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How to calculate Return on investment (ROI) of distributor in FMCG ?

Updated: Oct 29, 2022

Updated on: September 2022

Spoiler Alert: It is a comprehensive article on distributor ROI. You need to sit down and read it thoroughly.


Companies want their products to be available everywhere, in every city, town, village, and street.

But companies can’t scale up themselves, as it takes a lot of time and money.

That’s why most companies operate using channel partners (Distributors) by giving them a margin on their total sales value.


After you become a sales manager, you will face 2 kinds of distributors, happy type :) and sad type :(


It is the sad type which often questions you about his/her returns by saying:

“Sir, kuch kamai hi nai aapke products mein. ROI set nai horaha” (“Sir, I am hardly earning any profits from your company’s distribution. My ROI is very low”).

As a smart manager, you need to evaluate their business using ROI calculation.

Calculation of ROI is always an eye-opener for distributors, it helps him/her to understand what are the improvement areas which can increase his/her ROI.

Usually, the company ensures monthly ROI between 8-15 % depending upon the risk and viability.

If ROI is low, distributors will quit and if ROI is high, distributors will pose a problem of undercutting in the market.


In case this is your first sales article, then it is advisable to check 18 most important sales concept overviews here. Also, a complete guide for Sales fundamentals can be checked here.


Basic equation of ROI is simple: Return / Investment



Return = Earning – Expense

Earning = Margin earned from selling (If a company gives 5% margin, then 100000 sales = 5000 earning)

Expense = Direct + Indirect expenses


Let us understand expense in more details:


Direct Expenses: Expenses kept exclusive for your company. E.g. if a distributor hired an executive just for your company, it is called a direct expense.


Indirect Expenses: These are shared expenses. E.g. If a distributor bought a van which he uses for 2 companies, then the cost of fuel will be shared between the companies. (More on this in an example below)


Note: Cost also includes renting and interest on loan taken for business.


Let us understand investment in more details:


A distributor has incurred some costs to run his business along with utility costs.

E.g.

  1. The Average stock in the warehouse (Mean or weekly average can be taken for accuracy).

  2. Outstanding dues from the market.

  3. Pending claims from the company.

  4. Security deposit (Companies that provide interest on SD can exclude these from the calculation)


Let us calculate an example for an FMCG company “SOAPMAN”:


Star Sales Corporation is a renowned distributor in Ahmedabad that deals with 5 companies. Owner Mr. Dhansukh Shah is very proud of his association with 5 established companies. His average monthly business is 1 Cr, with Soapman contributing 20 Lacs. Mr. Shah has employed 5 salesmen at 15000/- each and 2 back-office clerks at 12000/- each. He is paying 50,000/- rent for warehouse and other utility costs around 8,000/-. Calculate Star Sales corporation’s ROI, if “SOAPMAN” gives a margin of 10%.


(Some companies provide fuel credit, but here for better understanding let’s assume they aren’t giving any fuel credit and fuel cost is 2% of sales).


Other Data:

  • The Margin of Soapman = 10%

  • Average stock of Soapman at warehouse or Days of stock kept at the warehouse = 10 Lacs

  • Pending claim/incentive from Sopaman = 10,000 /-

  • Outstanding (pending payment from retailers) from market = 5,00,000 /-


Let’s do the math:


Earning = 10% of monthly business

= 10% of 20 Lacs

= 2,00,000

(Note: 20 Lacs = 20% of 1 Cr total business of Star Sales given in the problem statement. Star sales has more than one company's work that's why the resources will be distributed among them proportionally)


Expense = Direct + Indirect

= 20% of ( (5x15000) + (2x12000) + 8000 + 50000 ) + Fuel Cost

= 31400 + Fuel Cost

= 41400 + 40000 (Assume 2% for fuel cost)

= 71400


Investment = Average Stock + Pending Claim + Market outstanding

= 10,00,000 + 10,000 + 5,00,000

=15,10,000


ROI = (Earning -Expenses)/Investment

= (200000-71400)/1510000

= 8.5 %


So, annually Star Sales Corporation earns = 12 months x 8.5 = 102% Return on investment


Few factors that need attention before giving a verdict on ROI:


1. Sunk cost (Loss) on retailer bankruptcy (If retailer goes bust, it will severely impact ROI)

2. Outstanding (pending payment from retailers) from Market trend (If it is increasing constantly, it is a very bad sign)

3. Stock loss due to expiry or damage in the warehouse (It is considered as added cost)

4. Legal cost due to govt. rules and penalty during transportation

5. Depreciation of utility such as Van, Computer, etc.

6. Credit days in the market plays a pivotal role. Few companies give goods on credit to distributor which distributor pass on as per market norms. The credit days provided by company minus credit days provided by distributor in market changes the average stock value.


Comment for any query, we will get back to you!


In case this is your first sales article, then it is advisable to check 18 most important sales concept overviews here. Also, a complete guide for Sales fundamentals can be checked here.



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9,470 views2 comments

2 Comments


Guest
Jun 25, 2021

How do you estimate the market outstanding as majority Distributors inflate the value and don't give a clear picture. What's the trick to get a fair estimate of outstanding credit

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Unknown member
Jun 25, 2021
Replying to

You are absolutely right that distributors can inflate marketing outstanding. Here come two key factors:

1) Your Industry's practice: If you are operating in an industry where goods are sold on cash only, then it is easy to assume that there won't be any major outstanding in the market. E.g. Telecom (Airtel,Vodafone, Jio) operates on cash, so market outstanding is usually near Zero in such industry. Now if you operate in Paints which runs mostly on credit, then it will have higher market outstanding.

Companies do give credit as per industry practice to off-set this loss of distributors.


2) Your sales executive in market: As a sales executive, he will be aware about the key outstanding. So, it won't be…

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