FMCG Distribution Channels in India:

Challenges and Opportunities for

Manufacturers and Retailers.

Summary:
India's economy is projected to grow at a fast clip over the next few years. With increasing
purchasing power and a rising middle class, the fast moving consumer goods (FMCG) industry is
posed to grow dramatically. To leverage opportunities, FMCG manufacturers and retailers will
have to develop and implement deliberate strategies for gaining market access. This paper
provides an in-depth look at the strategic role of distribution channels in the FMCG industry.
Specifically, it surveys the state of current distribution channels in India and identifies four
archetypes that FMCG firms can use as a starting point to develop their distribution
strategy.ABSTRACT FROM AUTHORCopyright of Journal of Global Business Issues is the
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Excerpt from Article:

The Journal of Global Business Issues – Volume 2 Issue 2 175 FMCG Distribution Channels in
India: Challenges and Opportunities for Manufacturers and Retailers Debi P. Mishra, School of
Management-State University of New York, Binghamton NY 13902 ABSTRACT India’s
economy is projected to grow at a fast clip over the next few years. With increasing purchasing
power and a rising middle class, the fast moving consumer goods (FMCG) industry is posed to
grow dramatically. To leverage opportunities, FMCG manufacturers and retailers will have to
develop and implement deliberate strategies for gaining market access. This paper provides an
in-depth look at the strategic role of distribution channels in the FMCG industry. Specifically, it
surveys the state of current distribution channels in India and identifies four archetypes that
FMCG firms can use as a starting point to develop their distribution strategy. With a population
in excess of 1 billion and current annual GDP growth of 9% (Vietor and Thompson 2007), India
is a major player in the world economy. Not surprisingly, by 2050 the country is projected to
become the third largest economy after China and the United States (Hawksworth 2006). India’s
economic prowess is being driven by the purchasing power of a burgeoning middle class as
wealth steadily trick- les down to the bottom of the economic pyramid. Given this brisk growth,
domestic industries are in a race against time to ramp up capacity, in- crease production, and
achieve market access via channels of distribution. One sector that is ex- pected to bear the brunt
of this demand is the fast moving consumer goods (FMCG) industry with retail sales expected to
top $40 billion by 2015 (India Brand Equity Foundation 2008). FMCG’s encompass a wide
range of products such as toiletries, soap, cosmetics, toothpaste, shaving cream, and detergents
(Coulthart 2006). Multinationals with a significant FMCG presence in India are Unilever, Procter
and Gamble, Nestlé, and Cadbury. Despite its potential, the FMCG industry faces several
significant marketing constraints. First, manufacturers and retailers have to grapple with
fragmented markets and a plethora of channel forms in a constant state of flux. In particular,
numerous street-side vendors, hawkers, and roughly 12 million unregulated neighborhood mom-
and-pop or kirana stores create strong institutional forces that cannot be ignored. Second,
frequent regulatory changes affect channel structure and exacerbate adaptation challenges. For
example, in 2006 the government allowed direct foreign entry by single brand retailers
(Lakshman 2007). Consequently, firms scampered for upscale retail space in a hypercompetitive
real estate market while domestic manufacturers faced a multitude of challenges in the areas of
new product introduction, line stretching, and branding. Given the importance of distribution
chan- nels to the Indian economy, one would expect a considerable body of relevant academic
research to be readily available. However, a careful ap- praisal of extant research belies this
expectation. While India has garnered much attention, the focus has primarily been on general
topics per- taining to the socio-economic, political, and business environments (Basu 2008;
Khanna 2008; Vietor and Thompson 2007). In recent years, the emphasis has shifted to include
re- search on other topics like entry modes (John- son and Tellis 2008), and outsourcing
(Marshall 2002). However, there remains a paucity of sys- tematic work on the impact of
distribution on the Indian economy in general and the FMCG industry in particular. This study
attempts to bridge the gap in our understanding of FMCG distribution channels in India. More
specifically, the objectives of this research are: a) to appraise distribution channel structure and
management challenges for FMCG products, b) to delineate variations in channel forms across
markets, and c) to outline the stra- tegic role of FMCG distribution channels in gain- ing market
access and achieving competitive advantage. The paper is organized in the following manner.
First, I discuss the impact of changes in

