Tectonic shifts in the FMCG distribution chain
Over the last few years, the pace of change in the FMCG distribution chain has changed dramatically. This is something we should talk about. Please note, our discussion will only revolve on business and economic conversations, not on valuations as we attempt to understand the structural changes in the industry.
From Unilever Plc to Colgate and Tata, consumer goods makers in India are facing distribution blues that have nothing to do with pandemic-induced shortages and bottlenecks. The trusted middlemen that brands have traditionally relied on to reach millions of small neighbourhood stores in over eight thousand towns and almost 7 lakh villages are in revolt; and it’s a mutiny that the multinationals have invited upon them.
Almost all (90%) of what gets consumed in India flows through general trade: Brands appoint third-party distributors 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 KYC checks of the formal financial system.
These last mile services are extremely important, especially in a country of 1.4 billion people across regions. It amounts to roughly 12% of the final price of merchandise, estimates Sumit Aggarwal, a U.S.-trained engineer (source: Bloomberg Quint) who returned to run his family’s consumer goods distribution business in north India. Yet, the distributors’ share of the pie is barely 5-6%; the rest of their value addition benefits other stakeholders down the value chain.
With the fast expanding footprint of players like Jio Mart, Flipkart and Amazon, flexing their muscles to garner a greater share of the pie offer better margins to retailers in order to woo them – price at which distributors get merchandise from brands allows for only 10%-12% margins for retailers. Apps are offering as much as 20%. Albeit, it is important to know that not always are the deep discounts financially viable for the big conglomerates, but their infinite pockets allow them to play this game to gain market share.
Tata just last year, in a bid to improve profitability, decide to remove a whole section of middlemen, thereby directly doing business with the retailers. While this does make some economic sense, we often discount the human costs of these moves. Distributors in India’s Maharashtra state stopped supplying HUL’s sauces from Jan. 1. threatening to expand the blockade to personal-care products and detergents; Colgate has also been similarly warned.
The ban might not extend to other states since Small and midsized intermediaries are scattered across the country. While they have temporarily come together in one state, they don’t have the staying power for a prolonged, nationwide strike against the far more resourceful producers.
Pure e-commerce players like Amazon and Flipkart, are still a minuscule part of overall consumer spending. Credit, which was the No. 1 reason for kirana stores 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.