Why B2B Commerce is an Unstoppable Force
Also why everyone has been unsuccessful to scale this business sustainably
*Disclaimer: Peel-Works wrote this report. The Company holds these views, and these may be divergent from the current industry thinking.
There are three critical forces at play here – one historical and the other of recent origins. Let’s delve into the historical reason first. The supply chains were built by manufacturers, where FMCG companies would appoint its distributors to serve the general trade. The FMCG companies needed the distributors to bring space, capital, and logistics to honor their contractual obligations. In the early 2000s, distributors would look to secure a 20% return on the money they deployed in the business. Over time, this expectation has tapered down to 15-16%. In this model, FMCGs transferred the pain of fragmented supply to the retailer, who deals with around 50 salespeople daily. This burden on the retailer is the first reason B2B aggregators will make inroads. They make the retailer’s life simpler. The second reason is that at 15-16% return, capital gets directed to low-risk and reasonable returns products in the financial markets. An excellent mutual fund delivers low double digits CAGRs. When the distributors look at that income source and compare it with the effort they invest in supervising salespeople, fulfillment, and the credit risk they take with retailers, financial investments seem to be the winners. The third significant change is that India has aspirations. Millennials do not like being order takers for FMCGs and instead prefer to operate at a higher level on the earning value chain. So, the interested parties are dwindling. FMCGs are facing a shortage of interested players, and it is getting harder to build distribution.
Aggregate all brands on an ordering interface to minimize the retailer’s pain points. With the scale, use technology to cut down operating costs. On the other side, use scale as leverage to demand higher margins from suppliers. Build alliances with fintech to extend credit to the retailers offering a low-cost, high-convenience value proposition to acquire retailers.
The large FMCGs do not like B2B disrupting their supply partners. Unwritten rules of price control and controlled geographies cause service problems for them. Distribution is a competitive advantage for prominent players; hence they resist direct contracts. Even if they sign up, they ration quantities so that the B2B remains inconsequential. To get the sales hooks and average order value, the B2B players look to oil manufacturers who genuinely do not fuss like FMCG. However, the margins on oil are not commensurate with the effort. Also, price changes in inventory can cause losses. B2B addresses these bottlenecks through a portfolio of suppliers and store profiles. That is where the magic lies – getting this balance right.
Why will B2B Make it large?
Only for one reason!
This supply complexity is a real customer issue. A frugal cost structure and an appropriate service mix will solve this problem. This model
needs iteration, and some of us have been working on this for a while now. There have been road kills – companies ran out of cash to solve this problem; teams gave up; bad debts did some in. We see a lot of resolve in the present B2B players to solve this. Some are taking the
route to private labels, and others are working to sweat their assets to convert cost rows into revenue items. Of course, it is hard – the global cash and carry would have disrupted this $ 300 Billion category long back. They failed and have sold out.
This is an Indian problem, and the solution will come from young Indian companies. Not from outside, and certainly not those who burn cheap capital to scale unintelligently. This market is a big prize; let’s see how many players distribute this catch.
We reckon next year, a few players will break through with a business model that is scalable and sustainable.