State of play

In Nigeria, the traditional sales channel accounts for about 65% share of FMCG route-to-market.

“Traditional sales” involves the use of key distributors (mega wholesalers) who buy company products in bulk and in turn resell to smaller wholesalers and retailers. The latter then sell to consumers.

Typical Traditional Sales Channel Schematic

FMCG Company -> Key Distributor -> Wholesaler/Retailer -> Consumer

This arrangement is all well and good until FMCGs realize the limitations of their relationships with key distributors (KDs), which include:

• constant, aggressive demands for price reductions and volume-based incentives
• demands for unsecured credit sales that in many cases can and do go bad
• demands to be assigned exclusivity over specific geographical territories despite evidence showing that the KDs are not effectively servicing the aggregate demand in said territories
•  non-commitment to any one FMCG, making individual KDs friends of convenience who would dessert any FMCGs that do not meet their short term interests
• Most importantly, lack of access to KDs customer data and market intelligence, thereby preventing FMCGs from gaining firsthand channel knowledge especially of the last mile

FMCGs essentially operate at the mercy of the KDs.

Making a case for last mile distribution

As a means of mitigating the challenges of the KD relationship, FMCGs are increasingly forced to explore last mile distribution, LMD. This involves bypassing KDs and wholesalers, to sell directly to retailers (the last mile) in other to achieve:

• Higher gross profit due to higher selling price(s) to retailers as well as inability of retailers to demand ‘profit-eating’ discounts/incentives as a result of their low volume purchases
• Cash and carry sales, thereby eliminating (or limiting) trade receivables/credit
• Better geographical territory penetration due to the door-to-door, street-by-street coverage nature of LMD
• First-hand market intelligence gathering
• Most importantly “ownership of the channel”, because whomever owns firsthand information of a channel’s last mile, effectively owns the channel

If last mile distribution is so great, why isn’t every FMCG using it?

Short answer: LMD is freaking expensive!

Long answer: Whereas KD-led distribution involves simply supplying a relatively small number (typically <100) of key distributors and going to bed, LMD requires the servicing of possibly thousands of retailers by hundreds of field sales agents equipped with corresponding numbers of assets (bicycles, motorbikes, tricycles or minibuses), themselves managed by tens of supervisors. Tying all of these together would be robust technology infrastructure and a multi-functional senior support team.

The way forward

Last mile distribution can be used as the sales equivalent of military special forces. Special forces, typically fewer in number, are used in conquering territory and not as an occupying force.

Same way, LMD can be used for opening up new or under-served geographical territories, acquiring first hand market data and intelligence, assessing distributor performance amongst others.

LMD should not serve as a permanent sales approach but for only-mission specific purposes in specific territories after which the LMD teams, hand over to KDs, and move on to new territories.

When it’s all said and done, LMD should be a quasi-marketing spend (and operation) aimed at bolstering sales performance within traditional trade environments and not as a fully-fledged sales channel approach.

On a final note

If some FMCGs had their way, they would, in their frustration, end their business relationships with KDs. But alas LMD cannot replace KDs. It's just too expensive to run at scale. Rather, what it does is level the balance of power in the relationship more in the FMCG company's favour. This in the grander scheme of things, is not such a bad proposition.

FMCGnaija seeks to equip investors and managers of fast moving consumer goods (FMCG) companies in Nigeria with validated insights and strategies for success in this market.