Here’s a question for you. How did that cellphone you are dabbling with your hands reach you? Your answer might be I bought it from the store down the road. There are bunch of stores like Sangeetha, Univercell, Hotspot and Next which sell cellphones. But by the time Nokia sends out a shipment to the time it reaches you, a lot goes on in the middle. The technical name for this ‘middle’ is channel. The channel is a multi-billion dollar industry. There are great attempts to know what goes on in this channel. This is one of them.
A channel starts when a manufacturer like Nokia or Samsung starts shipping their latest mobile phone. A product is deemed to be relieved from the channel when it receives the ultimate customer which is you. It is important to have the knowledge of what goes on in the channel to anyone involved in it.
Samsung alone cannot deal with the distribution of its mobile phones, tablets and computers. It signs up with few other companies in each region, country or city. These first contact points are called distributors. There could be national distributors like few bigger ones for the whole country. And there could be region wise distributors like distributors for south region and north region. And there could be distributors at the city level – a distributor who is solely doing it in a city like Bangalore.
The big distributors or the national distributors can’t sell a shipment by themselves either. They then sign up with multiple city and region based distributors. These are called tier 2 distributors. This distribution network can go on to multiple levels. The next level and the last level is the retailers. Retailers get it from either local distributors or the national distributors. Croma, Reliance Digital are few of the big ticket retailers. If you look at it there are three levels involved. First level is the distributor, second is the tier-2 distributors or resellers and third is the retailers. Tier-2 and the reseller level can go on to umpteen levels but for all practical purposes it is treated as one layer.
Another way to look at it this is in terms of shipments. A big distributor can stomach a shipment of million devices. The next level distributor will not have the audacity to order a million but would settle for a few hundred thousand devices. Same is the case with resellers and retailers.
Distributors in India
Redington is one of the major national distributors in India. Ingram Micro, Neoteric, Rashi Peripherals, Savex, Supertron, Brightpoint, HCL Infosystems and Salora are some of the major national distributors in India. Redington for example distributes brands from 75 different manufacturers. It is the distributor for Dell and Acer India when it comes to computers.
Logitech which sells keyboards and mice have four distributors in India – Ingram Micro, Neoteric, Rashi and Savex. Sony Ericsson has Salora and Ingram Micro as its distributors. While many manufactures deal with less than five distributors, LG in India has 13 distributors to channelize its products. Other brands like G’Five, Lava and Maxx follow a slightly different approach. Everyone and anyone could be their distributor and they pretty much reach out to whoever can sell their device. This is one of the reasons for their phenomenal success.
Rumor has it that Micromax has started out as a distributor for Nokia in India. Now it is one of the companies in emerging markets which is challenging Nokia’s dominance. Micromax has 60 national and state level distributors who in turn sell it to 8000 local distributors. Majority of Micromax’s business is in India. If it plans to foray into other markets, like it did in UAE, it will be looking for distributors out there. Because Micromax cannot traverse the complex local distribution channels. Supertron which is a distributor for Seagate has started its own mobile phone brand and selling them.
It could so happen that the national distributors are bigger than the manufacturer itself. A national distributor for a particular manufacturer could become a tier-2 distributor for another manufacturer. Retail outlets like Best Buy in the US are so big that they could be the distributors themselves. This is pretty much how the channel works.
Price drops, promotions and more
In a previous post of mine, I have discussed on how units shipped != units sold. So what happens for the units that aren’t sold? You often see the prices on Flipkart are lower than the MRP. Nokia is notorious for dropping the prices on their popular models. How does this happen? High tech products have a shelf life. They are expensive bananas. If you are not selling in three months then you might never sell it as the product quickly becomes obsolete as there is much better product waiting in the wings. Distributors and local distributors will lose money if the units aren’t sold. Would they take such a risk?
The distributors, tier-2 distributors and retailers have to be protected from these price drops. In the agreements there will be price drop protection clauses with strict time period agreements. Then there are offers of buying a product and getting the other product for half the price or free. This again is driven by the manufacturers or the national distributors. Manufacturers will often associate incentives in the form of credit breaks for channel partners if they reach some milestone – like selling a million products. This would immediately change the priorities for the retailers as they do all they can to sell those products. Pushing the product to the top of the shelf where it is easily seen, bringing it to the cash counter or a big display at the entrance are the most usual things they would do.
When you go to buy your next mobile phone, computer, tablet or a wireless mouse, this is what might have happened in several different flavors.