Photo: Marcia Zoet Bloomberg

Nestlé is planning to sail a supermarket barge down two Amazon River tributaries, namely Pará and Xingu rivers in Brazil. Nestlé wants to compete with Unilever in Brazil and aims to reach customers isolated from branded goods. Consumer goods companies are increasingly focusing on the one billion people in emerging markets estimated to exit poverty in the coming decade. These consumers will have the disposable income to afford packaged goods.

The distribution model – the barge will journey to 18 small cities for three weeks, docking one day in each city. From Belém, the vessel will sail to the region of Marajó Island to the city of Almeirim, into the Baixo Amazonas, or the Amazon Lowlands region, before returning to Belém.

The barge – Eleven people, including supermarket’s employees and crew members, will work on a daily basis on the 27.5m long boat housing three stock areas and 100m² store space.

Smaller package sizes – Nestlé has adapted its product portfolio by offering smaller, lower price point products including Alpino ice cream and Ninho milk powder.

Social Responsibility question

The distribution model is already ringing alarm bells in certain communities as Nestlé aims to penetrate deep in the Amazon forest. Nestlé’s product offering is unlikely to satisfy all, but how can Nestlé make their business model more inclusive and add value to communities?

Community development – Nestlé has the opportunity to include medicine, vaccines and other necessary products to their existing product range.

Micro-credit – Banco Bradesco SA in Brazil has already started to offer banking services in December via the Solimoes River, also in the Amazon. Nestlé can potentially tie-up with Banco Bradesco or other institutions to provide much needed micro-credit to potential entrepreneurs and distributors in the area.

Training and health information - Nestlé can provide training and development to local entrepreneurs and also include health and wellness education.

Pictures of the distribution model can be viewed here.

Robert Neuwirth writes about the informal economy in Lagos, Nigeria, and its importance to the local economy. Local governments mostly view these informal markets in a negative way, even though they contribute significantly to the economy.

Some interesting points:

The demand for economic activities takes over everything as bridges are transformed into informal markets. The informal sector is the most dynamic and fastest growing segment of the economy. With very high unemployment, it is the informal sector that holds the country together. Cities need to be designed to accommodate street traders. This works a lot better that expecting traders to obey some sort of government rules.

Channel strategy – companies must map out a clear channel strategy and identify which channel the selected distributor will service. A poorly defined channel strategy can severely damage any distributor roll-out. It is critical that companies understand how channels function and operate. One size does not fit all.

Selection criteria – companies need to understand the key components of a successful distribution partnership. Many distributors fail because critical components of the selection criteria are overlooked. The selection criteria will likely include important components such as capital, infrastructure, warehousing, transportation and required organizational structure.

Management – do we have management buy-in and is the distributor fitting in with our strategic goals? A distributor roll-out requires patience and a continuous improvement mindset. Small incremental changes can sometimes go a long way.

Territory – is the territory well defined and does the distributor have the ability to service the territory? Companies must build distributor capability and schedule joined training sessions. Companies must also ensure they have detailed territory maps and a clear understanding of the outlet density.

Outlet base – are traditional and non-traditional channels well defined? in most emerging market, determining the outlet base can be a challenging undertaking. Companies need to understand both the existing and potential outlet base. A well defined every dealer survey (EDS) is a key component of any successful distributor roll-out.

Customer service frequency – Are they over or under servicing their customers? Companies must have a clear understanding of the service frequency that both the distributor and the customers require.

Role definition – do we have a clear understanding what the company and the distributor are responsible for? What does the organizational structure look like and how will the company support the distributor? Does each profile (e.g. salesperson) have a clear understanding of his or her role?

Account development – account development is a critical component of any distributor operation. Not all accounts are equal. In most cases companies need to prioritize and focus their attention on high value or strategic customers. Companies also need to determine how they will split the account development activities between the company and the distributor.

Cost to serve – the true cost to serve is sometimes underestimated and companies must have a clear understanding of the cost to serve for both the distributor and the company. In many cases in emerging markets, financial cost centers provide limited data and financial modeling is essential to determine the true cost to serve . Many distributors also fail because the remuneration is set too low and not adjusted for inflation on a periodic basis.

Transportation – is the distributor making use of low cost distribution? For example pushcarts or motorbikes. Is the vehicle or cart load configuration inline with our requirements?

Warehouse – the warehouse function is sometimes overlooked when a company implements a new route-to-market system. Companies need to understand how the new system will impact the warehouse function and what changes need to take place.

Key Performance Indicators – focus on the key performance drivers of your business and don’t overextend yourself. Sometimes less is more. Include key performance measurements in your business planning process and evaluate on a yearly basis whether you are using these measurements to track and improve your business. There is no point it tracking something just for the sake of tracking.

Flow- are the processes and systems well defined and do we have a clear understanding of the product, cash and information flow? Are processes and systems standardized?  Always aim to eliminate non-value adding activities where possible. Standard Operating Procedures (SOPs) simplify your business procedures and help to ensure the same quality in all operations. Emerging market operations often lack critical skills and don’t make any assumptions what people can and can not do.

