Retail sales are 10% of the Indian GDP. Why many, including Reliance is betting big on this space.

Quick recap:

Blog Chain 1 (Pun intended) : A new world was created by the famous Mr. Edison. While new age technologies in focus include Blockchain, Electric Vehicles, AI and more, going un-noticed is the un-organised, understated, under-discussed industry : the critical backbone of progress, the electrical industry.

Blog Chain 2 :India, The world’s largest democracy with population, potential, and progress. Behind every initiative for development, is electrical power, that runs all things that signify progress.

Blog Chain 3 :B2B Distribution models, the role of technology and its potential future.

Continuing to… Blog Chain 4

Retail sales are 10% of the Indian GDP. Why many including Reliance is betting big on this space.

Ref : : Govt. Of India Initiative

Introduction The Indian retail industry has emerged as one of the most dynamic and fast-paced industries due to the entry of several new players. Total consumption expenditure is expected to reach nearly US$ 3,600 billion by 2020 from US$ 1,824 billion in 2017. It accounts for over 10 per cent of the country’s Gross Domestic Product (GDP) and around 8 per cent of the employment. India is the world’s fifth-largest global destination in the retail space.

Market Size India’s retail market is expected to increase by 60 per cent to reach US$ 1.1 trillion by 2020, on the back of factors like rising incomes and lifestyle changes by middle class and increased digital connectivity. Online retail sales are forecasted to grow at the rate of 31 per cent year-on-year to reach US$ 32.70 billion in 2018.

India is expected to become the world’s fastest growing e-commerce market, driven by robust investment in the sector and rapid increase in the number of internet users. Various agencies have high expectations about growth of Indian e-commerce markets.

Road Ahead E-commerce is expanding steadily in the country. Customers have the ever increasing choice of products at the lowest rates. E-commerce is probably creating the biggest revolution in the retail industry, and this trend would continue in the years to come. India’s e-commerce industry is forecasted to reach US$ 53 billion by 2018. Retailers should leverage the digital retail channels (e-commerce), which would enable them to spend less money on real estate while reaching out to more customers in tier-2 and tier-3 cities.

 It is projected that by 2021 traditional retail will hold a major share of 75 per cent, organised retail share will reach 18 per cent and e-commerce retail share will reach 7 per cent of the total retail market.

 Nevertheless, the long-term outlook for the industry is positive, supported by rising incomes, favourable demographics, entry of foreign players, and increasing urbanisation.

Ref : Wikipedia……. While India presents a large market opportunity given the number and increasing purchasing power of consumers, there are significant challenges as well given that over 90% of trade is conducted through independent local stores. Challenges include: Geographically dispersed population, small ticket sizes, complex distribution network, little use of IT systems, limitations of mass media and existence of counterfeit goods.[42]

A number of merger and acquisitions have begun in Indian retail market. PWC estimates the multi-brand retail market to grow to $220 billion by 2020.[43]

Reasons for retail shops in every locality:

  • Large diverse population, with distinct customer preferences varying by location, requiring localised customisation
  • Complex eco-system and infrastructure requiring deep local knowledge and presence to successfully serve needs.
  • Hyper local and instant availability, needs and benefits

Verticalised Retail

We strongly believe in the sustainability and potential for unit economics (also real scale), with a vertical focus in B2B.

There are many start-ups that are sector agnostic and looking at all B2B distribution from Electronics, FMCG, Garments etc. (and getting sky high valuations due to this), and in theory everything is possible, but practically we think its very difficult.

The main verticalised retail segments below, are those that have a recurring requirement, have hyper local needs including same day, same hour delivery preferences, with a presence in every 1km of area inhabited. Segments with a presence in e-commerce, but with a continuing and growing need for retailers.

We have not gone into detail for other verticals like garment, paint, other boutique shops, as the need for these to be hyper local is potentially not as critical.

Kirana, FMCG Shops : For day to day home consumable needs including food, drinks, toiletries etc. FMCG brands are large, often global players and hence distribution is organised comparatively. Further these can easily be bought online, as usually a store does not give additional information, product expertise or product experience, besides packaging that might prove as an incentive for a purchaser.

Reliance with an estimate of 5 million shops by 2021, Natures Basket, BigBasket and more are looking at the FMCG space.

Chemists, Pharmacies : For medical requirements and also toiletries. Pharma, since is handled by large companies, also has begun its journey to using technology for organisation. This is easily ordered online as brands and medicines are easily identified, ones that require prescriptions are seeing different trials for solutions and this does not require a touch and feel experience store.

Netmeds is doing well in reliable distribution and franchise of Pharma. Companies like Practo – will enable Pharma companies to solve the prescription issue.

Electronics and Appliance Shops : Electronics as a new industry, is substantially more organised. These include shops offering home appliances like mixers, toasters, ovens to now electronic shops selling mobile phones and accessories. Often also easily bought online and optimised by the larger e-commerce players. Retail shop becomes more of experience store and not necessarily a purchase store as end – users can buy this from websites directly.

Paytm, Amazon and many others offer a great experience to service the needs of electronics purchasers.

