Evolution of dual mode of distribution

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The competition between regional and national distributors has intensified. A few years ago competition was just restricted to the national distributor level. Today, the situation is totally different. Regional distributors have gradually captured large sections of the geography. Most regional distributors who were small entities compared to the reach of the national distributors have suddenly become popular in their region, fulfilling the local demand aptly. Also, with the metros reaching a saturation point, principal companies have started spreading their wings in new cities and are penetrating into the tier II and III cities. Hence, two modes of distribution have started getting acceptance.

By Sandhya Malhotra

Saturday, January 16, 2010: Which model is the best?

Whether a company adopts a national or regional model depends on the kind of its products. For example, fast moving products and products sold in volumes like components, are sold best through the regional distribution mode (RDM). For a product like high end SMT machines and tools, national distribution mode (NDM) seems to be the most viable option, since such products require specialised service centres and caters to a niche audience.

Basically, the role of distributors is to generate incremental business for the multinational and domestic companies. In India, the whole ecosystem of distribution model has been broadly categorised into NDM and RDM. NDM is a three to four layered model, where principal companies have a memorandum of understanding (MoU) with established national distributors, who distribute a whole range of product line and solutions and give service support through their network of local manufacturers, sub-distributors and resellers. On the other hand, regional distributors may or may not be attached directly to the principal companies but they may have strong hold in a particular region for selected products. Moreover, a regional distributor also has a chain of resellers operating under him in a particular region or a network of distributors working in small towns.

Commenting on the existing distribution model, Vinod Bajaj, senior manager of Delhi based Sumitron Exports Pvt Ltd, one of the leading national distributors of equipment, tools and materials for the electrical, electronics, automobile, pharmaceutical and telecom industry, says, “Product is a key factor which subsequently decide the future strategies, like which model to adopt, pricing and margins. However, it is difficult to pinpoint which model is the best but the market is definitely seeing a bend towards the RDM. While national distributors offer countrywide reach and also better credit facilities, the option of having a faster and a wider reach is propelling the growth of regional distribution.”

The growing size of regional distributors and their capability to provide credit limits to smaller partners have certainly opened a new window for them. Speaking on the benefits of regional model, Jaipur based regional distributor, Neelesh Saxena, proprietor, High-Tech Sytems and Services Ltd, a supplier of CCTV cameras, says, “Historically, most of the regional distributors started their business by addressing the local manufacturers and Chinese products in bulk in the mid and late nineties. Since the national distributors were reluctant to extend credit to the vast majority of resellers and system builders, regional distributors with their local strengths and risk taking abilities were able to create an additional tier that catered to the needs of the regional market.”

Moreover, the liberal and manufacturer friendly policies introduced by the government have also given an impetus to the distributors’ growth. Bajaj states, “Over the years, the Indian import laws have been relaxed and duty structure has been simplified. These, along with the influx of international principal companies, are indirectly boosting and creating market for national and regional distributors to import directly.”

APC by Schneider has six national distributors in India. Says Gaurav Burman, director, transaction business, APC by Schneider, “We have authorised our national distributors to supply and do commercial billing of our power products to their regional partners. However, with our focus on tier II and III cities, we are paying more attention on the regional channel partners.”

Is there any competition?

Looking at the financial abilities and wider reach of national distributors, the size of regional distributors is smaller as they have limited reach and limited financial support. Moreover, regional distributors are more attached to fast moving, unbranded products and do not have expertise to sell high end products. Therefore, there is a neck-and-neck competition when both push volume products for one or two more companies. Most of the time, when both face direct competition, it creates multifolds problems for the regional distributors like price disparity, over distribution of products and thin margins.

“As such, we don’t have any direct competition with the regional distributors as they are small in size, and don’t have the expertise, huge inventories and strength like we enjoy. However, regional distributors do have additional strengths like proximity and better understanding with local and remote based dealers and partners. Also, they are prompt in pushing consumer products and unbranded products to the buyers. However, RDM has been quite successful in making inroads in the SOHO segment,” points out Delhi based national distributor, GD Saini, managing director, Singodia Electronics Pvt Ltd.

Strengths and weaknesses

Every model has its own strengths and weaknesses, which can be judged based on the value they bring to the brand. The key weakness of NDM is that with growing competition, national distributors have not been able to pay much attention to the emerging brands. Also, principal companies are not very comfortable about the fact that national distributors handle their competitors’ products as well. When national distributors handle too many products of different brands, they just dump excessive products on the regional distributors without passing any product information to them.

