Kiranas discover a new partner

The FMCG direct distribution system faces an existential threat

The tussle on who gets to serve the ubiquitous kirana store owner is emerging as the next big battleground in India’s fragmented retail and distribution trade. The bugle was sounded more than two weeks ago, when the All India Consumer Products Distributors Federation wrote to over two dozen major fast-moving consumer goods (FMCG) companies, including Hindustan Unilever, P&G and Dabur, asking for a level playing field. Their ire was directed at the new breed of organised business-to-business (B2B) wholesalers, like Reliance Jiomart, Metro Cash and Carry, and Udaan. The association demanded parity with these B2B wholesalers on both prices and margins. Or else, they would stop carrying products from the FMCG companies from next year.

For decades company-appointed direct distributors have been a unique characteristic of the Indian retail and distribution trade. It allowed major FMCG companies to directly reach millions of kirana outlets at a low cost. The system also allowed them much greater control over new product launches, by persuading kiranas to stock these new products in the hope that the company would be able to trigger offtake through its advertising and promotion strategies. Besides, as brand owners, the FMCG companies retained their bargaining power and managed to keep both retail and distributor margins in check. So much so that there is still a differential of nearly 4 percentage points in India, compared to countries in South East Asia. No wonder, then, in India, FMCG companies see this direct distribution model as a key source of their competitive advantage—and it still accounts for a significant part of their valuation.

And that’s why this channel conflict in the wholesale trade spells trouble for incumbent FMCG companies. At one level, they can ill afford to ignore the interests of their own company distributors and alienate them. After all, they still account for a lion’s share of their retail sales system. At the same time, it is hard not to ignore the ground realities. Kiranas, long used to buying products from multiple company distributors, now have a new option: To buy directly from organised wholesalers in return for more frequent replenishments, higher margins and the ease of digitised ordering and replenishment. It cuts down the need to deal with a plethora of distributor salesmen and helps them consolidate their purchases. Since the new breed of wholesalers offer a wide swathe of products, it gives them the scale to promise better service levels. With limited space in the store, the kirana owner can stock less and replenish stocks more quickly, thereby unlocking precious working capital and offering a wider assortment.
 

There is one other threat that will be hard to ignore: Private labels. As the wholesalers expand their reach and build stronger relationships with the kiranas, they will do exactly what many of the organised retailers did, gradually look to substitute established brands with a plethora of private labels, which provide significantly higher margins to kiranas at a comparable quality. This is no ideal threat for brand owners. 

Let’s consider the possible scenarios. One, at an aggregate level, as long as the traditional company distribution system delivers better reach at a lower cost, FMCG companies will be forced to play a delicate balancing game. Even if they don’t offer lower prices and higher margins to these organised wholesalers, there’s little to stop the wholesalers from offering higher margins to the kiranas. Udaan has a strong line of venture capital funding to acquire customers, as do Reliance Jiomart, German B2B wholesaler Metro Cash and Carry and Flipkart.

If they start chipping away by acquiring new kiranas and expanding their footprint, how can the company distributor be protected from the coming onslaught? Over the years, there’s been an obvious fall-out: The better run company distributors have been allowed to manage bigger territories. The resultant higher scale also provides a better opportunity to digitise the supply chain, which in turn improves the quality of data for better decision-making. But this comes with its own set of challenges, because it willy-nilly gives the company distributor greater bargaining power with the FMCG companies.

Two, there are many new FMCG firms, local and multinational, who don’t even have a fraction of the legacy distribution advantage. For these new firms, the organised wholesalers are really a godsend to expand reach and distribution. They’d be more than happy to support and work with the likes of a Jiomart, Metro or Udaan, and take the fight to the incumbent brand owners.

Finally, unlike organised retail, avoiding channel conflict won’t be easy for the wholesale trade. Over the years, despite several rounds of head-butting, organised retailers were able to achieve some kind of equilibrium with the giant FMCG firms. Some of the bigger retailers like Reliance Retail and Future Group were able to get direct distribution from the company carry and forward agent, after clearly demonstrating that their large format, self-service model helped far better offtake of premium and new products. They were able to demand and get slightly higher margins to offset the higher cost of operations. It also helped that the pack sizes for organised retail were different from that of the direct distributor model. What will make it tricky is that the wholesalers will ask for the same packaging configurations that the company distributor currently sells to the kiranas. 

Given the potential threat to the livelihoods of lakhs of distributors, expect this confrontation to snowball into a bigger conflict in the new year.

The writer is co-founder at Founding Fuel