Following the pandemic-induced surge in e-commerce, the momentum of business digitalization continues to grow. Companies are increasingly utilizing digital tools to streamline operations, understand market dynamics, and engage with customers. In India, the fast-moving consumer goods (FMCG) sector is placing greater emphasis on digital advertising to connect with consumers. Analysts at Dentsu report that in 2023, nearly half (47%) of the FMCG industry’s advertising expenditures were directed towards digital media platforms.
Marico‘s Chief Marketing Officer, Somasree Bose Awasthi, said, “The digital realm offers unparalleled opportunities for personalised targeting, real-time communication, and measurable outcomes.” “As customers increasingly shift towards online content consumption, prioritising digital advertising becomes vital to uphold relevance and accessibility to our target demographic.”
The surge in ad spend on digital media coincides with another digital trend, where major legacy FMCG companies have been acquiring small D2C (direct-to-consumer) businesses and introducing their own digital-first brands and omni channels.
In the last few years, a number of well-known FMCG businesses have made investments in DTC digital-led startups that acquired popularity among consumers during the Covid-19 epidemic, including HUL, ITC, Marico, Emami, Reckitt, Wipro Consumer, and Colgate Palmolive.
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Many FMCG companies like Hindustan Unilever, ITC, Emami, and Marico have also launched their own microsites. Despite modest sales on these individual platforms, FMCG firms leverage their microsites as launchpads to gather consumer data, foster loyalty, and subsequently expand into larger channels for increased volumes, or direct consumers to scalable platforms such as Amazon or Flipkart.
Traditional FMCG companies cannot afford to overlook the emerging wave of digitalization. However, in this era of digital advancement, these legacy companies must grapple with new realities that may diverge from conventional business practices.
Traditionally, profitability in the market has been driven by factors such as economies of scale, bargaining power, and strong brand perceptions, leading to a correlation between market share and profitability. However, recent research suggests that this connection may weaken for digitally transformed companies. Being bigger may not necessarily guarantee profitability in the digital landscape.
According to a recent study conducted by researchers at Kuehne Logistics University in Germany, there exists no theoretical or empirical evidence supporting the notion that a high market share inevitably leads to high profitability for digitally transformed companies. Analyzing over 6,000 cases spanning approximately 800 US companies across diverse sectors, the findings convey a significant message for FMCG companies embarking on digitalization initiatives, as well as their digital-only counterparts. This insight holds relevance especially within the context of India’s rapidly expanding retail market, driven by the surging trend of e-commerce.
The study suggests that digital transformation could diminish the significance of market share. For instance, it may lower online distribution costs, enabling firms with smaller market shares to compete profitably while reducing the efficiency advantage of larger firms. Additionally, the increased accessibility of online information, such as product reviews and ratings, has diminished the relevance of market share as an indicator of product quality. This, in turn, has mitigated the risks associated with purchasing from lesser-known (i.e., lower market share) companies.
The investigators found that “Organisations can improve profitability regardless of a small market share by embracing digital transformation.” “Our research findings suggest multiple possible drivers behind this development, including efficiency gains like faster knowledge transfer as well as more viable offshoring, greater competitive advantage through easier access to global distribution as well as sourcing, and improved quality assessment facilitated by more conscious consumers and electronic word of mouth (eWOM).”
An illustrative instance is digital transformation, which offers opportunities for automation, replacing learning effects previously dependent solely on market share.”
The research highlighting the diminished correlation between market share and profitability in digitalized companies presents a challenge for legacy firms that have historically dominated with large market shares and thrived on their market dominance and power.
Although market share has traditionally served as an indicator of quality and a barrier to entry for smaller competitors, the research suggests that the digital age has the potential to undermine the dominance of larger players.
“Digitalization is diminishing the influence of market leaders; customers now have the ability to swiftly and effortlessly compare prices online,” explains Alexander Himme, one of the researchers. “This scenario renders it increasingly challenging for the ‘big players’ to maintain a profitability advantage over their ‘small’ competitors, who are also empowered to compete on a global scale due to the presence of e-commerce platforms and fulfillment service providers, and can pursue multichannel sales strategies.”
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“The key takeaway is that perpetual growth isn’t necessarily the optimal route for every company,” remarks Alexander Himme. “Moreover, it underscores that the benefits of digitalization vary depending on a company’s size. Smaller companies with a lesser market share often stand to gain more.”
The major FMCG companies with substantial market shares are currently facing a dual challenge posed by the expansion of local brands and the emergence of direct-to-consumer (D2C) brands.
In recent times, there have been frequent reports of local brands chipping away at the market shares of prominent consumer product companies, particularly in categories such as soaps, detergents, hair oil, tea, and biscuits. However, disruptions caused by the pandemic and subsequent inflation in essential raw materials compelled many of these brands to either cease operations or reduce their scale. Nonetheless, the subsequent decline in commodity prices rejuvenated these brands. According to a Kantar Worldpanel report from last year, local brands experienced a volume growth of 12.7% between April 2022 and April 2023, outpacing the 8.2% growth observed among national brands.
While the rise of local and regional brands could be cyclical, as they emerge when input costs are low, digital brands present a constant threat to huge corporations. In the e-retail space, more than half of all sellers currently come from seven cities: Delhi-NCR, Bengaluru, Hyderabad, Kolkata, Jaipur, Mumbai, and Surat. This information was reported in a research published by Bain and Co. in December of last year. Still, smaller cities are currently producing the majority of new sellers.
The Bain and Co. report highlighted that in 2022, twice as many sellers were added compared to 2021, with two-thirds originating from Tier 2+ cities. Furthermore, “three-fourths of these sellers operate within the lifestyle, home, and electronics categories,” stated the report. “Insurgent online-first brands have emerged as a rapidly expanding seller cohort, experiencing more than threefold revenue growth from 2020 to 2022. These brands particularly resonate with Gen Z consumers.”
The resilience of digital-first brands will likely increase, as highlighted by the new research, indicating that the absence of significant market share may not hinder them. Simultaneously, major companies, leveraging their dominance in traditional distribution channels, are also acquiring emerging D2C brands. Digitalization has led to a democratization of the market, where dominant players may not necessarily sustain profitability or retain the ability to hinder the entry of smaller brands.
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