One of the most prominent benefits of RDM is that it allows principals to directly target the upcountry markets instead of depending on the national distributors. However, regional distributors lack financial strength and supportive attitude of the national distributors. Regional distributors largely work on credit basis. Their smaller partners are mainly located in small towns and districts, hence, they cannot sell value or high end products as it demands more investment and very few customers demand it.

“We have been working with our national distributor for security cameras over the last 12 years. Yet, the national distributor does not have faith in us and hesitate to give materials on credit basis, which force us to push unbranded products. Moreover, we don’t get any support including technical training, lead generations, promotional activities and service support from neither the principal companies nor national distributors,” laments Saxena.

On the positive side, Mumbai based Gulab Chand Hariya, managing director, Crikit Electro Components, feels, “With the increasing number of multinational companies entering India, more opportunities and business prospects are being thrown open. While, as a national distributor I’d like to do business with more brands, it’s not practical because we cannot possibly give enough attention to everyone. For this reason, some of the new brands need to find smaller distributors.”

The appointment of regional distributors also help the principals to move beyond dependency on national distributors and also to enhance their presence in every nook and corner of the country.

Support from principals

As national distributors are considered to be an extended arm of the principals, they always get full product support, upfront margins, excellent rebates, apart from value products and competitive pricing. Regional distributors, on the other hand, get minuscule aid from the principal.

When training programmes are launched by the principals, usually the national distributors get the first preference. Says Singodia, “Our principal companies provide technical and sales training to our engineers and sales team on monthly or quarterly basis. They also give us the authority to determine margins for smaller partners and carry out promotional activities across the nation.”

On the flip side, Delhi based Vikas Aggarwal, owner, Computech Pvt Ltd, a regional distributor in power electronics, says, “In order to push the products to the local manufactures, we hardly get hands on training, proper advertising materials or tool kits from the national distributors or the principals. For everything, we have to invest ourselves. Moreover, for product replacement and failure, we have to send the products to the national distributors, while bearing all the expenses at our end.”

While acknowledging the issues being faced by the regional distributors, APC has taken new initiatives to resolve them. “Generally, regional distributors have communication gaps related to new channel schemes, change in pricing announced by the companies, lack of service support and training. However, to address these issues we have launched a partner online destination (POD) portal where a registered channel partner can get online training, updated information on current schemes and pricing, etc. And to resolve service issue and improve turnaround time, the company will be expanding direct service centres and appoint authorised service providers from 200 cities by December 2010.”

Co-existence of two models

No matter how big and influential national distributors are, the role of regional distributors cannot be underestimated. Today, both are fulfilling and helping each other, directly or indirectly, and co-existing together in the ecosystem.

Another major advantage of appointing regional distributors along with the national distributors is that the regional distributors have a first hand knowledge of the local markets, which gives them a clear perspective on what products will work or what needs to be done to sell these products.

Saini puts it, “We are co-existing with the regional distributors and are inter dependent. Regional distributors help us to provide ground report and give better estimate to position our products in the upcountry markets.”

Regional distributors also act as a bridge between the principal and the national distributors. “It is always good to work under the national distributors as they share good understanding with the principal company. That helps us to get the material and service backup from the distributors, in return, we sell the products quickly to our smaller partners, creating more demand,” says Aggarwal

Distributors are diversifying

To beat the competition, both the distribution models have started looking into new areas to grow. National distributors like Sumitorn have been focusing on building brand image in the market and growing as a corporate company. Says Bajaj, “Besides expanding our business into new territories, we are setting up new branch offices. We have been publishing an inhouse newsletter, spending more on online advertising and sales promotion activities, participating at the national and international exhibitions to scout for new principal companies.

On the other hand, despite shrinking margins, most regional distributors are also thriving because they have managed to diversify themselves and focus on their strengths. “The only way to grow and enhance profit in our business is to ensure faster inventory turnover and stronger credit management by starting credit rating exercise. This is to find out and eliminate partners who were not timely with their payments and don’t have a proper record. With this, we can now invest our working capital on those partners who are worthy,” says Saxena.

With both NDM and RDM laying equal claim on the market, majority of the principal companies say that a verdict cannot be pronounced on any one distribution model as each model has its own advantages. “But whatever be the distribution model, the one to benefit is the customer as he gets the best of both—product and services—from the channel,” concludes Hariya.

Electronics Bazaar, South Asia’s No.1 Electronics B2B magazine

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