It was almost noon and I set off for the gym. Since it was Sunday, I expected the traffic to be light (which means 30 cars at each signal, against the 150 on weekdays). This stretch of road is sans speedbreakers and so I was looking forward to a fast smooth drive with Ed Sheeran’s Sapphire at full blast.
Until the first interruption. A red traffic signal. The signal turned green but we could not speed through because we had to let a herd of 10-12 cattle cross first.
Nevermind. Both, cham-cham chamke sitare wargi and I speeded up, only to run into a jam again. A Chabeel was blocking half the road to distribute water to passers-by. (A Chabeel is the practice of offering free sweetened water during summer.)1
I was more than halfway there now. Two more minutes in and I had to again slow down to a crawl for the U-turn to the gym. I braced myself for those permanent potholes that would fit a medium-sized pig during monsoon. But I was pleasantly surprised. No Pothole! The U-turn stretch had been repaired almost overnight.
This pleasant surprise took away the sting of a disappointing drive.
India confounds us and then surprises us over just a 15-minute car ride. Indian retailers are the same.
On the one hand, they are obstinate and test your patience.
Our distributors buy books worth Rs.25,000, pay upfront, but haggle for days over Rs.300 for cartage2.
On the other hand, their business intelligence puts Ivy League Wall Street brokers to shame. Except Bezos, but we will come to him in due course.
Wholesalers buy Lux and Lifebuoy on credit from the distributor, cut the price and sell it quickly at a loss. They use this cash to stock up on ITC Cigarettes in anticipation of the tax increase which is guaranteed in every budget. This means they can sell the old-price cigarettes at a premium and more than earn back the loss on the soaps.
The CEO Factory, Sudhir Sitapti
Did you spot what’s common in both these behaviours? It’s a razor-sharp focus on velocity and cash flow.
- In the case of books, they are ok to pay for a brand that sells, but baulk at the non-consumer-facing cash outflow on cartage.
- In the case of soaps and cigarettes, they maximise their ROI on cash investment by leveraging two high-velocity brands.
Velocity and cash flow.
Retailers live and die by velocity, i.e. how fast their inventory sells out, for two reasons.
One, inventory is pure cash. Anything that does not sell is cash that could have been used elsewhere. The faster their inventory sells out (or turns), the faster their cash turns, ergo, greater their ROI.
Here’s the math.
A retailer who buys Rs.1,000 worth of products daily and sells everything the same day at a 1% margin, is turning his investment 365 times over. He makes a 365% return on investment. Whereas a retailer who sells Rs.1,000 worth each month makes only a 30.41% return.3
Two, a higher number of inventory turns keeps the cash flowing.
From trillion-dollar MNCs to tiny Indian retailers, profit is an outcome on the books. But it is a positive cash flow that keeps the lights on.
If a business has enough cash to pay salaries and operating expenses and to service its debt, it can live to see the next day, next month, next year, even the next generation.
This is why Amazon posted losses for twenty years and ran its business from the free cash flow it generated.
This is why companies like Hindustan Unilever pioneered mechanisms to always have free cash flow by getting money from their distributors in 2 weeks, but paying their vendors in 30-45 days.
This is precisely what quick commerce is struggling with. All of them are running on investor-funded fumes and are yet to turn free cash flow positive. That’s why, while they are a good opportunistic option to generate brand trials amongst India 1, the jury is still out on whether they will survive long enough to become long-term distribution bets.
For the average retailer in India, a daily free cash flow makes the difference between skipping dinner or buying groceries. This is because India is a market with a loooong consumption tail.
“India is a large economy. In terms of world ranking, India’s GDP is in the top 10, but its GDP per capita is below 150. As much as 50-60 per cent of its GDP is accounted for by household consumption. However a less appreciated fact is that this consumption is made up of a lot of people, each earning and consuming a little bit, that adds up to a lot.”
Rama Bijapurkar
India’s 12 million small retailers are the long tail of a $1.2 trillion retail industry. Some sources say that a typical Kirana4 store is usually smaller than 100 sq. ft. and serves customers within a 3 km radius. I could not find one credible source for this, but most reports agree that the average Kirana shop owner earns between Rs 15,000 to 2.5 lakh per month. I would imagine a power law applies here and more Kirana owners cluster at the bottom end of the income scale.
Having said that, even at a low margin, if a retailer has more cash in the evening than he had in the morning, it has been a good day.
What does velocity have to do with marketing?
