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News: 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.
What is the issue?
The manufacturer, Colgate, sells its product to the distributor for ₹40 and the distributors sell Colgate toothpaste to retail stores for ₹45.
The kirana stores further sell a 100g tube of Colgate toothpaste to the consumer at an MRP of ₹55.
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.
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 ₹5,000 crores in just five years and JioMart reports even greater losses.
What are the 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?
This is not just an Indian problem but a global one. For instance, 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.
The new Chairperson of the Federal Trade Commission in America, Lina Khan, is seeking to frame new rules to check such anti-competitive behavior.
Source: This post is based on the article “Predatory pricing is prising Indian livelihoods apart” published in The Hindu on 17th Jan 2022.