A recurrent theme of this blog has been the struggle to maintain the balance between efficiency and resilience across various sectors when faced with modern technologies and financial market incentives. This post highlights the same trend in FMCG distribution chain in India.
Indrajit Gupta, Andy Mukherjee and Ambi Parameswaran have three opeds in Business Standard that draw attention to the changes afoot there.
The story goes something like this. The current FMCG distribution chain is dominated by traditional distributors who are the face of consumer brands to the 12 million-odd kirana shops spread out across India's 8000 towns and 660,000 villages. Big brands serve them through redistribution stockists (RS), who in turn are served by the carrying and forwarding (C&F) agents. Unilever, for example, has over 5000 RSs and 40 C&F agents. These "third-party distributors stock bulk inventory, despatch goods in small quantities to shops in their area, collect cash and offer retailers unsecured credit at zero interest without the cumbersome KYC checks of the formal financial system".
The emerging organised wholesalers (Metro, Walmart, Reliance etc) and new generation of tech B2B intermediaries and fintech firms, with their cash-rich financiers and deep-discount based models, are threatening to disrupt this distribution chain. They offer attractions to both the brands and the kirana owners. The brands are attracted by simpler, neater and fewer interface with their end-buyers, with the potential for more efficient distribution chains. The kiranas are attracted by the higher margins and cheaper financing, which the traditional distributors cannot match.
Mukherjee has a good summary of the changes,
Better-funded bulk suppliers such as Walmart Inc., billionaire Mukesh Ambani’s JioMart and Germany’s Metro AG as well as business-to-business e-commerce firms like Udaan and Big Basket are flexing their superior financial muscles to win over the small shopkeeper. The price at which distributors get merchandise from brands allows for only 10%-12% margins for retailers. Apps are offering as much as 20%. Since none of the new-age intermediaries are operationally profitable, the deep discounts are very likely backed by investor capital, of which there is no shortage at present. Retailers are switching to more modern suppliers, and the traditional distribution chain is up in arms... The mobile internet is transforming the retail landscape in India... owners of mom-and-pop kirana shops are increasingly whipping out their smartphones to source goods as cheaply as they can. Credit, which was the No. 1 reason for them to rely on distributors, is now being offered by a whole range of new fintech players. The combination of digital and physical commerce is expected to account for most of the $700 billion expansion in Indian retail by 2030 and half of new jobs.
Gupta writes about its attractions for the kiranas,
Kiranas, long used to buying products from multiple company distributors, now have a new option: To buy directly from organised wholesalers in return for more frequent replenishments, higher margins and the ease of digitised ordering and replenishment. It cuts down the need to deal with a plethora of distributor salesmen and helps them consolidate their purchases. Since the new breed of wholesalers offer a wide swathe of products, it gives them the scale to promise better service levels. With limited space in the store, the kirana owner can stock less and replenish stocks more quickly, thereby unlocking precious working capital and offering a wider assortment.
Gupta however argues that these changes may not be in the interests of the FMCG brands.
For decades company-appointed direct distributors have been a unique characteristic of the Indian retail and distribution trade. It allowed major FMCG companies to directly reach millions of kirana outlets at a low cost... as brand owners, the FMCG companies retained their bargaining power and managed to keep both retail and distributor margins in check. So much so that there is still a differential of nearly 4 percentage points in India, compared to countries in South East Asia. No wonder, then, in India, FMCG companies see this direct distribution model as a key source of their competitive advantage—and it still accounts for a significant part of their valuation. And that’s why this channel conflict in the wholesale trade spells trouble for incumbent FMCG companies. At one level, they can ill afford to ignore the interests of their own company distributors and alienate them. After all, they still account for a lion’s share of their retail sales system. At the same time, it is hard not to ignore the ground realities... There is one other threat that will be hard to ignore: Private labels. As the wholesalers expand their reach and build stronger relationships with the kiranas, they will do exactly what many of the organised retailers did, gradually look to substitute established brands with a plethora of private labels, which provide significantly higher margins to kiranas at a comparable quality. This is no idle threat for brand owners.
Mukherjee writes about the important role that traditional distributors can play, arguing that there is space for both,
Instead of letting their long-term partners in the country fall by the wayside, brands must help the direct trade channel embrace technology to become more efficient and profitable. It won’t take much by way of handholding. With simple digital tools, distributors can have access to verified customer KYC, evaluate and underwrite credit risks and present a transparent account of their services in a language financiers can understand. The middlemen will become more bankable, their cost of capital will go down... Households in India withstood two debilitating waves of the pandemic without much fiscal support from the government beyond free food. Research has shown that it isn’t so much the formal financial system that helped them survive the lockdowns and the elevated medical expenses, but informal credit from shops. Where will a hole-in-the-wall kirana obtain the resources to be a lender of last resort for the bottom of the pyramid in remote towns and villages? The answer lies in the traditional distribution chain, nurtured by a previous generation of multinational managers. Their successors shouldn’t let a myopic vision of technological change destroy this important safety valve.
The unfortunate reality is that while it's one thing (and relatively easier) to know what policies to undertake, it's an altogether different (and extremely difficult) thing to execute them.
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