HUL restructures distribution strategy Hindustan Uniliver is pruning its distribution network strategy.

It is rationalising its own sales force and adding more muscle to its distributors on the field. CNBC-TV18s Sriram Iyer explains. Hindustan Unilever is facing pressure on volume growth. And, with its hands tied on the pricing front, it is restructuring its distribution strategy to bring in cost efficiency with Enter: the go-to-market programme. First tried out in Mumbai, this will now be implemented across all towns and cities with a population above eight lakh, starting with Chennai. How does it work? Earlier, HUL had different distributors for its home and personal care division and food division in the same area. Now, all the products would be sold by the same distributor in any one area. Also, earlier, products from different divisions used different distributors, even in the same city. Now, products across divisions will be fed to retailers through unified distributors. Though the programme may reduce HUL's sales force in southern India by half, HUL denies reduction in sales force. HUL currently has eight distributors in Chennai. This will fall to four as the company will no longer use different distributors in the same area. Experts say once implemented completely, the company's sales force in southern India may fall by half, something HUL denies. The Go-to-Market model also helps to remove the enormous

logistics hitherto faced by the distributors in their back-end operations, thus removing significant costs from the system. More importantly, enabling them to focus on the front-end to deliver better services to end-retail, HUL said. HUL has also tied up with Manpower Consultants to help distributors recruit better sales staff. Sources say that as part of the programme, HUL has withdrawn its channel financing facility, which it had with ICICI Bank and Standard Chartered. It will use the electronic real-time gross settlement mode of money transfer for future transactions, bringing down working capital expenditure. However, HUL says it will use both channel financing and R-T-G-S while dealing with its distributors.

Hul's rejigged rural distribution network trackback

There was a news item, sometime in January 2009 about HUL (Hindustan Unilever) rejigging its rural distribution network. Distribution networks are modified and tweaked to be in line with the market reality and company goals. When growth in urban areas was tapering, FMCG companies started concentrating on rural markets. In line with this, FMCG companies modified their distribution structure to be in line with this strategy and increase rural distribution. Similarly, when Modern Retail chains were setting up shop in India companies modified their distribution strategy to serve them. Companies will modify their distribution channels when VAT is implemented and CST% goes below 2%. When CST is reduced the necessity of maintaining a depot in each state vanishes. Companies will then rejig their distribution networks. This latest change by HUL, in my view is to make the distribution channel more efficient and reduce costs. HUL has removed one layer called the Star Stores. HUL has also reduced the margins of the Rural Distributors by 2% from 6.76% to 4.76%. What is the change in the distribution network. Before the change the distribution network might have worked like this. The RDs would have placed orders on depots and would have been delivered stocks from the depots. The RDs would have then supplied the Star Sellers based on a fixed route schedule. The Star Sellers in turn would have serviced the retail outlets in each village. What will now happen is that the RDs will have to service the retail outlets previously serviced by the Star sellers. How will the RDs cope the situation? Here is how the RDs will cope with the situation. RDs will start milk runs: What this means is that the RDs vans will start from a base town (the town in which the RD is located) loaded with stock. It will travel on a particular route selling to retail outlets on that route (these retails outlets would earlier have been serviced by the Star Sellers). The route will typically end at the base town itself. For village clusters that are faraway from the base town, the RD may retain the Star Seller, replenishing the Star Sellers stocks on a regular basis (once a week or once a fortnight). The Star Seller would continue to service the retailers as before. Wholesellers might be appointed. Instead of Star Sellers, the RD may sell to wholesellers in that area. The retail outlets would come to the wholeseller to buy their stocks/supplies. The RD may have his seller who takes visits retail outlets for 3-4 days and takes orders. These orders are conveyed to the RD who despatches to the seller, the stocks. The seller then spends the balance of the week 2-3 days supplying the stocks and collecting the cash. Some retail outlets will be dropped from coverage. The dropped outlet will have to depend on the wholeseller and buy from him.

Where and how is the value being unlocked in this whole rejig of HULs rural distribution network? How will the RDs manage with lower margins? It can be reasonable assumed that the RDs will give a better quality of coverage to the rural outlets. This is because they would be covering the outlets directly. The calls on the retail outlets will be more reliable (i.e. same day every week), credit would be given to the retail outlets, quality of execution of promotions will improve and visibility and stock weights will improve. With better coverage, business will increase. This will help the RD get more margin money (on an absolute sense) and reduce the fixed costs per call. Also, RDs will have a larger area and hence the fixed cost of distribution will be distributed over a larger number of stores. This would reduce the cost of coverage per store. One thing you can be sure of.. this is not the last distribution rejig you have seen!