B2B players sense a window of chance
Despite seeing a hit in growth, e-commerce platforms feel they’ll gain from the pandemic. Will it be sustainable?What remains to be seen is how long does it take for traditional distributors and wholesalers to recover, and how many brands and retailers go back to their old ways after the pandemic
PremiumBENGALURU : A week before India announced a nationwide lockdown on 24 March, Samarth Agrawal and Rohit Narang, founders of MaxWholesale (99 Algorithms Pvt. Ltd), an e-commerce platform that sells food and grocery products to kirana stores, had an inkling that harsh containment measures were likely to be announced in light of the rising cases of covid-19.
The company hurriedly began stocking up on goods like masks, Maggi, rice and soaps and cut inventory of goods like chocolates and fruit juices, which could go bad if they were stuck in warehouses and on store shelves without air conditioning.
The weekend before the lockdown, demand from the kirana stores (grocery shops) on the platform started increasing suddenly. People in NCR (National Capital Region) were resorting to panic buying and many kirana stores were running out of items like rice, pulses and Maggi—just the products that MaxWholesale had begun buying in higher volumes some days earlier.
When the lockdown was announced with just four hours’ notice, the company was completely overwhelmed. With no clarity around which services were allowed and where, its warehouse in Delhi’s Mahipalpur was presumed shut and about 70 of its 100 staffers, mostly delivery and warehouse workers, couldn’t make it to work. Truck drivers, who supplied goods to the company’s warehouse from wholesalers and brands, were stuck at state borders and many of those in NCR couldn’t secure passes or had decided to take off for their native places.
The entire supply chain was broken.
At the same time, daily order volumes from the 10,000 or so stores on its platform went through the roof, up by five times for days in succession. Unable to cope, MaxWholesale had to ration out its services by refusing new orders for hours every day.
“There was complete chaos and we were in the middle of it," Agrawal said.
Within weeks, though, MaxWholesale had become the default go-between for many brands and kirana stores in NCR, temporarily replacing offline distributors and wholesalers whose operations were frozen because of a combination of lockdowns, inaccessible warehouses, labour shortages and credit crunch. The firm stepped into the vacuum, worked with smaller, nimbler logistics firms, arranged for passes for their truck drivers and assumed the risk of fetching products from factories.
With help from one of the company’s investors whose other portfolio companies had laid off operations staff, MaxWholesale was able to rapidly replace its logistics and warehouse workers who had left Delhi, and hire dozens more. Most of all, its technology platform offered some predictability in demand and transparency in prices to retailers and brands in a volatile environment.
From 10,000 retailers in March, MaxWholesale now works with some 17,000 kirana stores and expects to have more than 30,000 on its platform by the end of September. The company has tripled the number of its consumer goods brands suppliers to 180. It has established direct business relationships with many of them, earning fatter margins and getting access to higher volumes per shipment and more products. Its monthly gross merchandise value has soared to $2.5 million from $0.5 million before March.
“GST compliance had already made life difficult for offline distributors and wholesalers but this added operational complexity is another thing altogether," Agrawal said.
MaxWholesale is one of the many business-to-business (B2B) e-commerce platforms that is trying to partially or fully replace traditional distributors and wholesalers that act as crucial go-betweens in the consumer goods supply chain starting from manufacturers and ending with retailers. Because it works only in the food and grocery space and because of its relatively small size, MaxWholesale has benefited enormously from the lockdowns that for months had brought commerce in most other sectors to a halt.
Other e-commerce platforms like Udaan and ShopX, which straddle multiple sectors, including fashion and electronics apart from food and grocery, have seen a decline in overall sales since March. Others like Indiamart have registered a steep fall in growth. A full recovery to pre-covid levels for many e-B2B (business-to-business) platforms is likely to take at least another quarter or two, depending on the duration and number of local lockdowns.
But even these platforms say that the short-term hit to their businesses is overshadowed by the acceleration of digitization of the retail and wholesale supply chains that is likely to outlast the crisis and trigger a faster expansion of the e-B2B sector. While large e-B2B startups are likely to face down rounds amid a wider funding winter for internet startups, this trend could persuade investors to spare them the kind of hefty cuts in valuations that are all but certain in sectors like travel and mobility.
What remains to be seen is how long does it take for traditional distributors and wholesalers to get back on their feet, and how many brands and retailers go back to their old ways after the pandemic.
Distributors disrupted
Some new trends have emerged in India’s largely unorganized retail market over the past four months. Modern trade, comprising supermarkets and brand-name stores, has been badly hit, while business-to-consumer (B2C) e-commerce companies like BigBasket, Grofers, Amazon and Flipkart have been the biggest beneficiaries of the change in shopping habits.
In contrast to offline modern trade, the 12 million or so kirana stores across the country have proved to be resilient as lockdowns necessitated hyperlocal shopping. Kirana stores procure most of their goods from hundreds of thousands of distributors and wholesalers that in turn source them from brands and manufacturers (e-B2B platforms have grown rapidly in recent years but still form a minuscule part of the overall market).
