Evolving GTM for insurgent brands Part 1
Digitisation of the kirana stores and the ongoing pandemic acting as a forcing function for innovation in the distribution
|Aug 7, 2020|
All digitally native brands (DNB) are insurgent, but all insurgent brands are not digitally native.
For some reason, the terms insurgent and DNB are used interchangeably in a lot of conversations. Online-first is an acceptable term for insurgent brands but not digitally native. Selling on e-commerce marketplaces or having a few million followers on Instagram does not make a brand digitally native. What is the difference? Brands that are born on the internet own the distribution with it’s own storefront online through which they own the customers, digitally native in every sense. Of course, DNBs do go wholesale at some point in their growth cycle, but they are not set up for wholesale.
India has omnichannel insurgent brands, not many DNBs and this is good. Indian brands have taken an approach that works for the local market - start with e-commerce and build an omnichannel distribution.
But the Indian retail landscape is changing fast. The next generation of insurgent brands will be built and scaled very differently from the current generation. Why? E-commerce and digitisation of legacy distribution channels well underway. The digitisation will change the way brands build their distribution, it will take lesser time to build meaningful distribution. Look around we notice the gradual rise of B2B e-commerce/commerce, digitisation of kirana stores, increasing adoption of e-commerce, DTC trials by big brands and consolidation of modern trade.
What does the changing landscape mean for insurgent brands in India? Digitisation of distribution will lead a level playing field for channels - B2B/B2C+Kirana model will challenge pure-play e-commerce and e-grocery. For brands it will mean reduced platform and revenue risks and much faster experiments and even the possibility of building it’s direct distribution.
Before we get into more exploratory mode, it will be good to look at what the distribution landscape. An as-is analysis informs us about why the current GTM approach works for insurgent brands, why they follow this model and how the future will change. Let’s start with the Pyramid Playbook adopted by most insurgent brands.
The Pyramid Playbook
We have all heard build something people want (product), but there is distribution corollary - sell where the people shop.
In India, brands aspire to be on as many General Trade (aka Traditional Trade or kirana stores) shelves. Why? Because GT is 87-88% of the market. While this share is decreasing but at a much lower rate than anticipated and this channel will never go away. So the GT aspiration is not misplaced. But there is a problem. Physical retail is extremely competitive, and most shelves are owned by the incumbent brands - through significant trade investments and sales relationships. Building GT distribution is time-consuming, people-intensive and capital intensive, not feasible for early-stage insurgent brands. Only deep pockets can afford a GT-first launch, most recent example is RP-Sanjiv Goenka’s Too Yum.
How do the insurgent brands get started? Online with e-commerce marketplaces. Wait why not build own e-commerce storefront? Because building a storefront is the easiest part, the other aspects such as discovery (associated customer-acquisition-costs), customer engagement, supply chain, and after-sales service are extremely hard to get right. E-commerce platforms have spent billions in building discovery, customer trust, delivery experience, returns and customer service standards. A customer today expects the same experience irrespective of whether a brand is small or big. So, it is wise to rent this infrastructure than to build from scratch.
Of course, there are exceptions. Brands such as ID Foods were born in GT, and the team had to build a complete distribution from scratch. ID Foods sells on e-commerce and e-grocery platforms, but the product is kirana and modern trade-first.
Amazon is the Shopify of Indian insurgent brands. Sure, Flipkart too is an option but if you compare a brand page on Amazon vs. Flipkart you will notice the difference.
E-commerce marketplaces have built a well-oiled infrastructure from discovery to delivery. Platforms have gained significant customer trust in buying online - easy returns, active complaint redressal. One of the big features of e-commerce platform is customer intent - the customer logs in usually with an intent to purchase. So the chances of converting a consumer are relatively high.
Why does e-commerce upfront work? Most insurgent brands start with a niche product for a specific customer base and online works well in this scenario. Also, the insurgent brands see themselves as anti-incumbent and often position themselves in the premium category. Finding a customer base that aligns with this premium position is better done online than offline.
Side Note 1: Most insurgent brands are positioned as premium by design in the early-stages, but as the portfolio matures the brand may offer more affordable SKUs. But it is still early days for insurgent brands, and not everyone can make such a transition successfully.
Going with e-commerce first has several benefits for a fledgeling brand; here are some of the key benefits observed.
Fast Innovation Cycles: Launch fast, engage with the customers, e.g. Q&A on Amazon/Flipkart, gather feedback and fine-tune the product. It does not take more than a few weeks to go through this cycle. Incumbents too, are trying their hands at this approach.
Targeted Engagement: Online provides brands with enough levers to drive targeted marketing initiatives. Amazon, Facebook allows brands an opportunity to engage with a target demographic based on their purchase/engagement patterns and demographics. Traditional retails lacks such targeting levers which makes it hard to early-stage brands to manage marketing spend.
