Understanding the Stockist's Contract: How Millions of Small Stores in India Get Their Goods

Thursday, August 12, 2021

If you're out of laundry detergent in America, you're likely to get into your car and drive to a big-box or mid-sized store that's part of a national or regional chain. If you're in India, you'll probably take a stroll to a tiny store in your neighborhood, where hundreds of consumer goods are within reach of a storekeeper eager to serve you.

About 12 million small stores operate in India, occupying street corners and other spaces in residential areas and generating more than 90 percent of retail sales. As consumers buy soap, toothpaste and other goods, these independent stores have to frequently replenish their inventories, but not directly from manufacturers. They get their merchandise through entities known as stockists, whose delivery methods may include trucks, cars, motorcycles, handcarts or even baskets balanced on heads.

In India and other developing countries, manufacturers and retailers rely on stockists to keep the goods flowing. But despite their vital, multifaceted role, stockists and the contracts they work under had been largely unexplored until they caught the interest of a Purdue University professor and his research colleague in India.

Ananth Iyer, professor of supply chain and operations management in Krannert School of Management, and Omkar Palsule-Desai of Indian Institute of Management (IIM) in Indore, were intrigued by the low distribution margins—an average of 5.4 percent—for consumer goods delivered to small stores. How was this possible, when delivering to so many small stores seemed inefficient?

"We wondered where the efficiency was coming from, because in many places around the world, whenever big chains have gone in and tried to compete, they've had a very hard time competing with the little guys," Iyer said.

The efficiency comes from the stockists' ability to serve many stores and their frequent replenishment of merchandise, as the researchers discovered after collecting and analyzing data, partly with help from IIM students who accompanied stockists and recorded their activities as they visited more than 240 stores in India.

The market-making role includes advising retailers on which products to carry, providing credit and collecting funds, and identifying new outlets for a manufacturer's products. The logistics role includes paying for a manufacturer's products, carrying an inventory in their own warehouses, and delivering the product to retailers through various means.

A stockist may fill up a van or other vehicle with consumer goods and make many stops to replenish stores within a sales territory. While the goods are on the store shelf, they're part of the stockist's inventory. The stockist has paid the manufacturer for them and won't collect from the storekeeper until the goods are sold.

Though the stockist may get a margin as low as 2 percent, what's critical, Iyer said, is the number of inventory turns. The stockist is rewarded substantially by turning over their inventory about 85 times a year (every four or five days), earning the margin over and over.

"For the same amount of money, they get a 170 percent return," Iyer said. "That's how they make their money."

Using the data they collected, the researchers developed a principal-agent model to understand the contracts offered by manufacturers to stockists. Because the capability of stockists can vary considerably, contracts offered to them are likely to be screening contracts, which offer them a series of options and give bigger rewards to stockists who are adept at selling and promoting goods.

Part of what we noticed is that not everybody gets the same contract," Iyer said. "You have to give a little incentive to people who are very good."

A stockist working for Hindustan Unilever Limited, one of the top manufacturers, isn't just trying to deliver Unilever products, but to convince storekeepers to carry more Unilever products, at the expense of products from Godrej and other companies. "The key is for this person not to just to push the same product, but to have a sense of the market, determine what will sell and help the retailer," Iyer said.

The model considers the type of assistance given to stockists—whether it substitutes or complements their ability—and characterizes firms using three parameters: logistics cost driver, demand generation and the mix of efficient and less efficient stockists.

Fitting the model to firms according to the parameters, the researchers were able to correlate the model-generated results with observed data. They hope the model will help manufacturers who are interested in entering the Indian market.

"The model they have to follow is not the Walmart model—ship in bulk— but to really deliver to the little stores very efficiently by contracting with stockists," Iyer said. "These stockists become the gatekeeper, and that's the reason we studied them and made the case that they're a unique entity."

The model may also be valuable for existing firms who want to adjust their distribution strategies to maximize performance. Proctor & Gamble, for example, decided several years ago to prune its product portfolio, offer lower margins and focus on urban consumers.

"The model allowed us to understand why that strategy might actually make sense as a way to be successful," Iyer said.

"It basically allows multinational marketing managers to think through their strategy as to how they should approach this market."