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Cracking The Fulfilment Centre Model In India’s B2B Wholesale Retail Market Isn’t Easy, Says LN Koteshwar, Business Head At Flipkart Wholesale

Flipkart Wholesale hopes that its experiment with the fulfilment centre format in smaller Indian cities will help in pruning its costs and adding another layer to its omnichannel strategy

Cracking The Fulfilment Centre Model In India’s B2B Wholesale Retail Market Isn’t Easy, Says LN Koteshwar, Business Head At Flipkart Wholesale
LN Koteshwar, Business Head At Flipkart Wholesale
POSTED ON June 27, 2023 6:43 AM

Three years after it took over the Best Price cash-and-carry business from Walmart India, Flipkart Group’s business-to-business (B2B) vertical, Flipkart Wholesale (FW), has 26 stores in its network. With a focus on tier-2 cities and towns, the company is now experimenting with a new business model by setting up fulfilment centres (FCs) that will operate as dark stores.  

LN Koteshwar, business head of Flipkart Wholesale, tells Outlook Start-Up how this will be a win-win opportunity for the company and its retailer network.  

Edited excerpts:  

What were some key learnings of managing B2B wholesale retail business in the past three years? 

The biggest learning was managing sustainable growth by becoming profitable and scaling up. We won’t do anything that is not financially sustainable either from the vendor or retailer perspective. India is a big market, so growth can come at any point in time.  

Almost 75 per cent of our competitors’ sales come from selling staples, but it is tough to earn money in this category. There is often a deflationary trend in oil for six to eight months a year, and this product category comprises 50 per cent of the staple business.  

We can double our topline by selling staples. However, this product category constitutes less than 50 per cent of our overall business. This is because we are focused on a healthy bottom line. Keeping this in perspective, we would prefer growing at a decent rate rather than burning cash. 
  
Isn’t it crucial to have the right product mix in the wholesale retail business? 

Yes, we are very conscious of our category mix. While it might sound simple, it is difficult to manage in India, given the numerous players in the market. If we don’t offer a particular product, someone else will. However, we did not fall into the trap of spending ourselves thin because it is not a sustainable business model.  

Even within a particular category like personal care, we work with products offering better margins, even if it’s a small brand or subcategory where customers are willing to experiment. For instance, many customers will consider experimenting with cooking oil if they get it at a viable price.  

Is this why FW is promoting challenger brands? 

Most of our catalogue has products from the big companies. In a way, we are increasing their distribution since conventional methods do not service many retailers.  

However, we have invested a lot in an alternate channel for new-age or challenger brands. Typically, our trial rates are higher for these brands. We also earn better margins on them as compared to established brands. 

Our business development associates especially go out and sell their products. We have become a distribution accelerator for these challenger brands since we are helping put their distribution in place.  

We are working with around 50 challenger brands across categories. While the pipeline is very big, we want to prove the success of one category with five to 10 brands before expanding it.   

Most challenger brands are start-ups run by first-time entrepreneurs. Is it easier onboarding them and marketing their products as compared to legacy brands? 

The problem is not getting them onboard but proving to them that this alliance works, which we have been able to do. 

As start-ups, challenger brands are more agile than mature retail entities. While traditional companies have brand equity, new-age companies have found their own niche and know how to target customers efficiently. 

However, they lacked access to distribution, so they are more than happy to work with a big B2B player like us. Moreover, keeping many stock-keeping units (SKUs) or minimum order quantities is challenging for these start-ups while working with bigger distribution companies.

We have our own understanding of what can work, at what pricing and in which areas. We typically test these brands in one market, and if it succeeds, then we roll it out in other areas. If it doesn't work, we change the test market to rule out as many variables.  

So, the issue isn’t about convincing brands. They want to work with us, which is why we have 50 of them onboard.  

How is FW’s credit system helping in retailer retention? 

In traditional retail trade, distributors offer credit to their retail customers for two to four weeks on average. This is a cost for the distributors. We have come up with a co-branded credit card with HDFC Bank that offers five per cent cashback.  

Retail
Flipkart Wholesale works with around 50 challenger brands across categories

Moreover, we have tied up with a couple of fintechs to offer a buy now pay later (BNPL) option. It gives them a credit line for a short period during which they can sell the products and repay on the platform. The credit limit is decided based on the algorithms created by fintech along with our internal data of the retailers’ transactions.  

Offering such fiscal alternatives helps retailers manage their cash flow positively while making big-ticket purchases. And it increases their stickiness with our company.  

What new changes are you making in your business model? 

We are experimenting with a dark store or fulfilment centre (FC) model in tier-2 cities and towns. Retailers can place orders at this warehouse and get them delivered to their outlets. This will help in B2B product categories like groceries with thin margins, where the cost is always under the microscope.  

FW incurs more cost with its assisted sales model, where everything is delivered to B2B retailers. The advantage of having FCs in different locations is the cost savings since we don’t have to dress up the aisle. 

However, cracking the fulfilment center model in India’s B2B wholesale, retail market isn’t easy. We have demarcated a few territories where we want to set up FCs but are working out the cost for this venture.  

How do retailers benefit from the FC model? 

Currently, FW has the assisted sales model, wherein we have over 2,000 people who visit retailers and help them place an order on our app, which we deliver to their store. This gives them convenience and ease of buying, but they might not be able to cover our entire product range while shopping online. 

Visiting an FW outlet gives them the flexibility to buy things that they see physically on display. 

How does your assisted channel help in maximising FW’s business? 

The biggest problem for most companies while working with any B2B distributor is the possibility of channel conflict. Most distributors cater to the same retailer, and some offer them lower prices, which is called bulking.  

We avoid this practice because it is not sustainable. You can do it for a month, but it gradually eats into your bottomline. 

Instead, our assisted channel reaches the smaller retailers with whom we can make the maximum margins. This is because larger retailers always buy in bulk but at heavy discounts.  

Besides, we have a very good understanding of data as compared to a typical FMCG company, with data sets about what we are selling, at which outlets, the profitability at various categories, how to customise it for a particular retailer based on their behaviour, etc.  

Aren’t there similar models in other countries?  

Worldwide, only a couple of markets share the peculiarities of India’s retail landscape, with the presence of many mom-and-pop stores. While things are evolving with modern trade becoming more popular, the fragmented trade will remain.  

Most countries have an organised and modern retail network with walk-in stores. When the in-store business of large distributors is very big, you don’t need the FC model; retailers come in their own pickup trucks and collect what they want. In India, retailers will hire a small truck while visiting a Walmart or FW store.   

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