Shorter Cash Conversion Cycle: Brands can control their inventory better early on, there is no credit extension and payments come through faster. Paying customers and cashflow is great validation and dopamine to move forth building a brand.
Data: E-commerce transaction data, online marketing engagement data support the brands in making critical positioning, pricing and partnership decisions. It this data that lays the foundation for the next step in growing distribution
In E-commerce data matters. Availability of good data means brands can target customers better (based on profile), advertise to the right segment, and better track the ad ROI. Something like this is not possible in GT today. Growth of logistics infrastructure means brands can serve customers in Tier II, III cities and towns too.
Not all insurgent brands rely on e-commerce marketplaces. Brands in categories such as fashion, beauty, electronics and wellness have built their own stores. Yes, they do sell on e-commerce marketplaces but a sizeable of customer engage with them directly. Pre-pandemic, some these brands were bullish on own physical stores and franchise. Now most brands are rethinking their retail strategies.
While e-commerce marketplaces are great launchpads, there are some important things to watch out.
Platform Risk - the marketplace could change policies, add/remove fulfilment infrastructure, change prices—also, revenue risk due to over-reliance on the platform.
Private Label - use the sales data; it is natural for the retail channel to launch a private label product.
Customer Ownership - the platform owns the customer relationship, not the brand. Brand as moat is a strong argument but proximity to customer can make the moat wider and brands need to build that direct relationship to survive the future.
Private Label is a reality of retail and brands cannot control it. For customer ownership brands have to build their direct distribution infrastructure and migrate customers there; easier said than done.
One way to manage platform risk is to diversify distribution. The next player in the distribution pyramid is modern trade retail chains.
Modern Trade (MT) comprises operators such as Big Bazaar, Nature’s Basket, Reliance Retail.
Gourmet Modern Trade and Modern Trade
Why Modern Trade? There is considerable overlap between online and supermarket buyers. That said, not all Modern Trade networks are created equal. MT can be segmented based on formats, target customer profile and SKUs. For example, we have gourmet Modern Trade, e.g. Nature’s Basket, Foodhall to mass, everyday low price (let’s call them jus Modern Trade), e.g. D-mart.
The premium positioning of insurgent brands makes them a natural choice for GMTs. The GMTs usually stock imported brands with a value proposition similar to those offered by insurgent brands. The drawback of GMT is it’s small footprint. For brands looking for strong national distribution it is better to work with mass MT.
The MT chains are national chains and cracking anyone one can open many markets. MT accounts for 13-15% of retail trade today; this share might increase a little in future, but if trends are suggest that e-commerce will leapfrog MT. In fact MT players will do lot in e-commerce, JioMart and D-mart are great examples.
Brands can leverage their e-commerce experience to negotiate better terms; here is how the data helps the brands.
Does the product make money?: Everyone loves revenue and cashflow. Strong growth and revenue vis-a-vis competitors is a very good starting point to demonstrate that this product can make money.
How good is the product? Customer reviews, testimonial, engagement on Q&A, customer discovery journey provide rich data on the perceived quality of the product and purchase intention.
Are customers aware of the brand? Sales data in combination with marketing spend, customer engagement on social media, rising ad impressions and clicks, and how the engagement has grown over time.
Do the customers overlap? Use the customer shipping data, city, pin code with any available granularity to demonstrate overlap of customer geography with the store network.
Breaking into MT is not easy, what is? Owing to high cost structures MT chains operate on wafer thin margins and all the decisions are margin-centric. As a result MT chains love to stock fast moving brands, SKUs. That’s not all, MT also wants some non-margin money in form of high listing fees (INR 7.5K - 10K per SKU), product visibility (yes, MT too has sponsored products of sorts 😉), promotional offers to push sales, and of course trade credit - overall this might be 25-30% of MRP. It’s hard for a young brand.
A brand usually works with 2-3 chains at a time, and many times it is only a few locations at a time. Expansion across multiple locations takes time.
Ok, this is the final frontier, this is where the majority of the market shops. GT is not just CPG, though. The kirana layer comprises independent consumer electronics stores, small eye-wear stores, novelty stores, stationery shops and many more categories.
Consumers prefer e-commerce for fashion, beauty, electronics but GT is still crucial for food and non-food CPG brands. CPG products are high frequency purchases with low order value; using an existing channel (with a deep distribution) is much cheaper than setting up its direct delivery channel. Although the pandemic forced brands to experiment with DTC, but such measures are more retain customers and not long term bets.
All GT aspirants do not make it this far; some stop at MT. What makes GT appealing (particularly for CPG) is the penetration of these stores and consequent discoverability, and accessibility it enables. Here are some behaviours GT drives:
Encourages impulse purchases: observe the checkout counters, they are one of the most expensive real estate in a store. Personally have discovered many brands at kirana stores.
