Can Cash and Carry make inroads in aggregation?

We would have read and discussed about rise of Modern Retail in India, which could be  fathomed thru the success of Big Bazaar, Spencer's or Reliance Retail, and obviously  this channel has grown handsomely in last decade and, if I have to say from FMCG perspective, it would be almost 10% to the overall sales. More than the % share it has garnered our share of imagination and focus. 

E Commerce is another channel which is emerging as a front runner. Whereas, internationally it contributes 14% to the sale, China it is 16% but in India it is nascent at 1.6% of the overall sales.

But one channel which is now gaining spotlight  silently and becoming a point of discussion in trade as well as the board meetings of many companies is the business-to-business (B2B) wholesale channel  or cash-and-carry stores. The market for cash-and carry players or the unorganized portion of India’s retail sector is potentially worth $600 billion. The belief for this channel comes from old age philosophy that most wholesale markets are dominated by middleman who is  unorganized and inefficient and why not have organised players come in, who bring everything under one roof.

This channel is selling everything from food grains and vegetables to apparel and LED TVs to any business or the “walk-in consumers” (I will touch upon this walk-in consumer angle a bit later in a separate article). Prominent players include Metro Cash & Carry India, Walmart India, and Reliance Market. Latest foray into this is Thailand’s CP Group which announced it will invest ₹1,000 crore in India over the next five years to open a chain of wholesale stores.

Metro’s 27 stores have revenue around 7000 Crores and  20 were opened in the last seven years, rival Walmart has 22 store and planning to open 50 more stores in next 5 years with current revenue hovering around 4000 Crores and in the race fastest growing is with about 45 stores and revenue around 5300 Crores in the behemoth Reliance (All revenues and numbers as of beginning 2019 from various news articles, mentioned in source list) . Multiple players including foreign players are there in this busines as 100% foreign direct investment (FDI) is allowed in cash-and-carry wholesale business but only 51% is allowed in multi-brand retail.

If we come to the model of C N C (Cash and Carry as it is usually called) then these broadly operate in four segments:

Let us first touch upon the Grocer sales channel thru these CnC outlets. It is this Grocer sales which these CnC are trying to make big as they see that this is a future aggregation model.

But why?

For one, there are more than 12 million retailers and about 13 million HoReCa organisations in India, which shows the country has a huge potential and these are catered thru either unorganized wholesale or traditional distribution model. Whether it is taxi business or hotels, restaurants home delivery or Ticket booking – all these businesses were highly fragmented and information technology enabled these to aggregate in the hands of Ola’s of the world.

Currently, retail outlets are being served by company distributors & it is where these stores see an opportunity that they can become an aggregation for all the (or most) companies. This is where the real game would be played in future. 

Normally a FMCG company in a town like Kolkata caters to 20K retail outlets and this is being done thru about 6-10 distributors. If in future Reliance is to open 8-10 stores and keep a dedicated force of sales executives and serves these outlets for all top FMCG companies then this whole distribution play will change. There might be one issue that distributors give credit in market and provide a personal touch, but these stores believe if profitable economics works and say some bank ties up for small finance, this could be a game changer. But, why is it not happening as of now at a certain scale with lots of thoughts and effort already going in this direction.

For one, unlike Taxi business, where the operations remained in the hands of drivers or taxi owners or say food delivery where the ownership is still with the restaurant, in FMCG distribution there are many components (as would be clear from the following diagram) of business which to be served by a single entity for hoard of companies or products for enormity of a city like Kolkata is near to impossible;

  

One major issue which is foreseen is the range complexity. Normally a FMCG company has about 20-50 sku’s which are catered to the retail outlet by each individual company sales executive who visits the outlet each week on a separate day. And say a retail outlet is catered by 20 FMCG companies; then it would have some 1000 sku’s which, if whole operation is to be taken by one entity, then it is not possible. 

The CnC stores are now alo seeing Information technology interface where an application may be with retailer and he orders thru it. But still it is not as easy as it seems, as already said, there is a credit angle which a distributor passes and then most of this business is thru cash only. Again, the delivery of goods happens the next day in maximum cases.

This has built a lot of anxiety in the board rooms of the companies as these stores can not be ignored because of sheer muscle power they wield due to investments they can make, but at the same time due to co-existence of these channels (stores and Distributors) there is price war which happens in the market. These stores have leeway to cut from their profit and pass on to the retailer and if the traditional distributor jumps into the price war then he loses his viability as his profit margin is fixed.

Not only the anxiety is boardrooms but in wholesale markets which are being replaced by these cash and carry stores. It is their clients also which these stores are eating into. Just to give a perspective, Kolkata there would be some where 1 lacs retail outlets and traditional distributors might be doing 20-25 k directly, the remaining are fed by the wholesale markets.

These B2B stores are also not operating in a very good levity as unlike B2C customers, they are dealing with traders and businessmen. They are faced with challenges like customer-specific pricing, negotiating deals, online-offline pricing. They cannot state a fixed-price policy with traders who traditionally like to crack the best deal.

So where does this lead us? Could there be a co-existence of both distributors and Stores in a town where about 10-25 % sales being catered by these stores and rest thru the traditional distributors? Can companies control the price inequality issue across channels? Can both these channels cater to same retail outlet and can drive the same portfolio without conflict? Or would the fear among the traditional distributors and wholesalers that they will die an accelerated death come true?

I think as of now the future seems to be anybody’s guess but three trends are emerging

     One thing is sure to happen that these Cash and Carry stores are to grow and the strategy for stores (CnC) probably will be driven by a desire to manage cost optimally while offering a sharper assortment. Secondly, the companies will look to increase their direct distribution and wider assortment thru traditional trade. And third, the traditional wholesale will also mold itself into a cash and carry format with inroads towards hinterland with margins getting thinner and thinner.

Let us keep a watch!