Wholesalers are spirited, ruthless and self
appointed re-sellers of products they choose to deal in. Product marketers must
carefully weigh how they wish to align themselves to these Robin Hoods. If they
become your complementors, they will help you grow. If you cross swords, they
can bleed you - sometimes to death as the example of a Chennai based CTV
company shows.
DEPENDS ON WHO YOU ASK
Who
are these wholesalers - and what do they
do? The question gets different answers from different people. At worst,
they are mercenary, parasitic, self-willed and exasperating. At best
they are symbiotic complementors, entrepreneurial and helpful. Just
like Sherwood's Robin Hood - depends on who you ask.
At
their best, wholesalers create new sales opportunities for your
products on their own; thereby boosting your sales volumes and shares.
At their worst, they are parasites who will subvert your distribution
set-up and take you to the cleaners. In the marketing textbooks and in
the Business Schools, they are neatly tucked away under a
classification called “channel partners” but you must speak to
the foot soldiers of marketing to get the real picture.
THE SAD EPISODE IN CHENNAI
Can
you believe that a single wholesaler was responsible for ruining a big
colour TV firm based in Chennai during the 80s by falling into
his trap? It is a true and interesting tale of what a wholesaler can do
to a company. This wholesaler, based in the busy T Nagar locality of
Chennai, must have initially seemed like an angel to this company when
he must have first showed up on the company's tracking system as a
wholesale with continuously increasing sales; month after month.
As
a reward for this good performance, the wholesaler negotiated - and
obtained - higher and higher extra discounts on his purchases. Most of
us may not see anything wrong with this. In fact, such discounting is
justified by the "Cost to Serve" model. This model says that, since
the cost of servicing a Rs 100,000 order is not very much more than the
cost of servicing a Rs 10,000 order, the former / bigger customer
deserves to share the cost saved in servicing a large order. However,
this model does not adequately capture the reality of
what actually happened in the marketplace for the CTV company.
The
wholesaler used these discounts to create his own pricelist for the
company's products in such a way that it was more attractive than the
original price list of thye company! As a result, customers who used to
buy directly from the company now started buying from the wholesaler.
The sales volume, which would have come at the regular price through the
dealers through direct transactions, now came indirectly via the
wholesaler at a discounted price. The more the wholesaler sold, the less
margins the company made.
This
was the beginning of the end. Slowly a stage came when most of the
dealers switched to buying from the wholesaler instead of from the
company and the company became over-dependant on the wholesaler. One
day, the wholesaler became so greedy that the fresh tranche of extra
margin he demanded made the whole company unviable. The company refused
further reductions in the margin but the company had to downsize its
operations. It never recovered and slowly the brand went into oblivion.
But the wholesaler prospered. He used the dealer network he had created
using the company's products and discounts - to generate sales volumes
for other companies. He built up a large retail chain spanning several
cities in Tamilnadu and lived happily afterwards.
NO-WIN SITUATION ?
We
all know the importance of the product, price, positioning, advertising
and the distribution but the role played by the wholesalers in making
or breaking of the companies has neither been fully analysed nor
appreciated. Most of us from the organized marketing industry see
ourselves in a no-win situation vis-à-vis these party-spoilers. The
principle objective of most wholesalers is to create their own loyal
sub-networks - by breaking into your original network - using your own
extra discounts against you. In short, they use your money to turn your
own dealers against you. A “parasitic operation”!
Some
time ago there was an article in the Business Standard describing the
success of Whirlpool in India. It said that one of the strategies of the
company was to stop the typically white goods style “informal
wholesaling” and replace it with FMCG style organized , multi-tiered
distribution with clear and transparent pricing. In short, the company’s
strategy was to bust the wholesale mafia . From my perspective this is
NOT a universal and failsafe strategy.
It
would work only if there is a high degree of support given to the
distribution channel by way of advertising, brand-building and field
force coverage. It is only when you are sure of finding, convincing and
driving a sufficient number of customers to your stores; that the stores
will “fall in line” and listen to whatever you want them to do -
including organized, multi-tier operation, with transparent FMCG style
pricing - if that’s what you want !
WHOLESALERS - ARE THEY ALWAYS THE VILLAINS?
If
the above has given you an impression that wholesalers are a problem;
let me give you instances where they come across as angels. Like Robin
Hood, they are foes of the high and mighty but friends of the ordinary.
If you do not have big resources - or if you do not wish to put in such
resources - the wholesalers are your best option. Somewhat like Robin
Hood, they help the small firms distribute their products while riding
on the widespread market demand of big-league items. The
wholesalers build their networks by dealing in big-league items, and may
sustain and bind these networks by negotiating extra discounts from
these big-ticket suppliers but they survive on the profits they make
through the margins they get from small and medium league marketers.
They have a symbiotic relationship with both the big league firms and
mid / small league firms. Without the biggies, they would not be able to
create networks. Without the smaller firms they will not be able to
make profits.