What is the other vertical you see everywhere? What do you need in your house as regularly and with same day fulfilment requirements?

Your local electrical store,
and why it is here to stay.

Electricals & Tool Shops : These shops cover various electrical requirements including electrical wires and cables, communication cables, switch-gearjunction boxes, fans, lighting and more. Often these shops also sell hand tools as these shops are frequented by electricians and are a parallel sell, for needs during home building, renovation or fixing/maintenance.

Electrical Stores are the 4th doppelgänger of the famous four pillars of retail distribution in India, one of the largest of the 8 core infra industries and present strong reasoning on why they will survive and thrive in future, not only as an experience store.

Our insights in this space and plan with coming up in the next blog..

Note: We have not gone into detail for other verticals like garments, paint, other boutique shops, as the need for these to be hyper local is potentially not as critical.

B2B Distribution Models with the evolution of Technology.

Different business models, drivers of business, gross margins

Continuing from the previous blogs : Edison and the massive industry he created and “Growth of the electrical vertical and electrical products”, we continue to another part of the value-chain – Distribution

A distribution channel is the channel through which the goods and services are transferred from the manufacturer to the end customer.

Amazon, Flipkart, Udaan, Moglix, Power2SME, Bluedart, Fedex, DHL etc. are all parts of the distribution industry.

Traditionally, major industries have their own vertical focused distribution channels. Brands in turn have their individual go-to-market (GTM) strategies i.e. how they want to approach distribution and sales to the end customer.

Sales channels are responsible for creating customers and sales. Distribution companies make the products/services available to a wider demographic and are the channel used to fulfil a sale. The third (sub)peg in this wheel are logistics services, that fulfil an already billed sale. i.e. They pick up a parcel and deliver it to the assigned purchaser as per details given by the seller. They only charge for their logistics costs, usually not related to the value of the parcel being delivered. Local transporters and package delivery companies like Gati, Fedex etc offer logistics services.

Distributors are different to logistics companies in various ways including:

  • Distributors do buying/selling on their books
  • They add their margins when selling
  • They assume the credit risk
  •  Invest in stock
  • Manage stock, transportation and logistics
  • Facilitate other services like maintenance, after sales service, schemes etc

Increasingly with progress in technology, sales and distribution channels are converging in which case distribution channels also:

  • Convert leads to sales
  • Create customers, awareness of availability and generate new sales
  • Offer promotions and get incentives from manufacturers/producers based on sales

The above channels are fairly mature in the B2C and B2B space. Technology offers some great opportunities to increase efficiencies and allow these channels to operate more efficiently.

Below is an analysis of different distribution business models*, where technology is pegged to play a part in convergence of the sales and distribution services companies.

Distributor / Buying Club Model

In the distributor/buying club model, large distributor’s/clubs buy specific fast moving products, from the manufacture at a large scale and gets additional discounts/economies of scale. This is then sold to smaller distributors at a price that is better than what, the smaller distributor would have been able to get, from the manufacturer directly.

Some of these large distributors are for profit while some others (like the Buying Club Model) are set up to serve specific industries and are not for profit.

This business is driven by lowest price offered and scheduled delivery. Large amounts of credit are given.

Currently there is limited use of technology as nearly all transactions are done offline and a change in purchaser behaviour is still not forthcoming. Profits are tight at around 2-4%. Current players in this model are existing large dealers / distributors of individual products.

Industrial Maintenance / Aggregator Model

Companies that are targeting the aggregator model typically offer a large number of products, predictability of delivery, fair price, reasonable credit and incentives for the purchaser.

Margins in this space are better at 5-15% but smaller in bill sizes. They work like suppliers but do not hold their own stock.

Technology can be used for rate contracts, punch out catalogues, out-sourced purchasing department services, but there needs to be a change of mindset at the purchaser level, there is a limited market of large companies where this can lead to unit economics and it is difficult to compete in price and service with existing suppliers of current products.

Retail Distribution

Distribution to retail shops, presents a large opportunity in a country like India. Due to the complexity and high density of the population, retail shops of FMCG, Pharma, Electronics, Electricals, Hardware and Tools etc. exist in every locality across the country.

Retail distributors have a limited product offer, but same / next day delivery, fair price, rotating credit.

This is currently a highly dis-organised offline play with retailers who are internet savvy looking for ways to modernise their purchases but without the ability to invest in technology.

Smaller local distributors are finding it increasingly difficult to sustain as the economy is becoming more organised and hidden margins are harder to come by, therefore they need access to economies of scale/partnerships with organised players to survive.

Mobile technology can be used to bring down the cost of sales, transactions and financing due to increased organised data. 

Distribution to retailers offers consistent 7-8% Margins which are promising due to the regularity of sales and lifetime value of these retailer shop customers.

Have you been reading about hyper funded B2B verticals looking at distribution and credit?

Read more about retail distribution, how it is now increasing company valuations by multiples and why in India electrical retailers are here to stay, on our blogs coming in the next few days…

*Ref. domain expert @Brijnandan Mundhra