Since 2016 retail sector is disruptive by promising startups, more than 100 startups turns Unicorn which is $ 100 bn in the business sphere so far opened. 60% share of the Food & Grocery segment is in the overall retail out of which 90% is still unorganised. The total retail market is going towards $1.497 Trillion from Its present $800bn market size. This shows the speed of consumption by the large public of India.
Retail 4.0 still is in its nascent stage, post covid we can see dramatic changes in consumers' buying habits. Consumer preferences are changing due to many reasons of which credit goes to organised retail which somehow made a funnel for new brands, brand awareness, and presence up to tier fourth towns.
Corporates are there in the market who are serious to open their stores in remote cities too but the still big question is how they will meet the operating cost. The cost of reaching directly to Retail or consumer is huge. There are many ground-level challenges that we have to understand.
eB2B startups like Udaan, Jumbotail, Shopkirana, Maxwholesale, Apnaklub, Elasticrun, and many more are reaching directly to Retailers. However, there is nothing wrong or right but the approach should be taken into account after evaluating the fundamental and ground realities of the business.
Are there any new ideas on which Indian startup is working? I don't think so. They are copied either from Western countries, China or other developing countries. I don't want to criticize that they are not workable in India but before that, we have to evaluable minutely and should take into account the ground realities, percentage of margins, execution hurdles, mindsets, and most important the dynamics of Indian economics. A model of Direct Retailer is successful in Europe and UAE because of the centralization of the Supply Chain & uniformity in distribution channels. FMCG distributors are selling more than a thousand brands from one centralized system so reaching retailers and making them dependent is easy as supply of such brands is only connected with the said distributors
Al Gurg is Uniliver's sole distributor in UAE so it is a kind of monopoly of the group where Retailers have to depend on them. Same way here in India HUL has city-wise distributors who directly bill Retailers. P&G is working on state-level distribution and accordingly appoint distributor who takes the supply chain for the entire state like DB Distributors in Rajasthan state and some part of Gujarat State.
I've been witnessing the growth in eB2B retail since 2014, a kind of disruption being created by eB2B startups since then. They work directly with retailers through their technology intervention (DTR = Direct Retailer). There is no doubt that they have been able to create a stir in the ecosystem and have created a void in the traditional supply chain where retailers are at the centre of all such disruptive ideas. But, why does the retail ecosystem need these horizontal distribution channels? Do they not have confidence in their traditional distribution system or do they want to increase the capacity of these channels? But if it's a matter of increasing the capacity in the funnel then why? Because on the contrary, FMCG companies are creating competition for their old distribution channels.
FMCG companies came to know about such blunders when existing distributors started agitating that their stake is been liquidated by eB2B startups who are selling similar products at a discount, however, those offered by eB2B provide an advantage to retailers through service level excellence. These players are again putting pressure on these traditional channels. There are always good and bad and there are inherent characteristics of any system but some fundamentals always work when we do business.
FMCG companies have to evaluate whether traditional distributors are a key component of the entire supply chain, and are the entities that helped them brand their products. I met many high officials of national-level FMCG companies and asked the same question why are they killing their old distributors? Do you have any feelings for them? Or put a blanket over them entirely without evaluating the ill effects on business volume and the stability of their traditional distribution system.
Later, they realize that they will face huge agitation from the existing channel if they continue to push on the same product line with eB2B players, so they come up with a product-level strategy that differentiates at the SKU level will be done. It is all about product level and ToT level strategy which they are working on since 2012 in the market. Product SKUs and grammars differ in many respects for modern trade (MT) and are of different sizes for general trade (GT). Also, this has abused the system by and large by the MT players. Later on, with the emergence of E-commerce, things went in other directions and price discrimination start happening across formats. Flipkart & Amazon started their own pricing, Modern trade was on its edge with the GT. Such a Battle is going on in Indian grocery retail since 2015 and now the intensity is increasing. It is hard to control the price cut basis markdown. In this kind of battle, FMCG companies are the winner. Despite channel conflicts, they are able to sell their products and grow YoY. Now they are playing a diplomatic role, and don't want to oppose either channel but to deal in a diplomatic way. Is it a good strategy?
But, who are the most affected? Is it an eB2B player, offline supermarket/hypermarket, or e-commerce marketplace under MT channel? The most affected stakeholders are the traditional distributors who are losing their business day by day. Traditional distributors are only associated with retailers, they do not have any other channel where they can sell their products.
On the other hand, eB2B startups are not able to sustain themselves due to low product margins and high operating costs. So burning money is the only way for them to stay in the fight. For e-commerce marketplaces,s they are least bothered as sellers will think about the outcome, however, stability is also a question for e-commerce marketplaces but they will be in the market.
My big question is who is going to survive in the retail ecosystem despite such low margins. Will heavy burning by the startups will help them to create their customer base in the long run? A value chain of 18% compared to 35% in Western countries is not enough to carry the burden of all such disruptive ideas.
As far as I have a little knowledge and experience of 22 years in this ecosystem, I must say that the cost of disturbing the existing ecosystem is huge but empowering them is economical, scalable and profitable.
At the same time, there is a big question for venture capital firms. On what basis are they investing in this segment especially in grocery eB2B players? The "skill set" in my previous post will only help grow the business temporarily, but will not help make it sustainable and profitable. "Importantly in the business mindset is a vital tool to make a business sustainable and profitable".
Let's brainstorm on this topic and share your valuable feedback.
Regards/ Balwant singh Rana
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