Discusses the distribution network within the country from how products enter to final destination, including reliability and condition of distribution mechanisms, major distribution centers, ports, etc.
Last Published: 10/10/2018

There has been a significant expansion in distribution channels in India in recent years.  The Indian retail market, currently estimated at $490 billion, is projected to grow at a compounded annual growth rate of six percent to reach $865 billion by 2023.  The total number of retail distribution outlets in the country is estimated at over 12 million, mostly family owned businesses.  An annual growth rate for the fast-moving consumer goods (FMCG) sector is predicted at 10-12 percent during the next 10 years.  A firm can deliver its products to the user through a variety of channels, using a range of marketing intermediaries. 

India’s Business to Business (B2B) e-commerce market is expected to reach $700 billion by 2020.  Online retail is expected to be at par with the physical stores in the next five years.  India is expected to become the world’s fastest growing e-commerce market, driven by robust investment in the sector and rapid increase in the number of internet users.  Indian e-commerce sales are expected to reach $120 billion by 2020 from $30 billion in 2016.

The three-tier system: most Indian manufacturers use a three-tier selling and distribution structure that has evolved over the years.  This structure involves redistribution stockists, wholesalers, and retailers.  As an example, an FMCG company operating on an all-India basis could have between 40 and 80 redistribution stockists (RS).  The RS will sell the product to between 100 and 450 wholesalers.  Finally, both the RS and wholesalers will service between 250,000-750,000 retailers throughout the country.  The RS will sell to both large and small retailers in the cities as well as interior parts of India.  Depending on how a company chooses to manage and supervise these relations, its sales staff may vary from 75 to 500 employees.  Wholesaling is profitable by maintaining low costs with high turnover, with typical FMCG product margins anywhere from four to five percent.  Many wholesalers operate out of wholesale markets.  In urban areas, the more enterprising retailers provide credit and home-delivery.  Now, with the advent of shopping malls, companies talk of direct delivery and discounts for large retail outlets.

In recent years, there has been increased interest from companies to improve their distribution logistics to address a fiercely competitive market.  This in turn has led to the emergence of independent distribution and logistics agencies to handle this important function.  Marketers are increasingly outsourcing some of the key functions in the distribution and logistics areas to courier and logistics companies and searching for more efficient ways to reach the consumer.  The courier network in India now spreads to smaller Class IV towns (defined as a town with a population of less than 50,000).

Most FMCG and pharmaceutical companies use clearing and forwarding (C&F) agents for distribution, with each C&F agent servicing stocks in an area, typically a state.  Taxes used to vary between states until the introduction in 2017 of a national value added tax, known in India as the General Service Tax (GST).  Now, at every stage from producer to end consumer, retail prices are the same throughout India.  With the cost of establishing warehouses extremely high, C&F agents are fast becoming the norm.  

India has 13 major (national government control) and 187 minor (local state/private control) ports, but in terms of gross weight tonnage conveyed annually, Mumbai and Marmagao on the west coast, and Vishakhapatnam and Chennai along the east coast are the most important ports in India.  Mumbai, the financial capital of the country, is very important for international cargo trade.

To assist companies entering the Indian market, the GOI uses free trade and warehousing zones (FTWZ) as a special category of special economic zone with a focus on trading and warehousing.  The objective of the FTWZ is to create trade-related infrastructure to facilitate the import and export of goods and services with greater flexibility.  These zones are established in areas close to seaports, airports, or dry ports.  FDI up to 100 percent  is allowed in the development and establishment of the zones and in their infrastructure facilities.  The program allows duty free import of all goods for warehousing (except prohibited items such as arms and ammunition, hazardous waste, special chemicals, organisms, materials, equipment and technology items).  The maximum period that goods may be warehoused within the FTWZ is two years, after which the goods must be re-exported or sold.  After the two-year period expires, custom duties as applicable and would automatically become due unless the goods are re-exported with a grace period of three months.

 

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