Traditional FMCGs Can’t Afford To Lag Behind Big Retail Like Amazon

The markets are flat. The rupee is down against the dollar, not so much because the rupee is weak — the real effective exchange rate of the rupee, trade weighted against six currencies, shows appreciation — because of the rise of the dollar against major currencies. US growth is robust, at the moment, and the resurrection of Donald Trump, with his promise of tax cuts and protection for US industries, has braced US stocks, relocating some equity funds back home to the US. At the same time, the longer term effects of tax cuts and deportation of illegal migrants working in the US, another Trump promise, is negative for the economy. So, bond investments have redeployed to the US as well, in anticipation of the higher yields expected to result from a larger fiscal deficit and inflation.

India’s central bank, the Reserve Bank of India (RBI) has been trying to avert a sharper decline of the rupee, and its use of its forex reserves to augment the dollar supply in the forex market, and India’s reserves have come down by nearly $50 billion from its peak level of almost $705 billion at the end of September. Reserves in excess of $650 billion are, of course, more than enough to meet any foreign exchange requirement of the economy.

Dilli Chalo And Winter Parliament

Farmers are on the march again, to press their demand for legal enforcement of minimum support prices, and the government is determined to stop the marchers from entering the national capital. The government is pressing ahead with its move to club all national and state-level elections into one event, and the Union cabinet has approved a bill to this effect. It has to be tabled, will probably be referred to a committee of MPs, and take its time to reach its final shape. The Opposition sees this as a move to erode democracy.

Other political controversies vitiate the atmosphere, as well. A sitting judge of the Allahabad high court has made public comments, speaking at an event organised by the Vishwa Hindu Parishad, that representatives of the Muslim minority have termed communally coloured, and a move is afoot to impeach him in Parliament.

Parliament is also disrupted by ruling party allegations that the Gandhis have received payments from bodies set up by George Soros, the bete noire of conservative politicians around the world, thanks to his Open Society Foundations that fund projects to advance the liberal agenda around the world. The Opposition is worked up over what it terms the partisan conduct of the Rajya Sabha chairman, Vice-President Jagdeep Dhankhar, against whom it has moved a vote of no confidence.

Amazon’s Quick Commerce Impact

But the development that is likely to have the largest impact on society is the move by the world’s biggest online retailer to join India’s burgeoning quick commerce business. Amazon has started a pilot, dubbed Tez, for the time being, in Bengaluru. Flipkart and Reliance Retail have also joined the race. Big Basket has transformed itself into a Quick Commerce platform.

This has implications for retail trade, obviously. It also has implications for the logistics industry, possibly for the food processing industry, for branded food products, consolidation and better organisation of the fresh produce business and faster adoption of artificial intelligence (AI) by the retail business, and also by established fast-moving consumer goods businesses. The quick commerce business launched in the US with the promise to make the home refrigerator superfluous. If that promise has a chance to turn realistic anywhere in the world, it is in India.

The traditional small stores, known as kirana in North India, would face serious competition in places where Big Retail starts quick commerce. Quick delivery of orders offsets the proximity of the corner store to the consumer. Prices are comparable, right now, for Quick Commerce and the kiranas. Big Retail can lower costs in two ways: one is the sheer advantage in terms of scale, and the other is the potential elimination of the normal profit centres of the traditional supply chain that delivers to the kirana, the stockist and the distributor.

A Threat To Kiranas?

Big Retail would be able to deploy AI to analyse consumer trends and anticipate demand better than traditional retail. Kiranas shift their stocking pattern, based on revealed demand by customers. Big Retail’s quick commerce arms would prove a more plentiful and reliable supplier of the things that meet evolving consumer demand. Cheaper price, superior availability and comparable speed of delivery make quick commerce arms of Big Retail a challenge to traditional retail. One appeal of kiranas is their ability to offer credit to longstanding and regular customers. Pricing pressure from Big Retail will erode kiranas’ ability to sustain such credit.

Kiranas that are able to convert shopping for groceries into an enjoyable social experience would, of course, thrive. The design and lighting of small stores would move from nondescript to aesthetically appealing. A new line of business would emerge to cater to this demand.

Some kiranas would turn themselves into distribution centres/dark stores for Big Retail. They, too, will survive. But a host of small shops, especially those run by shopkeepers whose next generation seeks social mobility out from behind the shop counter, will cease business. Their delivery boys would probably become the army of delivery agents who power quick commerce.

The labour code on occupational safety and social security contains provisions for gig workers, requiring those who avail of their services to mandatorily set aside a portion for social security. The increase in the gig working population and further expansion of quick commerce would end the government’s dither on notifying those provisions, and gig workers would be better protected.

What Of Traditional Retail?

Electric bikes and ordinary cycles running on pedal power would probably multiply on the streets, delivering for quick commerce, apart from food delivery apps and traditional online retail. Their makers should be happy, unlike the makers of refrigerators.

A class of consumers, the single workers who share an apartment and have somebody cook for them one meal a day, need a fridge for leftovers, whether of milk, curds, or cooked food. What if packaging evolves to cater to small needs, say a sachet of milk large enough to make one serving of tea, and these needs can be reliably met by quick commerce at any time of the day or night, why would this class of consumers need a refrigerator at home?

Sure, the milk would still need to be refrigerated, but at the store, awaiting delivery. So refrigerating units might change in shape and volume, with a slight decrease in the demand for smaller units and a corresponding increase in the demand for larger units kept in stores.

Big players in FMCG cannot really afford to lag Big Retail in anticipating consumer demand, lest they lose market share to new and smaller players fostered by Big Retail. So, they too would lose no time in deploying AI to map their options.

Quick commerce would accelerate the pace of modernising retail and the consumer goods business. The consumers stand to benefit. A section of traditional retail would suffer.

However, of India’s $1.3 trillion consumer business, just 5% is online and the share of quick commerce is in low decimal points. Even if these shares go up, it would be a long time before their market share rises to a level where traditional retail as a whole feels the pain.