CavinKare risks high costs with direct distribution

In an era consumer goods companies are dedicated marketers, hiving off manufacturing and distribution to third parties, CavinKare Pvt. Ltd is in reverse gear. The Chennai-based soaps-to-pickle seller is betting big on company-owned dealer networks to fight competition and drum up sales on retail racks.

Three years since this Rs.35 crore experiment was kicked off, CavinKare has snapped ties with distributors in 19 Tamil Nadu cities to employ 550 of its own sales people. But while revenue got a nice lift the first two years, it slid to a single-digit pace in 2011, fanning analysts and industry insiders’ scepticism about the model’s scalability and cost effectiveness.
“Our distributors were servicing big outlets but several small stores were also sprouting and they weren’t willing to invest further, rendering some towns financially unviable,” said C.K. Ranganathan, CavinKare’s chairman and managing director. “A new distribution system was much needed. Still, undoubtedly, it comes with its own risks.”
During an early 2009 visit to Cuddalore, Ranganathan pottered around his hometown’s market street, as he occasionally did on such trips, to scan his company’s Chik shampoo sachets and Fairever fairness cream packs on wires and racks of neighbourhood grocery stores, known as potti kadais in Tamil, in this coastal Tamil Nadu district.
Ranganathan’s impromptu survey that year was spurred by doubts about doubling his company’s sales to Rs.1,500 crore amid a shrinking crop of distributors—key propagators who buy goods from consumer products companies and truck them to retailers on credit.
A catalyst for this contraction was the rapid industrialization of this former shipbuilding and fishing hub that made it lucrative to intermediate other growing businesses, such as chemicals and pharmaceuticals. The mobile telephony boom also added to the company’s woes. There was heightened interest in cellphones and phone memory chips distribution that required smaller stocking spaces and lesser manpower, key cost crunchers amid rising real estate prices and labour costs.
“The telecom-related distribution business is easier for distributors as they need less people and less space,” said Nimisha Jain of strategy advisory Boston Consulting Group, who focuses on the fast-moving consumer goods (FMCG) sector. “The value-volume ratio is higher in such a distributorship than in an FMCG one. Look at it this way; a Rs.150 washing soap and a Rs.2,000-10,000 phone can be accommodated in the same shelf space.”
Undoubtedly, it was more profitable to hawk mobile phone paraphernalia. This story echoed across CavinKare’s homeground, Tamil Nadu, one of India’s most industrialized states with the third-highest teledensity—a measure of telephone connections for every 100 people.
In a fiercely competitive market with Herculean rivals, inadequate distribution was the death knell.
Unlike CavinKare, whose distributors stocked other brands too, the Rs.21,000 crore in sales Hindustan Unilever Ltd (HUL) could afford exclusive distributors. And increasingly, India’s largest consumer goods company was forcing distributors to “carpet bomb” areas by reaching out to smaller stores to stoke volume growth, according to one Chennai-based HUL distributor. HUL didn’t respond to Mint’s request for an interaction.
Ranganathan decided to fight convention. He cleared a Rs.35 crore investment on 21 depots in more than two dozen Tamil Nadu cities starting 2009 and three in Bangalore last year. Each company-owned warehouse employed 20-25 people and started servicing 25% more outlets than before through its sales people, who previously dusted off their hands at the distributor’s warehouse.
This year is particularly decisive for CavinKare as the now three-year-old set-up—formed by converting sales promotion arm Hemalatha Enterprises Pvt. Ltd into a distributorship —eyes a 35% sales spike amounting to five times last year’s jump, key to covering investments made so far.
The task of achieving that lofty target is on Bellari Prabhakara Ravindran, general manager of sales at CavinKare. Ravindran jumped ship from US breakfast cereal maker Kellogg Co. a year before CavinKare’s 2009 distribution rollout.
“We wanted to drive existing categories and get into new businesses,” said Ravindran, who honed his combat skills at Kellogg’s, credited with changing Indian breakfast habits after a decade’s struggle. “But the distribution model was critical for the faster success of new product launches without worrying about the redistributor. The biggest difference was that I was responsible not just for sales but also for realizations (revenue collections from retailers.)”
In the 3,000 sq. ft basement space of a three-storeyed, orange and white-coloured building in west Chennai, two women and one man are busy filling white plastic carry bags with the morning’s retail orders—20-sachet trails of Chik shampoo and red-lidded, pear-shaped bottles of Ruchi pickles, a brand CavinKare acquired close to a decade ago. In a neighbouring room, data operators continue to take calls from company sales people on retail visits to book orders.
In 2009, this Chennai depot replaced two distributors servicing the neighbourhood. Monthly sales jumped from Rs.27 lakh three years ago to Rs.47 lakh today. Still, Ranganathan considers it too early to cheer.
“I wouldn’t say this distribution model is a success yet,” admits Ranganathan. “If it doesn’t continue to work we may go back to our old ways.”
For now, CavinKare’s direct delivery does not extend to smaller towns where it still employs distributors. Both Ranganathan and Ravindran concede that the model isn’t scalable nationwide given the cost of renting goods carriers, warehouses and paying full benefits to depot employees—expenses normally dumped on distributors.
And while sales of personal care and food products—comprising more than 80% of the firm’s total sales, the balance comes from its beverage, dairy and snacks units—rose from 21% to 26% in 2009-10 after the distribution switch, it petered down to 7.6% last year with sales touching Rs.976 crore—still short of Ranganathan’s 2009-10 target.
“CavinKare has started working directly with retailers to get a grip of the value chain,” said Ankur Bisen, a consultant cued to the retail and consumer goods sector at Technopak Advisors Pvt. Ltd. “But margins pressures will increase.”

The company may have saved on 7-8% distributors’ commission but employee and other costs will easily add upwards of 12% to the costs, according to Ananth Nagarajan of Chennai-based Sigma Logistics, an exclusive HUL distributor.
On the production end, input cost pressures are continuing, especially in soaps and detergents. And revenue growth is also slowing. According to a Mint analysis, while the combined revenue of the top 10 consumer packaged goods companies in the BSE FMCG index increased 17.1% in the January-March quarter, it was lower than the 18.3% rise recorded a year earlier. CavinKare’s own figures reflect a marked slowdown.
“Repetitive fulfilment is key and an FMCG company incapable of sending regular stock to its retailers will lose the game,” said Nagarajan, who entered the distribution fray four years ago. Starting out with deliveries to 1,500 outlets, he now caters to 2,100 Chennai stores for HUL—the maker of Surf detergent, Knorr soups and Kissan tomato ketchup—that has pushed him to look at incremental Rs.1,000 monthly sales gains from smaller stores.
“When an FMCG company tries to enter the distribution game it is dabbling in a non-core activity and is in fact, going back to a time before distribution itself was a business,” said Nagarajan. “They may be able to pull it off only as long as number of SKUs (stock keeping units or product variations) are limited.”

Source : http://www.livemint.com/2012/06/10213051/CavinKare-risks-highcosts-wit.html?atype=tp