One problem faced by FMCG (fast-moving consumer goods) manufacturers distributing their products through informal supply chains in emerging markets is the inability to control the product’s price to the last mile distribution point – i.e. the person who sells to the final consumer. Lack of transparency around what retail shop owners pay for their supplies creates several problems for manufacturers, shop owners and consumers, including;
- Stock-outs.
- Inflated pricing.
- Market inefficiency.
For manufacturers, this can also mean opening the door to competition in a market where they could otherwise be more competitive.
First, let’s establish the supply chain layers. You start with the manufacturer, who sells to a distributor/wholesaler, then to a sub-distributor, and then to a retail shop owner, who then sells to the end consumers. There can be as few as one layer between manufacturer and retailer or as many as two or three.
The manufacturers typically set a suggested price for the distribution and retail layers. However, once the products leave the manufacturer’s warehouse, distributors can manipulate prices or inventory to maximize profit.
In order to control the market price, distributors undertake van sales or route sales. Van sales are mobile stock points that sell directly to retailers at the recommended price.
Also, Read: The Decline and Revival of B2B E-commerce in East Africa
Van sales attempt to control the price by giving at least one option for the shop owner to buy at the recommended price. The idea is that if the shop knows that it can get the product at that price, it will be less inclined to purchase from any wholesaler or distributor who sells at inflated prices.
The problem with van sales is the same you face with distributors. It is impossible to know what price the van salesmen actually sells to the retail shop owner. He can claim he is selling at the recommended price and provide receipts, but all transactions are made in cash so there is no way to know for sure.
In other words, van salesmen can behave exactly like the distributor, inflating prices wherever possible and pocketing the difference. Furthermore, van sales have limited market reach, typically follow determined routes, and sell to larger shops to generate more revenue quickly. Small shop owners are typically left out, and in aggregate, the small shop owner is a bigger percentage of the overall market.
An added complication related to price distortion is stockouts. A manufacturer may be producing enough quantity to meet market demand, but a distributor with control over a certain area or region can hoard the product and wait for demand to increase, then release products into the market at a higher price.
Revenue and sales for the manufacturer remain the same, but for the customer, the product becomes overpriced and unavailable when it may be required, further opening opportunities for competitors to enter the market.
As a result, manufacturers face a serious set of issues on price control. As soon as their brand becomes preferred, the informal supply chain can exploit increased demand for outsized profits, creating space for competitors to enter the market where retail shops feel squeezed on their margins.
For example, a high-selling mid-market product suddenly becomes priced at a premium, having to compete with actual premium products. Eventually, it will lose both mid-market and premium customers.
In addition, consumers become frustrated when a product becomes unavailable or inconsistently priced. This all happens even if the manufacturer produces appropriate quantities for the actual market demand.
One way to solve the problem of price transparency in informal markets is through digital distribution linked with digital payments. Only when prices are published electronically and universally – real time – can manufacturers and retailers be assured that the market selling price is in accordance with the manufacturer’s suggestion.
If payments are not digital, the problem of price manipulation remains a concern. Whenever a transaction is made in cash, there is no way to know for sure what exact price was paid, regardless of receipts or documentation – especially when a product is in high demand.
Solving for price transparency levels the playing field for manufacturers to compete on brand and quality instead of fighting rent-seeking behavior baked into the supply chain.
It also ensures retail shop owners’ visibility in pricing so they can make informed decisions on supplies to manage their limited working capital. The worst thing for an FMCG retailer is to be stuck with a product that does not move at the right price.
Increased transparency around transactions can unlock a tremendous amount of value in informal economic activity so that markets can adjust accordingly.
For more articles by Firas Ahmad, visit the website firasahmad.substack.com.
