The Small Format Mom&Pop (changarros) is the jewel of the Crown where all CPG company wants to be present but very few have succeeded pocas lo han conseguido.
One of the things I enjoy the most while working as Consultant is riding along with any of my customer’s DSD Salesrep every time I can… I always learn new things! A couple of weeks ago I had a conversation with a Front-Line Manager about sales force automation for DSD. This person has great experience in the field and was in the middle of an implementation of a DSD solution made by of one of the largest Software companies in the World. She was complaining that it was very “rigid”, and that a lot of standard processes would have to be “customized”. But then, she used a sentence that caught my attention and that I want to reproduce here, with her permission:
“When you ask in Western Europe or in USA: How much is 2+2 in DSD? And the obvious answer is ‘4’. However, when you ask in Mexican DSD language, how much is 2+2? And the answer could be ‘how much you want it to be?’, or ‘how do you want me to calculate the 4 for you?’ It should not be like that, but unfortunately it is!”
In my last article I explained the first 10 reasons that Mexican and Latin American do different in Direct Store Delivery Channel compared to other regions in the World. In this article, I wanted to complement the list with 10 more reasons on my take about this exciting Channel. As in the previous article, they are not in any order in particular and are analyzed from a generic view.
11) Mom & Pop Changarros is the extension of the kitchen of consumer. I have previously mentioned (see item 5 of first part of this list) that most of these changarros are located in low – income economic areas where consumer rarely do their grocery shopping in large surfaces on a weekly basis as they do not have enough cash flow to do so. Instead they only buy what they are needing on a daily basis turning into multiple visits to changarros per day, with small purchases each time. Why would you buy grocery for dinner and store it in your kitchen when you can get it the same day just a few minutes before you will use it? You would be surprised to see that some monthly expenses by home in low-income areas in Mom & Pops store are significantly high in categories like soft drinks, Snacks, Bread and certain types of perishables.
12) Variety of categories, SKUs, and vendors Derived from item 11 of this list, Mom & Pops stores have to sustain a tremendous variety of categories in stock. Inventory should cover the demand of all of their captive customer’s need, no matter how strange they could sound (and any type of retailer pursues the exact same thing: they want happy, returning and recurring customers that can be only attained by providing them what they need). This variety of categories actually mean an outstanding number of SKUs (4,000+) handled by significant number of vendors (80+). Some of the products you could be surprised to see are: clotheslines, needles, syringes, school supplies and even some stores have on-premise entertainment like slot machines.
13) Minimum Unit of sale. Given the dynamic of customers only buying what they are needing on a daily basis, the units of sale that consumer needs to buy should be in literally ready-to-consumption size and not for storing. For example, consumers go to Changarros to buy a single dose of an OTC Medicine(literally a single pill), a single cigarette, a single diaper, few grams of powdered soap, or $20 pesos-equivalent of pet food which was sold in 20 kilo bags from manufacturer. This actually mean that Store Owner has to fractionate packaging of some products when they are in larger presentations.
14) Priority Vendors. Given the variety of vendors getting into store, Store Owners have to prioritize which vendors to see and even book specific amounts of money for them. Top vendor list is heavily dictated by 2 things: a) Highest rotation and profitability of products, and b) personal relationship with Salesrep (remember item 6 in list 1). With those priority vendors, it is also very likely they help them increasing dropsize than reassigning “booked money” to non-priority vendors. This factor makes extremely important to have the right people and take care of level of service. Who is part of that Top list? Depending on the Region, in Mexico you normally find in this list soft drink bottlers, salty snacks, beer, dairies, and even some wholesaler(s) the store owner decides to work with and represent several brands.
