A great battle of distributors brewing in FMCG

Reliance’s JioMart has recently announced its plan to roll out a conversational WhatsApp grocery ordering facility. Consumers can order essentials both on-demand as well as through a subscription model. This facility would be largely available through the retail major’s over half-a-million kirana store network, which would obviously mean that the kirana retailer would have to source merchandise from Reliance’s wholesale arm. This explains why the traditional distributors of FMCG companies are up in arms.

The past couple of years, especially in the Covid-19 era, have witnessed a spate of new-age wholesale and distribution companies such as JioMart, Udaan, Metro Cash & Carry and Jumbotail gaining might at the expense of the traditional distributors. Since these new age companies (most of them flushed with private equity money) buy in bulk from the FMCG majors and pay them almost immediately (unlike the traditional distributors who operate on a 10-15 day credit cycle), they are able to attract margins as high as 17-18%, as opposed to the 10-12% margin that a traditional distributor gets.

“New-age distributors who have a lot of venture-capitalist money are undercutting the traditional distributors,” points out Prem Kumar, founder and CEO of retail tech company Snapbizz.

The traditional distributors had a similar spat with FMCG companies over margins during the initial days of modern trade, which eventually died out when the former realised that modern trade wasn’t really competition to them. However, this time round the new-age wholesalers and distributors are directly competing with them as they are supplying to the same network of kirana stores.

“The new-age companies are going to the same markets of the core distributors and that is why there is conflict,” explains Ankur Bisen, senior partner and head (consumer, food and retail), Technopak Advisors. “The traditional retailers employ a lot of people and have built an ecosystem. They are feeling that their bread and butter is getting threatened,” he adds.

In fact, most of the new-age companies, be it JioMart, Metro Cash and Carry or Jumbotail, are not just distributing, they are also pushing their private labels too. Private labels give them higher margins which they pass on to the retailers and that’s making their traditional counterparts even more insecure.

In fact, biggies such as Jio, say experts, also have the power to arm-twist the FMCG majors. “It’s difficult to tame Jio. It has the power to tell brands that if they don’t give them better margins they will sell their own brands,” points out a senior retail industry expert.

Impossible to ignore

Most FMCG companies embraced the tech-enabled wholesalers and distributors, especially during the first wave of the Covid-19 pandemic when their traditional distribution network came to a halt due to the lockdown. Even after life returned to normal, the FMCG majors felt the need for a parallel distribution network. However, giving less importance to the traditional distributors could prove to be counter-productive for brands.

“New-age companies are distributing for a host of brands, unlike the traditional distributors who are in most cases exclusive to the company. They are much more focused and have a higher sense of ownership,” says Kumar of Snapbizz.

“It is incorrect to assume that the traditional folks are inefficient just because they are not powered with technology. They charge just 3-4% for last mile delivery in rural markets, so they are as efficient,” agrees Technopak’s Bisen. He says that brands will have to figure out a way to please both the parties as they will not want to let go of incremental business.

Though the likes of Parle Products are looking at launching separate SKUs (stock-keeping units) for the traditional trade and the new-age distributors, Amit Kumat, MD of the Indore-based snacks company Prataap Snacks, says that he would rather work with new-age companies that would help to digitally empower the traditional trade. Kumat agrees that bypassing traditional trade could eventually lead to dilution of brand focus, as the new-age companies distribute multiple products and brands. “We can’t do away with the traditional distributors. Therefore, we are partnering only with those new-age platforms that will help us to power our traditional distribution network.”

Hybrid models

The narrative around technologically powering traditional distributors is gathering steam across the industry, with stalwarts such as Sanjiv Mehta, MD and chairman, Hindustan Unilever, consistently talking about onboarding more and more traditional distributors and retailers to the HUL Suvidha app. This has even led to companies such as Shop X, which initially started as a distribution company to evolve into a decentralised tech platform that would also rope in traditional distributors. “Local distributors do an extremely cost-efficient job of getting products out to the retailer. They can be transformed in a positive way with technology where their core strength can be retained,” says Amit Sharma, founder, Shop X.

Sharma claims he is in talks with several leading FMCG companies to get all the stakeholders under one roof. “There are three cycles in the value chain - goods cycle, money cycle and information cycle. Our platform preserves all the three. It gives information to the retailer about the brands and the various schemes, enables the retailer to make the payments digitally, but the last mile fulfillment of goods can be done by the local distributor. This will help protect millions of entrepreneurial jobs,” Sharma further explains.

The FMCG majors need to quickly find a win-win solution for their distribution partners, else, it could lead to a situation where the powerful become more powerful and the not so powerful traditional distribution could face an existential issue.