Why Patanjali is going the e-commerce way3 min read . Updated: 29 Jan 2018, 12:06 PM IST
Patanjali, through its tie-ups with e-commerce firms, is only being pragmatic in doing what's good for its own business, of being available where the consumers are
Some may have seen the irony in Patanjali Ayurved Ltd tying up with foreign-owned/funded e-commerce companies, even as it swears to end the reign of foreign-owned consumer brands in the market.
Patanjali is only being pragmatic in doing what’s good for its own business, of being available where the consumers are. Its decision is one more pointer to the growing importance of e-commerce as a distribution channel for packaged consumer goods.
Now, companies such as Hindustan Unilever Ltd have highlighted how modern trade (chain stores) and e-commerce channels have been growing faster than the traditional (kirana) segment.
But is this company-specific or is it a broad trend? Will this continue?
Consider what data from Euromonitor International (Euromonitor), a market research provider, shows.
Between 2014 and 2017, revenues of modern grocery retailers rose by a compounded annual growth rate of 16.1%.
Modern stores would include formats such as supermarkets, hypermarkets and convenience stores. In this same period, traditional retail’s sales grew by 9.8% CAGR.
While the Euromonitor data does not capture internet retailing for grocery separately, it has some individual segments that give an idea of growth. These are not directly comparable with the modern/traditional grocery retailing figures. Remember these are relatively small in online at the moment, so take the growth figures with a pinch of salt.
Food and drink internet retail saw sales rise by 42.7% CAGR between 2014 and 2017, while beauty and personal care rose by 20.1% and home care by 35.1%.
In the coming five years, Euromonitor expects that growth rates of modern retail will exceed that of traditional retail, and growth of specific categories in internet retail will trend higher (see chart).
This rapid growth is what is drawing FMCG companies to this platform. Some of that growth may be sales shifting from the other channels, due to convenience or discounts, for example. Note that the forecasts are for real growth (stripped for changes in price) and, depending on price growth, can change.
While the e-commerce companies are sure to benefit from this additional revenue stream, what of the consumer companies? This is both an opportunity and a threat. The opportunity is that a new channel offers new growth opportunities, once it stops taking share from the other channels and sales begin to grow everywhere.
The growing smartphone population and cheaper data rates mean the target market for e-commerce can increase further. E-commerce does away with the need to have a physical store to sell in a locality, the reason why modern retail’s expansion has been relatively slow in smaller markets.
Where is the threat then? The threat is not different from what you see in modern retail. Bargaining power tilts towards the retailer, compared to traditional retail which is fragmented (even if organized under retailer associations). This leads to pressures on margins payable, incentives for promotion and display and of course, working capital.
The bigger worry should be the customer’s loyalty and whether the balance tilts more towards the retailer. Then, there is the ever-present risk of private labels, of retailers selling their own products that compete with the consumer companies. If modern retail’s share becomes dominant, they can even influence price changes (to benefit the customer), as is seen in developed markets.
Some caution is also due. Modern retail has not been as successful in gaining share as was expected two decades ago. E-commerce has one significant advantage in not being tied to real estate for expanding reach, which gives it a better chance of riding out rough patches.
For now, consumer goods companies have no choice but to hitch their wagons to the e-commerce train so that they don’t miss out on the ride.