A large number of products are being consumed every month by a single family. Most of the grocery items are for kitchen use (food items). There are a number of factories in Pakistan which are manufacturing countless numbers of packed food products including beverages, chocolates, milk, yogurt, biscuits, chips etc. There is an extensive network of suppliers, distributors and wholesalers between factories and shops which make these products available in various stores and other retail outlets. IBEX team found distributing business a secure business opportunity. Distributors are required by every factory and this business is ever growing as population is increasing with the rise in the number & quantity of products.
Starting the Business
To enter the distribution business, no special expertise are required. If an entrepreneur has the investment and knowledge of the market, he can easily enter this business. The employees distributing at the front end are usually provided and trained by the factories themselves. The criterion to enter this business varies from factory to factory which is responsible for providing the stock. Companies or factories are selling their products for years and know well the market conditions, their revenue streams and the ups and downs of the market. They are familiar with the quantity of their products being sold in the market and demand of the consumers. The product distribution standards for distributors are set according to their daily consumption, demand, sale and supply of products. As demand, sale and supply of every product is different, the requirements of starting this business also differ. The average requirement of a company for distributors are that they should approximately have space of 2000 square feet, 8 vehicles, XYZ amount of cash for the initial investment. The investment amount varies from product to product. When an entrepreneur has all of the above mentioned then he starts applying for the distribution license. Also, he has to see the market which product’s distributorship is available because companies define different regions and territories and do not use more than one distributor in a particular region. In the beginning, the investor has to find the products and areas to start the operation. Once the distribution license is acquired for one product then you can also include other products with the passage of time and experience.
Initial Investment, Revenue and Breakeven
The initial investment in this business depends on the product to be distributed and its monthly sale. For example, if Nestle MilkPak sale for 1 month in Rawalpindi region is Rs. 2 crores, then distribution of this product requires an initial investment of 2 crores plus the office space, vehicles, and manpower. The office space and vehicles can be obtained on rent. Similarly, if another product has a monthly sale of Rs. 2 million then the initial investment will be Rs. 2 million. It is advised to start the business from a product with lesser sale in the market and then slowly move on to bigger products with a large amount of monthly sale.
Revenue in this business is usually fixed. The distributor’s revenue is set by the factory. Factories define the upper and lower limit of the price of a product and then the distributors, wholesalers and retailers have to play within that limit. For instance, a factory has manufactured a product at a cost of Rs. 70. They want to sell that product in the market for Rs. 100. They will give the product to distributors at a discounted price of Rs. 94. The factory will also give extra Rs. 2 to the distributor for its expenses (office/godown/store, vehicles, employees, and utilities). These expenses are already calculated by the factory and they set a standard for these expenses so that a distributor cannot charge more from factory. The cost of that product for a distributor is Rs. 96. Now, he will sell the product to the retailers at Rs. 98 and finally the retailer will sell the product to the consumer at a printed price of Rs. 100. The distributor will earn 2% profit on its investment. This percentage can vary from product to product but usually in Pakistan it is approximately 2% or 2.5%. Similarly, the standard expenses also vary from region to region and product to product. Vehicles can be taken on rent and in Islamabad/Rawalpindi region the rent of one vehicle including driver and fuel is Rs. 750 per day. 8 vehicles will cost around Rs. 180,000 per month.
If a product requires Rs. 5 million of cash investment, 8 cars on rent and 1500 square feet of office space on rent then approximately Rs. 7 million will be needed to start the business easily which will give you monthly profit of around Rs. 1 lac. The return is not very high as it is only 2% but it is fixed. Chances of loss are none or very minor.
Business Procedure – Acquiring the Distributorship
If a financier has a certain amount of initial investment, he will first survey the market to know which product’s distribution is in the range of the investment. After this he will apply for the distribution license. Factories always give 2 sheets; one is the Sales Sheet which shows monthly sale of that product and other is Expense Sheet which shows the standard expenses to distribute that product. These expenses will be compensated later on.
It is mentioned in the agreement between the factory and distributor that if the sales of the product increase, distributor will have to purchase more units by injecting more cash giving more profit to the distributor. Similarly, if the price of a product is increased from Rs. 10 to Rs. 12 and 10,000 units are being sold every month, the investment will increase from Rs. 100,000 to Rs. 120,000. The additional 20,000 will have to be injected by the distributor which again will give more return to the distributor in any case.
Distributors purchase the stock from factory on cash while retailers purchase the stock from the distributor on 60% cash and 40% credit which is returned at the end of the month. If the distributor is supplying the stock to modern trade stores like Metro or other big outlets, it is allowed to sell the product at further discounted rates which will also be compensated by the factory to the distributor.
If the stock is not sold in the market, the distributor is not bound to purchase more stock and even after a certain time period that stock can be returned to the factory. These agreements terms vary from factory to factory. This is not the responsibility of the distributor to get daily orders from shopkeepers and market the product. This is the job of the area and territory sales managers of the companies. The job of the distributor is only to pick the stock from factory and send it to shops.
Distribution of Imported Products
You must have seen imported chocolates, milk, chips and other products in stores. These products have no fixed retail price and can be purchased from any country depending upon your contacts and knowledge of the shipment procedures. You can sell that product in the local market at your own price. The profit margins in this business are high but the distributor himself will have to market the product and create the demand. There could be more than one importer for a single product. In that case, you will have to keep the price competitive.