Choices for striking FMCG distributors: To be creative or self-destructive
Premium- Modern trade buys in greater bulk than the largest traditional distributor, and so gets a bigger discount. To oppose this is to question their own business model
In about 10 years between the first and second decades of the 20th century, automobiles completely replaced horses and horse-drawn carriages in New York City. It is entirely plausible that cartwrights, who made the carriages, smiths, who made the horseshoes and metallic parts of the carriages, livery stable workers, suppliers of oats and hay for the horses, the workers whose job it was to clean up the mess the thousands of horses deposited on the streets of the city everyday, and sundry others, felt aggrieved by the technological paradigm shift that had made their jobs redundant. Some might have protested. But the cars continued to roll out, in greater numbers, ever more powerful and ever more affordable. Horses were reduced to quaint showpieces from the past.
The distributors who threaten to boycott Hindustan Unilever and Colgate-Palmolive because these companies offer larger discounts than what they give the distributors to newfangled organised trade would do well to consider this bit of history. The distributors’ pain is real, their plaint, valid; but without a solution, given the unstoppable march of technology. They have to adapt, not try to return to streets piled ankle-deep in horseshit.
Large e-commerce platforms and new B2B players, the likes of Udaan, Elasticrun, Jumbotail, and cash-and-carry players such as Walmart Best Price, Metro Cash- and-Carry and JioMart, who now compete with the traditional distributors to supply the kiranas, the retail stores from which customers buy their requirements of fast-moving consumer goods (FMCG), are creating a fundamental shift in the business of distribution. They are shortening the supply chain and making it more efficient. Agitational techniques on the part of the traditional distributors cannot stop the disruption. Right now, the traditional mode of distribution accounts for about 85% of the volume, but things can change rapidly. It took about 10 years for horse carriages to vanish from New York City.
The distributors err on two counts. When they oppose bigger volume discounts to the new organised trade than what they get, they are fighting against the very principle on whose basis the distribution business is organised. Each layer of the distribution chain gets a price linked to the volume it transacts. The guy at the top of the distribution hierarchy gets goods at a lower price than the price he charges the guy immediately below him, and so on. Modern trade buys in greater bulk than the largest traditional distributor, and so gets a bigger discount. To oppose this is to question their own business model.
The second mistake the traditional distributors make is to believe that if they get the goods from the FMCG majors at the same price as at which the modern trade entities get them, they would be able to compete with modern trade for the retail outlets’ custom. They cannot. Because modern trade also employs superior logistics and some of them also help the retail outlets spruce themselves up, giving them capital and offering technological inputs.
Ultimately, the business model eliminates some costs and shares the savings with the end-customer and the end-retailer. This improves collective welfare. The only way the traditional distributors can stay in the business is to organise themselves into versions of the large, technology-driven players they now oppose. In the face of creative destruction, it is their choice, whether to be creative or self-destructive.
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