31 Dec 2019 16:13 IST

Why distributors are protesting exclusive channels for modern retail

It’s time distributors accepted the reality that they cannot handle the volumes modern trade requires

It is quite common to read news reports about protests against online retailers and complaints of their discounting. However, a recent report on brand distributors protesting against certain manufacturers selling through a dedicated distribution channel for modern trade was a change from the routine.

There is no doubt that newer retail formats and shopper touch-points would cut into existing ones. However, the key question is the extent of such an impact as also the cross-pollination effect of newer channels.

Protests against change are nothing new and, in the retail context, this goes back to the mid/late 1990s, when modern trade was just starting off. When a supermarket chain expanded into a new region in the west, distributors in that city called for a meeting to boycott any company that decided to supply its products to this chain. This was resolved after the supermarket’s managers and the company representatives reassured the distributors that there would be no disruption in the market.

Exclusive channel

Almost a decade later, when a hypermarket chain was planning a new outlet in another State, the consumer durables distributors protested and had to be pacified. Now, the general trade distributors are protesting that there should be no exclusive distribution channel for the modern trade segment.

Despite such protests, it is a fact that modern trade has now become an established part of the retailscape for over two decades now. Supermarket chains have co-existed with conventional trade and also with online retail. And they will continue to do so in the years to come. It is against this background that one must look at the recent protest and the reasons for a separate distribution system for modern trade.

The genesis of the modern trade structure came about in the late 1990s and early 2000s mainly because of the impact of volumes. Initially, the general trade distributor would service the modern trade retailer whose warehouse was located in their area of coverage. Very soon the physical constraints of handling incremental volumes started to create bottlenecks in supplies.

Higher investments

As a reference, a typical supermarket might have sales and therefore volumes equalling to approximately 10-12 small shops. Add on the fact that most of the modern trade retailers use a central warehouse and the volumes increase even more. As such, a distributor covering both the conventional stores as well as the modern trade format would have to invest significantly in larger stock volumes. This emerged as a constraint, in terms of both space and finance, and the modern trade stores were hit by insufficient supplies.

A dedicated distribution mechanism for modern trade was the natural outcome. Most brand companies today use this approach and have a separate modern trade sales team whose operating style is very different. This channel is now being reconsidered just because of the protests, which do not seem to have a long-term perspective.

Clearly, increased levels of awareness are required in the Indian context with regard to the retail sector, the operating realities, and certain historical facts, without which we would continue to see such protests that usually end up fizzling out as they have no clear purpose.

Recommended for you