It is essential to have effective and efficient Go To Market (GTM) models in emerging markets, since to a large extent, the profitability of the company, the adequate provision of services, and the effectiveness in reaching target consumers will depend on it.
In developed countries, companies can direct their efforts and resources to modern, concentrated, organized, centralized retail with high levels of standardization (known as a modern or organized channel). This allows companies to establish structurally simple GTM models with little need for variants to cover a high percentage of the market.
However, the emerging countries, despite the fact that they tend towards a slow but inevitable change, continue to be dominated by what is known as traditional trade. Today in Latin America, for example, depending on the country, the sales of consumer companies through this channel can vary between 30% and 70% (even higher for certain categories) of total sales. Although we have grouped everything into a large channel, the reality is that it can be very complex from the point of view of the diversity of existing formats. For some of our clients, we have generated classifications with more than 30 types of business between those of immediate consumption (on-premise), those of subsequent consumption (off-premise), and those that present both types of consumption.
It is a very fragmented channel and each of these formats has very particular and dissimilar characteristics.
The Objectives of Channel Management
Despite the differences described above between developed and emerging countries in relation to the characteristics of their retailers, the objectives of the companies are the same: profitably maximize business coverage and product availability to target consumers, ensure retailers loyal influencing shoppers and having the possibility of implementing commercial initiatives of merchandising, exhibition and promotion, among others.
To achieve these goals in emerging markets, several and in some cases complex GTM systems are required. The level of complexity will vary depending on several factors: the breadth of the portfolio of categories and brands and the synergies that exist between them, the level of fragmentation of the types of business where they are marketed, geographical characteristics (logistical aspects), the level of development of the existing distribution channels (distributors, wholesalers, cash & carry, stockists, etc.), levels of coverage and control required and last but not least, the competitive position of the company in the different categories where it competes.
The Traditional Channel
In this channel, consumer companies must work with a large number of small independent stores. These customers have limited working capital to purchase goods, limited space for product storage and display, and are expensive to serve. The only practical way to reach many of them is through a fragmented network of agents, distributors of various kinds, and wholesalers. This complex distribution landscape reduces the margins of all channel partners and reduces the upward flow of market information and company visibility.
Traditional distributors and wholesalers can also be difficult to manage. They typically focus on higher volume categories and brands rather than market development. In most cases they tend to be passive order takers rather than brand advocates and developers. It tends to work well for Active brands in terms of distribution (strong brands with medium or high shares within their category), but very ineffective for Passive brands.
Let's analyze the channel through a real case
An important client of ours in Latin America that has maintained sustained growth over the last few years decided to comprehensively evaluate its GTM model. This company, through acquisitions and own developments, has multiplied by four the number of categories where it competes and similar numbers for the total references (SKUs) it sells. The number of direct customers served by the company has doubled (although not its sales force). At the same time, it has seen how, as the intensity of the fight in the channel increases, it becomes more difficult every day to ensure availability and space for its broad portfolio of brands. Many of the new brands have failed to establish themselves consistently in the channel and are already starting to divest from some of the new categories.
Over the years, the company has developed a solid and sophisticated model of direct sales to customers in the modern channel and those with the highest volume in the traditional channel. However, in the evaluation we carried out we detected some problems:
The large number of businesses visited daily by the FDV limits its possibilities of doing an adequate job, especially for medium or low turnover categories/brands (passive brands in terms of distribution).
These businesses served directly are the same customers that were served since the establishment of the current GTM model. However, other types of customer segments relevant to the new categories have not been incorporated. In these new categories, the company does not have strong leadership positions as in its traditional categories
The cost of serving is very high for various customer segments (negative profitability).
Limited understanding of the organization of all these problems due to an inadequate Classification and Customer Segmentation Model (see my post related to this point: Why is an adequate Segmentation of POS essential?).
The second level of clients with the highest volume of the traditional channel is served by a network of distributors with territorial exclusivities. These distributors were also conceived and contracted based on the original categories and brands of the company. They have been "forced" to market the new categories and/or brands over the years. In the diagnosis that we carried out, problems similar to those mentioned above were detected with the direct FDV of the company.
For example, one of the new categories that is considered strategic by the organization has obtained results far below expectations. The fundamental reason is that this category requires coverage and availability in segments of shoppers (adolescents) and types of businesses (kiosks, convenience stores and immediate consumption businesses) where the current network of distributors does not reach with sufficient strength.
The rest of the market (30% of sales volume) is served through the network of local wholesalers.
The new Go to Market models
Once these weaknesses were understood and quantified, we developed several GTM models. We had to initially design a new robust customer classification and segmentation. The direct sales model was maintained through vendors only for the largest/strategic customers of the channel, reducing the number of daily customers; a new teleshopping model (possibly replaced or supplemented by e-commerce in the future) was created for average customers, where previous relevant service levels could be maintained but with a lower cost of serving; a third level of customers with negative profitability was transferred to the distributor network.
On the other hand, we created new models of distributors by Category/Channel/Territory that are much more focused and specialized. For two of the new strategic categories, for example, a network of small exclusive distributors was created for the convenience channel and kiosks where the distributor was required to have the company's brands at least 50% of total sales.
After about three years of having implemented these new models, we can summarize some of the main achievements: 1. Large and medium direct customers are and feel better served (customer satisfaction study) with a much more focused FDV. 2. Increased commercial profitability by transferring customers with low sales volume (drop size) to distributors. 3. Significant improvements in availability, visibility, sales volume and market share in the new categories and strategic brands with higher added value. 4. Effective entry into new business formats. 5. Some of these initiatives have been considered as internal "best practices" and have been exported by the company to other markets in the region.
Some conclusions
This case exemplifies the complexity of the traditional channel and how as the categories marketed increase, the level of trade fragmentation and the intensity and competitive position (total and by category), among others, will mean the development of alternative models that ensure the desired position in the different target customer segments.
Successful models of the past are no guarantee of success in the present. Many companies organically develop very effective GTM models in certain customer segments, but as new players grow or enter and intensify the struggle in the sector, in-depth reviews of the model are required to ensure that they continue to be valid and profitable.
Any adjustment or development of new GTM models will additionally entail reviews of internal organizational structures (both sales and commercial logistics and trade marketing and merchandising support), design of new management and operational process models, possible new metrics of management control (especially associated with the cost of serving) and a commercial team with the knowledge and skills to manage this new complexity.
And by the way, the modern channel in emerging markets also has some peculiarities that differentiate it from that of developed markets. But we will see that in a future installment.