The changing network dynamics
The cement industry has been growing well in the last decade. Unfortunately, the cost of manufacture and transport too, is on the rise. Compared to other industries, cement has the highest logistics cost as a percentage of sales. The cost of freight has been rising due to the increase in oil prices and last mile delivery too is a challenge in the whole supply chain. On the other side, fierce competition amongst cement companies to grab a bigger share of the market pie has resulted in innovative strategies. Most of the major players have over the years built up extensive network of dealers, distributors and to manage the last mile connectivity across their markets which helps to achieve higher capacity utilisation.
So how has the changing equation impacted the highly successful and decades old dealer and distributor network? Degala Ramesh, Managing Partner of Degala Veerabhadra Rao & Brothers elaborates, ´The network dynamics are now changing since now most big companies are integrating more dealers and fewer distributors into their network. Earlier cement would be supplied by manufacturers to distributors, who in turn would forward it to dealers. Now major companies are selling cement through large number of dealers rather than few distributors. Only mini cement companies are appointing distributors in their network.´
Yuvresh Bansal, Proprietor, Jagdish Traders, throws light on some of the issues bothering cement dealers. Says Bansal, ´In the cement industry, there are no distributors as such, the way we have in other industries like in the iron and steel bar supply chain. What we have is more like a Carry and Forward agent (C&F). So basically, C&F agents supply cement in large volumes to dealers like us and we then supply cement to the sub-dealers and retailers. That is how it is in theory at least but on the ground level, things are not that well defined. In this sluggish market, the defining lines between dealers and retailers are getting fuzzy. Now both dealers and retailers seem to be selling the same volumes to the same consumers. So what is the difference between the two? Earlier there was a logical flow to the market but now it seems to be a bit skewed. Dealers today no longer have the advantage of scale and volume as the demand is very low.´
According to Lalit Agrawal, Business Development Manager, Goyal Agency selling a single brand in the shrinking cement market is tough. Diversification in brands and in products is the way to go forward. He says ´Having multiple brands is better. Customers vary, their choices vary; they want options in brands and in cost. And we have to provide to those choices if we have to stay in the business. Those with a single brand in the bucket will find the business shrinking every year.´ Agrawal further adds that, ´We are thinking of diversifying and we have now started our steel business along with cement. We are also exploring the construction sector.´
SaysRajesh Parwal, Proprietor, Bharat Traders, ´As you know, cement demand has reduced significantly now. In such a scenario, the retailer must be able to survive and make profit. Diversification ensures that the business continues despite ups and downs.´
Says Anshay Sehgal, Proprietor, RN Sehgal, ´ Lots of things have changed, especially in the recent past. Now cement is sold at FOR prices. Cement companies have become very aggressive in their sales and promotional efforts. New schemes are rampant in the market. They are trying their best to enticing dealers and masons. Even bigger places are not shying away from selling small quantities; some even supply it door to door.´
Impact of non-trade deals
Unlike in the past, some of the major manufacturers have started the DCS (Direct Consumer Service) initiative, where the consumers and manufacturers are connected directly, which in effect is side stepping the dealers. This increasing non-trade sale seems to have hit the dealers business and have tilted the equilibrium especially when cement companies have started taking order irrespective of the order size.
