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 price of the product to the last mile distribution point - i.e. the person who sells to the final consumer. Lack of transparency around what retail shop owners actually pay for their supplies creates a number of problems for manufacturers, shop owners and consumers including;
stock-outs
inflated pricing
market inefficiency
For manufacturers, this can also mean leaving the door open to competition in a market 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, who then sells to a sub-distributor, who then sells 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 manufacturers warehouse, distributors can manipulate prices or inventory in various ways 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. Van sales attempt to control the price giving at least one option for the shop owner to buy at the recommended price. The idea being that if the shop knows that he or she can get the product at that price, they 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, the van salesmen can behave exactly like the distributor, inflating prices wherever possible and pocketing the difference. Furthermore, van sales have limited market reach and typically follow determined routes and sell to larger shops in order to generate more revenue quicker. Small shop owners typically are left out, and by aggregate the small shop owner is a bigger percentage of the overall market.
An added complication related to price distortion is stock outs. A manufacturer may be producing enough quantity to meet demand in the market, 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 the higher price. For the manufacturer, revenue and sales 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 all of a sudden becomes priced at a premium, where it has to compete with actual premium products and then eventually loses 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. There is a tremendous amount of value to be unlocked in informal economic activity by increasing transparency around transactions so that markets can adjust accordingly.