Distribution, promotions, private label, and innovation
How brands reach small shops, how to test whether a promotion pays, how private label competes, and how to judge a new product.
Industry brief, with a one-minute summary: Consumer goods (FMCG)Key takeaways
- A consumer goods brand grows in two ways: more stores stock it, or each store sells more of it.
- Modern trade means organised chains: supermarkets, hypermarkets, convenience chains, and online grocers.
- Private label (own brand) products are made for a retailer and sold under the retailer's name.
Key idea
A consumer goods brand grows in two ways: more stores stock it, or each store sells more of it. Every promotion, new product, and distribution push should be judged on the extra profit it creates, not on the extra volume.
Route to market: modern trade and general trade
Modern trade means organised chains: supermarkets, hypermarkets, convenience chains, and online grocers. A few large buyers negotiate hard, and the brand serves them from its own warehouses. General trade means small independent shops. In India these are kirana stores, in East Africa dukas, in South Africa spaza shops, and in Latin America tiendas. In many emerging markets general trade still sells most groceries. A brand reaches them through distributors, who buy stock, hold it locally, and send salespeople and vans to each shop on a fixed route, often weekly. Large Indian brand owners such as Hindustan Unilever serve millions of shops this way, part directly and part through wholesalers. Small packs (sachets) at very low prices help shoppers who buy daily with little cash.
Worked case
Where the shopper's rupee goes in general trade
The prompt
An illustrative shampoo pack in India has a maximum retail price (MRP, the legal ceiling printed on the pack, including tax) of INR 100. The goods and services tax (GST) on this product is 5 percent, included in the MRP. The shop keeps INR 12 and the distributor keeps INR 5. How much does the brand owner receive?
The structure
- Brand receipt = MRP minus tax minus retailer margin minus distributor margin
- Tax inside the MRP = MRP minus MRP / 1.05
- Channel margins are shown in rupees per pack
Working it through
1. Tax inside the price
The MRP includes 5 percent GST on the pre-tax price.
GST per pack (INR):100 - 100 ÷ 1.05 = 4.762. Brand receipt
Pre-tax price minus shop and distributor margins.
Brand receipt per pack (INR):100 ÷ 1.05 - 12 - 5 = 78.24
The recommendation
The brand owner receives about INR 78.24 of each INR 100 pack, so it should manage its margins on that figure, not on the MRP. This is because GST takes about INR 4.76 and the shop and distributor keep INR 12 and INR 5. As a result, a change in trade margins or tax moves the brand's receipt more than it seems. The risk is that when tax falls, shoppers and the government expect the saving to be passed on through a lower MRP. As a next step, track what each channel partner keeps per pack.
Worked case
Is wider distribution in Nigeria worth it?
The prompt
An illustrative biscuit brand in Nigeria is stocked in 40,000 outlets, which each sell 30 packs a week. The brand receives NGN 150 per pack and earns a 40 percent gross margin. A distributor can add 20,000 smaller outlets that would each sell 20 packs a week, but serving them adds NGN 30 of cost per pack. What revenue does the brand make today, and what weekly contribution would the new outlets add?
The structure
- Revenue = outlets x rate of sale x net price per pack
- Today's outlets
- New outlets: smaller rate of sale and extra cost to serve
Working it through
1. Revenue today
40,000 outlets x 30 packs x NGN 150, in NGN millions per week.
Weekly revenue today (NGN millions):40,000 × 30 × 150 ÷ 1,000,000 = 1802. Contribution per new pack
Gross margin of 40 percent of NGN 150 is NGN 60, minus NGN 30 cost to serve.
Contribution per new pack (NGN):150 × 0.4 - 30 = 303. Weekly contribution added
20,000 outlets x 20 packs x NGN 30.
Added weekly contribution (NGN millions):20,000 × 20 × 30 ÷ 1,000,000 = 12
The recommendation
Yes, the brand should add the 20,000 new outlets if the distributor's cost estimate holds, because they add about NGN 12 million of contribution a week on top of NGN 180 million of weekly revenue today. First, each new outlet sells only 20 packs a week, but each pack still earns NGN 30 after the extra cost. Second, this means wider distribution pays, although gains shrink in more remote shops. The risk is that serving small outlets costs more than NGN 30 per pack. As a next step, pilot with part of the new outlets and track sales and cost per pack.
Promotions: does the extra volume pay?
Worked case
A 20 percent price promotion in the UK
The prompt
An illustrative drinks brand in the UK sells 1,000 units a week to a grocer at a net price of GBP 10, with variable cost of GBP 6 per unit. The grocer proposes a promotion: the brand funds a price cut so its net price falls to GBP 8, and volume is expected to rise to 1,400 units. Does the brand gain, and what volume would it need to break even?
The structure
- Compare weekly contribution with and without the promotion
- Contribution = units x (net price minus variable cost)
- Break-even volume = old contribution / new unit margin
Working it through
1. Without promotion
1,000 units at GBP 4 each.
Base contribution (GBP):1,000 × (10 - 6) = 4,0002. With promotion
1,400 units at GBP 2 each.
Promotion contribution (GBP):1,400 × (8 - 6) = 2,8003. Difference
Promotion minus base.
Change in contribution (GBP):2,800 - 4,000 = -1,2004. Break-even volume
Units needed at GBP 2 to earn GBP 4,000.
Break-even units:4,000 ÷ (8 - 6) = 2,000
The recommendation
The brand should decline the promotion as proposed, because it loses GBP 1,200 a week: contribution falls from GBP 4,000 to GBP 2,800. First, cutting the net price from GBP 10 to GBP 8 halves the margin per unit from GBP 4 to GBP 2. Second, this means volume must double to 2,000 units to break even, against the 1,400 expected. The risk is losing shelf space or share if a competitor accepts the promotion. As a next step, propose a smaller price cut and test it in a few stores.
Private label and innovation
Private label (own brand) products are made for a retailer and sold under the retailer's name. They are usually priced below the leading brand but can give the retailer a higher margin, because there is no brand advertising to pay for. Brands answer by innovating (new flavours, formats, and benefits the retailer cannot copy quickly), by sharpening entry prices, and sometimes by making private label themselves to fill their factories. New products fail often. To judge one, estimate trial (how many households try it), repeat (how many buy again), and cannibalization (how much it takes from the company's own products). A launch that only moves shoppers from an old product to a new one adds cost without adding profit.
A personal care company in Indonesia has gross sales of IDR 2,000 billion and trade spend of IDR 440 billion. What is trade spend as a percent of gross sales?
A grocer in Spain sells a branded detergent at EUR 5.00 (cost EUR 4.00) and its own brand at EUR 3.75 (cost EUR 2.50). What is the grocer's gross margin on its own brand, in percent, to one decimal place?
A brand in Mexico earns MXN 20 per unit on 5,000 units a week. A promotion cuts its per-unit margin to MXN 12. How many units a week must it sell on promotion to earn the same total contribution?
What is weighted distribution?
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and frameworks
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