New circles in the sands of distribution
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The importance of distribution—the ability to take your product to the consumer—cannot be overstated in India where companies have stayed dominant through their ability to reach the length and breadth of the country. A great example is Hindustan Unilever Ltd which, with its strong presence across 6.3 million retail outlets, has been the undisputed leader across several consumer product categories. Will traditional distribution models continue to remain as strategic in the future? What should younger companies do to neutralize this significant advantage that incumbents have built over decades?
Distribution as a Strategic Advantage
In India, as in Europe, one encounters a different culture, language and consumer habit every few hundred kilometres. However, unlike Europe, we have not had retail infrastructure that brands can use to build an effective presence across the country. This has posed tremendous challenges to consumer products companies, both for marketing as well as distribution.
It is not uncommon to see three-five layers of intermediaries between the brand owner and the eventual consumer. As inefficient as that may sound—given the margin requirements of each layer— this continues to be the most effective way to get to the consumer in most parts of the country. With close to 70% of the country living outside urban areas, a distribution model that looks like the one in the accompanying graphic ensures that there is both reach and coverage.
Companies with such national distribution structures use it as a moat to keep out challengers. Young companies find it hard to build relationships with hundreds, and possibly thousands of distributors and find it even harder to make the economics (RoI or return on investment) work for them at small scale. However, recent changes in the retail landscape and interesting developments in the logistics and financial services industries have combined to challenge this so- called strategic advantage of incumbents. In fact, for some categories, traditional distribution structures could even become impediments to reacting to shifts in consumer preferences and in adopting large-scale changes such as the goods and services tax.
The Changing Face of Distribution
In light of all the new developments, there is tremendous potential for new consumer products companies to re-imagine distribution in their favour. Below are a few trends and approaches that may allow them to do this.
Emerging retail models: Much has changed in the retail landscape over the last 10 years. The two new fastest growing channels are modern trade and e-commerce. The likes of Amazon and Flipkart are threatening to change buying habits in a way that could put traditional distribution models at risk. Breadth of products, aggressive pricing and convenient delivery options have made this the retail channel of choice for a new generation of consumers.
Consumer product start-ups find online retailers to be ideal channel partners, thanks to their willingness to experiment with new products and their ability to get quick consumer feedback. We have seen the emergence of several names in beauty, wellness and apparel that are online first or online-only brands. MuscleBlaze, an online first brand, grew to become one of India’s top three protein brands within three years of its launch.
Modern trade has emerged as another large channel for consumer products companies and contributes to approximately 8% of total retail transactions in the country. For certain categories such as packaged basmati rice, modern trade has a penetration of more than 20%, making this a channel that is essential in every marketer’s mix today. We have seen retailers such as Reliance Retail and Nature’s Basket encourage smaller, innovative and niche brands by giving them shelf space and visibility across India.
A good example of this is Drum Foods, which successfully markets a premium ice cream brand called Hokey Pokey and a Greek yogurt brand called Epigamia, largely using modern trade as a channel. For a few categories, modern trade is likely to emerge as an effective means for innovative consumer product start-ups to gain exposure and build sizeable businesses over time.
Direct distribution: A few challenger brands have gone the direct distribution route in order to retain control over customer experience and this has paid off. For example, when Hector Beverages, the maker of the wildly popular Paper Boat range of traditional Indian beverages, was ready to go to market, it was determined to deliver a high level of experience to its first set of customers and realized that the existing distribution system was not geared to do this. So it built a direct-to-retail model that gave its products excellent visibility in stores and resulted in high consumer affinity for the brand.
Another example worth noting is that of ID Foods, the maker of a range of ready-to-cook natural foods. Like Hector Beverages, ID Foods also realized that they were up against a distribution system that was not designed to deliver fresh foods. With their near obsessive focus on freshness and quality, ID Foods decided to build a direct distribution channel that would move its products from the factory to retailers everyday. While this sounds hard to do, this was an essential part of its overall value proposition and one of the reasons for the brand loyalty it enjoy today. Clearly, if handled right, direct distribution can be a powerful way for consumer product start-ups to seed the market and establish consumer connect.
Direct to consumer: In some categories, brand owners are taking their products directly from factories to consumers by leveraging several digital channels for customer acquisition. In categories like apparel and niche personal care products, the young Indian consumer is yet to form strong brand loyalties and this allows new consumer product start-ups to build meaningful businesses by speaking directly to and innovating for this segment. Bohoo clothing, a UK-based rapid fashion brand, has grown rapidly from zero to over $250 million in five years, purely operating online and introducing 300 new styles of clothing for women every week.
A few companies are attempting to do a similar direct-to-consumer approach online in India, using rapid fashion (design to retail in 7-10 days) and international styles as their selling points. These companies aim to use their strengths in digital marketing to keep the cost of customer acquisition low. Urban Ladder has built a sizeable business and a highly admired furniture brand—based entirely on the online and direct-to-consumer model—through obsessing over all the details from design to installation to ultimate customer satisfaction.
Such full-stack companies are cutting through layers and enabling a “naked touch” between the brand and the consumer, thus controlling the brand experience fully. On a cautionary note, the approach of direct-to-consumer only works when the economics allow it. For several categories where order values or absolute gross margins are low, this approach is unlikely to be profitable.
Distribution tech platforms
As e-commerce becomes more prevalent, new business-to-business (B2B) distribution platforms are emerging in several categories. From steel to toys, several young entrepreneurs are building “stores” that small retailers can order from, in the quest to eliminate layers and drive greater efficiencies. These new platforms aggregate several retailers and provide opportunities for new consumer product start-ups to access and target. While these platforms are still evolving in form, the inherent efficiency they help build is undeniable.
Electronics Bazaar, a B2B e-commerce company, is helping take a number of mobile phone brands to tens of thousands of retailers through its distribution platform. In a category where brand loyalty is low, this distribution channel can, over time, nullify the advantage that a brand like Samsung enjoys thanks to its distribution reach. A clutch of new start-ups are emerging in apparel, presenting manufacturers (or labels) directly to small retailers and opening doors for new brands in the process.
Fintech and logistics—Hitting the Core
This last one is still an early trend but could change the face of distribution. It involves removing logistics and financing from under the purview of distributors, leaving them with more of the warehousing function. It may sound radical today but it could lead us to a better world in which all the entities involved specialize in what they do best.
For example, a specialist logistics firm can enable last mile delivery of multiple brands from a distributor’s warehouse with optimal beat planning, an small and medium enterprise credit focused financier can fund the retailer’s inventory based on its point of sale data, and sophisticated ordering platforms will allow retailers to order products based on sales data and customer preferences. In such a world, current distribution systems will seem both limited and inefficient.
In summary, emerging new retail channels are neutralizing the traditional strategic advantage that distribution offered and providing opportunities for innovative brands to emerge and catch the consumer’s fancy. As this new breed of entrepreneurs is able to fashion distribution channels and modes that work for them and their products, consumers are in for a significant upgrade to customer experience.
G.V. Ravishankar is Managing Director at Sequoia Capital India Advisors.
(Disclaimer: Hector Beverages is owned by a Sequoia portfolio company. ID Foods is a brand owned by a former Sequoia portfolio company.)
This article is the second in a three-part series highlighting key trends and developments in India’s consumer entrepreneurial space.