These are times when a home-maker in the conservative boom town of Coimbatore who traditionally buys her groceries from the “Maligai Kadai” (neighbourhood store), now simply orders her morning supplies the previous night, to be delivered at 7 AM just after her morning puja. It arrives on schedule and her monthly bill is accumulated to be paid at the end through her mobile wallet with a single swipe. The e-store that delivers her groceries keeps a record of her data and orders and customises reminders, requests and choices— almost seeming to know what she would need even before she realizes it herself!
At the other end of the country in Lucknow, a grocery store owner logs into an app to place orders for the next day. “horizontalB2B.co.in” offers over 50,000 SKUs to choose from, provides delivery within 24 hours (reducing capital and space requirements), and frees the owner from daily trips to the wholesale market.
While the above is far from being an all-pervasive scenario now, we observe different factors leading to similar pictures in the future. A new landscape of Indian grocery retail is dawning on us and clearly, it is an exciting time to be a retailer and a consumer in India. The overall India grocery market is set to grow from ~$550 Billion to nearly $1 Trillion in 4-5 years. Of this nearly 60 per cent is fresh produce—fruits, vegetables and meats – where FMCG players don’t really play. So, the addressable market for FMCG players is about $250 Billion today and estimated to double in the next four to five years. But more than the increase in sheer scale, what is of interest is the shape of the market – where and how will people shop, will unorganized retail and wholesale trade continue to flourish or co-exist with modern organized formats, and what will shoppers experience in real and virtual stores.
Inflection Point and Scenarios of the Future
Future scenarios in grocery retail will be determined by how key uncertainties evolve. We see at least 3 significant locked-in trends; even as the direction of these changes is clear, the pace and extent are not. Firstly, wholesale will become far more organised, as players like Reliance, Walmart and Metro invest to grow. Additionally, e-commerce horizontals like Amazon and third-party logistics players could enter in a big way in this arena, further boosting the shift towards organised wholesale. Secondly, e-commerce, direct-to-consumer (D2C) models, chain supermarkets and kiranas-turned Independent Self-Service (ISS) stores, will significantly outgrow existing channels and formats, especially in the top 40 urban towns and consumers. Despite policy checks (should we say uncertainties rather than checks), e-commerce players will invest in grocery to drive customer acquisition and frequency. Thirdly, as per ‘The Future of Consumption in Fast-Growth Consumer Markets: India’ report, 31 boom towns and developed rural will drive new high-growth consumption locations; premiumization will make hitherto-niche segments viable to address; and consumers will be more open to using different technologies for discovery, browsing and shopping.
The pace and extent of these locked-in trends will be in our opinion, critically dependent on how two uncertainties play out. One, the pace, extent and direction of regulations and policies governing foreign and domestic investment in multi-brand retail, logistics and the food value chain; two, how soon and how far, is the adoption (change chart axis to adoption, not absorption) of different technologies by FMCG companies and consumers.
In this backdrop, we have evaluated four interesting scenarios for the future (refer Figure 1).
The first scenario is the Age of Behemoths where they thrive in investment and market environments that are conducive for rapid growth; however, consumer and supplier technology adoption is still relatively slow. Organised wholesale and B2C (especially offline/omni-channel) take off but is not dominant; and the rural Bharat market thrives with investments in the food value chain and logistics.
At the other end is the 2-Speed systems scenario where D2C and e-commerce thrive, and consumers use digital technologies for discovery and shopping. Companies must manage 2-speed systems viz. both traditional unorganized trade and wholesale, and an emerging organized retail and wholesale system.
In the third Consumer Nirvana scenario, the entire value chain undergoes massive organisation – across wholesale, retail and consumer levels. Rural India thrives and D2C models and consumer-facing technologies take off as well.
Finally, the fourth scenario is a Linear Progression from today, where the extent of modernization and organisation of retail and trade, and the use of technologies by consumers and suppliers, remain low.
What do these Scenarios Imply for FMCG Players?
FMCG players will have to operate very differently from today, regardless of which of these scenarios emerge. We see the need to re-design offers and marketing mixes, re-invent Route-to-Market (RTM) and re-invest in technologies.
In different scenarios, companies will have to re-invent RTM to handle the complexity of co-existing organised and unorganised wholesale and retail channels, emerging e-commerce and D2C models, and different locations of consumption. Adding to this complexity is the fact that some RTM models will be sub-scale but with high growth and very different requirements from traditional trade. In the 2-Speed systems and Consumer Nirvana scenarios, we foresee the traditional distributor-led model being replaced (partly or fully) with a system of partnerships with specialists in logistics, payments/ financing, software, manpower management and consumer engagement.