Says Rajesh Agarwal, President, Pune Stockists and Dealers Association, ´One major area of concern is the volume of cement sold via non-trade transactions. Now, more and more companies are selling the material directly to the consumer at non-trade rates. This reduces our viability drastically. The company seems to have no discrimination in accepting the orders irrespective of the order size Earlier they would take orders directly if the quantity exceeded more than 250 tonnes, now they are picking up deals as low as of 25 tonnes. And that too, at the non-trade rates which are Rs 40 to 50 less per bag. How can dealers compete with them?´
He further adds, ´Today, the trade market is fast vanishing. Earlier, it was 90 per cent trade and 10 per cent non-trade. Now, it is 70 per cent trade and 30 per cent non-trade. In cities like Mumbai, only five percent deals take place at trade rates, the rest is at non- trade rates. Pune too, is now on the same track.´
Ramesh supports the view. According to him one of the major challenges that dealers face is that the cement companies are bypassing distributors and dealers and supplying material directly to the contactors, which has a negative impact on their sales performance. ´As production capacities are dropping and the market gets saturated with excess products, cement companies are trying to scoop orders by sidestepping dealers and distributors and then, offering discounts to contractors. This will affect the network in the long run,´ says Ramesh. ´There has to be some agreed consensus on the volume that could be supplied directly. Earlier companies would dispatch cement directly to the consumer only if the volume exceeded 200 tonnes. This was fine with us since huge volumes are involved and major consumers would like to take advantage of discounts gathered by dealing directly with company. However, of late, companies have started selling volumes as low as 50 tonnes and that too, through direct billing.´ He further adds,´Our demand is that companies should leave at least the small volumes to us.´
Says Rajesh Parwal, ´Some cement manufacturers have started the DCS (Direct Consumer Service) initiative; here the consumers and the manufacturer are connected directly. Dealers are not mediators in all the deals. However, bypassing dealers is also affecting the business. Yes, we had a dialogue with top cement manufacturers, requesting them to include us in their growth. We have suggested that the manufactures could sell directly to the consumer if the sales volume is more than 500 tonnes. For volumes below that, we must be included.´
Says Ashok Ku Patra, Proprietor, Srikant Agency, ´Companies are selling cement through non -trade sales. The price gap between cement sold via trade sales and non-trade sales is very high, up to Rs 40 to 50 differences per bag. As a result, unauthorised shops are selling non trade cement at trade sales rate with a discount of Rs 10 to 15. This is giving a tough time to authorised shops and the dealers are losing in the market.´
Patra further adds, ´We are facing several challenges on several fronts. Today´s market is the buyer`s market. Cement companies are promoting several sub-dealer shops in small areas. The market is getting more than saturated with small cement sellers. This is creating unnecessary competition.
The credit policy too, should be tweaked. While dealers like us are getting credit facility up to five days with a security amount, the sub- dealers are getting 10-15 days` credit facility without having to deposit any security. Sub-dealers are free from any worries of losing cash discounts.´
Rajkumar Modi, Proprietor, Vishesh Enterprises had this to say. ´There is difference in trade and non-trade rates and there is lot of discussion in the market about it. The cost difference varies from brand to brand and also based on prevailing market conditions. The difference in top brands of cement will be around Rs 25, while other local brands may have a gap of around Rs 40 - 50 in their trade and non-trade price. Even the excise duty on the trade and non-trade cement varies, which adds to the cost difference.´ As the demand for infrastructure is growing, more contractors are moving towards RMC. Bansal adds ´As a civil engineer, I have worked on a few RMC projects myself. In such projects, dealers, retailers, etc, are bypassed. As RMC requires cement to be poured in bulk, we cannot supply bagged cement to RMC contractors. Builders and contractors get in touch with the manufacturers directly and fulfill their requirements.´ According to him as the RMC industry grows, dealers will have a tougher time. He says, ´I wonder what can be done to make dealers too, a part of this growth and ensure that the outcome is win-win for everybody.´
Says Sehgal ´RMC is also impacting the market to a significant extent. It is mainly used by the builders. The end users and small consumers do not use RMC but the RMC market cannot be ignored now. At least 25 per cent of the market is covered by RMC.´ Modi sums up the story on a positive note. Surviving in today´s market is not that difficult if dealers come together and stay united. A systematic approach will help dealers tide over the tough time, says Modi. ´We must adopt the cash and carry policy. If we are strict about our system and do not give material on credit, we will be able to come out of this. But for this, all dealers must come together and follow this strictly. Unfortunately, despite several attempts, we are not able to achieve strong unity amongst ourselves. This has to change.
Apart from this, one must also be careful about giving too much material on credit which can be detrimental to the business in today`s market.´
As Rajesh Agarwal puts it succinctly dealers must come together in order to be heard.