Buy now: e-commerce is convenient, but you still wait for you product. Now you know why the push for 2-hour delivery, you are competing with local stores. Now, this is about to change, as well.
New customer segments: Discoverability and accessibility can open new customer segments, demographics which are not part of the earlier target
One of the most shining examples that demonstrate power GT is StoreKing. StoreKing distribution was active much before e-commerce made rural breakthrough or Jio enabled internet access. Customers bought all kinds of products from Nike sneakers to induction stoves on StoreKing. It is a fascinating story that deserves standalone assessment.
The experience and knowledge gained in developing e-commerce and MT help brands in negotiating competitive terms of trade, distribution partnerships.
The last-mile retailers are sharpest, always look to minimise risk as opposed to making more money. Such risk averse retailers work on "sell or return" model - the brand takes back unsold stock, and the retailer is not obliged to pay. But if a product works well in the neighbourhood, the retailer will demand higher fill-rate and decent credit terms.
Brands can work with kirana stores directly, but it may be wise to go through distributors, stockists who in turn work with stores. But partnering with a distributor is hard. Distributors work on small margin, and faster cash flow, so they demand higher volumes. Emerging brands cannot work at scale in it’s early days and need a different kind of distributor tailored for smaller brands. Platforms such as Anka SuMor, Dartss are some of the new modern distributor platforms working with insurgent brands.
GT offers amazing customer reach but it has big drawback, quality of data. The availability and quality of data deteriorates readily as we move from e-commerce to GT. In such a scenario it is hard for brands to make intelligent selling decisions, estimate ROI on visibility investments etc. everyone struggles with data in GT.
The data situation in GT is expected to change in the future as the likes of JioMart, Metro, Jumbotail, Grofers are gradually digitising the GT inventory. We will cover more how this digitisation will change the landscape in the future in the next part of this article.
Ok. DTC too is happening, but mostly in fashion, beauty, electronics and wellness categories. Customer discovery is still a challenge, but once the customer is acquired then the LTV can be sizeable. The e-commerce pioneers have set the customer expectations, paving way for others to follow.
Side Note 2: Insurgents rely on social media channel such as Facebook, Instagram, YouTube, ShareChat to reach the customers. Compared to US/EU Indian brands spend less on online ads and more on store visibility (Amazon Sponsored our Shelf placement). Partnering with influencers on social media channels is very popular among brands right now. The popularity of short video formats, and web-shows have given insurgent brands a method to make targeted advertisements. Influencers are hot today, but there platform risks too, TikTok? It may be wise to brands to build content in-house, reduce the reliance on external influencers over time. It’s really going back to internet-first business of building a community, it’s a slow process but a very rewarding one.
Younger brands in the above categories are tasting great success. Check the customer map shared founder of Flatheads. Started not more than eight months back, absolutely fascinating. It will be interesting to learn what they got right. Flatheads sells on Amazon too, but not more than 2-3 SKUs are listed. Hope those are not the SKUs driving all the sales 😉. It will be great to see a DTC brand own the customer relationship and scale operations.
One CPG category that is DTC from the get-go is premium tea. We have brands such as Teabox, Vadham Teas in this category. I believe international customers or Indian diaspora account for a greater share of the customer base for these brands. Until recently none of premium tea brands was on Amazon or Flipkart, it's only recently we see Vadham Teas are available on Amazon. What worked? The product is premium, the target customer segment is more evolved, and pricing matches the premium tag - all these working together made DTC viable for this category.
Side Note 3: Most premium tea brands have vertically integrated operations. Every brand has it's own tea estate which gives them better control on the quality and consistency of the product.
For typical food and non-food CPG at large, the unit economics of DTC still appear dicey. DTC is more challenging for products that (1) have a shorter shelf-life (needs special supply chain infrastructure) (2) average order value is less than INR 500-600, and (3) frequency of purchase is high. For DTC to work in India for CPG, we need a fulfilment infrastructure similar to e-commerce.
From the looks of it, the DTC model in India will go through kirana stores.
For the current generation of insurgent brands, it is product first followed by distribution. The current playbook works well. But eventually there is no difference between insurgent and incumbent distributions. That’s the nature of the Indian market. Indian insurgent’s are not internet-first, they are Amazon-first.
That said, the GTM of insurgent brand is set to change with the digitisation of the GT layer. It might save a brand 3-4 years compared to the current GTM approach. The internet revolutionised commerce overall, the digitisation of GT will revolutionise distribution. We will see new go-to-market strategies, data-driven and programmatic trade investments, and improved customer service through micro-fulfilment and more.
We explore more in Part 2. So stay tuned.
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