Does The Udaan Saga Signal Changing Dynamics In The FMCG Sector?

A week ago, business-to-business (B2B) start-up Udaan filed a complaint with the Competition Commission of India (CCI) against Parle Products Private Limited.

Parle is the manufacturer of the iconic Parle-G biscuits and several other popular food products. According to Udaan, Parle has engaged in anti-competitive practices by abusing its strong position in the fast moving consumer goods (FMCG) space.

According to Udaan, Parle has stopped supplying goods to Udaan without any objective justification. Currently, Udaan is buying Parle’s goods from the open market to sell on its platform.

A week later, Amul, Parle and several other players refused to sell on Udaan’s platform. The companies have alleged that Udaan was monopolising the distribution business and undercutting distributors.

The boycott by FMCG companies is a blow to Udaan, as the business model is aimed at cutting out middlemen and connecting small traders to manufacturers directly.

The company hopes to become the Flipkart for B2B e-commerce, with smaller traders buying directly from the manufacturer. Unlike incumbent B2B platforms like IndiaMart, Udaan has focused on building an entire ecosystem — covering discovery, logistics, credit and payments.

“Amul has 10,000 exclusive distributors, or small entrepreneurs. If platforms like Udaan do the distribution themselves, they compete with our existing exclusive distribution partners and directly hurt them,” said RS Sodhi, the Managing Director of Amul. Other employees of the FMCG companies also confirmed that platforms like Udaan were undercutting distributors and gaining a larger share of the market.

The FMCG companies’ accusations of monopolising distribution might indicate changing dynamics in the space.

FMCG Company Perspective

FMCG companies have enjoyed high margins and a high return on capital for decades. Earning a high return on capital consistently for years is a difficult task, but successful FMCG companies focused on brand-building and growing their distribution networks.

Distribution of products takes place through general trade, modern trade and e-commerce channels. General trade refers to traditional channels through which FMCG companies sell their products — distributors, stockists, retailers and others. Modern Trade refers to retail chains and similar outlets. E-commerce refers to platforms like Reliance Jio, Flipkart Grocery and Udaan.

While general trade has always contributed to a large percentage of FMCG sales, modern trade and e-commerce channels have grown at a rapid pace. Companies like Reliance, Future group, and DMart have built up large distribution networks which have allow them to buy from FMCG companies and sell directly to customers.

Unlike other platforms that source goods from manufacturers and sell the products under their own name, Udaan’s main customers are small traders who wish to buy from manufacturers directly, thereby making Udaan a distributor of sorts. Udaan has a large distribution network in place which allows the customers on its platform to source goods without any hassles.

Udaan’s strategy of cutting out the middleman and supplying goods at a lower rate has irked distributors, who supply to wholesalers and retailers. Small traders have been flocking to Udaan, Jio and other B2B platforms to circumvent distributors and earn higher margins.

The FMCG companies that stopped supplying goods on Udaan’s platforms have accused Udaan of monopolising distribution to retailers. In the past, Udaan has been known to subsidise logistics and other expenses to attract more users. Pointing to its immense funding and continual losses, industry stakeholders believe that it has been using similar tactics in the current scenario.

A fragmented distributor base allows these companies to maintain their margins, but a consolidation among customers could lead to lower margins. Modern trade and e-commerce channels receive goods at a lower price along with a long credit period, clearly implying that larger customers have better bargaining power as compared to a fragmented distributor base.

Boycotting Udaan might be a step towards curbing Udaan’s power while simultaneously pleasing distributors who contribute to high margins and a large percentage of sales.

Distributors’ Perspective

For distributors, the rise of digital platforms combined with the pandemic, have posed an existential threat. Supply chain snags during lockdowns have forced FMCG companies to enter direct distribution or partner with larger players.

For instance, HUL partnered with Jio for its direct B2B distribution from manufacturer to retailer — a move that met with stiff opposition from distributors. With the rise of well-funded platforms like Jio and Udaan in the B2B space, distributors feel that they might be pushed out of the business.

Platforms’ Perspective

The platforms have access to funding has helped them scale up their operations within a short period of time. Udaan reached the unicorn status with two years of its launch.

Similarly, Jio raised around Rs. 1.5 lakh crore in 2020 and has been on an expansion spree. Its sister concern Reliance Retail bought JustDial, which already runs a listings and B2B platform.

The platform has seen adoption by traders from more than 100 cities. The deal with HUL further cements its position in the space. These platforms also run their own private label products which might get precedence over third-party products.

Despite the moves to boycott Udaan, it is unlikely that FMCG companies and distributors can hold off the disruption in the space for much longer. While FMCG companies might have to bear the brunt of lower returns, customer concentration and increased working capital requirements, distributors will have to deal with an existential threat to their business.

But, the government’s new e-commerce regulations and launch of the Open Network for Digital Commerce might offer some hope. Nevertheless, the episode has certainly demonstrated Udaan’s impact on the industry.