Well, everything dies at some point. While Death is in God’s hands, for businesses you can almost predict sometimes when they are headed to an imminent end. I still have couple of DVD players in my cupboard that went through this process! I think Distribution business in its current form is rapidly moving in that direction in India. Having said that businesses can many times outlive us humans but for that they have to quickly innovate and evolve with the changing times.
There are about estimated 1600 big and small smartphone / accessory distributors in India. While the industry has grown multi-fold these distribution houses have largely remained un evolved in their approach. In india the distribution layers have typically been divided in to 3/4 levels. The big National Distributors, Zonal Distributors, City level distributors, and sometimes micro distributors / whole sellers. Almost all of the $30B mobile phone business moves through the distribution system and it costs anywhere between 4 – 10% to move goods to a small reseller. As the industry grows potentially towards $40-50B size in the next few years the dynamics are bound to change drastically.
The “joy ride” enjoyed by distribution companies in the last few years is about to come to an end in my opinion – times have changed. Many of the current players may struggle with their business models. The following five dynamics will drive this change:
1.Ease of Credit / Lending
Distribution business has thrived and hinged upon the unique capability to lend and in many cases on an unsecured basis in India. Majority of smartphone retail works on negative working capital principle especially when it comes to smaller retailers. The Distribution business has largely been filling this gap by providing goods on credit and in many cases relationship based unsecured credit. Carried over from the pre GST era this symbiotic relationship where the buyer wanted all the flexibility on payment terms and credit and the seller just wanted to offload goods and achieve targets is changing.
Buyers / retailers are now looking for more: better delivery times, stock availability, ability to see stock at the click of a button on their smartphone and also ability to return damaged goods and so on. So the needs have moved away from “credit only” proposition because post GST era the retailers’ ability to secure credit through multiple sources / start ups has improved tremendously. As GST implementation matures over the next couple of years we will witness the surge in activity around lending to small retailers basis their GST filing and sales history. Some of the start up’s active in this area will play a big role in leading this change.
2.Need for Innovation
More than half of the distribution companies in India rely on the business from over 300K small shops selling mobile phones. The role played by distributors as stated above has been just limited to credit and logistics. Basically moving the boxes and that too at their own pace. Distributors have played limited role in handholding or enabling the business at these shops. There is no concept of retailer training, inventory assessment, financial analysis, business health check, or consultative approach towards selling.
Very few have tried or extended their capabilities to handhold and help small retailers transform their business. Basically the idea of “value added distribution” is completely missing in India. This is going to backfire now as time has changed, the distributors who will not develop and implement value proposition beyond credit and logistics will face challenges in the next couple of years as other players innovate and bring those services to small retailers.
3. Industry Pressures
The smaller retailers are under pressure because of e-commerce and the change in customer behavior. Today more than ever, the retailers need agility around stock availability, accessory range, returns management and other issues highlighted above. And, they need it on a real time basis.
All of this is doable. While some distributors may claim that they have many of these elements in place the truth is that they are still processing purchase orders through phone calls manually. We all know how painful the “scheme” reconciliation process is and how retailers bleed while they don’t even know much the distributors owe them resulting in years long legacy issues related to debit/credit notes. Distributors who carry on in this way will pretty soon learn a hard lesson.
4. Logistics Evolution
Every now and then you read about the new age logistics companies that are thriving due to the supportive FDI regulation in this area. Many startups are disrupting logistics. They are bringing solutions to the table that are obviating one of the key propositions of the current distributors; “box moving”. Bhai, zamana badal gaya hae. We need under four hour delivery time, real time tracking of shipments, and seamless returns process. And we need this in few clicks. So distributors will only be left with one proposition which is “Credit”, and that is eroding away faster than anything else.
5. Date Speed / Internet Penetration
Gone are the days of information disparity, high speed internet has changed everything. We are likely heading into 5G technology in the next couple of years. Many of our key day to day processes have collapsed into an app and most of the time they do a phenomenal job. We need all catalogues from distributors, order processing, pricing, pricing changes, scheme communication, new launch information, and other business critical information in our hands. Some of it may be happening but we are yet to see a holistic approach to this by any distributor.
Over the years I have made many friends and acquaintances in the distribution business. I am concerned for their businesses. I genuinely think that they need to evolve faster and innovate to add more value to the process otherwise they will become obsolete very soon. The need to create efficiency is real. Innovation and simplification of processes and adding value beyond just credit and logistics is a must do. What do you think?