Complexity – can the distributor handle the level of complexity in the business? In many cases distributors that distribute all SKUs to all channels fail. Always aim to reduce the complexity in the business.

Collaboration – how will the distributor share information with the company? Too often critical information is only available at distrbutor level and not shared with the company. What role can technology play in all of this?

Take note of the evolution – too often supply chains in emerging markets just evolve without any strategic intend. Modern trade and retailing are expanding and middle class consumers shopping patterns are changing. How will these changes in the market affect your business and are you taking the necessary steps to adapt to these changes?

In a competitive environment, Consumer Packaged Goods (CPG) companies are increasingly forced to get within arms’ reach of the retailer and consumer. CPG companies that have a Route-to-Market strategy that includes a direct focus on mom-and-pop stores are the most successful in reaching the “base of the pyramid”.

The buy-in-bulk mentality is unlikely to have a major impact in developing markets, as transport limitations, poor cash flow and infrastructure will restrict purchasing options. Nielsen’s research has indicated that modern trade is on the increase in a large number of emerging markets. However, even with the increase in Modern Trade, mom-and-pop stores will continue to command a major share of the retailing environment.

Some of the advantages of well designed Route-to-Market strategy dealing with mom-and-pop retailers are:

Increased outlet penetration – the Route-to-Market strategy is designed to penetrate small, high frequency retailers, and increase availability within such outlets. The strategy allows “trial” SKUs entry and assists companies in controlling the SKU range in their identified strategic channels.

Improved merchandising – even though merchandising space in quite limited in these outlets, companies will find it easier to negotiate merchandising space compared to modern trade retailers. Multi-nationals have more leverage with mom-and-pop retailers, and can negotiate better space allocation and control the message in these outlets. Innovative merchandising designs (e.g. hanging shampoo racks) will further support this strategy.

Improved retail and consumer Insights – by removing the supply chain layers, CPG companies gain a better understanding of retailers and ultimately the end consumer. This grassroots approach will improve communication between the various parties and provide the company with valuable insight about their consumer base.

Improved profitability – a well designed Route-to-Market strategy will yield improved margins and reduce incentive and retailer discounts being paid to Modern Trade retailers.

However it is important to highlight some of the challenges that companies will face with such a strategy:

Increased Route-to-Market complexity – increasing the outlet base to include mom-and-pop outlets adds complexity to the Route-to-Market and the business. Drop sizes will be much smaller and the increased outlet base could put additional pressure on resources.

Information flow dilemma – penetrating smaller retailer distribution networks is unlikely to justify investment in information technology. e.g. mobile devices to support Enterprise Resource Planning (ERP) systems. CPG companies will be forced to reevaluate sales data processing and information gathering.

Increased personnel count – managing, controlling and monitoring an increased outlet base will require additional human resources. Employee turnover tends to be higher for employees dealing directly with mom-and-pop outlets. Market conditions are tougher and increased and specialized training will be required.

Companies can benefit immensely by expanding their retail base and penetrating smaller retail outlets. For companies to succeed, market development and training activities must be on the forefront of Route-to-Market strategy. Such strategies will require a major rethink and redesign. Changing to a Route-to-Market strategy that includes smaller mom-and-pop outlets will affect all aspects of the business, including supply chain, sales, marketing and human resources. A strategic shift should not be taken on lightly. However, for the winners, the rewards will be large.

Article fist published in 17th of July 2007 for the Gerson Lehrman Group Councils website

What is a two-tier distributor? They buy from manufacturers and sell to resellers.

What are their competitive advantages? Two-tier distributors can expand the retail footprint in emerging markets. They normally sell a diverse range of brands and control a large percentage of the local distribution in the telecom and the computer industry. Two-tier distributors understand local conditions and can negotiate much better lease terms with proprietors. In some cases they might even own their own buildings.

How can they add value? Smaller distributors understand the needs of retailer and have well established practices and systems to deal with local customers. Because they are closer to the customer, they are also a valuable source for customer feedback.

Do they provide additional services? They normally provide credit terms to small retailers. In a current credit tight market, this can be a big advantage.

How will it affect lead times? By making use of two-tier distributors, manufacturers can reduce lead times by moving goods closer to retailers.

How can manufacturers support two-tier distributors? Manufacturers can assist them with route planning and help them identify the potential outlet base. Training workshops can go a long way in developing the business and building relationships.

How can they avoid channel conflict with their own sales force? Manufacturers can restrict salesmen activities to certain channel, and avoid conflict with distributors.

Wholesalers - like most of markets in Africa, FMCG companies rely heavily on wholesalers for distribution capability. The market is extremely fragmented with no clear dominant player. Key accounts and organized distribution is limited. Warehouse space is limited with no clear layout principles.

Outlet base – with the current political instability, the outlet base has been on the decline. Once thriving wet markets have seen a visible decrease in traffic and sales. Informal outlets are closing down as merchants are returning to the country side.  The economic upside of living in the city does not hold the same allure anymore.