High velocity (and therefore free cash flow) is strengthened by brand pull and weakened by sales push.
This is how it works.
A naive view of business building is that sales and velocity are the salesperson’s or the performance marketer’s job. In reality, these roles 1) service the demand that already exists and 2) drive depth at the retailer end.
But depth without velocity leads to ageing and slow-moving stocks.
Here’s how.
Let’s say a retailer holds inventory of Rs.1,500 worth of snacks per week and sells Rs.1,000 worth every week. Out of Rs.1,500, your brand is Rs.750. This is a 50% depth. On the surface, this is very healthy.
Let’s dig deeper. Now if out of the Rs.1,000 he sells, your brand is only Rs.200. And this trend continues over months. The retailer will do two things in the short term.
One, he will not buy your brand anymore until he sells off the remaining Rs.800. Two, He might recommend your brand to consumers, not because he likes you or your brand. But only to get rid of idle inventory.
What’s worse are the long-term repercussions. Next time, he will be more careful and buy less, maybe only Rs.200 worth. And if your inventory continues to undersell over some time, he will stick you with a bill for expired stocks.
I agree when Sudhir Sitapati says, “Brands, and not the sales function generate sales. The job of a sales system is to fulfil demand at the lowest cost possible. Pipes don’t quench thirst, water does. Roads don’t take you to a destination, your desire to go does. Roads and pipes, like the sales system, are mere enablers.” (The CEO Factory).
Sudhir says that’s why sales is a cost function.
Naive businesses view marketing as the cost.
Brand-led businesses know that if sales are the pipes that satisfy demand, then marketing generates demand. And the more the demand, the greater the velocity.
An increasingly naive view of demand generation is that there are only three ways to generate demand.
One, make ads. Advertising is one of the four Ps in a marketer’s arsenal. So, if a marketer only focuses on advertising, they are entering the battlefield with only 25% ammunition.
Two, go viral. This isn’t just naive, it is also lazy because it depends on luck and prayers to grow. Not skill and effort.
Three, flood the market with consumer promotions. When I see brands that have one, or even two (!) consumer promotions each month and no market share increase to show for it, I know that the target pressure is greater than consumer demand. This is a sure-shot lead indicator that the product mix itself is losing meaningful differentiation and the marketer needs to devote some serious time to consumer insight work.
A marketer’s only job is to increase velocity. But how?
In the context of retail, there are two golden, but tricky-to-execute thumb rules:
In the short term, overstock the retailer just enough to get him to feel the pressure so he recommends your product to consumers. Do this because, in the short term, it is worse to lose a consumer sale because you were out of stock, than it is to over-stock the retailer and risk ageing stocks.
The ideal way to do this is to increase the frequency of sales officer visits and replenish high-velocity products more frequently.
Let’s say the retailer has been selling 5 units a day of your brand, but 10 units of the category. The sales officer visits every 4 days and stock is delivered the same day.
If you simply mirror your offtake, the sales officer will place 20 units per visit (5 units X 4 days).
This is inadequate because competition will be increasing their stock weight simultaneously. Your goal should be to own the lion’s share of the category and to maintain that gentle pressure on the retailer to recommend and move your brand into the consumer’s basket.
Therefore, the sales officer should try to sell 25-30 units each visit. He will justify the higher sell-in by promising a demand upsurge – “because we’re running an ad,” or “we will buy a display – jo dikhega woh bikehga (what gets seen gets sold).” He can also incentivise a higher sell-in through volume-led incentives.
This only works if, in the long term, (one financial year) the retailer+distributor stock holding and consumer offtake equalise. This means you are generating higher demand and can meet it too.
The risk. If you find yourself moving stocks from slow-selling areas to fast-moving ones. Or worse, you are frequently liquidating ageing stocks through BOGOs (Buy one get one free) or giving them as a child pack with a fast-moving brand, this is a lag indicator that the consumer does not find enough value in your brand and it is time to rethink strategy.
Now I have understood why FMCG is called fast-moving. It’s all about velocity.
Thanks for reading and I’ll see you next week.
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1 Chabeel originated with the Sikhs. It is their way of giving back to the community – a pillar of their Guru’s teachings.
2 Since last year, we have been publishing my dad’s books. 17 done. 10 to go.
3 (Rs.10 profit per day X 365 days)/1000 = 365%. 365%/12 month = 30.41% return.
4 Local mom-and-pop retail stores