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FMCG Undercutting / Rate Issues: Biggest Bane of Sales

Updated: Feb 4

After joining a sales team, the most challenging part is to fight rate issues in the market.

You will find few Gyaani (Omniscient) retailers

“Sirji, isse sasta to pass wale town ka Mohan Traders de raha hey” (Sir, nearby town’s Mohan Traders is giving me for a cheaper rate).

As a newbie (Management Trainee), you may wonder how is he able tp give it at a lower rate than the company’s prescribed Dealer Price?


This is where the daldal (Swampland) undercutting plays its devilry.


(In case this is your first sales article, then it is advisable to check 18 most important sales concept overview here)


What is Undercutting?


It is a phenomenon when a distributor or a wholesaler sells product at lower rate than what is prescribed by company.


E.g.

If company gives Bisleri 1 Lt. bottle to distributor at 15 Rs. and prescribed him to sell it at 17 Rs. which retailer sells to customer at 20 Rs. ( Isn't it such a sweet trade )


Now if someone starts selling Bisleri bottles at 16 Rs. to retailers, that is what we call undercutting a product means.


Undercut Rate = Dealer Landing Price – X

X = Amount which undercutter let go to sell huge volume


Comparison of Normal Vs. Undercutting scenario
Concept of Undercutting

Why is undercutting not recommended?


Undercutting hurts your company’s image in market as a retailer can no more trust the salesman regarding the right price.

They may start buying products from such undercutter, hence hurting your sales

(Why your sales? Because, an undercutter may not buy it from you. More on it later).

If access undercutting leads to lower rate offered to consumer, retailers may stock your competition brand and your counter share gets affected.


Let us solve the unspoken truth about the world of sales systematically in this article.


Before we dig deep in the mathematics of rate, let us first understand some basic terms of sales.


1. MRP: It is the price printed on your product and retailers are expected to sell the product to consumer at this rate.


2. Dealer Price: Ranging from FMCG to FMCD, this price is 5 to 30% lower than MRP. It is the price at which company ask distributors to sell the product to retailers.


3. Distributor Price: Rate at which company sells the product to distributors which is 5-15% lower than prescribed Dealer price. This % is what we call distributor margin.


4. Market Operating rate: It is the actual rate offered to consumers at retail counter. Many times, it is lower than MRP. Usually famous shops in our locality tend to quote prices lower than MRP to instill consumer loyalty. MOP changes from shop to shop. FMCG products such as biscuits, oil, soap, etc. which are directly bought by consumers have less issue with MOP compare to FMCD products such as Paint, Cement, Steel, Adhesive, etc. which are bought by contractors.


MRP > MOP > Dealer Price > Distributor Price



Example 1:

Simple Undercutting by Distributor by virtue of overlapping areas.


There are two distributors Amit and Bikram, Amit serves areas 1,2,3,4 and Bikram serves areas 5,6,7,8.

If both these distributors keep serving their own market, then there will be no undercutting but what if Amit start dumping Cadbury Silk for 2% extra discount in area 5 which is a border area for A & B, it will impact the revenue of the distributor Bikram.


Above undercutting is external undercutting, also known as Undercutting by Infiltration.

Distributors do play such dirty game especially when they have multiple brands distribution with different area allocation. See the table below


Overlapping breeds greed for undercutting
Overlapping breeds greed for undercutting

As we can see from the above table, distributor Amit already sells a different brand in area 5 and he must be having a regular beat in this area.

He obviously won’t start formal distribution in your area 5 but will secure 2-3 big wholesaler which does batting for him. In return he will reduce his margin for the sake for higher volume.


These types of undercutting can be stopped by informing the ASM or RM of distributor Amit which intervene his actions. Smart ASM will have a proof (Bill or challan or batch number of the carton which can be traced) before starting an interdepartmental bout.


Example 2:

Undercutting by wholesalers within the area


Trade schemes are the necessary evil which leads to this type of undercutting.

(Complete article on Trade Scheme Here)

Trade schemes in most companies favour big dealer. Trade schemes are given to improve sales and defend market share against competition.

Also, it is useful in slow months as well in particularly high target months. It is like a powerplay in T20 which helps team to score more run.

(It is actually more relatable to doping in Olympics, just kidding)


Suppose you are selling biscuits and current month is a high target month for your company.