The Journal of Global Business Issues – Volume 2 Issue 2 176 the regulatory environment on the
FMCG indus- try in India. The next section assesses the het- erogeneous nature of supply and
demand by out- lining and discussing a framework for classifying consumer markets given
myriad market varia- tions. This is followed by a discussion of specific channel archetypes that
collectively describe variations in channel forms across markets. This section also describes the
marketing impli- cations of channel archetypes for FMCG manu- facturers and retailers. I
conclude by highlight- ing the contribution of this study to marketing practice. The Regulatory
Environment India gained independence from the British in 1947 and decided to create an
egalitarian soci- ety by adopting the Soviet model of centralized economic planning. The
hallmarks of this com- mand and control economy were: a) the primacy of the public sector or
government enterprises in core sectors, b) import substitution and protec- tion of domestic firms,
and c) tighter control of economic activity via a license and permit re- gime. Over time, this
system engendered a co- lossal, insular, and highly inefficient bureauc- racy, which could not
replicate the free market. For example, political considerations forced bu- reaucrats to subsidize
and administer prices in key infrastructure industries such as construc- tion, electricity, and water
thereby discouraging private investment. Not surprisingly, overall economic growth stalled, the
rich-poor chasm worsened, and the government faced a severe balance-of-payment crisis in 1991
with foreign reserves enough to last just two weeks. At the behest of the International Monetary
Fund, the government ushered in economic reforms by opening up the economy to foreign and
domestic private investment. As reforms accelerated, multinational firms such as Procter and
Gamble entered the FMCG market. At the same time, a number of domestic retailers such as
Pantaloon and Reliance opened up western style retail channels in the major urban centers of the
coun- try. Almost three fourths of India’s population or approximately 700 million people live in
rural areas (Rangan and Rajan, 2006), which lack ba- sic infrastructure such as roads,
transportation, electricity, water, health, and education. Under centralized planning the rural
population lan- guished at the bottom of the economic ladder with meager discretionary
purchasing power. For decades, the average rural person had to sustain his family on a wage of
less than one dol- lar a day. Given the lack of roads and viable means of transportation, FMCG
firms had to navigate through a labyrinthine maze of frag- mented, improvised, long, and
inefficient chan- nels for gaining access to rural markets. To overcome infrastructure bottlenecks,
a multitude of regional manufacturers serving a narrow geo- graphical market cropped up. The
mushroom- ing of local production and ensuing brand clutter created differentiation challenges
for national firms which were further exacerbated by wide- spread production and marketing of
copycat products and fake brands. In contrast to rural areas, urban markets with well developed
distribution channels offer relatively seamless market access to FMCG firms. For the most part,
these channels are the ubiquitous small kirana or mom and pop stores employing fewer than four
people and selling a narrow range of products. Customers value these outlets because of their
convenient loca- tion within walking distance of home or work, free home delivery, familiarity,
and the provision of credit. In recent years, with economic liber- alization, private firms such as
Big Bazaar, Sub- hiksha, Reliance Fresh and Vishal Mega Mart, all employing western style
retailing formats have entered urban markets in a major way. Of late, the rate of growth of
western style retailing out- lets has accelerated with the Indian government paving the way for
foreign direct investment in shopping malls and warehouses (Baijal and Mardsen 2005). Kirana
stores, fearing a direct threat to their livelihood have secured the back- ing of trade unions and
rabble-rousing politi- cians to stage massive protests against organized retail (Lakshman 2007).
Realizing the oppor- tunity to benefit from a captive and disgruntled vote-bank, some political
parties have promised to change laws favoring organized retail. The present government is
treading gingerly on this issue and as a sop to kirana stores has allowed only single brand
retailers to enter the country, which in effect has locked out behemoths like Wal-Mart and
Carrefour from the market. Classifying Consumer Markets in India The task of classifying the
consumer market in India into a meaningful and useful taxonomy is challenging given the
perplexing linguistic, cultural, political, geographical, and economic diversity of the country.
Unlike China, where Mandarin is the main language, there are sixteen official languages and
more than 500 dialects

