Hindustan Unilever's (HUL's) Humara Store project is close to Chairman and MD Sanjiv Mehta's heart. With the company generating 90 per cent of its business through general trade, Mehta has been passionate about digitally enabling kirana stores across the country. Way back in 2017, the company had converted a few grocery stores in Delhi into Humara stores. It tried to technologically empower the owner by getting him to order through HUL's Shikar app. It also enabled him to offer online services to consumers and keep the right stock keeping units (SKUs) by using data analytics. Back then, a tech-enabled kirana store sounded unreal. In fact, many store owners downloaded the app, but never used it. "I have the app but have never used it. Who has the time to order online? I prefer distributors coming to my store and taking orders," Arvind Sathe, a kirana store owner in Nashik, had pointed out then.
Fast forward to March-April 2020, the era of the deadly coronavirus pandemic where becoming digitally enabled is a must for the entire FMCG ecosystem. With traditional supply chain ecosystem nearly coming to a halt due to lack of manpower, FMCG majors (HUL, Britannia, Marico, ITC, among others) have hurriedly started using the digital route to get their products to consumers. The last one month has seen companies partnering with food delivery platforms (such as Swiggy and Zomato), cab aggregators such as Uber, and even security and community management solution providers such as MyGate and NoBrokerHood, to reach consumers.
Third-party supply chain distributor ShopX claims a 46 per cent rise in ordering by traditional grocery retailers from its platform in the first week of the lockdown itself. Cash and carry retailers such as Metro Cash & Carry have started picking up stocks from factories of FMCG majors and delivering to kirana retailers. Metro has also been encouraging stores to order from its app. Close to 83 per cent packaged FMCG business in India happens through general trade while ecommerce is less than 2 per cent. The latter, say experts, will surely see a surge post the lockdown to 15-20 per cent but the most interesting bit is how the traditional distribution network, which FMCG companies have built over decades, will evolve.
From companies adopting more automation across distribution networks, to moving towards asset-light models by working with third-party distributors, to consolidating existing networks, the next few months will see a major overhaul of the distribution network of the $100 billion Indian FMCG industry.
"The pandemic has subjected the country to an unprecedented situation. To provide support to consumers, we decided to address the distribution challenge in line with our core principles of innovation, agility and empathy. We are delighted that our unique partnerships with food delivery chains, consumer food apps, community e-commerce brands and our own direct to consumer portal have provided timely supply of essentials to consumers. We are witnessing strong demand through these channels," says B. Sumant, Executive Director, ITC, adding: "These partnerships are a vindication of the power of collaboration as no brand alone can fulfil the needs of the nation during these unprecedented times."
Marico has partnered with not just new-age tech platforms. It has also joined hands with logistics companies such as Delhivery, Shadowfax and Lalamove to deliver products from factories to depots and thereafter to distributors. "The distributors have also used services of these logistics partners to ensure movement of goods to retailers. Rolled out within 48-72 hours of the lockdown, this helped resolve problems at different levels and helped multiple distributors across regions restart their business," says Sanjay Mishra, COO (India Sales and Bangladesh Business), Marico.
A recent Nielsen report says supply chain and distribution reinvention is the priority of 50 per cent leaders of the FMCG industry while 43 per cent consider it as their top priority for the next 12 months. Evaluating various methods of digital distribution is priority of 57 per cent leaders while over 50 per cent consider digital transformation as top priority of their organisation over the next 12 months. Acharya Balkrishna, MD of Patanjali Ayurved, says a digitised supply chain and distribution ecosystem is a must in the current scenario. The FMCG player had unveiled a new digitised supply chain distribution system - which enables traceability right from the source of ingredients to manufacturing and thereafter at the distributor's warehouse right up to the final sale point - just before the outbreak of the pandemic.
"Our business faced a setback post demonetisation and GST after which we started putting together our digitised supply chain distribution mechanism. We have a clear picture of our stocks in various warehouses and at retailers. Thanks to the new system, we have been able to handle the coronavirus disruption well. Our system gave us real-time information the moment the disruption happened and we at once focused on markets where supply was an issue. We also prioritised products we needed to manufacture keeping in mind the labour shortage," says Balkrishna. He says after the initial disruption during the first two weeks of the lockdown, Patanjali is close to achieving its sales target for March-April.
