Mainline DistributionSHIP - Heading Towards An Iceberg?

This blog is not about brands, market shares or even projections. This blog is about the future of the traditional mainline distributors of smartphones in India. I do foresee tough times for them in the future. Some of you may find my views too strong, but this is what I feel personally based on information I have collected from different sources.

There are a lot of happenings which got me thinking on the future of this community. Examples:

1. An article which said that Udaan a B2B online platform has sold 10 million mobile phones in 2020. This should make them the No. 1 distributor for Mobile phones in India with a 4% contribution to the industry in volumes.

2. The increased share of online specially post COVID. In fact online contribution was growing even prior to COVID-19. It has only accelerated and shall accelerate more as we go through the second COVID wave and look forward to a possible third wave.

3. Lot of mainline retailers buying from online. Even on a conservative basis, 40-50% of the online buyers are mainline retailers.

4. Point 3 leads me to the fact that brands now understand that retail will sell its products today not because they want to sell it but because the customer wants it and the channel has limited choice in conversions.

Let’s look at what are the typical or traditional ways in which a smartphone undertakes its journey to the end customer:

1. Brand --> Mainline Distributor --> Micro Distributors --> Retailer --> End Customer. In some cases the Micro Distributor may not be a part of the chain.

2. Brand --> Online Platform --> End Customer.

In summary, we are talking about four stake holders in the value chain - The brand, the distributor in mainline/the platform in online, the retailer in offline and the Customer. Let’s try and evaluate, how each of them are placed today, and how important is their role and what is their future. I am not covering the end customer and Online platforms in this content.

First – The Brand; of which there are 3 types. Those in the top 5 which contribute to 85% of the shipments, standout brands like #Apple which have a niche set of customers, 4-5 fence sitters like #OnePlus, #Transsion, #Nokia, #Asus etc. The top 5 for sure are presently in a strong position with their high market share, and the gap between the 5th and the 6th is close to 6-7%. The top 5 are slugging it out with new products and an aggressive specifications to price ratio. Apple is Apple with its niche set of customers and growing slowly. The fence sitters are in the race, hoping for better times which could bring them in the group of the top 5.

Second is the distributor and being the subject of this blog I will come back to them later.

Third the Retailer. Mainline is still the major contributor to the mobile device sales in India and their importance cannot be undermined. Brands cannot bypass them as mainline specially retailers will remain irrespective of growth in online.

Well, they may have major issues with brands related to not being given a fair treatment vis a vis online in terms of the same product at same price at the same time as online specially in the period starting August (with the start of the festival season) to the end of January. But then it seems directly or indirectly both the brand and the retailers have reconciled to the fact that there is no permanent solution to it except a change in government regulations or brand approach which may or may not happen to their satisfaction. In any case many of the retailers do buy new models of leading brands directly from online if they are not launched at the same time in mainline or if the allocation to the mainline is meagre.

Now, let’s go back to the distributor who sits in the middle of the channel with the brand above him and the retail below him. He is expected to put in the investments in stocks, extend credits in the market and have a team of front-end and backend staff to run the business and more. All of this at very low margins with higher risks. For them the show has to go on irrespective of what is happening around them in the Industry with an up and running setup and the expectation of doing better sooner than later. They have bank limits which will be cut down if their turnovers fall which could impact their future requirements of capital in case the business needs scaling up in the future.

I will try and list down the challenges being faced by them today strictly from the channel perspective.

1. The way things are going in terms of the increasing share of online, and the consolidation with the top 5 brands, the distributors have limited options in terms of taking up other profitable distribution of mobile brands. They have to learn to adjust with the brands with whom they work and take the high pressures of brands.

2. The opening of brand stores.

3. The rise of the retail chain stores who could buy directly from the brands.

4. Brands opening their own e-stores which could ship directly to customers.

5. The anticipated growth of B2B platforms which could cater to the retailers directly.

6. Add the much talked about O2O/Omnichannel/Hybrid channel which could reduce their role gets us the big question – What will be the future of mainline distributors?

7. Brands not making profits which will push them to further reduce margins for the distributors.

When one talks to distributors of these top 5 brands, one can see that they are not happy with the ROI and the pressures they have to bear from the brands. However, they are so insecure of losing even the little that they make at a high risk that they have no choice but to go along. Like I said they have few choices left with mobile brands, and whichever brands are left may be giving them lower returns. The leading ones like #Vivo, #Oppo, #Realme and OnePlus are brands from the same group and distribution of another group brand if you leave anyone from this group may not be a possibility.

This brings me to the answer. The weakest link today is the distributor and things are not going to be easy for them. They are riding a tiger. If they try and get down the tiger will eat them. They have to ensure that the tiger continues to run, and they are able to hold on to it whichever way they can.

Diversification is a possible alternative but as the saying goes, it is better to deal with a devil you know than with a devil you don’t.