Simply put, route-to-market is the journey that a product takes from the factory gate to the shopper’s basket.
Jack de Wet, a senior researcher at Frontline Market Research and a route-to-market specialist helps to explain. He says “Along the product’s journey there may be several stops. How many and where depends on the route the product follows and whether the producer is doing direct or indirect distribution.”
Direct distribution is where the manufacturer delivers goods to, and transacts directly with, the retailer while in the case of indirect distribution retailers buy their stock from a third-party or an intermediary, such as a wholesaler or from a dealer’s warehouse.
“In many instances, the manufacturer uses both direct and indirect distribution, depending on the costs and efficiencies of servicing particular retail channels or sectors,” adds Jack.
The route may include the following:
Distributors: who are contracted to move stock from the factory to a warehouse or wholesaler, or to the retailer’s point-of-sale.
Warehouses and distribution centres: who function as centralised storage and redistribution facilities, usually owned by the manufacturer, or by a retail group, or a distributor.
Wholesalers and Independent transporters: who act as intermediaries, reselling to retailers on their own account.
Cash-and-carry outlets: who sell goods to retailers i.e. independent, traditional, or informal stores who are buying and collecting the goods for re-sale. Most of these are hybrids, in that they also sell to the consuming public.
Retail channels: who are made up of distinct groups of retailers who share similarities in the goods they sell, the way they operate, the people who buy there, and their reasons for buying. The channel architecture for any product describes how its market is segmented into different channels. This channel architecture plays a very important role in determining route-to-market strategies – as will be seen later in this series of articles.
Points-of-purchase: also referred to as points of buying, these are the different locations where one can buy goods inside the store, the most common being shopping aisles, refrigerators or freezers, service points (deli, bakery, butchery, etc), promotional displays and checkout displays.
Direct distribution
Direct distribution is mostly used to serve modern trade i.e. hypermarkets and supermarket chain stores.
Jack says, “Modern trade groups often require the manufacturer to deliver to their own warehouses, or distribution centres, from where the stock is redistributed to the stores in the group.”
Manufacturers usually service forecourts and convenience supermarkets directly, or through a regional warehouse. They would use their own fleet, or a distributor for this.
Jack says that van sales occur when stock is sold to the retailer straight off the truck, usually on a COD basis, to mitigate risk. The manufacturer may use their own fleet, or a distributor.
Indirect distribution
Indirect distribution is conducted for:
Traditional trade or independent retailers, who buy and collect their stock from cash-and-carry outlets, or other intermediaries.
Sub-Distributors are sometimes used to service regions or channels, where the cost is justified, or conditions require it. The manufacturer, or their distributor, would deliver directly to these sub-distributors.
“Specialist wholesalers are used to service channels e.g. liquor stores, pharmacies, HORECA to name a few. Again, these specialists obtain their stock from the manufacturer, or their distributor,” adds Jack.
Informal wholesalers are redistribution entities that purchase stock for re-selling to micro- or informal traders and often also the consuming public usually in their immediate neighbourhood or vicinity. Jack says that informal wholesalers fill gaps in the market landscape, such as crime ridden no-go areas, remote areas that have high transport costs or for traders who need high-frequency re-stocking to “roll their cash” and maximize stock turn. Also, they often provide limited credit to traders whom they know and trust, and where the corporate wholesalers and distributors would not take the risk.
Why you need a tight grip on your route-to-market
A profitable route-to-market is one of the important keys to successful marketing.
“From years of previous research, we know that for the average consumer packaged goods category, there usually are 5 to 15 different routes-to-market. Generally, 2 to 4 routes-to-market will account for up to 70% of the product category sales,” says Jack.
This often means that the profitability of the different routes-to-market can be highly variable; and that there can be significant inefficiencies in how the product gets to the end-buyer.
A well planned and co-ordinated route-to-market strategy will optimise profitability.
How route-to-market impacts the value chain
Probably the most important factor that influences profitability is how the efficiency of the route-to-market impacts the value chain.
Jack says a simple definition of a value chain for a route-to-market analysis is that products flow from the factory or the warehouse, to the end buyer. These product flows can take the product through various stage-points along the way. These stage-points can be distributors, warehouses, wholesalers, sub-distributors or informal re-distributors. As the product flows through the stage-points, price markups often occur, and cost-push factors are present at all of the stage-points.
“Complex routes-to-market often push up costs-to-serve and negatively impact the value chain,” adds Jack.
Jack provides two examples of product flow. The first is “a transporter takes the product from the factory to a retail chain’s central warehouse; a distributor, or the group’s own transport, then moves stock from the warehouse to a chain supermarket. This is a typical modern trade example – with four stage-points before reaching the shopper’s basket.”
The second example he provides is that a distributor takes the stock from the manufacturer to a cash and carry wholesaler; an informal reseller buys the stock at the cash and carry; then a micro-trader buys it from the informal re-seller, to take to his own store. This example has 5 stage-points before reaching the shopper’s basket. This pattern is becoming more common amongst small traders in many African markets.
