An optimized distribution network: The cheat sheet to FMCGs’ long-term growth
The African market is globally recognized for the potential of its consumption economy. Although the average purchasing power across the region has declined over the last two decades, the opportunity still abounds. The African FMCG (Fast Moving Consumer Goods) industry is characterized by certain attributes. Some of these are; intense competition, unstable economic and operating environments, and a shortage of exceptional talents.
The FMCG industry is an extremely tight-margin industry. The rate of profitability depends on the ability of businesses to scale. This of course creates an extremely competitive landscape. A major determinant of how effectively an FMCG company can scale is the strength of its distribution channel. How well has it been able to cohesively link discrete units to form a dovetail system? What unique advantages does its supply chain structure have over the competition? How resilient is its distribution channel to environmental shocks? The distribution chain is the brain box of the FMCG business. A faulty distribution chain signals a potential or already unprofitable business.
These FMCG businesses either employ a 3rd party distribution structure or develop a company-owned distribution system. Some businesses also employ a hybrid mode approach, whereby both types are effectively blended. Even though there are numerous advantages and disadvantages of having any of the three, it is recommended that FMCG companies own, end-to-end, their distribution channel. By having direct ownership and complete oversight across its distribution channel, the company can easily adjust its distribution model to fit the prevailing economic conditions.
FMCG businesses strive for optimized distribution systems for different reasons. Some of these are; acquisition (developing a replicable cheaper customer acquisition model), scalability (fast-tracking its ability to grow and increase revenue generation), and sustainability (creating a system that preserves the company’s growth).
One of the major components of an efficient distribution channel is easy and cheap customer acquisitions. Developing a cheap customer acquisition model is extremely important for FMCGs, especially African-based FMCGs. This is due to the increasing cost of doing business across the region. Plus, Africa as a continent still has numerous untapped consumption opportunities across its landscape, and some markets are still unreachable. Unfortunately, any attempt to access these markets without having a strong distribution foundation might be synonymous with organizational suicide.
Secondly, the ability to scale seamlessly is another primary reason FMCG businesses seek optimized distribution systems. An optimized distribution system boosts the business’ efficiency, reduces costs, and enhances customer satisfaction. These are competitive advantages that can be leveraged for growth. These businesses project their profitability and growth on unit economics and economies of scale. An optimized distribution system enables businesses to develop a profitable unit economics model. Once this has been achieved, the result can be easily replicated at scale to drive revenue and business growth.
Beyond the acquisition of customers and seamless scalability, an optimized distribution network enables FMCGs to sustain their growth. One of the major components of an optimized distribution chain is proximity to customers. This is important for two reasons. Firstly, proximity to customers means that the results of any product changes or the introduction of new products are speedily introduced to the market and evaluated based on early user feedback. This is a component of the innovative process required for businesses to drive continuous growth. Secondly, proximity to customers increases product accessibility for consumers. Easy accessibility increases the company’s total addressable market which in turn causes a direct increase in product consumption and drives revenue growth. For example, the increasing inflation rate in Nigeria has made the cost of everything including transportation astronomically high. By reducing the cost of transportation incurred by the consumers to near zero, the company can drive an increase in product sales.
So yes, for FMCGs, an optimized distribution network enables them to acquire customers cheaply, scale seamlessly, and conserve their growth even amid economic rollercoasters. But the general question has always been, “How can FMCGs in Africa optimize their distribution networks?” Although there is no size-fit-all answer to this question, there are certain pathways that might foster the quick development of an optimized distribution network.
Firstly, partnerships are extremely important. Multinational FMCGs that are operating in Africa, have the financial capability to dive into new markets independently, but such privilege is rarely possible for indigenous FMCGs across the continent. For example, a Nigerian alcoholic beverage brand that aims to expand into the Ghanaian market can create a merger with an existing Ghanaian brand that does not have the financial capacity for expansion. This will bridge the cultural and knowledge gaps. FMCGs can also develop bespoke revenue-sharing partnerships with distribution agencies to ensure they have oversight over every aspect of their distribution network.
Secondly, FMCGs need to start building proprietary infrastructures. These proprietary infrastructures can either be digital or non-digital. These infrastructures should not be designed to create value solely for the company, they must also have direct impacts on the middlemen. By creating infrastructures that serve as the backbone for the growth of the wholesalers’ or retailers’ businesses, FMCGs can create an environment whereby the intermediaries are dependent on them. This will, of course, lead to an increase in the switching costs. An example of such proprietary infrastructure is a credit lending system that enables wholesalers and retailers to replete their inventories without having to tie down their working capital. Keeping the intermediaries obligated to them for every business cycle. For example, there is currently an estimated annual working capital lending opportunity of about $23 million in Nigeria’s B2B industry. By building a credit system that takes advantage of this, FMCGs can position themselves as the fulcrum of the industry.
Developing an optimized distribution chain is the cheat sheet for the long-term growth that FMCGs on the continent aspire to. But this is not a secret or a novel idea. The question has always been how it can be achieved. By fostering relevant partnerships and developing proprietary infrastructures, FMCGs can create pathways that can foster the rapid development of optimized distribution systems that can be leveraged for high-speed and sustainable growth. Doing business in Africa is extremely difficult, notwithstanding, building profitable businesses is also possible. FMCGs are core to our survival as a continent, and their growth signals the overall economic growth of the region.
