🚫 Why are Small Distributors Boycotting Brands?
Distributors in many states decided to boycott HUL and Colgate products, refusing to put them on grocery store shelves. Here's why.
We've been hearing a lot about the Covid-induced supply chain crisis lately.
But last week some Indian states faced a different kind of supply chain crisis. One that had nothing to do with Covid or shipping. And one that had long been brewing.
This crisis was orchestrated by distributors.Â
Distributors in several states came together and decided to stop supplying Colgate and HUL products to grocery stores. Why?
Because these FMCG brands had been taking them for granted lately. The distributors had demanded a higher profit margin on the products they delivered, but the brands ignored them.
But why were the distributors suddenly demanding an increase in margin?Â
The Distribution Chain
Have you ever wondered how the products that you use every day reach you?
The answer is distributors. The distributors collect products in bulk from FMCG companies and then supply them to different grocery stores in their areas.Â
Sounds simple? It isn't.
Not only do these distributors have to manage the entire logistics of the deliveries, they also have to deal with the rules and regulations surrounding such deliveries and take back any defective or expired products back to the brands again.
Plus, they also often have to give out these goods on credit because small kirana stores can only repay them once the goods have been sold. This is often a huge risk.
And for all these services they end up getting only a 3.5%-5% margin on the products.
So far, the distributors had been okay with this and life was going on. But then new players entered the market.
These players were B2B (business-to-business) e-commerce firms like Udaan and Big Basket and bulk suppliers and distributors like JioMart and Walmart.Â
These players have a lot of money, some their own but mostly that of investors. And with these huge cash reserves, they can afford to buy more products than these small distributors. And because they buy more products brands tend to favour them and give them a higher margin, around 12%-15%.Â
If this story ended here, the small distributors probably wouldn't have a problem. But here's where things get complicated.
The Current Problem
You see because these big distributors get products for cheaper, they can offer them to retailers for cheaper. So, retailers get a higher margin if they buy from them.
Let's assume that a brand sells a Rs. 10 soap to small-time distributors for Rs. 8. They sell the same soap to these large distributors for Rs. 6 because they are buying more soaps.
Now, the small distributors have to sell this to retailers at Rs. 9 to make some profit. But big distributors can sell it for Rs. 8 and still make more profit.Â
So, who will the retailer choose? Obviously the big distributors. And that's exactly what started happening.
Many small distributors stopped getting any orders for products from the grocery stores that they had faithfully supplied products to for years. In fact, many grocery store owners accused distributors of cheating them by charging a higher price.
So, the small distributors decided to take matters into their own hands.
But why did they boycott only two brands?
You see, the distributors didn't straight away take the boycott option. The All India Consumer Products Distributors Federation (AICPDF) had first written to 25 FMCG brands demanding that they get margins equal to the B2B players. All but two refused to listen to them.Â
So, they began their boycott. However, after they took this drastic step the brands realised they were serious and finally began negotiations with them.
Right now the AICPDF has agreed to stop boycotting these brands but has put Colgate on a 3-month watchlist. If the brand doesn't fulfil its promises by then, it will be boycott time again.
But why are these huge brands caving in to these small distributors' demands?Â
Because they still account for 80%-90% of the sales of these brands. Yes, they are the backbone of the general trade that goes on in the country. So, the brands cannot afford to alienate them.
But why are we talking about this when the problem has been solved?
On the surface, yes, it seems like the problem has been solved. But has it really? In 2020 also these distributors had made similar demands which the brands had 'seemingly' considered. But two years later, they are back to square one.Â
Meanwhile, newer e-commerce players and B2B brands are cropping up every day, further chipping away the market share of these distributors. So are they a dying breed now? Has technology and innovation killed them off?
Well, innovation has had an impact on their business model but it can also help them.
These distributors can adopt technology and get access to verified customer KYC. This will allow them to underwrite their credit risks, which means they can take a fee or a premium for offering credit instead of just giving unsecured credit. This digital file of their transactions will also make them more trustworthy, allowing them to get better loans from banks and NBFCs. And they can leverage these funds to buy more products from brands and get higher discounts.
But this option alone will not solve the issue. Brands also need to take action to maintain some parity in margin between B2B and small distributors. Otherwise, the sector could collapse, which will have far-reaching consequences.
With no competition, these B2B suppliers will be able to demand higher margins from brands. But they'll stop passing on these discounts to the grocery stores and customers because. Meaning, ultimately the products will get costlier for us. Â
Do you think the traditional distributors will manage to win this war against the large distributors and brands? Or will they ultimately die out?
Only time will tell…
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