Context: Consumer goods distributors in Maharashtra were protesting against Colgate’s alleged unfair treatment of traditional distributors with respect to B2B technology companies such as JioMart, Udaan, and others.
What is the issue?
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The manufacturer, Colgate, sells its product to the distributor for ₹40 and the distributors sell Colgate toothpaste to retail stores for ₹45.
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The kirana stores further sell a 100g tube of Colgate toothpaste to the consumer at an MRP of ₹55.
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Whereas, the new age technology B2B companies (JioMart, Udaan) were able to supply Colgate toothpaste to the local store for ₹35, lower than the ₹45 charged by the distributor.
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India’s distributors claim these are unfair practices and want manufacturers such as Colgate to stop supplying goods to the technology companies.
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Colgate has refused to do so and, hence, the distributors have decided to boycott its products.
How B2B companies were able to sell at lower prices?
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Creative disruption: B2B companies have developed technologies to connect directly to the retail stores through mobile phone apps, bypassing the intermediaries. This results in cost reduction.
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Predatory Pricing; These B2B companies are able to bear a 15%-20% loss on products they sell to the local stores. They deliberately offer their product at a price lower than what it costs them, to lure local stores away from the traditional distributors. This predatory pricing becomes possible by the funds from big domestic and foreign venture capital firms. They are able to sustain huge losses for several years until they destroy existing market players and gain dominant market share. For instance, Udaan has suffered total losses of more than ₹5,000 crores in just five years and JioMart reports even greater losses.
What are the implications of this disruption?
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Consumers may benefit from lower prices for a shorter period. However, as soon as, big techs are able to eliminate the competition, they start raising their prices.
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In India, the livelihood of more than 20 million families (100 million people) depends upon the role of intermediaries. Whereas foreign funding is available to a few selected firms, who eventually can displace the millions. It can result in enormous social unrest in the country.