Emergence of e-B-to-B distributors, life savers for retailers or death knell for offline FMCG distribution?

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“This is my second visit to your shop and you still haven’t got me my facewash!” Sai Krishna, owner of Sri Lakshmi Provision Store on the outskirts of Bengaluru, looked blankly at the lady who was asking for her favorite brand of facewash. He felt helpless as the distributor servicing his area was stockout for the last one week.  Sai Krishna, complained “distributors don’t seem to care and most of them don’t even visit here as there aren’t too many shops around.” Reaching such stores and ensuring constant availability of all their products is a problem even the largest companies aren’t able to solve, cost-effectively.

Nuruddin, a kirana (the Indian name for mom and pop stores) store owner explains his dilemma, “the distributor’s sales representatives come only once or twice a month, I may not have enough cash then to purchase stock worth a month. And even if I do, where do I keep it?” Lack of space and liquid money to invest, prevent small retailers from stocking. As a result, store owners are forced to close their store every few days to visit the closest wholesale market to buy what their consumers demand. This results in loss of business, time and money.

It is hardly surprising that many entrepreneurial ventures see this as an opportunity, of using technology and riding the ecommerce wave to provide solutions to these aggrieved shop owners. A plethora of online platforms (the term used for online market places, that use technology) have cropped up in the Indian retail scene where store owners can order groceries, FMCGs, staples, electronics, you name it, on their smartphone apps. Moreover, these are delivered to their store, often within 24 hours. These e-B2B platforms are aggregators of products categories they procure from companies or the existing distributors. The products are listed on the platform which are accessed by store owners. The industry statistics and increasing adoption of digital by these store owners seem to be working in their favor. On the other hand, a typical B2C e-commerce company like Amazon, Flipkart, Myntra or Pepperfry reaches the final individual consumer directly. In B2B e-commerce or e-B2B, marketing, selling and distribution of products from a business to other small businesses or retailers happens through an online platform. This channel is expected to grow at a CAGR of 86% according to RedSeer. There is an emergence of vertical players like Ninjacart (grocery) or horizontal aggregators like Udaan, whose portfolio includes several brands and commodities across various categories. Several existing B2C players like Amazon and BigBasket are also expanding to include B2B platforms.

The Indian retail industry has reached INR 66.39 lakh crore (US$ 950 billion) in 2018 at a CAGR of 13 per cent and is expected to reach INR 76.87 lakh crore (US$ 1.1 trillion) by 2020, according to the Indian Retail Industry Analysis by IBEF. The country is also among the highest in the world in per capita retail store availability, with over 10 million kirana stores. Meanwhile, e-commerce is transforming the way consumers shop. Increased smartphone penetration and the Government’s focus on e-commerce policy and initiatives have spurred digital transformation. An expansive assortment of products and brands with a lower delivery time, cash on delivery and easy returns have prompted even the sceptics to try it.

Online B2C entrepreneurs are struggling with low average order values and high costs of providing seamless service. Likely, the e-B2B players are more cost effective despite lower margins as the order size and value are both substantial. Small retailers too are increasingly growing comfortable with digital means of business, post GST and increased smartphone penetration caused by Reliance Jio. A large section of these retailers has adopted payment apps like PayTm and PhonePe, post demonetization. While most of them still depend on company representatives or their next generation in the family to discover new, useful apps, the willingness to try is high. These factors have made e-B2B lucrative or at least worth a try. The retail B2B sector is set to grow at a CAGR of 86% and has seen investments of over US$ 1 billion+ with players like Udaan, SHOPX, Jumbotail and StoreKing seeing several rounds of funding.

These online B2B start-ups are exploring various storing practices- ‘inventory-led’, ‘marketplace’ or a ‘hybrid’. While the end objective is smart-phone usage habit cultivation wherein the retailers self-order using their app, start-ups are also experimenting with several distribution practices. A lot of them have company representatives going store-to-store and taking orders on the app (as self-ordering has not caught on yet) and educating kirana store owners about the services that the platform provides. Another exciting model is one of an entrepreneur-led distribution system, where local small entrepreneurs are on-boarded in distant or rural places to collate orders and do last mile deliveries. What’s more, these e-B2B platforms offer credit, competitive rates and exclusive offers along with the promise of never going out of stock, at minimal rates and no effort. Interestingly, they are differentiating themselves on the basis of assortment (staples, electronics, grocery focus), type of stores reached (large vs small stores) and geography (urban, rural), all things that store owners like Sai Krishna and Nuruddin are complaining about. They are able to do this because they have assortment across categories, local players and major brands, thus increasing the average order value per store, making it more feasible to service the store frequently. Additionally, having a wide-ranging product portfolio listed on their app ensures they can cover most stores in an area and not just certain large stores.

In short, e-B2B aggregates products on an online platform, takes orders on their app and supplies it to the store promptly while also providing credit and customer service. They are able to give competitive rates as they get good margins from companies and are able to cover more stores because of their vast portfolio and better reach.

All may not be well: While e-B2B has a lot to offer, it will only add fuel to the fire for companies and their struggle with channel conflict. Recently the distributors in Gujarat stopped stocking products of major FMCG companies to protest the differential, and the higher discounts that these companies are offering to other channels. These FMCG companies are now directly supplying to modern trade giants and online retailers as they buy in large volumes, further eating into offline FMCG distributors’ margins and supplier power. In the future, could e-B2B replace distributors and wholesalers? As companies adopt this new channel, they will have to plan for the arising conflicts and find ways to resolve the opposition from their offline distributors.

With traditional retail still accounting for 80% of the business, e-B2B players could drastically change how companies reach their customers, the retailers. Online B2B proposes to solve a pertinent problem and seems to have the industry’s support. But it will be interesting to observe how it alters distribution practices and how companies will handle the channel conflicts, that this new channel threats to cause.

Sri Lakshmi Provision Store now rarely runs out of stock. “Today I can just sit in my shop and order whatever I need, whenever I need. I can compare prices on my phone, get credit, check out new products and manage everything with almost no extra expenditure to avail this service. It has definitely made life easy!” says a smiling Sai Krishna.

Dr. Renuka Kamath, Professor Marketing and Manaswi Sankrityayan, a 2nd year PGDM student Both at SPJIMR, Mumbai.