Harsha Razdan, Partner and Head, Consumer Practice, KPMG, says reinvention of supply chain and distribution has become all the more important as consumer expectations and behaviour will change in the post-coronavirus world. "This will require FMCG companies to re-align supply chains in terms of agility, reliability, transparency, hygiene perception and traceability. The globally interlinked supply chains will move towards higher localisation and source diversification to mitigate risk. In addition, there is going to be a marked shift towards online/marketplace delivery. Supply chains will need to be reconfigured to address this shift."
Automation is set to become the buzzword. While bigger companies have embraced automation to a large extent, mid-sized and smaller manufacturers will also feel the need to invest in technology. "So far, supply chains have been optimised for costs and responsiveness to demand. Now, companies will say, how do we factor in risks to labour? Therefore, they may want to automate across the value chain," says Kannan Sitaram, former Dabur COO and currently Venture Partner, Fireside Ventures.
Small and mid-sized companies are also looking at strengthening ties with third-party distribution companies such as ShopX and Udaan which already have a strong tech backbone. Srini Vudaygiri, CEO, Unibic Biscuits, says he is in talks with several such companies. "During the lockdown, these new-age distribution companies seemed to be better prepared than most others. They were able to get curfew permits and put trucks and manpower in place. Relationships with these companies will become stronger," says Vudaygiri. These companies enabled retailers to place orders online and could, hence, follow social distancing. "Since our warehousing is digital, all that the retailers need to do is log in to our app and place orders," says Amit Sharma, CEO, ShopX. He says their digitised system enables them to tell retailers about products that are more in demand. "Sanitisers were not the only product in demand. A lot of consumers also wanted to buy products like UHT (ultra high temperature) processed milk and juices. We were able to give this information and, thereby, enabled them to stock more efficiently."
Ashish Jhina, Co-Founder and COO of Jumbotail, says orders on his platform have risen two-three times since the lockdown. "Post COVID 19, we will see a huge change in go-to-market strategies of companies. They will try to find ways to make their supply chain and distribution networks more resilient. Traditional supply chain and distribution networks were also not able to withstand shocks such as demonetisation and GST."
While players such as ShopX, Udaan and Jumbotail have been in the distribution business for a while, the new kids on the block who have taken advantage of the disruption are the likes of Swiggy, Zomato, Dunzo, Uber, MyGate and NoBrokerHood. While NoBrokerHood doesn't consider this a long-term business proposition, a spokesperson for Uber says, "Right now, our aim is to keep the economy running and enable Indians to stay at home in line with government guidelines and create earning opportunities for our driver partners. The partnership with retailers further consolidates our new last-mile delivery service."
Food delivery platform Swiggy says it is here for the long term. In fact, there is also unconfirmed news of Zomato buying online grocery platform Grofers. Vivek Sundar, COO, Swiggy, says delivery of grocery and essentials was always part of its long-term strategy and coronavirus lockdown has helped it ramp up faster. "Swiggy entered the groceries and essentials category in 2019 with pilots in Gurgaon and later in Bangalore and Hyderabad. Extending hyperlocal delivery has unlocked a new dimension of convenience and safety for our consumers as well as earnings for our delivery partners during these extraordinary times. We will continue to scale up this category with the goal of providing access to essentials," says Sundar. Mishra of Marico confirms they are considering their partnership with the likes of Swiggy and Zomato for the long term. "We will continue to leverage this to reach our consumers directly."
While FMCG firms' increased focus on ecommerce (currently less than 5 per cent of sales) is a no-brainer considering that consumers will avoid visiting stores even after the lockdown, a number of experts say unit economics of doing business with food delivery platforms may not work in the long term. "The traditional supply chain is much more cost effective," says Kannan of Fireside Ventures. A big FMCG brand would have retail margins of 10-12 per cent and distributor margins of 4-6 per cent. A Dunzo or a Swiggy, says Kannan, will also charge a shipping fee, which will take overall costs to 25-30 per cent. "Most companies are currently absorbing these costs as they are desperate to take their products to consumers. I am not sure if it will make sense for them in the long term." Platforms such as Swiggy and Zomato are not viable in the long term, says Balkrishna of Patanjali. "They approached us too but we didn't find it profitable. Ours is a low margin business and they were asking for high margins. It didn't work for us."
