Developing markets represent the future for many businesses. Brazil, Russia, India, China, and Indonesia make up 60 percent of the world’s population and account for 40 percent of global GDP growth. But companies cannot treat these markets as fledgling versions of the developed economies that have been their mainstay. They must rethink how they go to market in these places, which frequently do not have a state-of-the-art marketing, distribution, or retailing infrastructure. This article is the second in a series on how consumer-facing companies can succeed in developing markets through excellence in consumer insight, channel management, and in-store execution.
In developed economies, the rules for channel management are fairly straightforward. Companies can focus on the modern retail landscape of large hypermarket and convenience-store chains and rely on a limited number of partners to handle distribution and a lean sales force.
In developing markets, however, this familiar playbook will not fly. Modern retail—though growing rapidly—is a relatively new format and does not account for most of the market.
But if channel management has become a common denominator in developed markets, it can be a great differentiator in developing markets. Companies have a unique opportunity to generate stronger ties with retailers, lower costs, and lubricate and speed their distribution channels.
Traditional trade remains the dominant retail channel in developing markets. Depending on the country, mom-and-pop shops still make up between 40 and 90 percent of retail sales.
The mix, however, is changing quickly, with modern retail formats growing annually by 20 percent in the BRICI nations—Brazil, Russia, India, China, and Indonesia. For the foreseeable future, companies will need to operate in this hybrid environment, which only intensifies and complicates the channel challenges.
Rather than simply targeting the headquarters of a single large chain, companies must work with a huge number of small, independent outlets. These traditional-trade customers—with their limited working capital for purchasing goods and limited space for stocking and displaying goods—are costly to serve. The only practical way to reach many of them is through a fragmented network of third-party agents, distributors, and local wholesalers. This complex distribution landscape shrinks the margins of all channel partners and reduces the upward flow of market intelligence and visibility to the company.
Distributors and wholesalers can be difficult to manage, as well. They typically focus on the top line rather than market development. They tend to be passive order-takers rather than passionate advocates of brands. Sales force turnover can be anywhere from 20 to 70 percent per annum.
Distribution outside of major cities is a particular challenge because of the concentration of traditional trade. In China, for example, modern retail formats represent less than 30 percent of grocery sales volume in tier 3 and 4 cities, compared with more than 50 percent in tier 1 cities.
The overall goals of channel management are the same in developed and developing markets. Companies want broad coverage; they want their products to reach the right consumer segments. They want retail advocacy, with loyal retailers influencing customers’ purchases and creating below-the-line, targeted promotions. Finally, they want consistent and innovative point-of-sale execution, so that consumers have confidence in the brand.
In order to achieve these goals, companies generally rely on one or more of five sales-and-distribution models. Each offers various tradeoffs in reach, control, and complexity in these markets. (See the exhibit “To Create a Winning Model, Companies Must Balance Reach, Control, and Complexity.”)
Direct Distribution: High Control, Limited Reach. Companies in industries with a few large customers, such as industrial goods, or in industries in which pricing consistency or customer experience is important, such as luxury goods, will likely want to maintain their own sales force and distribution. This model is very expensive to scale because of the cost of building out sales and distribution networks in fragmented retail landscapes.
Selective Outsourcing: Medium Control and Reach. If they are willing to sacrifice some control, companies can maintain their own sales force while selectively outsourcing less critical functions, such as delivery and collection. The need to retrain and improve the skills of an entire army of distributors and their sales personnel is not as daunting, since distributors are playing only a limited role. Customer reach, however, remains limited by the coverage of the sales force and therefore is challenging in highly fragmented, low-throughput retail environments.
Integrated Distribution: Medium Control, High Reach. In this model, companies actively partner with large distributors, often on an exclusive basis, so that they can guide, shape, and build their capabilities. These relationships increase complexity but enable companies to have greater influence on the distribution and retail presentation of their products. Companies often influence the distributor’s internal processes, KPIs, sales incentive schemes, IT systems, and training in order to get better visibility and more consistent superior execution. This model relies on the willingness of distribution partners to adopt new practices and the ability of the company to actively manage extensive capability building.
Distributed Distribution: Low to Medium Control, High Reach. Rather than work with just a few distributors and wholesalers, companies can work with many of them. The organization sacrifices significant control but is able to rapidly roll out products at lower costs. This model would allow companies to tap into the fast-growing middle class in tier 3 and 4 cities and would be effective with products that do not demand a high-touch sales approach or significant point-of-sale execution capabilities.
