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India’s retail space is undergoing a churn it has not witnessed before. From the conflict between ecommerce and brick-and-mortar stores, the scene has now shifted to the emergence of technology-based B2B players which are competing with the traditional distributors of FMCG companies. Jayen Mehta, COO, Amul, talks about why these new players cannot displace India’s traditional distribution network. Edited excerpts:

Amul has taken a public position on what it calls monopolistic practices of the B2B players. Why did you choose to stop direct supply to them?

Companies like ours have a legacy distribution network. In our case, these are distribution highways—for fresh products like milk pouches, ambient products like ghee, chilled products for which distributors have cold rooms and related infrastructure, and frozen products like ice cream or paneer (cottage cheese). This also requires specialised infrastructure for storage. Retail outlets have them installed at their cost or the company provides it to them.

In India, the FMCG business operates on very thin margins. A distributor typically has a 3-5% margin, while a retailer has a 10-15% margin. That is how the supply chain runs. This whole system has been created by FMCG companies with a clear objective of serving consumers and working with thin overheads and margins while setting up the infrastructure and technology backbone in the process. The Amul Cart app shows the location of outlets that have our products within five kilometres of your radius. This is because we have developed a common software used across the length and breadth of the country.

Against this backdrop, these B2B players are interested in undermining our traditional distribution network. We have distributor partners who are second and third generation entrepreneurs. They have set up this whole infrastructure, employed salesmen, delivery boys, accountants and created a small business. But unlike modern trade or any other retailers, their margins are thin. Now, someone is entering the market and riding on the high-selling products of Amul and creating demand by undercutting and serving the market. For a distributor, if your flagship item business goes to someone else, the cost of servicing the outlet goes up automatically. This is making them unviable and once they become unviable, companies depend more on these new channels which then start dictating the terms.

We also have more than 10,000 Amul parlours which sell Amul items exclusively—from milk in the morning to ice cream till late in the evening. Unlike Parle or Hindustan Unilever which do not have dedicated branded stores, we have our own parlours which depend on margins to survive. Now, if someone undercuts and offers customers at a rate lower than these places, they will walk away.

‘It Is A Little Far-Fetched To Say App Ke Through Kranti Ho Jayegi’
 

Did Covid-19 provide an opportunity for B2B players to become more important in the larger scheme of things against the backdrop of widespread digitisation which was either negligible or absent in the FMCG sector?

Amul Cart was always available to our parlours and top outlets, and more than 50,000 outlets started placing orders on the platform. Even after the lockdown, about Rs 1 crore worth of business happens only through the app. In fact, more products are available on the app but distributors might have limitations sometimes. In the case of digitisation and technology, fortunately, we have been ahead of the curve. We have been able to take care of last-mile delivery.

The future of these disruptors is dependent on the funding they get. Without that funding, these companies are not viable because the model is not viable. The thin margins at which distributors work includes buying of the stock by giving advance payments. As Amul does not sell on credit, these guys buy from us by making advance payment and then with that margin, keep the inventory with them, have infrastructure to stock it and then have salesmen, vehicles and delivery persons sell products and collect money. They also additionally extend credit and that risk is also borne by them. Yet, they make a profit to remain viable.

These disruptors think they would be able to service outlets, get orders, extend credit and work within this 6% margin, it is simply not viable. This is being funded by someone else, hoping this way they would be able to capture a larger share of the pie. Everyone can be hopeful in life but business does not happen like that.

Does digitisation not make companies leaner and also ensure better growth?

Personal selling is actually big in India. If you go to any retail outlet, you will see 40-50 salesmen selling products to a retailer who is a pampered guy. He negotiates with a lot of people, bargains, and gets the best terms. Otherwise retail is a one-way street. Here, it is about relationship building—a positive relationship between the distributor, the salesman, and the retailer. These are one-to-one transactions running into hundreds for each one of them. A distributor also has an equity which an app-based seller would never be able to replace. It is not that people do no go through apps but it is to only see kiska do rupiya kam hain (Where will I get it for Rs 2 less?). Today, if Udaan sells one litre ghee for 20 paise cheaper than Jio Mart, the customer would go to the one that is selling it at a cheaper price. But transactions are limited to only that. If there is anything else, like product complaints or customer feedback, the company does not have the wherewithal to handle that. But in our case, if you go to a shop and say, ‘I did not like Amul ghee’, the retailer would immediately take it back from you and give it to the company’s salesman saying that there has been a customer complaint, please replace it. Why? Because he knows that he has bought it from the official channel and he would get his redressal from the company. The company also gets to know about customer complaints and would reach out to the customer to understand what his/her issue was.

The B2B scheme of selling is a one-way street. Jisko lena hain le, margin pe becha usne. Thik hain to thik hain, nahi thik hain to nahi hain. (Whoever wants to buy can buy, they have sold on a margin. If it is fine, it is fine. If it is not, then it is not.)

There is a whole ecosystem that the distributors have created—from credit to logistics. How important are they in influencing a retailer’s business choice?

A retailer is like any normal consumer. We also look at three different apps while shopping to find out which gives the best price. We also look for discounts on the five-seven top items we regularly buy. But for something like toothpaste, which is bought once a month, you wouldn’t bother if you get it for Rs 10 less or more. Bargain hunting is there for the top products of every brand and perhaps not across the range.

It is not difficult for new companies to extend credit also because it has become relatively cheaper now. Those with deep pockets would also experiment with giving credit. But all these do not build relationships—it is transactional. Giving discounts is one thing, defaults on credit is a separate ballgame.

A lot of B2B players also have their own logistical support like warehouse facilities which makes them an alternative worth considering. What are your thoughts on that?

Warehouses add to the cost of the company. In the case of distributors, the company is maintaining the warehouses. We get deliveries twice or thrice a week. We don’t expect distributors to carry inventory because the doors are closed. We can service every single distributor in a 250-km radius anywhere within the country. But in the case of B2B players, if they maintain warehouses, the margin would be the same. What the company gives to distributors, it would give it to these guys as well. They will have to hold inventory and then there is warehousing cost. That would increase costs for these companies that are already struggling with losses.

The current situation looks like a clash of the old model with a new one. Going forward, how would it play out for the sector?

FMCG, as a sector, is quite mature. It has seen a lot of new brands coming in and struggling brands fading out. When foreign direct investment was proposed in retail, it was Amul that had put its foot down and said that it would not benefit the manufacturers.
Historically, modern trade has commanded one-third of the share of the consumer’s rupee. For a litre of milk bought, 85% goes back to the producer and the rest is adjusted between all the other players. In Europe or the USA, the producer gets only one-third of the share of what the consumer pays. We made the government realise that modern trade may look good from a customer perspective but the producer would lose out. That was high-margin retail with players having deep pockets.

Looking at these kinds of investor-driven models, it is very difficult for them to compete with the traditional distribution channels that already exist. Unless you are there to burn a lot of money for a very long time, you cannot displace them. Co-existing is one way of survival for B2B players, innovating to make their cost structures leaner is another. But it is a little far-fetched to say app ke through kranti ho jayegi (revolution will take place through an app).

Source : Outlook Business 09th April 2022