E-commerce will get a big boost in demand, but this will not be a game changer

As an immediate aftermath of the lockdown, demand across e-commerce platforms saw a dramatic surge in volumes and value. Grocery platforms such as Grofers and Big Basket saw a 3x to 5x increase in daily demand. With online grocery players running at 60 to 70 percent of their capacity, most were unable to serve the new peak in demand because of manpower, infrastructure, supply chain, and regulatory issues. This demand curve is expected to continue its upward trajectory, and Indian e-commerce players will overcome the capacity roadblock by making significant investments to expand the supply chain, manpower, and front-end capabilities. However, the economics of these players still make it infeasible for them to fulfill low-value orders.

New players have also arrived in the form of hyperlocal delivery experts such as Zomato, Swiggy, and Dunzo expanding their services to the grocery category. In the short to medium term, this will open up somewhat of a direct-to-consumer channel for CPG players. As the situation stabilizes, India’s e-commerce industry is expected to grow at a rate of 100 to 150 percent. (Online grocery has been the biggest winner in China with sales growth for 2020 to the tune of more than 60 percent.) But even with huge investments and extraordinary growth, e-commerce will not contribute to more than 5 to 6 percent of total CPG sales on an average in the medium term.

Modern trade will need to innovate to survive; doorstep delivery to be crucial

Modern retail is one of the biggest economic casualties of the coronavirus pandemic. With less than 50 percent of stores operational and footfalls being low, sales has taken a big hit. Most retailers believe it will take them at least nine to 12 months to show signs of recovery. This segment has a tough road ahead. With social distancing becoming the new normal, consumers see e-commerce and the neighborhood mom-and-pop stores as safer options. In China, footfall has halved for more than 60 percent of modern trade retailers. Modern trade will need to innovate with doorstep delivery and digitalization, either by partnering with delivery players such as Swiggy, Zomato, and Uber or by investing in a dedicated delivery fleet. For instance, Big Bazaar has initiated its own doorstep delivery service in select cities, and Metro Cash & Carry has partnered with Swiggy to facilitate deliveries. Innovating for bulk orders or community delivery on WhatsApp (Chinese retailers did the same using WeChat) will be another lifesaver for retailers. Even in the best of scenarios, modern trade will have a long road to recovery.

General trade will continue to be the leading sales channel and may face strong working capital pressure in the short to medium term

Although COVID-19 has had a significant impact, general trade has proven to be agile in adapting to new circumstances. With high penetration and convenience, it will continue to be India’s leading distribution channel. General trade has shown tremendous agility by using digital platforms such as WhatsApp and Paytm for orders and payments and has even offered home deliveries. The recent launch of JioMart in partnership with WhatsApp in select areas around Mumbai in the coming quarters will provide an additional impetus by bringing the local kirana store onto the digital platform. However, the prevailing issue of a severe cash crunch as a result of slowing consumer demand before COVID-19 will worsen in the medium term. Around 80 percent of the medium and large retailers don’t expect to make any profits by August. Even retailers with some cash to spare will prioritize investments toward essential items over discretionary items. This will put immense pressure on distributors to extend credit for longer periods of time, and they will bear the burden of the higher costs of vehicles and manpower in the medium term. General trade players will require hand-holding support, at least in the short term, either from the government or from CPG companies, which will empower them to be resilient and bounce back swiftly.

Implications for CPG players

Ensure continuous availability of stock across e-commerce and modern trade as operations are scaled up. Set up a flexible supply chain with inventory available at multiple nodes to ensure on-time and in-full delivery for different order sizes from different nodes.
CPG players have struggled to access information about consumers’ buying behaviors with traditional e-commerce companies. With the arrival of new hyperlocal players, CPG players have an opportunity to reach upfront agreements for sharing data about behavioral trends—which will be valuable as they develop value propositions in the post-COVID world.
Modern trade will be a wait-and-watch game: the channel will have to innovate to recover from the crisis.
This will also be a once-in-a-lifetime opportunity for CPG players to structurally transform their general trade distribution network by consolidating the tail and shifting the focus to strategic partnerships.
Shift the relationship with retailers from purely transactional to true loyalty. Trade schemes and offers have long been the main tool—and at times the only tool—to get more out of retailers, and this has led to high proliferation of schemes and payments. This would be an opportunity to take a clean-slate approach, simplifying and reducing the scheme structure while developing new tools of engagement, including differentiated service levels, credit extensions, and tech solutions for retailers to manage their business better.
This is also a once in lifetime opportunity to accelerate the front-end digital agenda. Most CPG players have not gone beyond basic front-end digital tools for order taking and distributor billing. They should use this time to push the agenda on online payments, extending digital engagement to retailers and driving “low-human-touch” sales.

Resetting your supply chains post-COVID-19

COVID-19 has given supply chains a tremendous jolt. While short-term issues of demand volatility and labor shortages are being mitigated through intensive dynamic planning, portfolio rationalization, and multiple cross-industry collaborations, there are major long-term implications on strategic choices for the supply chain. Organizations should use this unprecedented opportunity to reimagine supply chains on a clean slate.

Two key themes will drive the new supply chain strategy and multiple long-term trends post-COVID-19.

Theme 1: Business continuity considerations will battle it out with cost pressures

India has been a low-price-point, large-volume market. This has made cost optimization a key objective in all supply chain design exercises. The pandemic has exposed this objective due to its vulnerability to drive business continuity.

But this also doesn’t mean companies can afford to spend a lot on risk-aversion given the overall profitability pressures are even higher in a lower volume and value growth environment. This tension will continue to be high, so only those trends that don’t have a substantial cost or cash impact will really be accelerated.

In our study of COOs and operations leaders across some of India’s top CPG firms, an overwhelming majority believe COVID-19 will have a significant long-term impact on their company’s business continuity processes (see figure 6).