Reshaping the future of consumer goods distribution

Local distributors of consumer goods must adapt to the shifting landscape and focus on value creation to thrive in a changing sector, write Makram Debbas, Sukalp Tipre and Matteo Amici from strategic consulting firm Strategy&.

As the consumer goods market in the Middle East matures, the traditional advantages enjoyed by local distributors are diminishing. The Middle East is an increasingly attractive market, and brand principals are relying less on local distributors as a route to market. Instead, companies are seeking to increase their footprint in the region to get closer to their end customers.

Although this represents a threat, established distributors in the region can still compete by making concerted efforts to improve the quality and range of services they offer.

Shifting landscape

In the past, many brand principals had a limited presence in the Middle East and relied heavily on local distributors with large customer bases and local market knowledge. According to a report by PwC, online retail still accounts for a smaller share of the market in the Middle East, at an estimated 2% to 3% compared with 10% to 15% in developed western economies – yet that share is growing quickly.

Today, the landscape for distributors is changing for several reasons.

The retail market in the Middle East is maturing with a shift to modern retail formats, demanding enhanced capabilities in joint business planning and trade marketing. Simultaneously, brand principals have increased their local presence with sales and distribution capabilities while also placing greater demands on the distributors, expecting a higher degree of coordination, transparency, and serviceability.

Consequently, distributors are losing their bargaining power whilst seeing volumes and margins decrease.

Focus on value creation

Despite the shifting landscape, distributors can still maintain their presence as a critical link in the value chain for consumer goods, provided they develop a unique value proposition that considers four factors.

To begin, distributors must excel when it comes to operational and commercial execution. These companies must build strong offerings in logistics and warehousing. Robust inventory management, reliable forecasting through artificial intelligence, and strong fulfilment capabilities are necessary to ensure on-shelf product availability.

Furthermore, distributors need to develop dedicated teams with specialised expertise in channel and product categories, backed by strong merchandising capabilities.

Systems and processes – such as sales and operations planning – need to be integrated with those of the brand principals and supported by comprehensive back-end operations.

Secondly, distributors must build unrivalled local expertise. These local distributors must develop a deep understanding of local market dynamics and consumer behaviour to proactively identify opportunities. Moreover, they must seek to strengthen local networks and relationships, develop a qualified on-the-ground salesforce, and offer analytical market insights and data management capabilities.

Distributors must seek to excel in their home markets first, before thinking about expanding into other regions.

Another factor that distributors must consider is curating the right portfolio mix and building category specialisation.

To build scale profitably, distributors should create an optimal portfolio that minimises complexity and leverages synergies across product categories and related areas. Distributors should build a portfolio of regional and international brands to ensure a balance between volume and profitability. They could also consider specialising in niche products or categories to improve overall portfolio economics.

Finally, distributors should design and execute a differentiated channel strategy. Wider coverage across channels builds scale, while channel specialisation ensures a competitive advantage for the distributors.

Middle Eastern distributors should balance these divergent priorities, each of which holds its requirements. For example, modern trade channels require strong key account management capabilities and a high degree of serviceability.

Conversely, traditional trade calls for an optimised route to market, a focused portfolio, and stock-keeping unit selection, along with strong on-the-ground execution.

Change is constant

Although the four measures outlined above help to build competitive advantage, they are not sufficient on their own.

The pace of change is accelerating, and distributors must expect to develop their operations over time to meet the ongoing needs of brand principals in the region. Distributors also require a win-win mindset with brand principals that allows for coordinated strategic and operational planning, transparency in operating costs, and integrated processes and systems.

Moreover, strong and practical experience in navigating local market laws and regulations is essential to local distributor success in the Middle East. With the emergence and rapid development of artificial intelligence, data analytics and data management capabilities must be developed to gain extensive market and consumer insights.

Importantly, the ability to recruit, retain and upskill talent required to operate and compete in changing market conditions and complexity remains essential in dealing with the rapid change in the industry

The future of consumer goods distribution

As the consumer market matures in the Middle East, new opportunities arise for local distributors to boost revenue and margins. However, unlike in the past, local players cannot claim this market by default.

Instead, distributors must compete for market share by creating value for brand principals. This in turn will help them to move beyond transactional relationships to create value in a competitive sector that is set for change.