Managing distributors: A key element of a successful route-to-market strategy
One of the most common elements that we see in delivering hundreds of route-to-market projects around the world, in developed and developing markets, is the importance of the relationship between suppliers, distributors, and/or wholesalers. It is an aspect of the business that creates a lot of tension, misunderstanding, defiance, and mistrust. All of that could be avoided with good management practices.
One thing is clear: Distributors are essential to a successful commercial strategy. They are necessary in many ways for gaining coverage, reaching outlets in fragmented channels, and getting to the businesses that you would otherwise not reach with your operations. They are an excellent conduit to your consumers wherever they go.
However, historically there has been a lot of noncooperation between suppliers and wholesalers, or distributors. Distributors fear that a supplier’s ultimate objective is to take over their business, steal their customers. They are very reluctant to share data and information. Suppliers are most often exasperated by the poor results and lack of dynamism of their distributors. This is counterproductive: We have seen the vast potential of both when they work together with a common goal, or a shared vision.
So the question is: How can both sides work together for the benefit of all?
By generating a win-win environment. Distributors need good products and to satisfy their customers by generating traffic, transactions, and margins. Suppliers need good distribution capabilities. Capabilities that they cannot afford to build and are more than happy to outsource. Suppliers want to reach intelligent penetration, “pervasiveness” in the market at a reasonable cost.
In order to be successful, both need to be aligned in 3 main domains:
1. Operational alignment
2. Economic alignment
3. Cultural alignment
Operational alignment: The commercial and logistics structure of one needs to be compatible with and complementary to that of the other. A beverage supplier, for example, will require a distributor sales force that can visit outlets with the frequency, quality, and capabilities needed to offer and defend its products, innovations, and even promotions. A distributor must ensure that the final picture-of-success is implemented in the field.
Economic alignment: It sounds obvious. Unfortunately, we see time and again how big flaws in the value chain cause the relationship to malfunction. The supplier must take the lead by making the effort to understand the complex margin structure of the distributor – warehousing, logistics, sales force, rebates, etc. – in order to offer the right set up. We often say that it is a question of “cents” repeated many times that will make the difference.
Cultural alignment: “You are selling nice brands and products, I am pushing pallets.” That’s what a major beverage distributor told one of our FMCG clients recently. If we want both of them to work together, the relationship needs to be based on a solid understanding of each other’s activity. There has to be a common language, which is often not the case. The objectives need to be understood by both parties, and the KPIs shared in a way that is meaningful to both. If a pay-for-performance agreement is in place, it has to reflect the expectation of one and the capacity to deliver of the other.
