Context: Recently, all 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.
Key Issue

• The manufacturer, Colgate, sells its product to the distributor for Rs 40 and the distributors sell Colgate toothpaste to retail stores for Rs 45.
• The kirana stores further sell a 100g tube of Colgate toothpaste to the consumer at an MRP of Rs 55.
• Whereas, the new age technology B2B companies (JioMart, Udaan) were able to supply Colgate toothpaste to the local store for Rs 35, lower than the Rs 45 charged by the distributor.
• India’s distributors claim these are unfair practices and want manufacturers such as Colgate to stop supplying goods to the technology companies.
• 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?

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. Also, the common citizen benefits from these lower prices at their local store.

• However, this is not the only reason.

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. Also, this fund is available to only few
• In other words, these technology companies rely not just on their mobile phone app innovation, but also steep price discounting and cheaper financing to win.
• For instance, Udaan has suffered total losses of more than Rs 5,000 crores in just five years and JioMart reports even greater losses.

Key implications of this disruption

• Firstly, 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.
• Secondly, 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.

Is it a problem in India only?

While consumers may benefit from lower prices, the livelihoods of millions of distributors, traders and their families suffer.

• To be sure, this is not just an India problem but a global one.

Social media companies such as Facebook give away their products for free and e-commerce companies such as Amazon sell at lower prices, benefiting consumers enormously, but also causing immense social strife and disharmony.

• But in India’s case, there is an added complexity of foreign capital flows.
• Access to this capital is only available to a tiny proportion of Indian businesses but threatens the livelihoods of millions of Indian families, as in the case of distributors, causing massive income and social disparities.
• This unequal access to capital creates leads to anti-competitive behaviour.

Road Ahead

• To be clear, this is not a Luddite argument against e-commerce or technological innovations. The issue is about illegal predatory pricing and abuse of pricing power by startups and big corporates through preferential access to easy foreign money.