A perfect distribution?
A perfect distribution?

A perfect distribution?

The distribution of cement to the end user from the manufacturer is a major cost factor in the landed cost of cement at the user end. ICR takes a look at the major obstacles in cement distribution.

Till 80s cement was available only as a commodity, and the production and distribution of cement was controlled by the Government. One had to apply to a district collector to get cement allotted for a job. It is only during the late 80s that cement was decontrolled and as a result many players entered into cement production, triggering competition into the cement industry.

It has been almost 28 years since cement has been decontrolled. Since then industry has witnessed high level of competition which has forced all the players to create their brand image in the minds of the customer so they can fetch premium price over competitors. But slowly all the companies have started replicating the activities undertaken by any pioneer company and so the companies were forced to control their cost in order to ensure reasonable profits during the lean period, i.e., when the demand is low and prices are under pressure. It is important to note the recent development of selling cement through online shops like Snapdeal, etc.

Mechanics of distribution channels
Companies invariably hire carry and forwarding agents (CFAs) to transport cement to their own or dealers´ warehouses, which is either done via road or railways. From CFAs or warehouses, the cement is then transported to dealers/distributors and further to sub dealers who finally sell it to the end user. The physical ownership of goods every time does not get transferred. In the other case, dealers and sub dealers take order from buyers and place it to the companies, distributors coordinate and monitor for the timely dispatch of said orders, transportation of goods and final delivery and in return get their commission. It must be borne in mind that it is high volume and low margin business as stated by both - Nikhil Phadke, Partner, Vaidya & Co, and Senan Shah, Om Swastik Trading.

Distributor network in cement industry is highly dominating, and companies are compelled to hire the services as they rarely have any rapport or contact with the end consumer of their product. Apart from this, distributors have storage facilities, which enable them to control the supply chain. Therefore it becomes an important link in the business chain.

Three major factors affect the cost of cement. These include: logistic (20 to 22 per cent), excise and VAT of which excise and VAT are Government duties and thus cannot be controlled by the manufacturer. So only cost that is in the hands of manufacturer is the logistic cost, and in order to reduce the logistic cost, the companies try to sell their production in the nearby areas.

Moreover as the cement plant has to be installed nearby limestone deposits, plants of various companies are located very near to each other. This creates an intense competition in the nearby areas as all the companies try to sell their product with minimal logistic cost. Largely this is applicable to all the cement plants but as the big companies have huge production capacity at the single plant they have low cost of production and so they can afford to distribute their product at far off places at a slightly higher price. But the small players have limited production capacity so they try to increase their profits by saving on the logistic cost by selling in a limited area, and this technique of saving on logistic cost is shrinking their area of operation. This can be experienced in the states of Telangana and Andhra Pradesh. Thus intense competition is experienced in local areas as big players have to sell some part of their production in local area to get higher realisation and the local companies have to sell in local areas as they cannot afford to sell in far-off places due to increasing logistic cost. Moreover the transportation cost always has an increasing trend, so every company prefers to sell their maximum possible production in the nearby area which increases competition to a great extent.

Today we can say, in all the developed countries, cement is still treated as a commodity whereas in India it is somewhere between commodity and brand. In short, for a retail buyer, companies sell it as a brand whereas for institutional buyers it is sold as a commodity. The dealer is extremely important for both buyer and manufacturer.

Distribution Channel: Cement v/s FMCG
The business is driven on relationship more than that of a brand. The market is extremely price-sensitive and therefore the brand cannot fetch a value beyond a certain level. Typically the institutional buyers squeeze the manufacturers and dealers to a maximum. The systems of payment and collection are better in FMCG sector than that of cement. The channel has to improve on that. Many a times as referred by Phadke, deliveries are effected just on telephone calls without any documentation and dealers have been exposed to a great risk. Probably the younger generation has to learn from it and correct their actions.

According to Rahul Akkara, Associate Vice President - Brand, JSW Cement, "In the cement business, the dealer is accountable for expanding the base across his/her territory and for doing this, he/she needs to have a good sub dealer base, which would help him achieve this. Also the dealer should also have good networking with influencers such as contractors, engineers, masons and builders, who are also equally responsible to increase business for a cement brand in his territory."

Exclusivity so called is meaningless and forced only by the companies even though they understand that exclusive dealers are doing business with other brands, may be in equal volumes only under different names. Secondly as expressed by Phadke, it is not legally enforceable but still cement companies are going on creating exclusive dealers. It needs second thinking.

Cement bags does not carry an expiry date but it does not mean that the old stock can be put to use for any job like casting a slab or column. Here it differs far from that of FMCG products and procedures. Leftover or damaged products are returned to the manufacturers, however it does not apply to cement. Another major difference with that of FMCG products is that the manufacturer scores over that of the distributor and he is dominant where as in cement business chain the dealer is more valued than the manufacturer.

The other issue raised by Phadke is very valid but has no immediate answer. CFAs are becoming cement dealers and competing with traditional channel members. It is important to remember that as CFAs have access to very vital information about the dealers customers and that can be used to compete with them. Even legally it will not be possible for any one to stop such entry but what can be done is they can be allotted different territory for doing business so as to protect the interest of the existing dealers. On the other hand some of the existing dealers have been investing money to have their own transport but it has not been very common.

Surprisingly no one has talked about the loss of cement either by the way of using hooks or because of transloading of shipment. The quantum of loss is significant but since it is a high volume business no one seems to be worried.

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