Study of CPG Brand Cross-subsidization and Electric Vehicle Usage for Offering Public Distribution System Services through General Trade Outlets and Direct-to-Home delivery in India

Introduction

In our first post we, AsterQuanta [AQ], introduced the public distribution system [PDS] in India and how we obtained permissions from the government for enabling proxy distribution of ration services.

In our second post we presented a survey that captures the time, effort and cost aspects from a beneficiary perspective and insights from the pre-deployment solution development for proxy distribution of rations.

In our third post we described the distribution models, operational stack and processes, findings and key learnings from testing the distribution models in the field while delivering the technology & design for enabling proxy distribution.

In our fourth post we presented a theoretical study of a Blockchain based digital platform offering public distribution system services, in a decentralized setting with consensus based regulation.

In this post we would like to present two options for achieving cost effectiveness and sustainability at scale of this model

Figure-1 captures the current and proposed process of food grains distribution. In the current system, food grains are sourced from Food Corporation of India (FCI) warehouses by the FPSs to be distributed to the beneficiaries. This is shown in the upper part of the picture. Multiple FPS outlets are directly stocked with food grains by FCI. Subsequently beneficiaries access these food grains from any of these FPS outlets.

In our pilot, Village Level Entrepreneurs (VLEs) sourced food grains from these FPS outlets and directly delivered to the beneficiaries or through the retail outlets. For our pilot, studies and experiments, we have designed an operations stack with a virtual FPS engine that can sub-source from the FPSs (accessed by the VLEs) and then distribute it to retail outlets for further decentralization or disburse directly to the beneficiaries enabling Direct-to-Home delivery. The neighborhood retail outlets also worked as intermediate distribution nodes for the beneficiaries simplifying the access to the rations.

Figure-1: Delivery to Beneficiaries — Proxy System Distribution Models

Cost Effectiveness & Scalability Roadmap

One of the key questions that was posed to us during our discussions with the government was on the scalability model. Government officials mentioned that the government funding the decentralized distribution stretches the ration finances, while also stressing that beneficiaries paying for home delivery is not a viable option. Based on the inputs, we researched and designed cross-subsidy models utilizing temporally unused infrastructure.

We review and present the two options we explored for achieving cost effectiveness and sustainability at scale of this model.

a) Consumer Packaged Goods [CPG] & Fast Moving Consumer Goods [FMCG] brand partnership for reducing distribution costs

b) Electrical Vehicles for reduced cost of operations and greener delivery

We studied, surveyed & researched the feasibility, operational aspects and cost modelling for these options.

Consumer Packaged Goods [CPG] & Fast Moving Consumer Goods [FMCG] brand partnership for optimizing and cross-subsidizing distribution costs

PDS Capacity Utilization

Typically ration is distributed only for a few days (less than 7 days) in a month. This window of distribution is generally less than a week. Hence the storage and distribution infrastructure is not utilized for two-to-three weeks. We have done a survey and the study was presented in the second medium post.

Currently, ration shops either own or have rented real estate (shops) for storage and distribution of food grains & other ration items. They may or may not have their own goods carrier vehicles. But are well connected in the local areas with the owners and drivers of such vehicles. In the neighboring state of Andhra Pradesh, the incumbent government incentivized local youth to own and operate ration distribution vehicles (9000+ vehicles). Direct-to-home distribution through vehicles is being tried by multiple states (either through pilots as in Delhi, West Bengal or a full scale deployment as in Andhra). The utilization, cost optimization and sustainability piece is still being figured out. In Andhra, the vehicles are parked in government designated areas for nearly 15–20 days in a month.

Commercial vehicle manufacturing companies are interested in being part of the ration distribution system as this is a big commercial opportunity for them. One big company has tied up with banks to provide vehicle finances. We have spoken to a couple of them and they are interested in providing these vehicles through the government.

Retail Brand Last-Mile Distribution

CPG/FMCG Retail Brands have a requirement for last-mile distribution. Based on conversations with five household brands across products, they currently incur about 10–14% (of product selling price) as transport and retail distribution costs. CPG/FMCG brands are looking at reducing these distribution costs. Also, the product availability in retail outlets is not guaranteed in rural areas due to distribution frequency issues. This is a problem that results in lost sales and customers. Brands try to resolve this but are limited by lack of visibility into inventory in retail stores.

Connecting the Unutilized Capacity Gap & Distribution Opportunity

We have explored the option of utilizing PDS unused capacity & vehicle time for CPG/FMCG products micro-distribution. Retail Brands are willing to partner and try out micro-distribution of CPG products from their warehouses to local retail outlets or direct-to-consumers using ration vehicles. Fig.2 is a representation of this model.

Figure-2: Distribution Model for unutilized PDS capacity for CPG/FMCG Retail Brands

Utilization of vehicle time during unused days, for CPG/FMCG products micro-distribution helps in paying ration distribution costs (part/complete). The hypothesis of a model utilizing unused vehicles and capacity results in cross-compensation of distribution costs. I.e. revenue generated out of CPG/FMCG micro-distribution can pay for ration distribution.

