Beating digital in its own game

Traditional trade companies stand tall even at the time of digital disruptions. Despite the exciting growth stories of their digital-first competitors, the traditional trade channels contribute 95 per cent of sales in India.

Eliminating retailers, wholesalers and middlemen with digital go-to-market (GTM) strategies, disruptors improve margins and offer customers attractive assortments and lower costs, which traditional companies find hard to beat. Yet, they cannot rely on digital sales alone.

A consumer durables D2C brand grew over 100 per cent in just five years, it has now expanded to general trade channels, setting up physical stores and 3,000 plus retail partners. A Mumbai-based furnishings company that began as an online-only marketplace now has 200 physical studios in 100 cities, growing at over 50 per cent revenue CAGR since inception.

And there are several more examples. A look at channel-wise sales contributions shows that traditional trade is here to stay. In fragmented sectors such as cement, steel, paints, sanitaryware, auto aftermarket, digital channels contribute under 5 per cent of sales, compared to 95 per cent from physical channels across distributor or dealer-led sales, institutional channels, and exclusive brand stores. This prompts most digital-first companies to expand to other distribution channels after an initial digital splash.

We studied the total market size for the fragmented sectors of cement, steel, paints, sanitaryware, auto aftermarket — on the basis of the balance sheets of top five to six companies in every sector plus industry reports on total estimated market size. We then estimated the total sales coming from digital channels in these sectors, evaluating toplines of digital disruptors in these sectors to arrive at the percentage of sales coming from digital channels and corroborated these findings through interviews.

While digital-first companies are not a threat to traditional trade companies, they are a crucial nudge to traditional trade to digitise their GTM strategies.

Entrenched in the brick-and-mortar approach, companies feel hesitant to take such initiatives for lack of ability or resources. This needs to change. First, because digitisation can help optimise costs — which are traditionally high due to leakages in trade margins for channel partners, and high costs for logistics, warehousing, and inventory. Tech solutions like analytics-enabled demand forecasting or real-time inventory tracking could boost efficiencies. And second, because digitisation can enhance customer experience and choice at the point-of-sale (POS), with analytics and personalised marketing strategies attracting the end-customer and increasing footfall.

Digital gains

Several companies that long relied on traditional trade channels have now added digital technologies for more effective GTM strategies.

– A large steel company used technology to grow secondary sales visibility for better incentive planning; they enabled third-party credit for their retailers, based on the history of their digital payments to distributors, seeing 20 per cent incremental sales growth for their distributors.

– An auto parts company used secondary sales data to better segment channel partners and customise trade promotion schemes, optimising trade spend by 10-15 per cent. They digitally paid out incentives to over 50,000 retailers – forming a direct connection for repeat purchases. Granular demand data has strengthened their logistics network planning and integrated business planning: they halved their depot footprint, improved direct dispatch to 70-80 per cent, reduced inventory by 20-30 per cent, and raised demand forecast accuracy 20 per cent.

– A tyre manufacturer used tools such as Google My Business and social media to generate demand for their channel partners. They caught customers at the moment of choice – when customers researched online before a tyre purchase, they pushed information on their nearby dealers and directed these potential customers to a physical store. Twenty to 30 per cent of their incremental growth now came via digital leads.

Besides reducing service costs, traditional trade companies have used digital technologies to differentiate their value propositions and enhance customer convenience. Doing so will allow them to beat disruptors at their own game, offering customers the unique value propositions usually monopolised by digital-first companies.

The writers are with McKinsey & Company

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