E-Commerce: Breaking the Tradeoff Between Reach and Control. E-commerce can help knit together the far-flung regions of developing markets without incurring the cost of a large sales force or branch network. In Russia, where most of the country is underbanked, online banking can improve access to financial services in remote areas. Likewise, in India, banks are experimenting with mobile-banking services operated through direct-sales agents. These agents travel on mopeds and operate a mobile ATM-like device that can process basic banking transactions.
E-commerce is gaining rapid momentum in developing markets. In 2009, countries such as China, Russia, and Brazil already had Internet penetration rates in excess of 30 percent. China’s retail e-commerce volume has dramatically grown from $18 billion in 2008 to $70 billion in 2010. While e-commerce may not be a standalone option, it should be a part of a multichannel strategy for companies in developing markets.
Most companies employ more than one model to reach consumers in developing markets. For example, a phone manufacturer reaches consumers in developing markets through three channels. On key retail accounts, the company handles sales and after-sales services in-house but outsources logistics, inventory, and credit and collection to distributors. To reach operator-owned shops, the company works more directly with the operators themselves. Finally, to reach traditional trade, the company works through a network of regional distributors that it actively manages.
Once a company has selected a channel strategy, it needs to focus on execution, execution, and execution. In fact, execution of a model is more critical than the selection of the model. Companies must influence hundreds of thousands of retailers and points of sale indirectly through dozens, not hundreds, of their own staff. Most companies have tremendous opportunities to gain mastery over execution. While successful execution depends on doing a long list of things right, there are a few key factors that matter the most—especially for companies working through large distributors using the models of selective outsourcing and integrated distribution.
Choose the right partners. Companies need to thoroughly vet channel partners. Can they take on the full range of sales and distribution tasks? What is their geographic coverage? Are they passive or active distributors? Are they financially stable? How strong are their underlying capabilities? Since most of them are relatively inexperienced, are they willing to learn and change? Are they willing to become an extension of the organization?
Establish the right structure and distribution setup. Companies have to carefully consider how to organize distribution. There are many interrelated issues: the boundaries between and size of territories; the number of account managers per distributor; rules on exclusivity; the split between direct distribution and indirect distribution; and the projected profitability of distribution partners. All of these issues require careful thought and should be reevaluated over time. Despite having an active presence in a developing market for more than 50 years, a large consumer-goods company, for example, recently collapsed its decentralized distribution model into a few large national distributors.
Build internal capabilities for active channel management. Many companies are unaccustomed to taking on the active and disciplined management of channel partners. They will need to change the culture and mindset of their sales force, instill a greater sense of accountability, and create a set of KPIs that encourage stronger collaboration with channel partners.
The partners also need to be evaluated against performance-based KPIs and targets. KPIs should include both leading and lagging indicators. If partners are performing strongly on leading indicators, such as direct retail-store visits, coverage, and product knowledge and market intelligence, then performance on lagging indicators, such as sales growth, will follow.
In addition, creating “sense and response” capabilities by building dynamic and granular market intelligence and acting on these insights can be a powerful lever for companies to lift performance at the microlevel.
It is important that executives with the right level of authority and responsibility are interacting with their peers at the channel partners. “Layer matching” helps create greater accountability and execution. For example, an area sales manager should be dealing directly with the operational manager and sales supervisors of the distributor on a daily basis, while a regional sales manager might only meet with the distributor’s owners and key executives to develop business plans.
Enable the channel partners to perform. Channel partners in these markets are changing and growing as rapidly as the markets themselves. Their sales forces are typically young and inexperienced, while attrition levels are high. Working with these partners requires more intervention than in developed markets but is worth the effort.
Companies need to train staff at their distributors and provide assistance in day-to-day management and monitoring. They also might help pay for inventory management systems that will ultimately help to increase their own sales and profits.
Anyone who has visited a developing country can imagine the challenges of channel management in these places. What is routine in the West can quickly become frustratingly complex. Creating a winning channel requires not just getting the channel strategy right but also achieving mastery over execution. Achieving this mastery requires a reset of channel capabilities that need to be built and delivered on the ground. Companies that place a premium on both will be rewarded with superior performance.