Distributors in emerging markets are facing a major disruption in their distribution model, with key metrics showing that challenges to the traditional models have eroded the financial health of distributors. The rise of modern trade and digital commerce threaten traditional distribution and have driven gross profit margins down by an average of 4% per year, resulting in direct EBITDA reduction of 1 to 2 percent, showing that distributors cannot maintain profitability levels.
The average return on invested capital (ROIC) for distributors ranges from 20-30 percent – significantly lower than other businesses, while SG&A costs as a percentage of revenue have remained high (10.5%) over the last five years. Now, more than ever, distributors must look to the future and adapt to a new way of doing business to remain profitable.
Traditional distributors are flying blind
Distribution in emerging markets has remained the same for years; other than some basic technology interventions to track sales, very little has changed. In many markets, distributors still manually order products from FMCGs, hold stock till retailers make manual orders, deliver the orders via van sales, and collect cash payments – an extremely inefficient model. Unfortunately, this ineffective model provides little to no insight into the distribution chain, with distributors lacking an overview of their business performance, productivity, and growth – areas where their modern competitors excel.
The pandemic proved that companies which embrace the digital revolution are more resilient than those that do not. Amazon, the world’s leading digital distributor, almost doubled its sales in a single month at the height of the COVID-19 crisis due to years of investing in digital selling and analytics. While traditional distributors do not have the same resources as Amazon, there is one thing they have in common: treasure troves of transaction data across products, brands, and consumers that can help anticipate consumer needs and create new strategies to match market demand. However, without a system in place to capture and utilize these valuable transaction data points, traditional distributors are flying blind, unable to unlock productivity in inventory planning, reduce warehouse costs, or save on delivery costs.
Digital-first distributors will continue to offer capabilities that traditional distribution cannot match, as e-commerce and online retail do in B2B what they have accomplished in the consumer world – personalized, data-driven processes that create an addictive experience. To compete favourably and remain profitable, distributors in emerging markets must rewrite the rules of traditional distribution and undergo radical restructuring driven by digital ecosystems and market networks that enable hybrid forms of cooperation and competition.
Digitalized distribution is the future
Today, distributors are under immense pressure as the balance of power shifts to brands and retailers, leading to reduced margins over the years. Major FMCG brands underperformed the market in recent years and are beginning to finetune their distribution model by embracing direct distribution, reducing gross margins, and increasing the costs transferred to distributors. Larger wholesalers and retailers also have more bargaining power and are negotiating for increased trade spend while developing higher-margin private-label products – leading to reduced margins for distributors.
The only way out is for distributors to digitalize their distribution chain and gain access to the deep data insights that are inaccessible under the manual distribution model. This new digitalized chain provides distributors with:
- Increased visibility: By capturing the data generated from each transaction, distributors have in-depth insights into the entire chain and can take advantage of the micro-consumption patterns to make strategic decisions on where to sell their products.
- Increased market capillarity: With synchronized geoanalytics data, distributors can identify high-demand areas and increase supply to retailers in those areas, taking advantage of growth opportunities to increase order volume.
- Reduced out-of-stock situations: $1 trillion is lost at POS every year due to products being out of stock. With granular data insights from multiple data points, distributors can identify inventory levels in real-time and ensure stock availability to retailers, leading to shorter lead times on orders and reduced inventory costs.
- Improved order velocity: With distributors and retailers connected digitally, lead time on orders can be reduced from weeks to days. Distributors can also drive retailer engagement, increase order velocity and volume with targeted digital communications.
- Reduced cash payments: By digitalizing the distribution chain, distributors can easily accept and process digital payments, eliminating the huge costs of processing cash. Cash payments cost FMCGs and distributors in emerging markets up to 16% of total revenue, with some brands spending upwards of $5 million every year on cash processing and reconciliation.
With real-time visibility across the value chain, distributors can finally step into the future and compete in the digital economy. However, adopting a digital distribution model can be challenging, especially for traditional distributors who currently operate through linear value chains, which is why you need a framework that seamlessly brings all the components of the digital distribution chain together.
Take your distribution digital with RedCloud
RedCloud is the world’s first integrated open commerce platform built to unlock the full value of the distribution chain by providing distributors with deep data insights and real-time visibility across the entire value chain.
The COVID-19 crisis has demonstrated how vulnerable the traditional distribution chain is, as many distributors could not anticipate rapidly changing demand patterns or supply-chain disruptions. Preparing for the future will require building digitally enabled distribution chains that harness real-time market insights, advanced analytics, and digital payments to deliver significant benefits, and RedCloud does this in 3 major ways:
- Sell smarter: RedCloud allows distributors to increase ROI and remain profitable by increasing sales velocity and order flow. Our proprietary open commerce platform provides in-depth granular data insights syndicated across the entire value chain, which allows you to identify underserved geolocations and increase distribution to those areas, effectively increasing sales volume and growing your revenue by up to 10%.
- Buy better: RedCloud puts the power is back in your hands by increasing market penetration and expanding your reach. You can reach even more retailers in real-time, allowing you make better decisions on which products to carry and negotiate for better margins based on actual consumption data
- Pay simpler: RedCloud solves the cash problem with an integrated payment platform that empowers distributors to make digital payments to brands and accept the same from retailers. Our platform also allows merchants to sell digital products to their customers, which helps overcome the biggest challenge in digitizing payments in emerging markets – merchant adoption.
The future of distribution is digital, and only those who are proactive enough to take bold steps will be the winners of the new digital commerce economy. This is the RedCloud advantage, a better, more efficient way of doing business for the traditional distribution sector.
Partner with RedCloud today to build the future of distribution and increase your revenue by up to 25%*
*Statistics based on research from Oliver Wyman.
