From Unilever PLC to Colgate-Palmolive Co, consumer goods makers in India are facing distribution blues that have nothing to do with COVID-19 pandemic-induced shortages and bottlenecks. The trusted intermediaries that brands have traditionally relied on to reach millions of small neighborhood stores in 8,000 towns and 660,000 villages are in revolt.
It is a mutiny that the multinationals have invited upon themselves.
About 90 percent of what gets consumed in the continent-sized economy flows through a pipe known as “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 “know-your-customer,” or KYC, checks of the formal financial system.
Distributors also take the onus of compliance with rules and regulations for the brands, as they are the ones dealing directly with the last-mile outlet, known as kirana.
Each of these services is important in its own right. Together, they are worth at least 11.5 percent of the final price of merchandise, said Sumit Aggarwal, a US-trained engineer who returned to run his family’s consumer goods distribution business in north India.
Yet, the distributors’ share of the pie is barely 5 to 6 percent. The rest of their value addition benefits other stakeholders, including consumers.
If the pipe is only now gurgling with discontent, it is because a new breed of rivals has arrived. Better-funded bulk suppliers, such as Walmart Inc, billionaire Mukesh Ambani’s JioMart and Germany’s Metro AG, as well as business-to-business e-commerce firms like Udaan and Big Basket, are flexing their superior financial muscles to win over the small shopkeeper.
The price at which distributors get merchandise from brands allows for only 10 to 12 percent margins for retailers. Apps are offering as much as 20 percent. Since none of the new-age intermediaries are operationally profitable, the deep discounts are very likely backed by investor capital, of which there is no shortage at present. Retailers are switching to more modern suppliers, and the traditional distribution chain is up in arms.
Distributors in Maharashtra state stopped supplying Hindustan Unilever Ltd’s Kissan range of ketchups and sauces from Saturday last week and threatened to expand the blockade to personal-care products and detergents. Colgate, which is facing a similar embargo on its Max Fresh line of toothpaste, has been warned by an association of traders that its products might vanish from retail outlets in Maharashtra by next month. The ban might extend to other states as well.
It probably would not come to that. Small and medium-sized intermediaries are scattered across the country. While they have temporarily come together in one state, they do not have the staying power for a prolonged, nationwide strike against the far more resourceful producers.
The mobile Internet is transforming the retail landscape in India. Pure e-commerce, the kind offered by Amazon.com Inc and Walmart’s Flipkart, is still a minuscule part of overall consumer spending.
However, owners of mom-and-pop kirana shops are increasingly whipping out their smartphones to source goods as cheaply as they can.
Credit, which was the No. 1 reason for them 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 US$700 billion expansion in Indian retail by 2030 and half of new jobs.
Technology-led disruptions would fundamentally enhance the productivity of commerce.
However, the conventional trade channel does not deserve to be left behind.
“There’s room for everyone,” Aggarwal said. “If brands ignore general trade and distributors’ salespeople lose their jobs, apps and other bulk suppliers will inevitably use their market power to raise prices. That won’t be good for anyone.”
Instead of letting their long-term partners in the country fall by the wayside, brands must help the direct trade channel embrace technology to become more efficient and profitable. It would not take much by way of handholding. With simple digital tools, distributors can have access to verified KYC, evaluate and underwrite credit risks, and present a transparent account of their services in a language financiers can understand.
Households in India withstood two debilitating waves of the COVID-19 pandemic without much fiscal support from the government beyond free food.
Research has shown that it is not so much the formal financial system that helped them survive the lockdowns and the elevated medical expenses, but informal credit from shops. Where will a hole-in-the-wall kirana obtain the resources to be a lender of last resort for the bottom of the pyramid in remote towns and villages?
The answer lies in the traditional distribution chain, nurtured by a previous generation of multinational managers. Their successors should not let a myopic vision of technological change destroy this important safety valve.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He was previously a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET Now and Bloomberg News.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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