In January, Udaan, a business-to-business (B2B) ecommerce start-up, closed a $200-million debt financing round by issuing convertible notes to primarily five new investors. Around the same time, DealShare, a social commerce grocery start-up, raised $165 million from Tiger Global and Alpha Wave Global, and became the fifth Indian unicorn of the year. Back in December, Jumbotail, a retail platform and food and grocery B2B marketplace, raised $85 million in a Series C funding round led by Artal Asia, an affiliate of global equity investment firm Invus. Moglix, another B2B commerce platform, raised $120 million last year in a financing round led by Alpha Wave Global and Harvard Management Company at a valuation of $1 billion.
These examples are an indication of the faith investors are putting in the FMCG sector’s B2B space despite it being nascent and loss-making. But the question is: why are they taking such a risk when the business-to-customer (B2C) space is still evolving and finally maturing? Are they taking cues from the global B2B ecommerce market, which was valued at $14.9 trillion in 2020?
“An investor’s strategy to invest in a loss-making segment is similar to someone buying shares in a public company, which, if not profitable right now, will have to eventually make profits. Venture capital investors are doing the same in the private side at a very early stage—sometimes even before a company starts making revenue,” says Anand Daniel, partner, Accel, an investor in Moglix.
He admits that discounts offered by B2B players in the FMCG space are funded by investors. “To get that market share, there could be discounting done on the demand or the supply side and that is why the margins go down and companies make losses. The investors fund those losses in that phase with the intent that once you scale, you can make at least the same amount of profits as the offline world was making.”
The FMCG space, which forms the largest portion of the Indian consumer basket, has one of the highest total addressable markets. But not every fund is investing in this space. Sudipto Sannigrahi, principal, Matrix Partners India, elaborates on why they have not invested in a B2B FMCG-focussed company yet: “We have not invested because the supply in this category is largely consolidated under a few brands. These brands also have a strong existing pan-India distribution network which leads to low margins and high working capital days for any new player that wants to operate in this category.”
However, Matrix Partners has invested in DealShare, which operates in the B2C and the B2B space, helping the company with faster penetration into a city, better pricing due to scale economies, better local intelligence on the SKU mix, among other things. DealShare, in association with the Rajasthan government, had launched an online B2B platform to address the shortage of essential goods faced by retailers in the state during the lockdown.
The scales, however, seem to be tilted towards the B2B players as far as funding is concerned. Sarath Naru, managing partner, Ventureast, does not believe that it is a low profit margin space because its customer acquisition cost versus its lifetime value is much more favourable than any FMCG B2C business. “The risk of these businesses is significantly lower, particularly for an early-stage company. Using a combination of technology and domain expertise, start-ups have been able to develop fully tech-enabled supply chain solutions, providing the small—less-served or never-served—retail stores many benefits such as transparency in inventory flow, pricing, convenience of ordering branded FMCG products and doorstep logistics,” he says. The fund has plans to continue investing in new businesses that are innovating for middle India—the next 400 million-plus consumers—and the ones that are building software products for small and medium-sized enterprises (SMEs).
Some believe that the growth margins, though low in B2B, are more predictable. For commoditised product categories with limited differentiation, a significant amount of the B2C FMCG margin is pumped into marketing spends. Here, B2B manufacturing becomes attractive—if done at scale. “The [B2B] model essentially aggregates demand through multiple contracts and leverages the sales force and marketing of B2C FMCG firms to drive sales. At large capacities, the scale itself becomes a point of differentiation,” says Apurva Dixit of Blume Ventures.
The B2B commerce companies are promising a new era of retailer integration, supply chain consolidation, digitisation-led data and information transparency and better customer intelligence. The path to profitability for these companies hinges on two levers. The first is margin expansion through higher realisation from retailers and lower procurement costs from brands, which one expects to play out through effective brand and product mix and greater bargaining power as scale builds. The second is operating leverage and efficiencies as scale and network density increases. Small distributors make a return on investment of 2% per month. “Given the greater investment power behind the B2B companies, data-led tools for better supply chain planning and the sheer scale of operations, investors see merits in backing these businesses for growth and profitability,” says Angshuman Bhattacharya, partner and national leader, consumer products and retail, EY India.
But, do we even need a new distribution network in place, particularly when the old one was working fine? Experts believe it is the underlying need of the segment. “The current system is clearly inefficient, fragmented and expensive where it is difficult to manoeuvre growth. B2B commerce is helping integrate this fragmented distribution network and driving efficiencies. Moreover, smaller brands and start-ups, despite product meritocracy, have been unable to find the investments for an effective route-to-market. B2B commerce is creating a level playing field between brands on the back of consumer meritocracy rather than distribution strengths,” Bhattacharya adds.
Like Bhattacharya, many vote for technology to be leveraged to bring in efficiencies in the B2B FMCG segment. Calling the Indian B2B commerce space a trillion-dollar opportunity, Naman Lahoty, vice president, Stellaris Venture Partners, says that despite being large, the segment is plagued with inefficient trade practices and unorganised credit. “We believe technology can be leveraged to efficiently organise Indian SMEs to unlock their true potential and build large B2B businesses across verticals and horizontals. The working capital requirement of these MSMEs is either fulfilled by unorganised credit channels or is largely unaddressed, restricting their growth. Organising credit in B2B commerce can create multiple opportunities to bridge the ~$300 billion credit gap in the Indian MSME sector,” he says.
The future seems to be well-funded for India’s B2B FMCG space.