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Nov, 2017

How to build a sustainable e-distribution business in FMCG

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What is E-Distribution?

In the age of internet and E-commerce websites where consumers are conveniently sitting at home and shopping online, business of traditional brick and mortars retailers, distributors and shop owners has gone down. Not all entrepreneurs, manufacturing companies and distributors have access to or knowledge of or the time to go about the process of moving at least some part of their business online – setting up a website, shipping goods, sales, marketing etc.

E-distribution is about providing an online platform to connect local retailers with manufactures (say M2R – Manufacturer 2 Retailer) thereby eliminating the need for a distributor in the supply chain.  Additionally, it is also about providing the retailers with an online platform for their customers where the latter can place orders and get delivered (Say R2C – Retailer 2 Customer). On the M2R side, it is a Zero-Inventory model, which means the entrepreneur (provider of e-distribution software and in some cases the goods delivery workforce) does not need to have a warehouse or store inventory. On the M2R side, the order is made by the retailers through the e-distribution software/website directly with the manufacturer. The website/software is designed for the manufacturer to access, maintain and view his inventory while retailer is able to view this inventory of manufacturer and also place order. The website/software also allows retailer to maintain his inventory which the customer can also view and place an order.

Infrastructure and human resources required:

  1. Latest technology knowhow or partnership with technology service provider for developing and improving technology platform and providing maintenance support to retailers/manufacturers.
  2. Logistics knowhow or partnership with logistics services provider to ensure delivery of goods from manufacturer to retailer
  3. Marketing team
  4. Sales team

Entrepreneur’s experience:

  • Before starting an E-distribution company, the entrepreneur must have knowledge about the supply chain from manufacturers to the consumers – essentially how the business functions from end-to-end.
  • The entrepreneur must have knowledge about the market, the process and how will the business be profitable.
  • They should also know the competition in the market, both locally and nationally.
  • Having a sales experience will be helpful in the business.
  • Marketing and branding of the business must be done strategically to target the right customer segments at minimum cost.
  • The entrepreneur must be ready to face all the challenges and market the business strategically to the manufacturers, distributors, retailers as well as consumers.

Benefits of E-Distribution?

  • White Label Solution to distributors to enable him to promote his business thus increasing his own equity in the market.
  • Reduce prices for the end consumers and improve margins for manufacturers and retailers by eliminating distributors from the value chain.
  • Provide a platform for niche, local and small manufacturers to reach end consumer in a cost-effective manner.
  • Wider range of products with depth, both horizontal and vertical to provide happy buyer experience with great offers possible for all channels and end customers.
  • No need of heavy stocking of all the products as products get shipped from a centralized warehouse in minimum lead time for all the products.
  • One-stop shop for wide range of products as well as services like mobile recharges, bill payments, travel services and domestic money transfer which is unique in the contemporary channel system.
  • Just in time delivery for a vast range of online products. You buy it online and delivery is done at doorstep like e-commerce players.
  • Face-off all kinds of competition from the mega stores of bigger brands with whom it is not possible to compete in the brick and mortar model.
  • Up selling and cross selling will happen at its peak with the help of offers, bundling, discounted second buys based on customer behavior thus adding to the revenue

Who does it benefit?

  1. Small Scale Manufacturers who want to promote their product in the market but does not have the resources to do so. Their profit will depend on the manufacturing cost and market price. It can be approximately 10-15%.
  2. Retailers who can order products online by click of a button without having to leave the comfort of their home. They earn a profit margin of 15-20%.

How is it better than the typical / traditional distributorship?

E-distribution model is different than the typical / traditional distributorship in many ways like:

  1. No- Inventory Model:

The entrepreneur does not need to have a warehouse to store inventory. The manufacturer or distributor will receive the order through the website and deliver the products to the retailer or consumer. This reduces the warehouse expense for the entrepreneur.

  1. Online presence:

The business does not need a warehouse or a physical shop to conduct business as the business is online. Customers can order the products without having to visit the distributor’s office or shop. It can be accessed any day at any time at the customer’s satisfaction.

  1. Transparency:

The website will clearly state the number of products available with certain manufacturer / distributor. If one distributor does not have the product in stock, the customer can check at other distributors’ or manufacturers’ inventory.

  1. Software support:

The company must offer software support to the manufacturer, distributors and retailers to constantly help address issues and defects in the software as well as help add more features and functionalities to make the proposition richer. A well-executed support can go a long way in attracting more manufacturers and distributors to opt for this service.

  1. Online services:

The website can also offer online services like e-recharge, ticket booking, Bill payments etc.

  1. Profitability:

The profitability and revenue margin is good in E-distribution business for all players in the value chain from manufacturer to retailer. It is higher than that of typical distributorship. The profit margin ranges from 8% to as high as 25%, depending on what the manufacturers offer.

Market:

  • Internet is expected to influence 1/3rd of the total sales in the FMCG sector in the next five years.
  • The influence of Internet will impact $35Bn worth of FMCG sales in India, as more and more users get online to research for FMCG products.
  • Online shopping will continue to see rapid growth and over 250 million users are expected to shop online by 2020.
  • Rise in the online shopper base in India, will contribute $ 5Bn worth of FMCG product sales through online channel, growing 50 times from current level contributing 5% of total sales from current 0.3% share by 2020.

Investment & Funding:

The entrepreneur will have to invest in building, maintaining and upgrading a robust technology platform and in providing logistics services for a smooth experience for his customers. Much of the investment will be on software development and maintenance, building a high quality low cost logistics mechanism.

One can get finance through various sources like nationalized banks, private banks, and financial institutions. You can even contact us at info@udyogcredit.com, if you require help with financing.

A snapshot of the typical formal financing terms and conditions is given below:

Particulars Contribution by Bank Contribution by Entrepreneur
Capital Investment 75% 25%
Working Capital Gap (Raw Materials/Stock+Debtors-Creditors) 75% 25%
Tenure of Loan 5-7 years  
Moratorium 6 months to 1 year  
Can be funded by Scheduled Commercial Banks, Co-Operative Banks
One can also enjoy the Mudra Yojana Scheme & Standup Scheme launched by the Government of India

You can even contact us at info@udyogcredit.com, if you require help with your financing.

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