Scheme is below:

  1. Buy >10000 Rs. – 2% discount

  2. Buy >40000 Rs. – 3.5% discount

  3. Buy >100000 Rs. – 5% discount

Now, a deep pocket wholesaler whose actual consumption is just around Rs. 40000, may stock it for the next 2 months and bill stock of Rs. 120000.


What he will do?

  • He will start selling the biscuit stocks next month when the scheme is low.

(Company schemes changes month on month and few selected months have high schemes compare to the rest)


Where will he sell?

  • He will obviously start selling it in your market at lower rate than yours and retailers will buy from him because of lower rate, he may give discount of 2%-3% to retailers and quickly cash in on his investment.


Why it is not a good practice?

  • Firstly it will impact your current month’s sales, second it will reduce your hold on your retailers because you are no more the lowest rate giver in the market and third your distribution infrastructure diminishes which won’t be appreciated by your boss.

  • Also, it creates an environment of distrust in market as there are more than one rate in the market and your existing retailers also question your company’s pricing policy.

  • They may feel, they are being offered higher rate, this makes it easy for the competition to kick in.


If you saw this coming, then why did you sell so many biscuits to this big bad dealer?

  • In sales, everything depends on your numbers and in months when schemes are high, pressure to do sales is higher. Hence most salesman concede to such catch-22 situation and ends up billing big wholesalers knowing it will sting them back.


Is there any bright side to this undercutting?

  • Yes, there is a positive side and many sales veteran consider undercutting as a dark knight.

  • Big wholesalers have big influence in market. If you don’t give them stocks as asked, trust me there are challenger/Local companies who are dying to bill him.

  • He will use his influence to counter competition in market, he will bill to certain dealer which doesn’t prefer to buy from company, also he may have contacts in areas not under your jurisdiction and this brings you extra sales. ( LOL, It's just an occupational Hazard)

  • Few wholesalers run their parallel distribution amongst their trusted retailers who exclusively buy from them. So, not everything about Big Bad Dealers are bad.


Example 3:

Undercutting by Rural Urban policy divide


Today, every other company wants to increase their presence in rural India.

Why?

Disposable income of rural India is accelerating, and everyone want a piece of this pie.


Two things that favor rural distribution:

1. Special focus = Better company schemes

2. Wider distribution = Better fuel credit and transport allowances


Two things that hinder rural distribution:

1. Habit Formation: Traditionally rural retailers visit urban towns to buy products in bulk. They have long term relationship with urban wholesalers which is not easy to replace by new rural distribution channels.

2. Investment Capacity: Urban revenue is but obvious very high compare to rural, hence distributors and wholesalers are deep pocketed and has high capacity of investment unlike their newly formed rural distributors.


Now, let us understand how each channel undercut:


1. Undercutting by rural super distributor:


  • As we mentioned in above favors, rural channel sometime gets better schemes and get more money for transportation.

  • If there is a super distributor sitting in an urban city and servicing rural sub-districts. He may cut bill to some non-existent retailer of an obscure village and supply it in an urban markets, he will get more scheme, extra fuel credits and hence better ability to sell at a cheaper rate then his urban counterparts.

  • If he is smart, he may have created a parallel firm with a different name and GST, hence even if someone found his bill in urban market, they may never be able to detect the perpetrator.

  • As we are salesman not CID, we may not have resource and time to start a full-fledged investigation.


2. Undercutting by Urban Wholesalers:


  • As we mentioned two things that favor urban channel, it is easy for them to keep supplying like they always used to do in rural market.

  • They can simply tell that retailer came to their shop and bought it in person if questioned by a company person.

  • Also, for a wholesaler, we may not have any authority to restrict him. People who are in this business know every form of legal and illegal means that it is useless to counter with force. But there is a way to counter it.


What is the solution for Type 1 and Type 2 undercutting?


  • Provide faster and regular door-step service

  • Solve problems of retailers regarding damage stock

  • Enroll them in loyalty programs and forge a strong relationship based on trust and transparency.

This method may seem slow but is highly effective and permanent.

Best of Luck countering Undercutting.



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Disclaimer: The opinions expressed in this article are the author's own & do not reflect the view of the author's employer.

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