A distribution channel is a path by which all goods and services must travel to arrive at the intended consumer. Conversely, it also describes the pathway payments make from the end consumer to the original vendor. It is very important because product in one place while the consumption scattered in many place. A channel of distribution connects a link between the producers and the consumers.
Channels are broken into two different forms—direct and indirect. A direct channel allows the consumer to make purchases from the manufacturer while an indirect channel allows the consumer to buy the goods from a wholesaler or retailer. Indirect channels are typical for goods that are sold in traditional brick-and-mortar stores.
For a typical label or fashion brand in India, the predominant channel is indirect, where distributors and dealers(retailers) form important links in the chain.
The fashion house designs and produces the products under their label. These are then allocated to the retailers through distributors or sales agents. Around 80% of the domestic apparel industry works on this model. The label/brand deals majorly with the distributors so this association can be denoted as B2Ch ie business to channels.
This system has been prevalent since the time of Bazaars, when large format stores and Ecommerce were unheard of.
Let us understand this trade channel from the point of view of the main stakeholders:
Labels:
These fashion houses stock the goods in a central warehouse but have to distribute the goods at diverse locations.
They cannot manage logistics of delivering minuscule quantities to smaller stores.
They need some middleman to buy their goods outright to secure payments and invest in the stock.
They are wary of bad debts from smaller retailers.
The sales heads in such organizations find it simpler to grow sales in virgin territories by appointing agents or distributors rather than working hard on improving like to like sales.
Most labels do not have the liquidity to kickstart their own EBOs to retail directly.
They can launch their Ecommerce platforms but cannot afford marketing expenses required to acquire customers and retain them.
If they use Myntra’s or Amazon’s marketplace, they end up realizing the same amount as they do through traditional ‘trade’ channel.
Sales Agents and Distributors:
Sales agents help the labels push sales through their contacts with the retailers in their specific regions. They charge a commission on sales. However, they are not responsible for bad debts or delayed payments.
Here step in the distributors who commit to pay the labels outright and collect payments from the retailers. In a way, they are investing into the goods made by the brand. They charge anywhere around 15%-20% of sales.
They perform 4 important tasks:
1)Bring in new retailers through their existing network to increase sales.
2)Manage the logistics of dispatching the goods to the small stores.
3)Act as an insurance with respect to payments to the label.
4)They reduce the points of contact of the label and the dealers. Each distributor is supposed to serve a minimum of 50 retailers
The most important task of the distributor is assurance of payment to the fashion brand for which 15%-20% on sales is a huge amount. This increases the MRP of the product by almost 10% making it less competitive to sell.
Retailers:
The retailers act as a last mile in offering the goods to the end users. These are typically small mom and pop multi brand stores (MBOs) that have a loyal clientele in that particular locality.
They establish relationships with the clients who frequent them.
They offer assisted selling to middle aged customers especially housewives who are low on confidence in selecting the right product for themselves.
They know exactly what is selling in the market as they are hands on
Most retailers have an obstinate mindset and do not believe in changing with times.
They do not like to spend money train the staff on the product or selling techniques
Many of them do not care for professional intervention in terms of digitisation of inventory
They believe that they can make and break labels
They typically return unsold goods when pursued for payments
They have stared to expect foreign trips sponsored by labels for season bookings
They try to hike their margins especially with new labels
They fail to realize the threat posed by the big organized retailers, ecommerce platforms as well as the changing preferences of the new generation.
The millennials do Not want store staff to assist them in selection of the products. They are guided by influencers and peer groups. They would prefer buying from an array of products offered on Myntra, Amazon, Ajio, Nykaa and the likes from the smartphones without having to step into crowded markets.
For a fashion label whose turnover is anywhere between Rs.25Cr to Rs.200 Cr, the margins shelled out to the retailer are anywhere between 30-40% of MRP, while the distributor margins are around 7%-9% of the MRP. This is apart from 6%-7% volume schemes offered to the dealers.
Thus, almost 55% of the MRP that a consumer spends goes towards the channels which hardly add any value in the supply chain. It is common logic to understand the redundance of the trade channel but the labels as well as the owners of mom-and-pop multi brand outlets refuse to acknowledge the impending obsolescence of this inefficient ‘trade’ channel.
This is where the organized players like Reliance, Aditya Birla, Shoppers Stop, Central and Lifestyle step in the brick and mortar space.
The advantages they have over labels who sell through trade channels are:
1)Direct and immediate feedback from the customers that help quick course correction
2)Economies of scale in product development, designing, merchandising, sourcing and retailing
3)Better quality can be offered at a lower price as compared to trade since the 10% distributor margin is cut off right away apart from achieving retailing efficiency at 20% of MRP instead of sharing 35% of MRP with retailers
4)Huge centralized database of customers and their preferences can be cashed in by profiling and target marketing.
Notwithstanding its inefficiencies, the trade channel is already walking a tightrope due to the pandemic. The organized chains are taking over a great deal of share from trade channel in fashion retail. Spurred by the incessant pandemic lockdowns, the online marketplaces too are accelerating their way into a bigger pie of fashion retail.
Water finds its level. In the hyperconnected world, ineffectiveness by one channel is viewed as an opportunity by the first movers who leverage their skills/infrastructure to solve existing problems. As a matter of fact, digital platforms like Udaan and Ajio are already replacing the expensive ineffective distributors and are acting as online mega distributors in B2B channels.
In the next 5-10 years, the face of fashion retail will completely transform. We shall witness transition from decentralized retail to oligarchy- a few huge omnichannel retailers controlling major stake in fashion retailing. Each oligarch will not only own but also accumulate/acquire multitude of brands. They will leverage economies of scale, not only in production of goods but also to amass realty for retailing and acquire customers online. The smaller labels will have to acquiesce under their umbrella or have outstanding USPs, deep pockets and lean sales channels to be able to survive and thrive alongside the oligarchs.