. To overcome such negative

perceptions, modern stores such as Big Bazaar have developed creative ways of signaling value

to customers (Raman and Winig 2006). For example, to create a familiar shopping environment,

Big Bazaars store layout mimicked the chaos of a traditional bazaar. The store also prominently

advertised trade-ins whereby customers could bring their old merchandise and exchange them for

store coupons. Finally, the company successfully organized Big Day sales around the time of

9
local religious festivals when customers typically go on a shopping spree. All these efforts have

paid off handsomely and today Big Bazaar is one of the fastest growing retail chains in India.

Although Big Bazaar has been relatively successful in weaning customers away from

kirana stores, other retailers have stumbled. For example, Reliance Fresh, a retail chain owned

by Reliance Industries, a large conglomerate has faced stiff opposition from kirana stores and

neighborhood retailers in many parts of the country. This backlash stems from Reliances

decision to position its stores as smaller convenience outlets located in far flung neighborhoods

where kirana stores are still extremely popular. The company had to close down its stores in

many states given protests and damage to property. In some states the company has adapted by

narrowing its product line and focusing on offerings that do not substantially overlap with kirana

stores.

In sum, in urban markets the traditional channel archetype has undergone profound

change and the emerging structure represents opportunities and challenges for FMCG firms and

retailers alike. Although the ubiquitous kirana store will still dominate the landscape, with the

passage of time the modern retail format will take roots in urban areas. FMCG firms will have to

undertake significant organizational changes to realize the opportunity in urban markets.

Channel archetypes A2, A3

As depicted in Figure 2, archetypes A2 and A3 are extensions of the basic channel A

archetype. Consider first the characteristics of archetype A2. Here, FMCG firms assess demand

in low per capita markets adjacent to urban areas and develop optimal routing schedules and

journey plans for urban retail stockists. Since the overall demand is not very high, urban

10
stockists visit these adjacent markets relatively infrequently and supply products to retailers. In

contrast to A2, archetype A3 represents a channel form designed to serve high potential markets

with relatively poor market access. FMCG firms typically appoint rural wholesalers who are in

close proximity to these markets. These wholesalers solve the last mile problem by contracting

with individuals who carry products using local means of transport such as motorcycles, three

wheelers, bicycles, bullock carts, etc. and deliver them to distributors in nearby villages. FMCG

firms face challenges in developing detailed stocking and replenishment plans for these channels

given lack of access to end customers.

Although the lack of viable infrastructure poses considerable challenges, some FMCG

firms have developed creative product and package designs to penetrate rural markets. For

example, Unilever has pioneered the development of low priced packets (LPPs) for a variety of

FMCG goods such as shampoos, detergent, tea, etc. which retail for a few cents. Given that the

average person in rural India still earns less than $2 per day, it is simply impossible for him to

afford bigger sized consumer products such as shampoo and detergents. Hence, LPPs

represented a convenient solution for the customer and also create huge profits in aggregate for

the FMCG manufacturer. Today, Unilevers approach has been widely copied by other firms

and a variety of products is sold in LPPs. This packaging innovation also helps companies

access remote markets by overcoming transportation bottlenecks.

Channel archetype B

Accessing the bottom of the economic pyramid poses considerable challenges to FMCG

firms and it is almost impossible to specify a widely generalizable channel archetype. In reality,

11
BOP markets are located in far flung rural areas where the average per capita income of people is

woefully low. Though no uniform archetype emerges in these markets, it is useful to consider

the approach of some companies that have practiced BOP marketing with varying degrees of

success.

Unilever has launched a BOP marketing initiative called Project Shakti in the state of

Andhra Pradesh. Essentially, the company works with non governmental organizations (NGOs)

to identify individuals who possess a strong entrepreneurial drive that will motivate them to

stock and sell the companys FMCG lines to other customers. Unilever ensures that these

entrepreneurs have access to credit, are trained in appropriate selling techniques, and can develop

into economically responsible individuals. Entrepreneurs are required to carry inventory and

although they are free to sell products to rural retailers, the main focus is on selling products to

fellow villagers. Since the projects inception, about 12,000 women entrepreneurs have been

appointed and the company has penetrated about 50,000 rural villages (Rangan and Rajan 2006).

ITC, a major FMCG producer has successfully introduced an innovative supply chain

initiative called eChoupal designed to benefit small farmers (Upton and Fuller 2004).

