How many big global brands have invited rebellion in India

This is a rebellion that multinationals have invited upon themselves.

About 90% of consumption in a continent-sized economy flows through a pipe called “general merchandise”: brands employ third-party distributors who stock the bulk inventory, with smaller quantities in stores in their area. Ship goods, deposit cash and make offers. Retailers offer unsecured credit at zero interest (without the cumbersome “know your customer,” or KYC, formal financial system checks).

Distributors also take on the obligation of complying with existing rules and regulations for brands as they deal directly with last-mile outlets, known as “grocers”.

Each of these services is important in its own right. Together, they are worth at least 11.5% of the final price of the goods, estimates Sumit Agarwal, an American-trained engineer who returned to run his family’s consumer goods delivery business in North India. Still, the share of Pai’s distributors is barely 5%-to-6%. Their remaining value addition benefits other stakeholders including consumers.

If the pipe is now only growling from discontent, it is because a new breed of rivals has arrived. Better-funded wholesale suppliers such as Walmart Inc., billionaire Mukesh Ambani’s Geomart and Germany’s Metro AG, as well as business-to-business e-commerce firms such as Udaan and Big Basket, use their improved financials to win over the small shopper. The muscles are flexing.

The price at which distributors get goods from brands allows only 10%-12% margin for retailers. Apps are offering up to 20% off. Since no new-age intermediary is operationally profitable, deep discounts are likely to be backed by investor capital, which is currently lacking. Retailers are switching to more modern suppliers, and the traditional distribution chain is up in arms.

The Economic Times last month carried the story of Reckitt Benckiser Group plc distributor Vipresh Shah in a small town 200 miles south of Mumbai. Shah, who had been selling Dettol bars to shops in his area for 14 years, had not received a single order for eight days when the newspaper came under his control. Store owners on Jiomart partner app are buying the same soap 15% cheaper and accusing Shah of reprimanding him.

Dare to take on the behemoth, the middlemen are sending out an SOS: “Don’t turn us into a bunch of Willy Lomans frustrated with Death of a Salesman. We, too, can digitize and compete.” Distributors in the Indian state of Maharashtra stopped supplying Hindustan Unilever Ltd’s Kisan range ketchup and sauce from January 1 and threatened to extend the blockade to personal care products and detergents Colgate is facing a similar ban on its Max Fresh line of toothpastes, with a consortium of traders warning that its products could disappear from retail outlets in Maharashtra by February. The ban could extend to other states as well. .

It probably won’t come to that. Small and medium sized middlemen are spread all over the country. While they have temporarily come together in one state, they do not have the staying power for a protracted, nationwide strike against the far more resourceful producers. (According to the latest news reports, the All India Consumer Products Distributors Federation has suspended its boycott of Unilever, though the campaign against Colgate continues.)

Mobile Internet is changing the retail landscape in India. Amazon.com Inc. and Walmart Inc. Pure e-commerce, offered by Flipkart, is still a small part of overall consumer spending. But owners of mom-and-pop grocery stores are lining up their smartphones to be cheaply sourced. 1 reason for them to trust 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 $700 billion expansion and half of the new jobs in the Indian retail sector by 2030.

Technology-led disruptions will fundamentally increase the productivity of commerce. But the traditional trading channel is not one to be left behind. “There’s room for everyone here,” says Agarwal. Use your market power. It won’t be good for anyone. ,

Rather than shore up their long-term partners in the country, brands should help adopt technology to make the direct business channel more efficient and profitable. It won’t take long to hold hands. With simple digital tools, distributors can access verified customer KYC, assess and underwrite credit risks and present a transparent account of their services in a language that financiers can understand. As intermediaries become more bankable, their cost of capital will go down. Agarwal is helping Mumbai-based fintech ePayLater start some of these innovations.

Families in India faced two debilitating waves of the pandemic without much financial support from the government beyond free meals. Research has shown that it is not the formal financial system that helped them survive the lockdown and increased medical expenses, but informal loans from shops. Where will the hole-in-the-wall grocery get resources to become the 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 the previous generation of multinational managers. His successors must not let a short-sighted vision of technological change destroy this vital safety valve.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He was previously a columnist for Reuters Breakingview. He has also worked for The Straits Times, ET Now and Bloomberg News.

This story has been published without modification in text from a wire agency feed. Only the title has been changed.