B2B food & grocery retail in India

Listing problems, opportunities, and possible solutions in the existing physical value chain

This post was originally published here. Cover image by Fortune India.

Modern retail isn't about bringing offline users online, or the common interpretation of omnichannel (O2O) offering, but creating a tech-enabled retail ecosystem with a consumer-centric approach that combines digitalization, merchandising, and supply chain to redefine key retail elements

Neighborhood shops problems

1. Have zero technology, run inefficient processes, no inventory visibility

2. Stock supplied only when salesman/distributor visits the store in 7-10 days

3. For staples, have to go to wholesale market every 10-15 days, incur fixed logistics costs

4. Working capital gets blocked due to longer inventory days for certain products and space constraint issues

5. Dealing with distributors for credit

Distributors and wholesalers level problems

1. Run asset-heavy operations that are costly because of legacy systems and processes

2. Have poor credit availability themselves

3. By providing informal credit at 1% (or x%) per week, credit costs eat margins that are borne by brands

4. Trucks often run partially loaded

Manufacturer level problems

1. Large FMCG brands

   1. Demand data either not available to FMCG companies or is of poor quality leading to uncertainty around real throughput, promotions, and pricing

2. Small manufacturers

   1. Have to go through multiple layers of intermediaries to reach demand 

   2. Investment required to setup advanced analytics capabilities

Market analysis

1. Multiple, small intermediaries playing in the same trade route, eating up margins, ultimately meaning higher costs to serve for FMCG companies

2. Volume game (value chain aggregation is important) - need to build a large scale distribution machinery working on mobile technology 

   1. Centralization and digitization in the supply chain is key

   2. Price sensitive value chain (aggregation gives pricing leverage)

3. Building cost leadership is important to differentiate and win in a fragmented market

4. Operating margins are low varying between 5-10% for neighborhood shops

5. Offline market volume is 60% very small ticket AOV ($1-$2) purchases, making it difficult to cater to demand through big-box B2C online retail

6. Neighborhood shops have a better cost structure than modern trade stores (beats them on rent, store operations, and overheads) but have limited space and longer lead time in certain categories

Ideal solution

1. Digital ordering and management mechanism for buyers (neighborhood shops) and sellers (brands and small manufacturers)

   1. A large variety of SKUs spanning daily staples, dry grocery products, packaged foods, personal care, homecare

2. Logistics infrastructure that optimizes costs (by aggregating orders, maintaining utilization)

   1. Building low-cost food and grocery supply chain through in-house tech and operational process excellence

   2. Tech-driven warehousing and storefront delivery 

3. PoS systems for neighborhood stores for data collection and usage

4. Consumer interface for shoppers for higher retention (a simplified Shopify)

Opportunities

1. Branded stores with integrated PoS for data collection 

2. Providing loyalty programs for customers

3. Vertical integration through private-label brands

Few things Good Capital tries to find evidence of

1. The team is incredibly well-versed and are thought leaders in this specific domain

   1. The DNA of a team that will succeed here is more technology-first and technology-driven, looking to disrupt the industry bottom-up

2. Tech capabilities for placing and fulfilling orders through a platform that can help utilize and manage their warehousing, distribution, and fulfillment — this is core to a company that is trying to disturb a sector that’s been operating in a similar fashion for a long time

3. Companies striving to build cost leadership in fulfillment, compensating for the existing EBITDA far from venture margins

4. Aligning incentives on either the demand or supply side (preferably here) to bolster growth and acquisition

5. Aggregating supply from small & local manufacturers/brands — aggregating demand only from brands leads to partial aggregation

   1. At scale, their trucks could go partially filled meaning the logistics costs won’t be optimized- this is something we are seeing Udaan and Ninjacart do well