Modern Vs. Traditional Channel Trade Power Game

An HUL spokesperson said, "We sell and distribute our products across all channels such as General Trade, Modern Trade, eCom, Cash & Carry B2B, etc, to make it convenient for our shoppers and consumers to buy our trusted brands.” A nice statement indeed from a fmcg MNC that has been marketing their well-known brands across India for many decades! Reaching out to different customers through different channels is indeed the hallmark of any fmcg company. Until a few years ago, the traditional channel, namely, stockist-distributor-dealer was being used by the fmcg firms to reach out to kirana stores located throughout India. Of late, modern channel (ex: JioMart) has come into existence thanks to technology (ex: internet, big-data analytics) and new business objectives such as “get customers now and make money later.” 

The traditional channel consisting of more than 5 lakh entities are physically spread throughout India with their brick & mortar establishments. They are mostly independent organisations and hardly a few of them are big enough to claim any significant market share in the channel they are a part of. They work along the channel on a business relationship basis. Dealers in a given area would receive goods from distributors into their local warehouse, use a pick-up van to periodically go and deliver those goods to the kirana stores in the needed measure.  

The modern channel players like JioMart are, on the other hand, just a few in number but each stretches on its own all the way from the manufacturing plants of fmcg companies to the kirana stores. Their connection is mostly electronic; they reach out to the kirana stores through an app on their smart phones. When kirana stores order goods through the app, the modern channel aggregates the orders in that area and deliver the goods to the stores periodically but within the promised time frame. Since they do it electronically, they could maintain the historic record of purchases for each store and thus be ready to help the stores in managing future purchases.

Recently, the traditional channel players have started complaining that the kirana stores are offered a much lower price by the modern channel and so they are losing their market share! This could be a major structural shift happening. If the kirana stores move over to procuring their goods through modern channel that would jeopardize the livelihood of lakhs of entities operating in the traditional channel. This fear has led the traditional channel to demand price parity from the fmcg companies. How do modern channel firms manage to offer significantly lower prices to kirana stores? 

A lower price is possible if the modern channel has a higher operating efficiency in moving the goods from fmcg factory outlets to the kirana stores. However, higher operating efficiency is questionable because the traditional channel has in place an established system of network wherein each player is likely to have used their experience to come up with efficient logistical processes. Modern channel might claim technology and analytical tools as their advantage but still they have to physically move the goods from one place to another through the chain and that costs a lot of money, especially in building up warehouses and other logistical needs across the country.

A second explanation is that the modern channel players operate with deep cash pockets so they don’t mind incurring heavy losses in the initial periods to buy the patronage of kirana stores now, harboring some plan to monetise it later. However this means that the HUL has not been giving lower price to the modern channel. That the HUL has not denied the differential pricing of their goods to different channels implies that the observed lower pricing to kirana stores by modern channel is less likely to be due to such business models.

A third explanation is that because they buy in bulk, the modern channel players like JioMart hold strong bargaining power over fmcg firms, which could translate to lower acquisition prices resulting in turn in them offering lower prices to kirana stores. Such volume based price discrimination can be challenged legally but there are ways to legitimise the transaction. For example, fmcg firms can claim reduction in inventory expenses as one reason why they give lower price for huge volume purchases. However, this could hurt them in the long run if the lower prices they offer to the modern channel are not truly due to any saving they realise but only due to their weaker bargaining position against the modern channel. As the article states, the traditional channel seems to believe this to be the main reason and hence are now asking the fmcg firms to maintain price parity. If the response is not convincing, the traditional channel might do something that would harm the firms in the long run. This includes, for example, supporting heavily private labels. Currently the traditional channel appears to have more than 80% market share and hence their actions would be impactful in the long and medium term.

And, the kirana stores seems to be enjoying this upstream competition because after all their margin is going up substantially. The lower prices could be a boon to them because they can fight the e-commerce firms like Amazon and Flipkart who supply directly to end-consumers i.e. households currently. In fact, if the business plan of JioMart is to be believed, these kirana stores will become part of the JioMart’s ecommerce network, which would be a major competitive threat to the ecommerce giants Amazon and FlipKart.

Would we lose the traditional channel gradually? Some of them might find it prudent attach themselves to the modern channel through offering their logistic infrastructure to bolster the modern channel. But, some kirana stores may “miss” the traditional channel on seeking credit, advice on which products to stock up, product returns, frequent delivery, etc. Would lower price from modern stores more than compensate the loss of services from traditional channel members? Only time can tell.

By Trichy V. Krishnan, Professor of Marketing at Great Lakes Institute of Management, Chennai