Historically, many farmers grow soybean but face insurmountable odds in gaining market access

and fair prices for their product. They are often caught in an antiquated procurement system

involving a number of middlemen who set prices arbitrarily and shortchange them. With little

education, many farmers accept low prices as a fait accompli. Against this background, ITC,

which uses soybean for its consumer products lines decided to change the rules of the game by

ushering in an innovative direct procurement model. By using the internet, the company created

a transparent pricing system by providing farmers with real time information about world

commodity prices and fluctuations. In addition, farmers had access to a wide variety of

12
information for improving farming techniques and crop yields. The company also undertook

physical investments in rural areas by creating depots where farmers could bring their produce

for sale. These depots also functioned as bidirectional channels since the company not only

procured soybean but also sold other FMCG products through these channels. The eChoupal

model per se has been extremely successful and is often hailed as an exemplar of successful BOP

marketing.

The Indian Postal System which operates in excess of 150, 000 offices has an unrivalled

presence in rural areas. The system has grown by relying on private entrepreneurs who offer a

range of postal services from their own premises in return for an allowance. In addition to

delivering mail, today this channel is being strategically used by private firms such as ICICI-

Prudential for selling life insurance policies and mutual funds. In rural areas, the postal channel

works bi-directionally in delivering mail and accepting deposits for insurance and mutual funds.

Such synergies may also be creatively exploited by FMCG firms which can market LPPs though

these channels.

CONCLUSION

The main objective of this study has been to appraise the distribution channel challenges

faced by the FMCG industry in India. This analysis sheds light on the challenges and

opportunities for FMCG firms and retailers alike. While the FMCG industry is well developed

in the west, in India the industry is in its incipient stages. To this extent, FMCG markets

represent huge opportunities for domestic and multinational firms. However, market access and

success is affected by several factors such as infrastructure, diversity in channel forms, and

13
regulatory changes. By using the four channel archetypes in this paper as a starting point, firms

can gain a better understanding about the Indian FMCG industry.

While the focus has been on the FMCG industry, several parallels can be drawn with

distribution challenges being faced by other industries in India. For example, recently the Tata

Motor Company announced that it will produce a passenger car in India called the Nano at a

price of $2000. This car will be aimed primarily at the rural market. However, a main challenge

facing the company is the lack of proper roads for transporting the manufactured car to end

markets. To overcome distribution challenges, the company has decided to ship the car in semi-

knocked down kits that will be assembled at the rural dealerships. The main implication here is

that companies have to think creatively for overcoming distribution challenges and infrastructure

bottlenecks.

Finally, although the paper concentrates on one element of marketing mix, i.e., channels,

in reality, companies have to consider and strategically combine additional elements such as

price, product design etc. into their overall marketing strategy. Consider the case of Nokia which

has more than three fourths of the market for mobile phone handsets in India. In addition to

reaching rural markets creatively, Nokia also implemented a unique pricing structure to help

people acquire handsets faster. When Nokia entered the market, the price of an average phone

was $20, an amount beyond the reach of most people in rural areas. The company encouraged

people to form buying groups where individuals would contribute a fixed amount every month

for a certain number of months. Every month, one person in the group would get a new phone

by lottery. In the end, after a certain period of time every person would end up getting a new

phone. Hence, although everybody would end up contributing the same amount of money, the

probability of getting a new phone would be higher on average.

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Hawksworth, John (2006), The World in 2050: How Big Will the Major Emerging Market
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 Figure 1

A Taxonomy of Consumer Markets in India

Per-capita demand

Low High

Cell 2, Emerging market Cell 1, Urban and semi-

Easy

urban market
Channel archetype A2
Channel archetypes A, A1

Market Access

Cell 3, Bottom of the Cell 4, Oasis market

pyramid (BOP) market
Difficult

Channel archetype B
Channel archetype A3

From: Mishra, Debi P. (2010), FMCG Distribution Channels in India: Challenges and
Opportunities for Manufacturers and Retailers, Journal of Global Business Issues, 2 (2), 175-
182. (To obtain a copy, please email me at mishra@binghamton.edu).

16
 Figure 2. Channel Archetypes in the Indian FMCG Industry

FMCG Firm
Profit Profit
Center A Center B

Manufacturing facilities

Denotes sales effort

Carrying and Carrying and Individual
Forwarding agent Forwarding agent
in a certain state in a different state

Other individuals

Denotes physical flow of goods

Redistribution Redistribution Rural outlets
Stockist Stockist

Retail Stockist 1 Retail Stockist 2 Modern retailer Semi urban retailer Rural wholesaler
(kirana store) (kirana store)

Rural retailer

Urban /Semi urban Customer Modern (Urban) Customer Semi urban/Rural Customer Rural Customer

Channel Archetype A Channel Archetype A1 Channel Archetypes A2, A3 Channel Archetype B

17