Jack makes the important point that, “An efficient route-to-market is a key source of competitive advantage. Controlling the route-to-market, particularly its cost-effectiveness, is central to this efficiency.”
What are some of the challenges in controlling the route-to-market?
Achieving line of sight in product flows is key to controlling the route-to-market.
“It seems obvious that the marketer should know where their product goes, and who is buying it. We call this line of sight. However, there are significant instances where marketers do not have line of sight of their products and brands.
Jack provides another two examples. In the first example he says that in many regions the distributors and transporters are independent operators with little or no loyalty to the brand or product owner. This means that they would only buy the brands that have favourable prices, to the exclusion of others, and distribute these throughout their regions. Sometimes the local consumer in these regions have no choice but to buy the brands on offer from these distributors, as there would be no other supplier serving the region. Brand marketing and communication campaigns can be nullified in regions where distributors control the brand availability.
As a second example he says that in some industry sectors e.g. certain OTC pharmaceuticals, the manufacturers rely entirely on wholesale distributors (e.g. pet health products in many countries). In this case, the retail customer belongs to the distributor, and not the principal (brand owner). Consequently, there is little or no line of sight into the efforts of the distributor to maximize sales or promote the brands. Often the distributor does not share information with the brand owner. What makes this situation even more difficult is when the distributor takes on many brands, from different manufacturers, thus diluting the care and attention given to the marketer’s brand.
Jack says, “Over the years manufacturers and brand owners have been reining in the latitude previously enjoyed by the distributors, usually by rationalizing their numbers, prescribing their territories and areas of operation, and formalizing relationships or partnerships via service level agreements (SLAs).”
Designing the Right Model for the Right Channel
Jack explains, “The idea here is to preserve financial viability for each channel.”
Viability is determined by the method of service to the channel. This requires flexibility in the route-to-market for the channel, to avoid negative value chain impacts. Thus, if the channel is not profitable, one may have to drop those outlets into a lower-cost route. For example, migrating the channel from direct delivery to their doorstep, to incentivized self-collection from a distribution hub or warehouse (owned by the company), or buying from a wholesaler.
“Some companies achieve this through customer tiering – grading their customers by their sales and profit contribution and potential; and then grouping them in order of priority or business attractiveness,’ explains Jack. For example, tiers can be described as platinum, gold, silver, bronze, in descending order of priority, and a suitable service model is then applied to each of these levels. He adds, “Of course, this requires the ability to calculate and track channel value – which requires the maintenance of accurate transactional and financial records for all drop points.”
Factors that affect route-to-market performance
“Faults within the route-to-market apparatus usually led to competitive disadvantages for the brand,” says Jack and adds that in developing markets he has found the following to be the most common sources of competitive disadvantage in route-to-market systems:
- Poor data (or no data) on market and competitive performance in the channel.
- Operational inefficiencies – ineffectual systems in ordering, deliveries, payment and administration, query resolution, customer calling, technology, to name a few.
- Lack of resources – financial, human and infrastructure.
- Lack of skills – the competencies for delivering profitable route-to-market are not well developed.
- Price mark-ups – the value chain (at the different stage-points in the route-to-market) exceeds those of competitors.
- Cost pressures – emanating from the distribution systems, apparatus and partners due, for example, to factory location, route lengths, warehouse siting, transport systems, fuel costs, trade monopolies and/or transport regulations.
Dealing with Environmental Impacts
“There are environmental factors that impact on route-to-market effectiveness, and we have become familiar with these in developing economies,” says Jack.
Typically, these factors include:
- Regulatory factors: these apply to transportation, distribution partners and importing, to name a few. Jack gives an example; “When a client of ours tried to replace wholesale distributors with contracted distributors who were operating under SLAs, the former approached their government for protection and our client was forced to market their products with no line of sight into the distribution, and through now hostile and disloyal partners. A great deal of lobbying was required to overcome this.”
- Anti-competitive practices: the most common form of this is when competitors lock-in distributors and retailers into exclusivity agreements. This is a case were “God is on the side of the big battalions” so that smaller competitors are effectively curtailed in their options.
- Infrastructure: poor roads, ports and communications – these are present in many developing economy environments, and directly impact route-to-market strategy
- Crime and lack of security: This occurs when local gangs or warlords dominate an area, they often extort the distributors and their truck-drivers for a cut in the takings, particularly with van sales, or they levy a “tax” for permission to operate when there is no cash involved. Jack provides another example; “In townships like Khayelitsha in Cape Town some suppliers have withdrawn their delivery vehicles and are driving retail traders to cash and carry wholesalers, due to the risk to their vehicles and drivers from protection racketeering. In some areas of the DRC warlords insist that their own members accompany delivery vehicles on their routes, to ensure their cut of the take.”
Join us for Part Two where Jack explains why creating a fact-base is a vital requirement for route-to-market insight and strategy development.
Please feel free to contact Jack de Wet for more information on email jack.dewet@frontlineafrica.com or call tel +27 (0)86 999 0407 or mobile +27 (0)78 422 9479
