Last Mile Commerce — an answer for a sustainable e-commerce model
Direct to Customer (D2C) seems to be the flavor of the season if fundraising as a metric is to be believed. Social media news feeds are flooded with ads by D2C brands. Established brands in FMCG, Consumer durable, Electronics and fashion are also exploring D2C channels.
Digital is increasingly claiming marketing wallet share and it is making enormous sense for brands to create a single and unique digital asset to direct the online traffic they generate.
This is a pivot from marketplace model of e-commerce where brands had to shell out significant margins towards listing fees, commissions, transport and advertisement, not to mention price cuts for discount sales. Customer acquisition was expensive while engagement and retention was low, mostly driven by pricing. Specter of cannibalization by private labels and other brands outspending you on promotions was also high.
For brands with an established distributor and retail network, adopting D2C comes with multiple challenges.
> Channel conflict with offline partners as they view D2C potentially cannibalizing their revenues.
Brands have tried to manage this by creating exclusive channel partners to service online orders and also by having a unique / niche product catalogue for online stores.
However, brands are yet to find a solution to address this conflict effectively. Distributors and retailers have multiple brands wooing them for their finite shelf space and one of the reasons brands are going slow on their D2C plans has been to keep them placated.
> Re-balancing supply chain costs
Brands are having to restructure their warehousing and customer care operations to cater to a huge surge in direct demand.
Unlike the offline mode where inventory is owned and managed by the channel partners or in marketplace model where shipping companies or large online partners manage inventory and shipping, brands will not only have to maintain inventory at their cost in warehouses but also make operational changes to ship in smaller pack sizes which adds significantly to direct shipping costs which were earlier absorbed via distributor margins.
A study by Mr. Shubhendu Kumar, Director at Miebach Consulting, captures the logistics cost-to-serve build up across the supply chain very aptly in FMCG/Retial/ECom etc.
He writes, “You will notice that product has to move from few locations to 300 mil. households. We are talking about exploding 100mil. times!”
“Further, the order basket size shrinks from 20,000kg to 0.5kg and distances reduces till its <5km. So, basically product has to move in smaller lot size and over short distances which naturally leads to increasing costs shown in pink dots.“
He makes some insightful points in his study:
“A typical firm controls ONLY 50% of supply chain costs in traditional retail model. We have Rs 150/carton of supply chain costs. Read this in context where FMCG COGS is around Rs 750–1000 / carton”
“Largest cost is last mile (Retailer to household) and that’s the opportunity e-com firms used to enter value chain.”
“Second largest cost is pre-last mile via distributors and that’s the opportunity aggregator and network firms like Udaan used to enter value chain”
Unlike Amazon and Udaan which derive economies of scale across multiple brands, brands will face challenges in individually managing shipping costs and service levels to customers at scale.
Lets take an e.g. of a leading B2C MedTech OEM which has over 150+ distributors each placing 2–3 orders a month by paying in advance for their inventory. By adopting D2C, they would attract about 75,000–100,000 direct orders a month. They would require to scale the team to monitor payments, cancellations, refunds, shipping, delivery and support customers. The load on the warehouse, used to shipping 15–20 orders a day in bulk has now multiplied by a factor of 200. They would also have to factor in warehouse space to store the inventory meant for these orders. It would tie up capital and inventory at warehouses not to mention reduced inventory off-take by existing offline distributors and retailers citing cannibalization of their sale via online channel.
Exclusive D2C brands, in turn, face challenges of scale once their revenue hits a certain level. ROI on digital marketing drops sharply as customer acquisition cost (CAC) rises along with churn. They will need to depend on offline mode to grow their business and will find scale up challenging. They will need to migrate to a different price structure to accommodate trade margins, create different product catalogues while also managing perceptions from offline channels.
Inclusiveness is the need of the hour
Globally online sales have accounted for nearly 19% of total retail turnover up from 16% a year earlier,last year as lock-downs to combat the spread of the coronavirus pandemic fueled a boom in e-commerce, a United Nations study released in May 2021 showed.
Ever-since the onslaught of e-commerce started over a decade ago in India, 7% of the $1.2 Tn Indian retail market is online. 2020 added 20 Mn online shoppers despite pandemic and this resulted in a 45% jump in the GMV. 2021 is already on road to add another 40 Mn users taking the over all user base to 190 Mn. Organized retail accounts for another 9% of the retail.
Traditional retailers and traders are finding themselves increasingly marginalized. Covid19 left its impact keeping stores closed and reducing footfalls drastically. Many medium — large owner run retail shops that have been around for decades have had to shut shop or scale down operations drastically as revenues hardly justified incurring operational costs and bleeding the business dry.
Cannibalization of sales by online platforms through predatory pricing and subsidies have driven trade bodies like CAIT to force govt. to make policy changes and initiate probes against these platforms for violations of FDI and e-commerce laws.
The ongoing CCI probe against marketplaces like Amazon and Flipkart, draft ecommerce law and talks of open e-commerce tech expected to do a UPI in e-commerce are a reminder that the e-commerce model needs to be more inclusive. Existing models are proving to be an existential threat to millions of distributors who have other wise provided merchandising, logistics, channel finance and service support to customers.
Distributors and retailers who still support and service 84% of the retail trade need to be integrated into the e-commerce model. Technologically enabling them to manage inventory, orders and last mile delivery will drastically reduce fulfillment time and logistics costs, improve inventory turns, make replenishment more efficient and give much needed visibility across the supply chains to brands.
Enabling Last Mile Commerce
We at Atto are enabling brands to sell online via their existing distributor network (B2B) and retail network (B2C) with their own branded e-store.
We are an antithesis to the current e-commerce models which either requires companies to be dependent on marketplaces like Amazon or invest millions of dollars / spend a significant margins in matching their delivery experience.
Micro-store technology offers the benefits of D2C while using existing offline structures to fulfill orders at the last mile. With our proprietary micro-store technology, brands can replicate their offline distributor / retail structure online, enabling their channel partners to be online fulfillment partners to the brands with their own inventory.
Brands can demarcate geographies at pin-code level, define service level agreements (SLAs) that define inventory and order fulfillment norms. Replenishment can be automated and inventory across the supply chain can be optimized due to improved visibility.
Our experience shows improved retail sales due to improved assortment planning at last mile and faster delivery times with more efficient replenishment resulting lower inventory across the supply chain and lesser write-offs due to product expiry.
For B2B market, we offer gate-walled stores, KYC based customer on-boarding, account based pricing and linkage to authorized distributors for order fulfillment.
Our technology aims to digitize the supply value chain without causing any structural disruption to the existing distribution network thereby accelerating adoption and implementation across product categories and geographies of our customers.
To know more about our technology and understand how we can help companies be truly omni-channel, please reach out to us at sandeep@attoinnovations.com or visit www.attomarket.com
