Supplier's dilemma

Economic slowdown signals testing times. But handful of B2B brands used it to enter consumer mkt

The post-Lehman world has been both different and difficult for businesses to operate in. The collective impact of all the financial turmoil has meant a fall in demand and therefore a severe strain on the bottom line for many. The problem is even more pronounced for companies that operate in the business-to-business (B2B) space. The business they do will depend on the success or failure of the final product assimilated using their components. There isn’t much a B2B player can do to control the end game. Whether it is this notion of being the master of its own destiny or simply to get a wider consumer sweep, some players are using the turmoil as an excuse to switch over and engage with the consumers directly .

Then there is the bigger attraction of fatter margins. To be successful in the B2B space, companies need to be at a different level of cost competitiveness. Reason: even if their costs go up, there is only so much scope to pass it on their ‘consumers’, the businesses. That is because the businesses’ ability to pass on the input cost to the actual consumer on the street, too, is restricted. The dominos will start falling for the supplier should the institutional consumer swap him for a cheaper supplier. If nothing else, moving to a B2C model can afford a producer some respite from the squeezing margins in the B2B space.

But the switch is hardly easy. “Shifting from a B2B model to a B2C is a complex journey and can take years, even decades, before businesses can successfully achieve this transition,” says Rahul Jain, partner and director, BCG. The basic DNA requirement for the two businesses is very different, he adds. In a B2B model, one needs to deliver a tangible economic value to the consumers. In a B2C model, the product game is completely different. You need to give the consumer what he wants, when he wants and where he wants, all at the price he wants it at. You need to continue evolving to changing needs, constantly communicate to the consumer, and above all, establish a brand which embodies your proposition.
 

Mrs Bector’s had spruced up its quality and supply chain while supplying buns, liquid condiments to McDonald’s, ensuring a smooth second innings 
Akshay Bector
MD, Mrs Bector’s

There is limited growth in a B2B market. It makes sense to leverage our knowledge to enter the residential segment
Sameer Nagpal
VP & business head-residential solutions, Ingersoll Rand India

The company launched Nesta, a a readymade furniture brand, in August, four years after deciding that it wanted to reach out to the consumer directly
Abhra Banerjee
executive business head, Centuryply

The supply chain, too, will be different for the two models. It begins for the B2C where it ends for B-to-B. The B2C business is a ready stock business. “One supplies the product here in anticipation of orders. You need to get the forecasting right. Products must be placed in advance in locations where demand is anticipated in the right quantity and for a fragmented demand base,” says Jain.

The product complexity, in terms of stock keeping units (SKUs) mix and location mix, present a challenge. It can take a while before companies gets it right.

The institutional business is usually a bill-to-order business. The process of getting the product in place begins only once the order is placed. There isn’t much need for forecasting. Also, the locational mix isn’t as widespread as that for the consumer business since industries tend to operate in clusters. Plus, the order quantum makes up for any out-of-regular-reach kind of delivery.

In B2C business, one can take the partnering approach—retain the core business in-house and possibly outsource some of the processes. In B2B, sub-contracting makes the whole model less efficient. The two business models need different focus — a switch, therefore, may take years to bear fruit. But that doesn’t seem to deter companies from taking the leap. Some may switch sides entirely; others may prefer a balancing act. There is no rule book stating which works better. Each business needs to independently assess its strengths and weaknesses to figure that decision out.

Dual focus
Many B2B players have found the space restricted beyond a point. The arena is much larger in pure volumes terms when one considers the consumer end. Take Ingersoll Rand’s Trane, for instance. The US-based Trane’s main businesses are climate (air conditioning) and security solutions, both largely in the commercial space. However, three years ago, the company realised it could extend its expertise in the residential market. That was the birth of residential solutions, a single unit tying in both their businesses for the individual customer.

Trane recently launched air conditioners in India for residential usage. “There is only so much one can grow in a B2B market. The residential market is much bigger than the commercial one. It makes sense to leverage our knowledge to enter that segment,” says Sameer Nagpal, vice-president and business head, residential solutions, Ingersoll Rand India. He says, if X (approximate $2 billion for industrial solutions) is the current opportunity in his industry, then with residential solutions it could be 2X, or “the opportunity doubles”, he says.

While prospects are big, challenges are bigger. The Indian residential solutions market differs from that of the US, its home market. For instance, air conditioning is centralised in the US even for homes. In India, window ACs (different units for different rooms) dominate the residential market. A new market to service — the product couldn’t be simply brought down and sold here. So, the company spent the first 18 months researching the market, understanding consumer usage patterns, crafting the product and then launching it.

A bigger market may not be the only motivation for companies. Take Centuryply, the plywood manufacturer. The company launched a readymade furniture brand, Nesta, last month, four years after deciding that it wanted to reach out to the consumer directly.

Technically, plywood is not a business product. But building materials purchases are typically made by architects, carpenters or interior designers. The customer rarely gets involved in the category directly, leaving the choice up to the influencers. “This is a category (plywood) that consumers interact with hardly twice or thrice in their lifetime (assuming that’s the number of times one buys houses and furnishes them). It is low involvement and one is either ignorant or is a little intimidated to interact with the category. As a result, the decision is left to the influencers, who may or may not make the right choices for him,” says Abhra Banerjee, executive business head at Centuryply.