Transportation – delivery in the city revolves around low cost distribution such as pushcarts with a few Chinese tricycles roaming the street. Tricycles also are being used for ice distribution (e.g. fish and beverages) and some tricycles even act as ambulances.

Pushcart operators – most wholesalers have limited interaction with their customer base and rely exclusively on independent pushcart operators to distribute their products.  Pushcart operators visit the same outlets every day and are not necessary in close proximity to the wholesaler. None of the wholesalers I visited have any outlet information.  As one wholesaler put it, “You better have a good relationship with your pushcart operators, because if they go, so does your outlet base.”

SKU complexity – All sales are conventional selling, with pushcart operators only carrying the SKUs that they think will sell. Carrying low yielding SKUs simply takes “too much energy” and launching a new brand can be a challenging undertaking.  A few companies are starting to explore pre-selling.

Cash collection - pushcart operators handle all transactions and normally have to provide some security prior to doing business with the wholesalers. Family members and friends often assist in this regard. Cash is normally collected at the end of the day and is, in effect, one day credit.

Electricity – Conakry is suffering from chronic power outages that make refrigeration limited and the cold chain challenging at best.  In the words of one FMCG supervisor “When the power goes on at home, I iron all my shirts at once. Delaying my ironing duties can be a fatal mistake.”

However through all the difficulty, companies are launching new brands and an increasing number of suppliers are looking for ways to improve distribution. Guineans have a fighting spirit with hospitality unmatched by many in the region.

South East Asia prefers the three wheel motor-cart version, known for its high noise and air pollution. Not to mention Popeye like arms to steer the thing. In South Asia a three wheel Chinese agriculture machine is responsible for getting the job done, especially in rural areas.

With fuel prices on the rise at the pump (and at the shop selling fuel out of an oil drum) you are likely to see more of these delivery vehicles as trucks fall out of favour. With electric bike sales going though the roof in Vietnam, is the three wheel delivery edition just around the corner?

The following key issues were identified during the assessment:

Select the right partners. Ensure you have a clear understanding of the partner selection criteria. Identify the key drivers of partner success and include it in your selection criteria e.g. retail expertise. Communicate the selection criteria to all stakeholders and constantly evaluate if you are on the right track. Focus on distribution partners that hold real growth potential. Poor partner selection can severely affect your Go-to-Market strategy.

There is gold in those mountains. Emerging economies provide unique opportunities outside of the capital. Regional town populations and GDPs are always understated and hold great financial rewards with often little competition. By expanding your footprint, it is also important to create the necessary support structure for your more rural partners. They are too often left to their own devices.

Take the guess work out of your business. Standard Operating Procedures (SOPs) and retail standards (for example) simplify your business procedures and help to ensure the same quality in all operations. Emerging market operations often lack critical skills and don’t make any assumptions what people can and can not do.

What gets measured gets done. Focus on the key performance drivers of your business and don’t overextend yourself. Sometimes less is more. Include key performance measurements to your business planning process and evaluate on a yearly basis whether you are using these measurements to track and improve your business. There is no point it tracking something just for the sake of tracking.

Distribution network strength – covering more than 600,000 outlets, their distribution network is a key competitive strength and a barrier for entry.

Growth in modern trade- accelerated growth in the modern trade sector provides opportunities for competitor entry.

Affordability – small pack sizes ensure the brand is affordable to all segments of the population.

With crisis comes opportunity- the 1997-98 financial crisis forced the company to reevaluate their strategy. These strategic changes are currently driving sales growth.

Low labour cost provides opportunity- the company is currently exporting products to South East Asia and Australia.

Micromarketing approach- consumers are segmented by geography and need state. Different climate and environment, result in different need state.

Quality assurance- the company does not outsource manufacturing and has better control over quality.

Furthermore two questions were continuously asked:

How to manage distributors in emerging markets?

How to keep control of the outlet base?

The following key issues were highlighted:

Distributor selection criteria. Operations do not spent sufficient time drafting a distributor selection criteria. Sales professional are under constant pressure to “make the numbers” and in the process, poor distribution partners are selected.

Distribution means. Optimal vehicle configuration and poor utilization can add substantial cost and affect distribution penetration negatively.

What gets measured gets done. With a lack of capital and IT solutions it is challenging to track and monitor distributor performance in emerging markets. Some distributors question all the paper work and fail to see the value in good measurement systems.

The retail landscape and environment are evolving fast. What worked today is probability not going to work tomorrow. Some emerging operations have used push-carts in the past, and now find them banned by local authorities or unviable with increased traffic.

High staff turnover. Some organizations in fast growing markets complain of staff turnover of 50-100% in distributor networks. Distributor remuneration is unattractive and new recruits are constantly in search of better opportunities.

Successful companies spend substantial time and resources gaining a clear understanding of the distributor environment and dynamics. Adapting to changes in the market as they happens.