In today's Finshots we see why FMCG distributors across the country are revolting against the manufacturers
The Story
The neighbourhood stores that sell us everything (from biscuits to soaps) typically rely on a chain of distributors to source their inventory. These distributors, in turn, buy their goods from the companies that make the stuff. It doesn’t matter if you live in Imphal or Indore, this chain is as extensive as it gets. There is always a salesman or two chugging along on his scooter or pickup truck, busy making deliveries of Parle-G or Maggi. And this happens every day in every nook and cranny of the country. There’s also a decent chance that you may have witnessed some of them making deliveries while you were grocery shopping yourself. This is how India’s retail ecosystem has functioned for decades — offline and in plain sight.
And for fast-moving consumer goods or FMCG companies like HUL, Procter & Gamble, Dabur, etc, these humble distributors were a godsend. They were responsible for getting products featured on the shelves of Kirana stores and ultimately pushing it to the customers. If we were to simplify fast-moving retail this is how it would look.
FMCG > Distributors > Kirana store > You
All four participants of the retail chain (including the consumer) have a distinct role to play.
However, this time-tested equation faced its biggest test during the height of the pandemic. There were lockdowns and there were disruptions. Thousands of traditional distributors were left stranded. They couldn’t move around and they couldn't move the goods either. Although this was a brief period of disruption, the FMCG companies soon realized it wouldn’t hurt to cultivate a parallel channel of distribution. And this gave an impetus to new age organized wholesale distributors like JioMart, Udaan, Metro Cash & Carry and Jumbotail.
These companies proved to be good partners and since most of them were backed by VC and PE money, they had cash to burn. Lots of it. They also paid for goods right away as opposed to traditional distributors who buy goods in small quantities on a credit basis, paying off their dues within 10–15 days. FMCG companies meanwhile returned the favour by offering sizeable discounts on their products. And this meant new-age distributors could offer significantly large margins in the range of 15–20% as opposed to traditional distributors who could only offer shop owners margins of 7–12% over products sold.
Put another way, this meant the likes of Jiomart could severely undercut the traditional distributors and sell goods at much lower rates. Not only did shop owners find apps like Jiomart cheaper and easy to use, they also delivered goods faster. And it probably wouldn’t surprise you to know that many shop owners preferred the latter option over the former.
Now, these traditional distributors feel that Jiomart and co are destroying the age-old distribution networks. And what’s worse? They believe that the FMCG partners are enabling it by offering deep discounts. And they don't seem to be in the mood to take this indignity lying down. With the beginning of the New Year, distributors have decided to stop supplying certain popular consumer products to local stores until FMCG companies promise to give them similar prices and margins like the ones given to organised distributors.
And while you may think that this is a bluff of sorts, FMCG brands would not want to upset their old distributor friends entirely. Because offline as they may be, they still are quite effective at getting the goods to every nook and cranny of the country. They still service about 90% of the overall retail market.
And so, while newer channels like Jiomart may seem important and appealing to some FMCG brands. It is important to note that over-reliance on the likes of Reliance could prove detrimental to the business of some FMCG companies, owing to the fact that Reliance is known to push its ever-expanding private label brands to neighbourhood shops using Jiomart.
So yeah, distributors are revolting against their FMCG partners, and if you find your favourite toothpaste missing from the store shelf, maybe you’ll remember this story.
Until then…
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