In today's Finshots we talk about why Amazon's foray into B2B e-commerce failed
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The Story
Amazon spent $227 million to build a B2B e-commerce platform in India.
What does that mean?
Well, India runs on Kirana stores — millions peppered across the country. That’s where most people buy their groceries. But manufacturers don’t just supply these stores themselves. Instead, you have an elaborate network of distributors who push the product from FMCG companies to the Kirana stores. And Amazon wanted to disrupt this delicate equation. Remove the middlemen entirely and link the manufacturer to the last-mile stores — like Udaan and JioMart.
So they embarked on an experiment. They set up warehouses in Karnataka — Bengaluru, Mysuru, and Hubballi. And began operations.
Until this week…
Amazon finally brought the curtain down on its experimental B2B e-commerce venture. It was bleeding money with no sign of profitability in sight. $227 million flushed down the drain and they couldn’t succeed.
Why?
Well, Amazon hasn’t told us why just yet. But maybe looking at the B2B e-commerce ecosystem could shed some light.
For starters, distributors are extremely resilient
Remember our story about the tiff between Parle-G and Udaan?
Udaan wanted to buy Parle-G biscuits from Parle directly. They hoped to make the biscuits available to kirana stores at a competitive price. But Parle refused. They wanted Udaan to buy the biscuits from the distributors instead.
Parle’s arguement was this. The likes of Udaan have been posing a massive threat to the distributor network they so painstakingly built. And they believed the company would decimate their competition and drive most distributors out of business. If this happened, Parle would eventually be at the mercy of Udaan. And it’s not a position that they wanted to find themselves in.
So even if the likes of Amazon offered a better price to manufacturers, the long-term implications of depending on them can be disastrous. And FMCG companies are aware of this existential risk.
Which is why the likes of HUL, ITC, and Marico — top FMCG companies still distribute nearly 90% of their products through traditional distribution networks.
It’s also about competing with FMCG ‘brands’ that have clout.
Take the example of Hindustan Unilever, an FMCG behemoth that’s been around for a long long time. Do you think they need Amazon’s help in selling Surf Excel? Not really. People in the country know the brand. And they demand it. It is a ₹5,000 crore brand and drives over 10% of HUL’s revenues.
But HUL’s fast-moving products are usually 500g and 1kg variants. That’s what HUL hands over to distributors who ship it to the kirana stores where it’ll fly off the shelves.
Now imagine that Amazon Distribution goes to HUL and says, “Hey, we can help you cut your costs, eliminate the middleman and drive sales of Surf Excel”. It might be an interesting proposition — HUL wants to explore new channels but doesn’t want to hurt its existing distribution.
So, what can it do?
Well, per what Dhairyashil Patil, national president of the All India Consumer Products Distributors Federation, told The Morning Context, maybe it appeases Amazon a bit. If Amazon asks for 100 boxes of a product, HUL gives them 20–25 boxes.
But that’s a problem for Amazon. When a kirana store owner visits the Amazon Distribution app to place an order, they might invariably find that there’s not enough stock. They’re then forced to place orders for 5 boxes on Amazon. And reach out to the distributor for another 5. That’s a tedious process. So they could simply choose to eschew Amazon instead.
Or in another case, HUL might tell Amazon, “Look, we’ll give you the Surf Excel. But, we’ll give you the 5kg pack. We want to drive sales of that specific quantity”
At first, Amazon is overjoyed. They’re getting to deal with HUL’s top product. But then, reality strikes…why on earth would a kirana store owner buy a 5kg pack from Amazon? It’s the 500g and 1kg that are in demand. And a small store doesn’t want to waste shelf space stocking something they know won’t work. They’ll simply prefer to buy the smaller packs from HUL’s distributors.
And Amazon will be left in a lurch.
Also, nothing beats a good ol’ fashioned relationship.
Sure, digital is great. But feet-on-the-ground is even better. At least that’s what the kirana store owners will tell you.
Last year, The Ken pointed out how JioMart was dealing with a very specific issue. Their sales folks weren’t dropping in to visit these kirana stores. According to a distributor they spoke to, JioMart sales representatives were visiting kirana stores once a month. They felt it should be at least once a week. Because that’s what store owners are used to. That’s what makes them comfortable.
So what happens when the visits drop?
Kirana stores aren’t happy. Look at JioMart for instance. The satisfaction levels reported by kirana stores dropped from 98% in December 2020 to under 80% in July 2022.
Now imagine if a ‘digital’ disruptor has to employ the same tactics as a traditional distributor and create feet-on-street employees. The costs could be humongous. In fact, Udaan’s estimated to have nearly 12,000 folks to keep drumming up business.
That kind of hurts the digital business model doesn’t it?
Amazon would have to incur quite a bit of cost just to survive.
And finally, there’s the competition from FMCG companies.
Folks like HUL don’t want to be left behind the digital Direct-to-Business (D2B) wave. HUL saw the writing on the wall and launched its B2B Shikhar app a couple of years ago. It told kirana stores that they could simply stock up on products using HUL’s own app. If that wasn’t enough, HUL even struck a deal with SBI to dole out easy credit to kirana stores. Quick access to money is always appealing to a small business.
And it’s not just HUL. Look at Coca-Cola. Last year, there was a rumour that Coke was set to launch its own B2B e-commerce app Wabi in India. Kirana stores could simply use Coke’s own app to order their cans. No more picking up the phone, dialling the Coca-Cola distributors and placing the order. Use the app, and the distributors will deliver.
And while it doesn’t seem as if Wabi has stormed into India, it’s something that Coke has tried in other parts of the world. Especially in markets such as Nigeria that have a large network of their own kirana stores.
For HUL and Coke, the idea is simple — they already have an extensive supply chain. So, why not simply build the tech over it? It’ll make life harder for disruptors such as Amazon who’re building out everything from scratch.
So yeah, with all these hurdles, running a B2B e-commerce business in India isn’t a cakewalk. And it boils down to one thing — cash burn! Some estimates say that incumbents spend ₹4 to earn ₹1 in revenues. Maybe Amazon realized that it’s not a viable proposition in the long-run.
Until next time…
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