Margins remain a pain point for organised FMCG supply-chain companies

Experts say gross margins are low, with the last-mile supply chain and retailer not making money

Jiomart B2B is the latest among organised supply-chain companies to bite the bullet, shutting down its warehouses, and asking its employees to leave.

Why are companies finding it difficult to sustain the supply-chain business? Experts point out that gross margins in supplying fast-moving consumer goods (FMCGs) are very low.

While it does look attractive because it is the largest part of the consumption market, the last-mile supply chain and retailer are not making money.

“FMCG brands have ensured high margins for their businesses by streamlining and smoothing their supply chains over decades and making them cost-efficient,” said Anshuman Singh, founder and managing director, Stellar Value Chain Solutions.

Singh said in rural markets, the costs of supply chains were proportionately high due to lower volumes. 

He added: “The low margins in the last leg of the FMCG rural supply chain make it difficult for new-age rural distribution players to offset the high costs.”

Devangshu Dutta, chief executive officer, Third Eyesight, a consultancy firm, said modern B2B (business-to-business) players had tried to step in to replace the traditional links in supply chains with price incentives and a large selection of products.

“Traditional distributors and wholesalers don’t just add costs but also add value, including aggregating demand for brands, disaggregating supplies for small retailers, providing market intelligence to both ends of the chain, and giving credit to retailers and a sort of financial guarantee for manufacturers,” Dutta said.

He said for their business models to work — online or offline — B2B businesses needed a significant concentration of demand, which had been tough to get in many locations.

On July 6, 2022, the Competition Commission of India (CCI), in the dispute between biscuit manufacturer Parle and B2B player Udaan, upheld the plea of the former, saying it did not violate competition laws. Parle had refused to sell its products directly to Udaan.

Udaan was the first B2B start-up to have a run-in with a well established brand, which was not interested in moving away from the traditional distribution model.

What has that meant for Udaan? It has meant tweaks to its business. It further diversified its product portfolio so that its access to the market was not impacted. It forayed into the mobile accessories segment as local brands tapped into its network of over 3 million retailers.

Earlier, this year it expanded its reach in the miller segment, which supplies staples like pulses, grains, wheat, rice, and oil.

Udaan aims to take on board about 100 miller partners per quarter. It works with over 500 miller partners, supplying over 10,000 SKUs (stock-keeping units) to retailers and kirana owners, according to the company in an interaction with Business Standard.

The other company that recently had to tweak its business or go back to its focus on rural India is Pune-based ElasticRun. B2B start-up ElasticRun has decided to focus on the core business and wind up its new expansion plans.

Backed by SoftBank and Prosus Venture, ElasticRun, which typically runs distribution for FMCGs in rural areas, decided to expand and also cater to retailers within city limits, i.e. tier 1 and tier 2 markets that had a strong distribution owing to companies having direct distribution in those areas.

“We initiated a pilot for urban markets. But through the year, as the macro changed, we decided not to pursue the urban pilot and focus on our core of rural business … we have to part ways with almost 2 per cent of our employees,” said Sandeep Deshmukh, co-founder and chief executive officer, ElasticRun, in an earlier interaction with Business Standard.

ElasticRun extends the reach of the brands’ direct distribution networks to deep rural markets. It enables access to a set of net new stores and customers, who were not accessible through traditional distribution networks.

The need to spend in order to get market share has caused well-entrenched players like Amazon to pull out of some of its distribution business. Amazon India has decided to shut down Amazon Distribution, according to sources. This follows its recent decision to close down its food delivery and edtech offers.

The moves are part of the annual operating planning review process amid global macroeconomic uncertainties. The e-commerce giant is looking to focus on its core businesses, sources said. 

Amazon Distribution operates a platform where sellers sell FMCGs and apparel products from companies and distribute them among kiranas and small neighbourhood stores. However, this unit operated in only three cities of Karnataka — Bengaluru, Mysuru, and Hubbali.

 Experts say the costs of supply chains are proportionately high due to lower volumes in rural markets 

 Analysts say for business models to work, B2B businesses need a concentration in demand, which has   been tough to get in many locations

 Udaan diversified its product portfolio so that its access to the market was not impacted

 ElasticRun has decided to focus on its core business and wind up new expansion plans

Amazon India has decided to shut down Amazon Distribution, according to sources