Different business models, drivers of business, gross margins
Continuing from the previous blogs : “Edison and the massive industry he created” and “Growth of the electrical vertical and electrical products”, we continue to another part of the value-chain – Distribution
A distribution channel is the channel through which the goods and services are transferred from the manufacturer to the end customer.
Amazon, Flipkart, Udaan, Moglix, Power2SME, Bluedart, Fedex, DHL etc. are all parts of the distribution industry.
Traditionally, major industries have their own vertical focused distribution channels. Brands in turn have their individual go-to-market (GTM) strategies i.e. how they want to approach distribution and sales to the end customer.
Sales channels are responsible for creating customers and sales. Distribution companies make the products/services available to a wider demographic and are the channel used to fulfil a sale. The third (sub)peg in this wheel are logistics services, that fulfil an already billed sale. i.e. They pick up a parcel and deliver it to the assigned purchaser as per details given by the seller. They only charge for their logistics costs, usually not related to the value of the parcel being delivered. Local transporters and package delivery companies like Gati, Fedex etc offer logistics services.
Distributors are different to logistics companies in various ways including:
- Distributors do buying/selling on their books
- They add their margins when selling
- They assume the credit risk
- Invest in stock
- Manage stock, transportation and logistics
- Facilitate other services like maintenance, after sales service, schemes etc
Increasingly with progress in technology, sales and distribution channels are converging in which case distribution channels also:
- Convert leads to sales
- Create customers, awareness of availability and generate new sales
- Offer promotions and get incentives from manufacturers/producers based on sales
The above channels are fairly mature in the B2C and B2B space. Technology offers some great opportunities to increase efficiencies and allow these channels to operate more efficiently.
Below is an analysis of different distribution business models*, where technology is pegged to play a part in convergence of the sales and distribution services companies.
Distributor / Buying Club Model
In the distributor/buying club model, large distributor’s/clubs buy specific fast moving products, from the manufacture at a large scale and gets additional discounts/economies of scale. This is then sold to smaller distributors at a price that is better than what, the smaller distributor would have been able to get, from the manufacturer directly.
Some of these large distributors are for profit while some others (like the Buying Club Model) are set up to serve specific industries and are not for profit.
This business is driven by lowest price offered and scheduled delivery. Large amounts of credit are given.
Currently there is limited use of technology as nearly all transactions are done offline and a change in purchaser behaviour is still not forthcoming. Profits are tight at around 2-4%. Current players in this model are existing large dealers / distributors of individual products.
Industrial Maintenance / Aggregator Model
Companies that are targeting the aggregator model typically offer a large number of products, predictability of delivery, fair price, reasonable credit and incentives for the purchaser.
Margins in this space are better at 5-15% but smaller in bill sizes. They work like suppliers but do not hold their own stock.
Technology can be used for rate contracts, punch out catalogues, out-sourced purchasing department services, but there needs to be a change of mindset at the purchaser level, there is a limited market of large companies where this can lead to unit economics and it is difficult to compete in price and service with existing suppliers of current products.
Distribution to retail shops, presents a large opportunity in a country like India. Due to the complexity and high density of the population, retail shops of FMCG, Pharma, Electronics, Electricals, Hardware and Tools etc. exist in every locality across the country.
Retail distributors have a limited product offer, but same / next day delivery, fair price, rotating credit.
This is currently a highly dis-organised offline play with retailers who are internet savvy looking for ways to modernise their purchases but without the ability to invest in technology.
Smaller local distributors are finding it increasingly difficult to sustain as the economy is becoming more organised and hidden margins are harder to come by, therefore they need access to economies of scale/partnerships with organised players to survive.
Mobile technology can be used to bring down the cost of sales, transactions and financing due to increased organised data.
Distribution to retailers offers consistent 7-8% Margins which are promising due to the regularity of sales and lifetime value of these retailer shop customers.
Have you been reading about hyper funded B2B verticals looking at distribution and credit?
Read more about retail distribution, how it is now increasing company valuations by multiples and why in India electrical retailers are here to stay, on our blogs coming in the next few days…
*Ref. domain expert @Brijnandan Mundhra