For
small start-ups who know how to make a good and competitive product but
cannot afford big-budget marketing; wholesalers may be saviors. The
wholesalers can give them access to the networks they have created using
the big brands. The wholesale channel is absolutely indispensable even
if you are not a start-up but just want to “feel” how a new market
responds to your product and pricing strategy without spending much on
advertising or your own sales force.
But,
even large firms benefit from the wholesale channel. For example, a
toothpaste brand with a 5% share of the market can afford to cover only
about 300,000 outlets per month but, on the other hand, it may be
typically available in 600,000 outlets. How does it get such an extra
reach of about 300,000 outlets? Through the activity of these
wholesalers of course!
The
organized sector - which is the source as well as user of marketing
knowledge - considers the wholesales as being on the seamier side of the
market and many times get classified as belonging to
“unorganised”, "grey" or “parallel” segment. But from my
perspective, they play an important role in the marketing of products -
and stand you in good stead if you are not strong on resources.
5 comments:
Sir, this is a very informative article regarding wholesellers and their role in product distribution. Thank you for the insight..
Useful & though provoking article. I think just concentrating on marketing without creating value enhancement, product differentiation will lead to such traps. - S.Srinivasan, PGEMP 33
This came into my mail from Mr Kadiyala Murtyof Sun Pharma on April 8, 2012
In my opinion the wholesalers distribution system is good for having huge investment as the commodities produced may not be stocked at the firms/factories. The Generation of goods may become slow if one needs to wait for sale. On the other hand wholesalers take the intermediacy of business. However, some times this system may pose problems as the chennai case described. I remember some time back, to have better prices for people Hon. Ex. chief minister of AP, Mr. Chandrabahu Naidu has introduced Raitu-bazaar system (farmer driven sales structure) in which state sponsored the space and stocking capabilities to farmers and the goods(vegetables) are sold at very low prices. This was successful as the govt. rightly envisioned the vegetable prices can be under check if they are sold by the farmers who produce them. Otherwise the stockists and distributers are having such premiums the cost of goods was continuously increasing. One may recall what happened in Delhi for onion prices and also some time back the lemon prices. Finally I would say the wholesalers are required in certain businesses and less useful in certain other markets. A good vision of Government may have the fruitful benifits for people and the manufacturers if they categorize the commodities and take steps accordingly. No individual should have a higher say, otherwise the business doesnot function soothly. In India the awareness is also less and people are the ultimate loosers who pay the price in any system as there are no effective checks by the goernment. Prices fluctuate very randomly and no controls.
One more post that came into my e mail box is from Akhil Chaturvedi who founded "Provogue" fashions and I respect his views a lot. He writes:
Enterprise begins from some point, there are two major types of enterprise depending on the time horizons of the risk appetite of the entrepreneur. There are the ones with low risk characterized by high turn around with very low value addition, the other type of enterprise is diametrically opposite with an appetite for higher risk these have higher value addition, despite a slower turn around.
Both are fair and respectable businesses. The former are traders whether they are called distributors, retailers, wholesalers and are applicable for any business, FMCG, durables, stock markets, derivatives, commodities, currency, metals, etc. These traders essentially work only with a clear objective of turnaround of capital and are very clear about their role as facilitator, sourcing agent, buying agent. In any business while selling and marketing is a very important skill, in this trade a critical skill is ‘buying’ and they have ‘buyers’ designated who would be more important than their Marketing or Sales Director.
The value the trader creates is clear and focused ‘cost advantage’ hence all traders work on a phenomenal ‘PULL’ they create to attract the customers in thousands mostly for large volume buyers. They are consolidators and aggregators of buyers. The inherent focus is only on large volume, value customers and they cannot focus on small orders.
In the case above, the trader was true to his core value of delivering ‘cost advantage’ and it’s clearly visible from his actions. He wasn’t a competitor or a potential threat. Else, he could have bought out the company that he had reduced to becoming a vendor and the roles would have changed. The wholesaler trader quite cleverly controlled pricing that the brand sales manager ought to have controlled. Their changed appetite for risk, changed the brands focus from Higher Value addition and changes and not spreading their risks by developments in other markets significantly to reduce their vulnerability. The pressures to possibly manage cash flows would have possibly lead to dependence, but no wholesaler or trader can be blamed for a brand which doesn’t identify the risks and adequately take steps to minimise or cover up.
The Wholesaler, traders, brands are tools for an enterprise to do business, hence they are like the Arab horses, one has to be a good rider to go the distance at great speed, else the horse will throw you off their back.
Dear Sir,
Nice thoughts in this article. I agree on your point that wholesalers can be both angels and parasites. I can also draw a parallel to marketing concepts. The angels are the ones who help help you achieve one of the Ps (Place / Distribution) of the 4P framework without spending too much on another P (Promotion). Parasites are the ones who have too much bargaining power and end up ruining you as per Porter's 5 Forces (Bargaining power of customers). Hope these parallels are appropriate.
Thanks.
Kalpesh (EMP21)
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