Global brands in India face mutiny as they bypass traditional distributors
The trusted middlemen (Distributors & Wholesalers) that brands have traditionally relied on to reach millions of small neighborhood stores in 8,000 towns and 660,000 villages in India are in dire state as Global Brands are changing their Supply Chain mechanics. As much as 60% of the general trade market for FMCG goods is serviced by authorized distributors, 35% by wholesalers, while the remaining 10% is serviced by large wholesalers and business-to-business distributors. Most Indian manufacturers use a three-tier selling and distribution structure that has evolved over years. This structure involves distributors, wholesalers, and retailers. As an example, an FMCG company operating on an all-India basis could have between 40 and 80 distributors.
In recent years companies have become more focused on improving their distribution models to survive in a fiercely competitive market. Independent distribution and logistics firms have sprung up to meet this need. Marketers are increasingly turning to courier and logistics businesses to handle essential distribution and logistics duties, as well as looking for more effective ways to reach consumers. India’s courier network has expanded to include smaller cities with populations of less than 50,000.
About 90% of what gets consumed in the continent-sized economy of India flows through a pipe known as “general trade” consisting of Distributors & Wholesalers. Brands so far used to appoint third-party Distributors & Wholesalers who stock bulk inventory, dispatch goods in small quantities to shops in their area, collect cash and offer retailers unsecured credit at zero interest (without the cumbersome “know-your-customer,” or KYC, checks of the formal financial system). Distributors & Wholesalers also take the onus of compliance with existing rules and regulations for the brands as they’re the ones dealing directly with the last-mile outlet, known as “Kirana.” Each of these services is important in its own right. Together, they’re worth at least 11.5% of the final price of merchandise but the Distributor’s & Wholesaler’s share of the pie is barely 5% to 6%. The rest of their value addition benefits other stakeholders such as logistics, storage & administrative costs.
Distributors & Wholesalers are now gurgling with discontent because a new breed of rivals has arrived such as Wal-Mart, JioMart, and Metro besides Ecommerce biggies like Amazon & Flipkart, Big Basket etc. who all are better-funded as they are flexing their superior financial muscles to win over the last mile small shopkeepers.
The price at which Distributors & Wholesalers get merchandise from brands allows for only 10%-12% margins for retailers whereas Ecommerce Apps are offering as much as 20% discounts to end consumers making them redundant in whole SCM. Moreover, none of the new-age intermediaries are operationally profitable, the deep discounts are very likely backed by investor capital (with deep pocket of financial & technological resources. Retailers are switching to more modern suppliers, and the traditional distribution chain is facing severe competition & it is a question of their very existence.
In the meantime, these Distributors & Wholesalers have started agitation by boycotting brands against these brands with a threat that they can digitize and compete with these new age intermediaries.
Survival of last mile Kirana Stores
Retail is one of India’s fastest-growing industries. According to Forrester Research, India’s retail sector was valued at $883 billion in 2020, and the retail market is expected to grow to $1.3 trillion by 2024. There are approximately 12 million retail distribution outlets in the country, the majority of which are family owned. The fast-moving consumer goods (FMCG) sector is expected to increase at a rate of 10-12 percent annually over the next 10 years. According to Boston Consulting Group, India’s consumption will quadruple to $4 trillion by 2025 as rising wealth drives changes in consumer behavior and spending patterns.
The mobile internet is transforming the retail landscape in India. Pure e-commerce, the kind offered by Amazon and Wal-Mart’s Flipkart, is still a minuscule part of overall consumer spending. But owners of last mile Kirana shops are increasingly whipping out their smartphones to source goods as cheaply as they can. Credit, which was main 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.
Households in India withstood 2 debilitating waves of the pandemic & lockdown without much fiscal support from the government beyond free food for poor and many consumers have shifted from current Kirana stores to App based Ecommerce portals as they offered home delivery at a discounted price. Thus, even last mile Kirana Stores are also facing severe competition and it may a question of their survival also. Research has shown that it isn’t so much the formal financial system that helped them survive the lockdowns. 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?
Coronavirus lockdown has brought the traditional distribution and supply chain network of FMCG companies to a grinding halt. It all began with the trucks carrying essential goods not allowed to ply due to lack of clarity in regulations, which was soon followed by a huge shortage of manpower. As wholesalers and distributors pulled down their shutters, their daily wage employees left for their homes in fear, hunger and starvation, and there was no one to reach the products to the retailers. In fact, many retailers have had to shut their stores in the second week of the lockdown, as their stores fell empty and the distributors had not been able to deliver to them.
At a time when social distancing has become a way of life, the digital backbone of these eCom companies with strong chain backbone has become their strength. Their warehousing is digital. The presence of the data layer which connects the supply chain makes us more effective. With the traditional supply chain mechanism coming to a standstill, these eCom players has actively started engaging with third party supply chain companies and are looking at every possible way to ensure that product reaches consumers at the earliest. Not only are these companies better equipped in terms of manpower, their digital ecosystem is especially useful.
Many FMCG majors have even started to work with third-party supply chain solution producers during this hour of emergency and have also started direct distribution. This has made role of Distributors & Wholesalers redundant threatening their very existence.
Pre GST, these FMCG & Brands had to have Distributors & Wholesalers via C & F mechanism due to requirement of having local presence to avoid 4% CST but with GST they can ship directly to last mile Shops by avoiding these Distributors & Wholesalers and saving 10-15% of leakage which will improve their profits. Due to the high cost of operating warehouses, most Indian companies use clearing and forwarding (C&F) agents for distribution. C&F agencies typically handle inventories in a limited area (e.g., state).
FMCG majors such as HUL, already have apps that enable retailers to order products online. So, the question arises whether the new normal post COVID-19 will force FMCG companies to digitise their supply-chain and distribution?