P.C. Musthafa, Founder, ID Fresh, says the disruption caused by the lockdown has forced his company to invent an online-offline distribution model. The company has launched an application called 'Product Finder', which enables it to track inventory across stores. It also tells consumers about stores which have ID batters. "One needs to go to our website and key in details of one's locality on the product finder. The finder also gives us information about consumers which, at a later date, will help us service them directly."
Here To Stay
Easwaran P.S., Lead, Supply Chain, Deloitte India, expects companies to make their distribution channels nimbler and lighter. "Companies will conserve cash. A lot of fixed assets will get converted into variables. They will work with people who are specialised in this, which could either be a third-party company or a specialised distributor." An asset light model, however, doesn't mean that the traditional distributor will vanish. In fact, the traditional model is the most cost effective, especially in rural and Tier IV-V markets which account for over 50 per cent of FMCG sales. These are markets where most companies do not have direct distribution networks and largely depend on sub-distributors and wholesalers. "The traditional distribution channel is here to stay because it is a strong backbone of the country. It will take some time to wish that away. Having said that, online and modern trade channel will continue to witness accelerated adoption due to the Covid crisis," says Rishav Jain, Senior Director and Consumer & Retail Sector Lead, Alvarez and Marsal, a consultancy.
In fact, companies such as Amul and Parle Products have tweaked their distribution strategy during the lockdown, but have continued to work within the traditional network. R.S. Sodhi, MD, Amul, says the company has three supply chain and distribution channels, one each for fresh, ambient and frozen products. "When our products were unable to reach consumers due to lack of manpower, we merged the network. The idea was to take products to consumers and whichever distributor had the ability to do so started distributing all kinds of Amul products. This helped increase sales."
Similarly, Parle Products offered incentives to transporters and workers so that they keep working, says Category Head B. Krishna Rao. "Since manpower was an issue for our distributors, we encouraged them to get in touch with retailers and ask them to pick stocks from them. We also directly delivered to retailers and partnered with cash and carry players to pick stocks from our factories and deliver to the stores." Rao says though Parle Products is evaluating partnerships with third-party distribution platforms, its traditional distribution network will always remain the focus. "General trade constitutes 90 per cent of our distribution. It may come down to 80 per cent in the foreseeable future but it can never be replaced."
Sodhi of Amul says his company will go back to the old ways once normalcy returns. "We are more worried about today. Once normalcy returns, no one can serve better than general trade."
Experts are expecting the emergence of a host of hybrid models. A traditional distributor is the stockholding point. He also delivers to the retailer. He is also the working capital provider as he extends credit to the retailer. Vudaygiri of Unibic says distributors may continue to raise bills to retailers and act as stockholding points. But companies may prefer working with a third-party logistics enabler for last-mile delivery. "The distributors needn't extend credit either. There are quite a few fintech companies which are extending credit to retailers," he explains.
While companies will look to conserve cash by working with third-party suppliers, they will also consolidate their existing network for more efficiency. "Covid would have adversely impacted many smaller distributors with stressed cash positions. Therefore, distribution channel could potentially consolidate. Larger and more liquid stakeholders are likely to survive this crisis. Even companies are less likely to take care of all participants in the value chain," points out Jain of Alvarez and Marsal.
The other stakeholder which FMCG companies will increasingly work with are cash and carry retailers. The lockdown has seen the likes of Metro Cash & Carry pick stocks from manufacturers and delivering directly to retailers. Arvind Mediratta, CEO, Metro Cash & Carry, says his company is making a pitch to FMCG manufacturers to make it their natural route to market. "If you look at a small kirana shop, a big company like HUL may have enough products to cater to the small store. But a mid-sized FMCG player may not find it economically viable to serve a kirana shop. Kiranas come to us to buy. We have a large sales force of 750 people. We also have our own ecommerce app. It is much more efficient to reach consumers through us," he says.
On the other hand, the good old kirana store owner who was once averse to ordering online is now trying to become digital savvy. Dinesh Patel, owner of a kirana store in suburban Mumbai, says he earlier never understood the business models of various online B2B platforms such as Udaan or even BigBasket. "In fact, none of them have been able to deliver due to manpower shortage. I am personally going to distributors to pick up stocks."
But will Patel switch to online platforms when normalcy returns? "I will order online when I am out of stock of certain fast-moving SKUs but I will never stop buying from the distributors. I have a long-standing relationship with them."
The FMCG industry will surely relook at its distribution infrastructure in the new normal post the lockdown.
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