The company started engaging with consumers in 2008, trying to build an emotional bond with them through below-the-line activations and digital media initiatives. Centuryply commissioned studies to understand consumer behaviour. It was through these studies that the company’s next step in the consumer engagement programme took shape. “We learnt that there is a significant portion of population in the age group of 28-45 years today that is quite on the move, staying in one location for not more than three-five years. And that this population doesn’t carry the furniture along each time they shift, preferring to buy furniture instead with a budget of around Rs 4-5 lakh. We tied up all these learnings and their amalgamation is Nesta,” says Banerjee.

The company knows the road ahead won’t be easy — and so it has kept the expectations low. In terms of numbers, the company is expecting to be worth around Rs 4,000 crore by 2014-15 (double their current worth Rs 2,000 crore). Of this target, furniture is expected to contribute 5 per cent. But the company hopes the brand will gain prominence as consumers become sensitive to the benefits of using branded plywood.

There are some lucky ones who are egged on by their institutional partners. Mrs Bector’s Food Specialties, the company that owns Cremica (that provides liquid condiments like ketchup, mayonnaise etc to quick service restaurant chains like McDonald’s), is one such company. “We were largely focusing on the biscuit business while we did have a presence in breads and buns. Then came McDonald’s in 1996 and chose us to be the sole supplier for buns, liquid condiments etc,” tells Akshay Bector, MD, Mrs Bector’s.

Here the story is about a company going from B2C to B2B to again B2C with a larger play. The fact that it had spruced up its quality and supply chain to service McDonald’s ensures its second innings in the consumer market was relatively free of hiccups.

Based in Punjab, primarily servicing the markets of north India, Mrs Bector’s is expanding one market at a time. Its biggest worry now is to get the SKU mix right. Ketchups as a category has various SKUs—from big glass bottles to mid-sized squeezies to sachets.

Another foods category player, Canadian company McCain Foods, which operates largely in the frozen foods segment, with its marquee product being french fries, supplies to restaurants and QSR chains and is now available for in-home consumption. McCain straddles the B2B plus B2C models simultaneously. Its offering is largely the same, only the consumers—whether retail or institutional—is different. While the company refused to participate in the story, observers say for companies like McCain the dilemma would be segregating the two lines of businesses—of which processes to club and which to keep separate and how best the manufacturing capacities may be leveraged.

The key challenge that these brands are contending with, irrespective of the sectors they operate in, is building a consumer base. How does one make the consumer who has never seen your product trust you? Is there a chance that you will alienate your current consumer base with a focus of a new set? And how do you leverage your position as a seasoned supplier? One way could be to start early. Ingredient branding can be a good idea, something that Intel has done successfully. But that only doubles the pressure on the manufacturer—to stay consistent and not compromise on the quality. Being a supplier to an institutional player, you can’t risk any backlash for inconsistent quality or bad press. In the age of social media you need to be vigilant as one business’ reputation can easily rub off on another.

Evidently, switching or extending from a B2B to a B2C model is a juggler’s act. Drop one ball and the show may be over.
 

EXPERT TAKE: Harminder Sahni, Founder, Wazir Advisors

Moving from B2B to B2C

Building a consumer brand is the ultimate high for most of the businesses and almost all of them strive to create a consumer brand. The benefits are definitely worth the effort. It is also a reality that not many businesses are able to make the transition. The reason lies in the basic nature of the businesses. The seven major differences are: 

Direct connect with the customer: Contrary to the belief, a B2B business is far more in direct touch with its customers as compared to a B2C business. Every single business customer is a relationship and is to be built and nurtured extremely carefully. While in case of B2C businesses, the company’s relationship with the consumer is through the brand that is distributed through a layered channel and most of the communication with the consumer is through mass media. 

Size and scale of the transaction: In the case of a B2B businesses, depending on the nature of the product, the size of each transaction is much larger than a consumer product. Also, the lifetime value of a business customer is far bigger than most consumer products. Hence, the way in which a B2B company treats its customers and the investment it makes in each of them are very different from a B2C business. 

Mutual dependence with customers: B2B businesses enjoy a sort of mutual dependence with the customers wherein customers are as much dependent on them as much they are. For example be it a technology supplier or a raw material supplier, the relationship is more balanced than say in the case of a consumer business wherein the consumer takes an impulsive call every single time of purchase. And this decision can be influenced by many factors that are not in control of the brand managers. 

Service element: The service element plays a much larger role in a B2B business even if it might be a commodity raw material supplier. The customer business is dependent on the services offered by the supplier while in case of B2C it has far less impact and the role of other channel partners like retailer is far more visible than the brand’s own. 

Channel of distribution: In most of the B2B businesses, the channel of distribution is flat, and at most there is a stockiest or an agent that facilitates the business between two companies. In B2C, there is a layered distribution channel and will have at least 2/3 (wholesaler/distributor/retailer) intermediaries between the company and consumer. This close working relationship between demand and supply end of the business is missing in B2C businesses and can be hard to comprehend and deal with by B2B companies transiting to B2C side. 

Inventory and stockholding: B2B moves inventory fairly efficiently from its warehouse to customer with limited chance of stocking in between, and has full visibility from both ends of the supply chain. In contrast, B2C supply chains are extremely long and opaque with numerous stocking points in between. A B2B business manager can feel overwhelmed with this ambiguity. On the other hand, a B2C manager will feel too exposed with such transparent chain of B2B.