These traditional distributors and wholesalers, which use rudimentary technology, rely on salespeople to visit stores for taking orders and maintaining relationships with shop owners. They usually offer generous credit terms and arrange for logistics.
But the covid-19 crisis has frozen their businesses. Many of their staff were migrant workers who left in March and April and haven’t returned yet. Retailers are more wary of meeting salespeople in person for fear of transmission, which has made demand forecasting uncertain.
The warehouse and logistics operations of distributors are at the mercy of local regulations, which keep changing; because many of these distributors are small and medium enterprises, they don’t have the scale to divert goods to other regions in the country that are open for business. In addition, there is a huge credit crunch in the network as many distributors have stopped offering credit for fear of defaults and uncertainty in demand.
All these factors have driven retailers and brands towards e-B2B platforms. Retailers, because they are able to place orders online without interacting with salespeople and get a regular supply of goods at their stores regardless of local lockdowns. And, brands, because e-B2B platforms are a relatively more reliable channel presently, offering demand predictability and an assurance of delivery of goods across cities and states.
“In these three to four months, the e-B2B sector has gained three years in terms of the push towards digitization of supply chains," said Amit Sharma, chief executive officer, ShopX. “There has been a very deepened and heightened interest from brands and sellers to work with the e-B2B industry."
The recovery
In April, monthly gross merchandise value (GMV) at Udaan, one of the top two e-B2B firms along with Indiamart, plunged by more than 70% from its regular level of nearly $200 million. In the expectation that sales of fashion and electronics products, which contribute nearly half of its GMV, would take about nine months to recover, the company fired more than 3,000 operations staff in these categories.
But by early July, Udaan’s GMV in these categories had clawed back to about 80% of pre-covid levels, co-founder Sujeet Kumar said.
“All the major supply hubs like Mumbai, Delhi, Calcutta, Chennai are in virtual lockdown so retailers in tier II and below have become very dependent on us. For manufacturers and brands, their traditional distribution channels have gone for a toss. The brands that were earlier showing resistance are coming to our platform by themselves," Kumar said.
Because of this willingness among many brands and retailers to work with Udaan, the e-B2B platform has seen a sharp drop in sales costs and extracted lower prices from brands. Its monthly burn rate has reduced by a third. The same factors have tripled gross margins at ShopX from pre-covid levels, according to Sharma. ShopX had earlier planned to achieve Ebitda-level profits by FY24. Now the company expects to show Ebitda-level profits in FY22.
While it has capital to chase rapid growth, Sharma said the company is only interested in “high-quality revenues"— where margins are high and risk is relatively lower. This means that the company continues to avoid offering credit to retailers, even though many stores are asking for it. Instead the firm encourages retailers to buy more often—every two or three days as opposed to their previous frequency of once every week or 10 days.
“In the consumer sector, there is a theory that you can keep investing in a customer and one day he will be loyal to you, and you would have eliminated all competition, then you can lower your discounting and make money. That theory of company building is not suitable for e-B2B. It’s not a winner-take-all space. We’ve always known this. But with the covid crisis, we have accelerated the profit agenda," Sharma said.
Will digitization sustain?
An immediate worry for e-B2B platforms is the possibility of an increase in local lockdowns in smaller cities and towns, where transmission rates are rising. Over the past month, Bhubaneswar, Guwahati, Patna, Bhopal, Hubballi-Dharwad, Madurai and many other cities have imposed curbs on commerce to limit transmission that end up having a severe cumulative effect on supply chains.
“Lockdowns keep driving up costs—vehicles take more time to deliver, they are less utilized, and the fixed cost of EMIs (on vehicles) increases," said Raghuram Talluri, CEO of Loadshare, a logistics startup. “They affect the confidence of the entire ecosystem. Workers who had begun returning now wonder how long this lockdown will last for?"
Even after the pandemic is over, the jury is out on whether retailers and brands will continue to move towards e-B2B platforms and away from their older channels at the same pace.
What will certainly make it harder for some offline distributors to stay afloat over the next year is that the economy is expected to contract, which will hit retail spending and exacerbate the credit crunch in the sector.
The current system where the offline distributor acts as the expert on everything from logistics and credit to demand forecasting is not the “most evolved," said Kanika Kalra, partner, McKinsey & Co. “While kirana stores have seen a revival of demand through covid-19, the footprint of offline distributors may shrink with further digitization. E-B2B players will become a larger force (especially for smaller brands)," Kalra said.
But Sharma of ShopX said that while some distributors may be forced to go out of business, a majority will survive and go on to thrive again.
“In many categories, traditional distributors remain the most cost effective and operationally effective mechanism. A lot of them have thin cost structures, a lot of their properties are ancestral properties so they don’t pay rents. They will be forced to evolve—they will have to use more technology and probably have to sign up with more brands. But after a few months, many of them will bounce back," he said.
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