Channel Intensity and Structure – some cases

P&G, Nestle and HLL are FMCG companies operating in India, P&G and Nestle thought that it would be appropriate for them to follow the HLL channel model. It was only after losing some precious money and time that they realized that they neither needed nor could afford channel intensity on the HLL pattern.

HLL maintains a channel consisting of over a million retail points and 7,500 distributors, the largest in the country. The arrangement has suited HLL very well.

HLL has a large basket of products and brands covering every possible price/demographic/geographic segment. At the last count, it had over 110 actively selling brands. HLL’s marketing channel has to naturally cover every income group and every geographical segment in the country. And HLL has an annual sales turnover of over Rs10,000 crore.(not latest figures)

P&G and Nestle were different from HLL in all these respects.

Moreover, the HLL model comes with its associated costs. Setting up marketing networks in rural areas and small towns takes both time and money. HLL had incurred the associated investment and had absorbed a dent on its bottom line on this account over the past several years, and it is not affected currently by this strategy.

After learning the lessons the hard way, P&G decided to forget the HLL model and drastically downsized its distribution. It now confined itself to Class 1 and Class 2 towns, and exited practically all rural areas. Only for some select products like Vicks Action-500, it continued its distribution in rural areas.

It also reduced the number of pack sizes in which it offered its products as another measures towards reducing distribution costs. Nestle too decided to move away from the HLL model. Earlier, embracing the HLL model, it had gone in for high channel-intensity. For example, between 1993 and 1996, Nestle had added on 350,000 retail points to its distribution network in India, the bulk of them in smaller towns and rural areas.

As its sales were nowhere near the HLL level, it could not sustain the channel intensity. It reduced it considerably. It also compressed its product mix and product line. It now concentrated on products in which it was traditionally strong-milk products and beverages and weeded out the low-profit products from the portfolio.

It also went in for tighter market targeting and limited its attention to urban population. In fact, it limited its focus to roughly half of the urban population. With these moves, it could reduce the cost of servicing the channel. Its new policy was to be on perpetual guard in the matter of channel intensity, limiting it to the level warranted by its sales and profits-present and planned.

As mentioned earlier, P&G had embraced a highly intensive, two-tier channel structure in India. It was more or less akin to the channel structure of HLL. Over the years, it became clear to P&G that it did not need such a structure, as in business growth and pattern of sale, it differed from HLL. P&G then went in for a reorganization of the channel set-up. It had to face several problems.

P&G had earlier gone in for nearly 200 stockists and 4,000 dealers all over the country. But sales had remained limited. A large number of the stockists and dealers were not notching up enough sales. In other words, P&G’s channel productivity had become low. The company was incurring a disproportionately large cost on channel. Moreover, the company’s sales were coming primarily from the urban market, as this market alone was willing to pay the premium price, which P&G normally charged for its Products.

P&G then downsized and revamped its channel structure, drastically pruning the number of stockists. In the revised scheme, it appointed state-wise sole distributors and derecognized more than 150 ongoing stockists in the bargain. At the retail level too, thousands of dealers became a casualty.

P&G also went in for the ECP (efficient consumer response) approach. ECP focuses on containing costs and improving bottom lines. In the ECP approach, stocks are replenished at the retail shops at more frequent intervals. This enables the retailers to operate with smaller inventories. And consequently, a cut in retailers’ margin would be in order.

P&G drastically cut the trade margins on its best selling products. It cut stockists margin from 10 to 3 percent and retailer margin from 12 to 8 percent.

P&G did inform the stockists beforehand about the new scheme. But, many stockists had set up a lot of infrastructure over the past two decades, much of it specifically for marketing P&G products, and with the loss of P&G stockists role, they faced financial hardship. They went on a warpath. In a collective bargaining move, most of them banned P&G products. The retailers too, especially those in mofussil areas, went on a warpath and banned P&G products.

In conclusion even larger companies with well known branded products must carefully organize channel network so that it does’nt result in lack of sales and reduction in sales outlets.