In line with the changes in RTM, FMCG players have to re-design portfolios for different retail and wholesale channels in each scenario. Moreover, e-commerce and D2C models enable a different shape and structure of the offer portfolio, addressing now-viable niches, and in the Consumer Nirvana scenario, moving beyond products to (partnering to) offer solutions. Marketing spends will – in different scenarios – shift from awareness and width-driving mass media towards Point of Sale (POS), Below-the-line (BTL) and digital channels.
Notwithstanding which of the above scenarios plays out, one thing is certain: that the market will be more complicated, and it will not be for the faint-hearted to navigate the complexities. Scale, performance, products, differentiation, cost, technology and people will be some of the key parameters and challenges that a FMCG player will need to work through in the emerging grocery retail environment.
Technology is ripe
As you consider the above trends and scenarios, think about the abundance of data that is just beginning to fuel the RTM innovation engine. With data, companies are discovering creative ways to transform existing operations, enrich customer experience and create new businesses. Brands and players now benefit from digital design tools that reduce both development time and cost, advanced analytical approaches and in-store technology that offers innovative ways to engage and build loyalty with customers.
Technology is both a driver and an enabler of these disruptive shifts. Beyond Sales Force Automation which most sophisticated CPG companies have now embedded, technology helps to use structured and unstructured data to map granular opportunities and drive far more sophisticated segmentation of retail and wholesale customers. In addition, a host of efficiency drivers can be addressed through technology in a superior manner. Advanced analytics is enabling FMCG players to drive not only their last mile efficiencies, but also to increase their revenue through the hyperlocal route. Many organisations are either piloting or scaling up dynamic route mapping, suggestive and predictive ordering, n=1 consumer and customer marketing and better marketing ROI by outsourcing tasks to the channel itself.
As FMCG players move away from a traditional distributor-led system, frontline executives will need to manage a host of partners and stakeholders at the local level—not just distributors and linear channels of yore. Technology partners, logistics players, financing/payments solution providers, outsourced manpower agencies and CRM systems call for managers who can take a long-view to building assets and not just exploit them for quarterly and yearly returns. Speed, agility and managing ecosystem partners will be key capabilities and behaviours that the new frontline warriors will need. We know that incumbent frontline managers, and the current operating model of structures, accountabilities and incentives, are a long distance from what is needed for the future – and the sooner companies start to re-think their people strategy, the better prepared they will be to adapt to emerging scenarios.
So, what do we do today?
Given the uncertainties and very different plausible futures, what should FMCG players be doing today? We have a few suggestions – some that we are driving at our companies or at Bain clients – for today’s action agenda. Companies need to construct a portfolio of actions comprising no-regret moves (those that will be valuable and relevant across all scenarios), options and hedges that can be scaled up (or provide some protection) depending on which scenario unfolds and one or two big bets that will payoff immensely if the scenario you believe in comes through.
In particular, we have seen tremendous success in embedding Agile ways of working in the sales force – a big paradigm shift in typical FMCG sales organizations. Technology-led pilots – in telesales, hyper-local potential mapping, dynamic routing, n=1 targeting – are showing a lot of promise, and will be ready for scale up when required.
As every CEO knows, turning opportunities into realities is the challenge. In the coming decade, India will see in a more pervasive manner hypermarkets and supermarkets. Kirana stores that were condemned to extinction will see a new afterlife. Brick-and-mortar stories will thrive along with online and virtual stores. Virtual reality and augmented reality will be used by consumers to buy products.
In conclusion, let us go back to the homemaker in Coimbatore. She is very excited because the platform that she uses to buy groceries has sent her a device which she can use to help her with the grocery shopping. This device looks like a miniature pyramid and it is made of a transparent material. Along with the device she gets a manual explaining how to use it. She follows the instructions and downloads a link. She plays the link on her phone and places the device on top of her screen. Within a few seconds she gets a 3-D rendition of a catalogue with all product features and benefits. She can add products to the cart by tapping on the product image. She is super excited with the experience.
We believe that the FMCG world—with its big bets on trends and timing—has never been a haven for the faint of heart. Add digital disruption, emerging alternative business models, and changing consumer trends to the mix, and sustained profitable growth becomes even more challenging—or a tremendous opportunity for insurgents and challengers to leapfrog slower-moving incumbents. The next decade could well be the golden age for fast-moving consumer goods players in India.
[box type=”shadow” align=”” class=”” width=””]Joydeep Bhattacharya is a partner in Bain & Company’s New Delhi office. He is the head of Bain India’s Consumer Products and Retail practices. Sanjay Wali is Head of Sales at Godfrey Phillips India Ltd.[/box]