The Journal of Global Business Issues – Volume 2 Issue 2 177 spoken in India. English, a legacy
of the British rule, remains a link language and the major means of communication in
government, com- merce, and law. Hinduism, with a pantheon of gods at its core is the dominant
faith. However, in practice, numerous variations of gods, god- desses, deities, temples, and an
almost endless potpourri of festivals, beliefs, rituals, and cus- toms characterize the religious
milieu. India is a federation of states with the federal government in charge of significant
national matters like cur- rency, defense and foreign affairs. The Congress party, which was at
the vanguard of India’s free- dom movement, ruled the country for more than four decades after
India gained independence from the British in 1947. The party was wedded to socialism and state
control of the economy and during its rule, private business could not thrive. Today there are
hundreds of political parties split along narrow caste, geographic, economic, and religious lines,
which clutter the political scene. While national parties like the Congress and the Bharatiya
Janata Party (BJP) still exist, they have to rely on support from sev- eral smaller parties to remain
in power. A direct consequence of these fluid political alliances is that businesses have to
contend with federal and state laws that are in a constant state of flux. Given environmental
diversity and its im- pact on consumer supply and demand, develop- ing a parsimonious
taxonomy involving multiple dimensions such as religion, culture, etc. will become a complex
undertaking. However, recall from an earlier discussion that the main conse- quences of
inefficient central control have been lack of infrastructure and uneven economic growth.
Translated to the present context, the major implications for the FMCG industry are: i) a lack of
infrastructure and the means to access far-flung rural markets, and b) the yawning gap in
purchasing power between the rich and poor. The taxonomy is presented in Figure 1. As depicted
in Figure 1, FMCG firms face challenges in accessing markets with different degrees of
economic potential. In cell 1, firms cater to markets with reasonably high purchas- ing power and
consumer demand. These urban and semi-urban markets also have access to rela- tively efficient
channels of distribution. Emerg- ing markets depicted in cell 2 provide easy mar- ket access but
the purchasing power of consum- ers is low. These markets are satellite towns and cities, which
develop gradually around a major metropolitan area. For example, the town of Gurgaon in the
state of Haryana was an append- age of Delhi that supplied cheap migrant labor to nearby farms
and cities. Over time, Gurgaon has grown into a booming metropolis with a prolif- eration of
shopping malls, call centers, and modern retail stores. Cell 3 represents a sizeable portion of the
country’s rural ‘bottom of the pyramid’ (BOP) population without access to roads and
infrastructure. While per capita de- mand is low, the sheer size of this market esti- mated at
between 250 million and 300 million people offers tremendous business potential. Finally, cell 4
is an oasis market where purchas- ing power is relatively high but market access is Cell 2,
Emerging market • Channel archetype A2 Cell 1, Urban and semi-urban market • Channel
archetypes A, A1 Cell 3, Bottom of the pyramid (BOP) market • Channel archetype B Cell 4,
Oasis mar- ket • Channel archetype A3 Market Access Easy D ifficult Per-capita demand Low
High Figure 1. A taxonomy of consumer markets in India

The Journal of Global Business Issues – Volume 2 Issue 2 178 poor. In some south Indian states
like Kerala and Andhra Pradesh there are many remote vil- lages with high purchasing power
due to cur- rency remittances by large groups of expatriate Indians working in Middle Eastern
countries. Despite the economic bonanza, these villages lack proper roads and infrastructure.
Using the taxonomy of Figure 1 as a starting point, in the next section I describe the distribu-
tion channel archetype in each cell labeled as A, A1, A2, A3, and B. I provide a discussion of
each channel archetype follwed by implications for FMCG manufacturers and retailers. Figure 2.
Channel Archetypes in the Indian FMCG Industry Distribution Channel Archetypes Channel
Archetypes A, A1 Most large Indian FMCG firms are organ- ized around profit centers
comprising groups of brands belonging to related product lines. Over time, incumbent firms have
reacted to competi- tive pressures by stretching their existing brands and creating numerous
variants. In the absence of proper management, the sheer number of branded variants or SKU’s
(stock keeping units) creates the potential for inefficiencies such as brand dilution and
contamination. In most firms, the profit center is responsible for brand management decisions
involving resource allo- cation, product improvement, new product in- troduction, line
stretching, and market share growth. As an organizational unit, a firm’s profit center also makes
decisions in the area of sales promotion, distribution channels, advertising, and pricing.
Archetype A in Figure 2 is the most common channel structure in urban and semi-urban mar-
kets. Typically, firms ship products from their manufacturing facilities to carrying and forward-
ing agents (CFA) located in each state. CFA’s are atypical channel members since they do not
take title to goods and are not customers of the firm. On the other hand, CFA’s collect taxes from
the …