15) Retail Execution and “Perfect Store” in DSD. Every CPG company regardless of their size are striving for the same thing: Get the “Perfect Store”. They want their salesrep negotiate with Store owner on how and why getting the right products with the right execution at the Changarro’s shelfs will increase sales… But when you are Store Owner and hear that from 15 different vendors a day and with limited space to execute properly, these efforts are hardly transformed into actions. On the other hand from CPGs perspective, with Salesrep trying to complete the 40+ calls scheduled for the day where they have to clean, rotate, sell, execute, collect and complete the visit – there is just not enough time to do Retail Execution as other Channels / Markets would do… At least not from Salesrep directly. In the pursue of the “Perfect Store”, other complementary roles need to be in place and help on development of POS properly: Promoters, Supervisors, Sales Development leaders, special teams for placing exhibitions, push for innovation, and implement Trade Marketing tools perform these activities when there are budgets for them. Without this type of help complemented with the right set of Retail Execution platform and Processes, it will be hard to expect radically different results.
16) Consignment products at the Point of Sale. When you are a Changarro store owner, you will hardly try for new products and vendors unless your captive customers start asking for them. For CPGs, one of the most creative ways to gain space at the limited size shelves of the changarros is to place product in consignment. This means vendor leaves inventory at the Point of Sale and the next visit (1 week later usually), customer will only pay for the product that was actually sold. Vendor leaves new inventory and cycle repeats. This is a 100% risk free for store owner but very high risk for Manufacturers and Distributors due the need of control over this process. This model is subject to big losses if the right process and tools are not put in the field and help mitigate the risk by collecting evidences and a tracking of the whole consignment.
17) Price Changes are expected by default at least once a year. “Inflation” and “economic crisis” are common words that we grew up hearing in Latin America very often. Most of us are used to see price increases several times in a year. In DSD Channel, manufacturers decide when to increase prices and they really only let changarros know a few of days in advance (is not like they have to ask for authorization as it happens in other formats or channels). Typically, the new price is calculated based on Suggested Retail Price and in a range of a few cents. But in Mexico, as well as in other countries, the smallest “real” currency is 50 cents (although 20 and 10 cent coins are available, they are not worth enough to be used in commerce that often). If the manufacturer increased by rule only 10 or 20 cents and this doesn’t fall into the fraction value of a 50-cent coin, chances are that it will effectively be round to the highest 50 cent partition or otherwise stores won’t be able to give change back.
18) Price elasticity strategies. Also related to increase in price is the expected impact in consumption/demand (elasticity). Due the fact DSD channel rarely has a price reduction, largest CPG companies have implemented strategies for reduce any outstanding impact on consumers demands when prices increase. For example, new prices may be released in January when in the mind of consumers ” everything is expected to have an inflation-related increase “. Also, manufacturers may temporary increase grams of a product while doing price changes so on the eyes of consumer “they are getting more product for the same (increased) price”.
19) Improving Margin at all costs. An average Mom & Pops changarro store has a margin (means before expenses) between 16-18% of revenue which is not that bad and generates just enough money for a small family. But there are several problems with this short level of margin: Poor administration, unexpected expenses, tax burdens and other factors can make this profit disappear. Store owners are always thinking on how to improve their margin all the time. I have seen so many creative ways: Credits & loans to but more product and get better rate, find vendors with best price, push products with best profits)… to others not so morally correct such as evade taxes, not paying any benefits to employees, acquire product in black market, or get power light for “free” and reduce the most expensive monthly bill significantly.
20) The future of DSD channel. My vision of this highly dynamic, competitive, complex and yet exciting channel is that it will not go anywhere, anytime soon. It has been definitely impacted by Convenience stores (like Oxxo or 7-Eleven) and some special small formats implemented by large Retailers (like Bodega Express from Walmart). The DSD channel will contract in short term but will not disappear… it cannot disappear as it is the way of living of close to 1 million of Mexican families. However, this channel must evolve!… and by evolving I do not mean to try to become like any other channel (as trying to copy C-Stores format) but to keep its own identity of being closer to the consumers and to have that level of personal interaction, but it should be incorporating new Technologies and become more formal Process driven. This is an effort and responsibility shared by CPGs, Distributors, Changarro Store Owners, and all of us that live in this ecosystem.
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