udaan, JioMart may disrupt $100 bn B2B e-commerce mkt in decade: Jefferies

udaan has already garnered over 50 per cent market share while Reliance is at around a quarter share, says the report by top investment bank Jefferies.

Business-to-business e-commerce (e-B2B) is expected to be $100 billion in size in the next decade and players such as udaan and Reliance’s JioMart are expected to disrupt this space, according to a report by top investment bank Jefferies.

Indian distribution channel across staples, FMCG (fast-moving consumer goods), and pharma employs a multi-layered structure that connects producers and consumers. A fragmented distribution yields a strong bargaining power to brand owners in general.

“But the landscape may change as tech-enabled B2B players (JioMart, udaan) emerge,” said the Jefferies report. “Assuming a 40 per cent CAGR (compound annual growth rate), e-B2B could be $100 billion in size in the next decade, though its penetration would still be 5 per cent. Scale holds the key for unit economics.”

Udaan and JioMart (Reliance Retail) compete with players such as Amazon, Walmart-owned Flipkart and Tata to tap the booming business-to-business e-commerce market in the country. udaan and Reliance Retail are dominant players in the e-B2B category, accounting for the bulk of the market, according to the Jefferies report.

It said that the logistics for an e-B2B business model, is fairly unique, compared to that used by B2C e-tailers such as Flipkart and Amazon. Staples and FMCG are the most important categories for e-B2B, given their relevance to a kirana store and limited penetration of organised retail. The supply chain requirements are also different as retailers tend to order with a higher frequency (once a week or more) and expect an overnight delivery or a 1-day delivery timeframe. Given this delivery timeline and high tonnage, fulfilment networks have to be highly localized and close to the end-demand market, to ensure the distance travelled is as optimum as possible.

The Jefferies report said that udaan has built robust logistics capabilities, comprising over 50 fulfilment centres, 350 branches, and 10 million sq. ft. of warehousing space. Its supply chain can deliver about 8,000 MT (metric tons) of products daily, and the company has overnight delivery capabilities in over 1,500 towns.

“In fact, in terms of the volume of products moved daily, udaan's throughput is 4-5x that of leading B2C e-tailers, despite a lower GMV (gross merchandise value).

udaan has also developed strong credit offering capabilities on all fronts. This has now enabled it to offer credit to over 160,000 kiranas.

Currently, there is a multi-layered B2B with a parallel distribution system by producers and a fragmented buyer base results in a lack of scale. There are smaller and scattered middlemen (distributors and wholesalers) who have a high dependence on producers.

However, the distribution system has been seeing rapid changes due to technology. The Jefferies report said that players like udaan and Reliance Retail have taken a multi-category and full-stack approach. Other players such as Ninjacart (fresh), Jumbotail (food and FMCG), and Pharmeasy (pharmacy) have a vertical focus.

“udaan has garnered over 50 per cent market share while Reliance is at around quarter share, in our view,” said the Jefferies report. “From a meagre 1 per cent share, sized at $3-4billion, we see e-B2B to rise to $100 billion over the next decade.”

The report said the current B2B (business to business) commerce in India is a highly fragmented and complex structure. There is a dispersed nature of consumer demand, as over 60 per cent of India's population lives in rural areas spread across the country. Even in urban, the population is dispersed across over 5,000 towns. Further, the top-10 cities in India account for only 7 per cent of the total population.

Also, B2C retail in India remains highly unorganized, with standalone mom-and-pop stores accounting for about 85-90 per cent of the market. The rest is coming from modern trade and e-commerce. Organized retail penetration varies significantly across retail categories — as high as 60 per cent in consumer durables, electronics, and mobile phones and less than 5 per cent in food and grocery. Given the nature of B2C retail, India is home to nearly about 15-20 million mom-and-pop stores and has one of the highest retail densities globally. This again increases the utility of intermediaries as the need for bulk-breaking is high.

The Jefferies report said technology adoption is fairly limited for mom-and-pop retailers. This leads to inefficiencies in inventory planning and can lead to obsolescence and stock-out risks.

Also, several large consumption categories in India are characterized by the presence of unorganized (unbranded) players on the supply side. For example, in basic staples (cereals, pulses and edible oil), over 80 per cent of products sold are unbranded. About 70 per cent of fashion industry revenues are from unbranded apparel. The share of unorganised or unbranded is a tad lower at 20-25 per cent in packaged foods. This means there are numerous small manufacturers operating in a specific category or a region and are sub-scale. Now with the distribution strength of platforms such as udaan and JioMart, these regional players can also have access to national distribution.

As per consulting firm Redseer, the overall Indian retail market was sized at $900 billion. About $170 billion is retained by the retailer as channel margins. The rest $700-750 billion is the market size for B2B commerce.FMCG and grocery form the largest share of this pie with a market size of about $450-500 billion. In terms of channels, over 70 per cent of overall B2B commerce is currently dominated by unorganized traders and wholesalers, as per Redseer.

“Within organised B2B, e-B2B is likely to be the business model of choice for most players, to drive adoption and growth,” said the Jefferies report. “This is already evident in the fact that retailers such as Reliance Retail have shifted their focus from cash-and-carry to e-B2B.”

Covid-19 and subsequent lockdowns have also caused substantial disruption for the unorganized B2B supply chain. At the same time, kiranas saw a surge in demand as the modern trade channel was not fully functional. With supply from traditional distribution patchy, the Jefferies report said the kirana outlets were forced to seek new avenues to procure merchandise. “This accelerated the pace of adoption for e-B2B in a major way,” said the report.