Waiting For Maturity In The Market

For new companies—Indian or multinational—entering the FMCG sector, building a distribution network in the country has been the most difficult task. It has taken FMCG companies decades to scale their reach while generating the right throughput for an efficient cost-to-serve framework. Mergers and acquisitions, joint ventures and alliances have been orchestrated to acquire the right distribution network. It has been a competitive moat for large companies but the biggest challenge in scaling up for small companies.

In the past few years, e-commerce and direct-to-consumer (D2C) platforms have allowed the emergence of hundreds of digital brands—some of them challenging the incumbents in their respective categories. Building sales and distribution infrastructure requires fixed investments and involves risks. As a result, the traditional distribution system has been systematically biased against the new entrants—much to the eventual loss of the consumer. Consolidation of the fragmented distribution infrastructure is necessary for greater optionality for retailers and consumers.

Business-to-business (B2B) commerce is an emerging model which aims to democratise brands, allowing small and mid-sized brands to find retailer access with minimal fixed-cost investment and risks. Players like JioMart and Udaan are investing large sums of money to integrate retailers into a technology-enabled third-party model which was earlier run on a stand-alone basis by companies. The benefits of this model are clearly around establishing a global optima over local sub-optimisation. While some view this as a challenge to the existing distributor-based model, it may actually be a huge complementary route to market development which further enhances and deepens a company’s retailer and consumer reach.

The current system is clearly inefficient, fragmented and expensive where it is difficult to manoeuvre growth. Few categories reach even a million outlets out of the 15 million-plus outlets in the country, creating a wide availability gap for consumers. Small distributors are unable to invest in sales teams, making it difficult for companies to service these smaller outlets profitably. Huge parts of the small grocery outlets in Tier II cities and rural markets are thereby serviced by indirect channels such as wholesale. B2B commerce is helping integrate this fragmented distribution network and driving efficiencies. The future of distribution lies in an omnichannel model comprising the traditional distributor serving kiranas, D2C, quick commerce, modern trade and e-commerce.

At the moment, the challenge is to find the right equilibrium between the current distribution models and the emerging B2B commerce model. The coexistence of the two models does raise issues related to price parity and territorial integrity, which eventually has an impact on the channel profitability. In the short term, companies are developing different product or brand portfolios and working on channel economics to ensure parity. In the long run, the benefits of incremental growth would outweigh the fears of cannibalisation, as B2B commerce would allow for better outlet servicing and availability. The sheer depth of the retail market in India would continue to allow for the coexistence of both the distribution models in the foreseeable future.

Much like how the ecommerce journey played out, the B2B commerce space will take a few years to mature.

The author is a partner & national leader for consumer products and retail at EY India