24 Jan 18 E-commerce: Altering the shape of India’s FMCG markets

The Internet has already changed our lives, and if one thing is certain – “we ain’t seen nothing yet!”

For incumbent companies and industries, much attention has focused on the obvious threats. For instance in retailing (esp. books) and advertising; the impact of technology is direct and clearly visible. But in many other industries, the disruption may be more insidious and therefore unexpected.

In this article, some random thoughts on how things might play out in the fast moving consumer goods, or FMCG industry.

FMCG is considered a stable, high-moat business. And for good reason! Brand building is expensive, and takes time. Incumbents have a huge advantage in managing the supply chain. Apart from the economies of scale in manufacturing and procurement, the biggest advantage is in distribution. In India for instance, Hindustan Unilever (HUL) sells via more than 7 million outlets. For a small company, getting to even 1% of that is a huge ask. Further, getting shelf space in crowded shops is extremely difficult for unknown brands.

Effectively, large advertising budgets, massive distribution networks and store access – have ensured that the moat remains deep.

But for how long?

Today, Amazon, Flipkart and numerous e-commerce portals take care of the distribution headache. So a customer in Ranchi can not only find a small brand from Hubli, but purchase the product in the comfort of her home, and have it delivered too! The platform also provides sellers visibility and options for relatively low-cost, targeted online/digital marketing.  Sure, volumes may be limited, but these enterprises have smaller capacities to exploit.

This has resulted in huge opportunity for small producers of a variety of consumer products, especially niche products. To illustrate the point, how many soap brands are stocked at a typical kirana or grocery outlet?  Ten, twenty… fifty?

A quick browse on Amazon India showed 155 distinct soap brands starting with the letter A! I gave up counting after the letter F, by which time I’d got past 750 brands of soap. My guess is that more than 3000 soap brands are available on Amazon India’s platform. This is not products, but distinct brands! Many brands have multiple products (or variants). For example, Dove (a Unilever brand) had 178 products (including variants) listed. Interestingly, around a third of the brands had only one product. And more than 90% of brands had less than 10 products/variants.

Soap is a huge category, so I thought I’d try something less ubiquitous – like nail-polish. I found > 300 brands before getting to the letter D!

So what is happening here?

I don’t think most of these companies will become large, or seriously threaten the HUL’s of the world. But in aggregate? What happens if a thousand companies achieve revenue of Rs 25 crores?

The last few decades have seen substantial consolidation in all industries, as companies try to maximize scale benefits – and this is true of consumer products as well.

But in tomorrow’s world, thanks to the disruption in the traditional distribution model, we might see hundreds (thousands) of micro companies being able survive and make decent returns. The big moat for consumer giants has been distribution muscle, especially in markets like India. But now e-commerce players offer boats to cross the water.

From an era where consolidation has been a constant in the never ending desire for more and more scale, will we see a parallel and opposite trend – towards significant fragmentation (a long tail) in consumer industries? I believe it’s already happening, though market share changes will be gradual.

Something to think about – especially given the rich FMCG valuations in Indian markets!