We have surveyed, spoken to multiple senior sales and operations heads in CPG companies. They in-principle liked the concept of time sharing for micro distribution in rural markets. We were able to capture the following points during our survey and discussions.

a) There is a 14%-18% margin available that can be used to remunerate the FPS/local distributors.

b) Customer Convenience. Customer Consumption. Customer Demand — are the 3 factors that brands see as benefit in this model.

c) Retailers can have more frequent and timely delivery of products (last mile delivery problem).

d) INR 850 worth of CPG products purchased by a beneficiary in a month is sufficient to cross-subsidize the complete direct-to-home distribution costs (INR 45-INR 50 per month) **

e) FPS owners/local distributors can make up to INR 25,000 in this model (excluding operational costs). An EMI of around INR 7,000 — INR 8,000 has to be serviced towards vehicle costs, if the vehicles are bought on a loan.

This is a win-win situation for the FPS outlet owners, brands, beneficiaries and retailers.

f) Revenue enhancement for FPS owners & cost reduction/zero-cost for Beneficiaries

g) Unit level (1kg) Cost of disbursal and other logistics incurred by CPG brands are lower in this model.

h) Retailers do not have to spend time, effort and resources in sourcing the products.

** One point to be noted is the relevance of INR 850. It is an average number across beneficiary families. Typically a household spends money on CPG products such as soaps, shampoos & toiletries, detergents, cleaning supplies, biscuits, packaged food items etc. And the cost of these run upwards of INR 1000–1500, on a monthly basis. Another point to be considered is that minimum daily wage in India is INR 350. Hence, INR 850 is not a large sum, and is not a big portion of the overall CPG/FMCG products spend.

Average CPG product purchase of INR 850 will result in brands paying a margin of INR 120 — enough to pay the stakeholders and direct-to-home distributors.

Based on a business model that has been derived from multiple sources of data — our pilot data, survey with beneficiaries, retailers, FPS owners, government folks, and sales heads of large CPG retail brands — we present a possible business model. The following table highlights the business model with rupee costs and benefits

Brands also benefit from

a) Targeted Promotions

b) Direct Discount to Consumers (currently biased towards urban consumers)

c) Brand-to-Consumer Engagement channel

d) Data & Analytics (Consumption pattern)

This is an untapped opportunity and there is a clear gap that can be addressed. We intend to pursue this with a pilot deployment in the future.

Electrical Vehicles (EV) for reduced cost of operations and greener delivery

We explored if scale up of decentralized distribution of ration is much more feasible with electrical vehicle hiring for operations.

We designed our studies to look for

a) Cost savings for FPS owners & Beneficiaries

b) Unit level (1kg) Cost of disbursal and other logistics incurred with EV usage.

We have done a basic study of existing electrical vehicles and the manufacturing entities in the market. Following are our findings in the market.

a) 1-km costs up to 0.9 INR in EV’s against 5–6 INR in diesel vehicles — 6x difference in costs.

b) Load capacity of EV’s is around 500–600 Kgs as against 800+ Kgs in diesel vehicles

c) There are options to buy the vehicle at around INR 300,000–400,000 without Batteries.

d) Battery technology is changing very frequently. Batteries can be hired at around 7,000 INR per month

e) There are companies that can lease the vehicles on a monthly basis but with a lease period of 3-years.

f) If vehicles were to be bought, EMI’s up to INR 7,000 have to be borne by the owner for 5-years

g) E-commerce companies are extensively using EV’s for their distribution.

While we were studying the feasibility of the EV’s for ration distribution, we also asked the EV manufacturing entities when is the earliest that they can supply us with the vehicles. We asked proposals for both hiring and outright purchase of the vehicles. We were informed that there is a long waiting period (up to 6 months) for delivery of the EV vehicles. When we enquired about the reason for such a long waiting period, we were informed that most of the e-commerce companies are bulk booking/hiring these EV vehicles. Sourcing of EV’s is a potential challenge in our pilot.

But the brighter side is that adoption of EV’s in a mass scale by e-commerce and logistics companies is a validation of our study that EV’s have to be adopted for public distribution services.

Our study points to scale up and operations being much more cost effective and green with electrical vehicles usage. EVs are not critical to the model itself, but an opportunity for individual FPS owners to make use of EV efficiencies exploited by the e-commerce companies. I.e. e-commerce companies have cracked the EV model, shouldn’t FPS owners or governments pursue the same model?

What next?

We hypothesize that an ecosystem with the following characteristics would provide substantial benefits in making the ecosystem scalable and sustainable

a) A frontier tech enabled Aid-Platform-as-a-Service (PAAS) with decentralized last mile distribution, aggregated beneficiary behavior and smart contracts execution is a game changer in the aid distribution world. We would like to design and pursue such a PAAS

b) This PAAS platform leverages local information (beneficiary information, consumption, needs etc.), local infrastructure, capacities and distribution channels (FPS distributors and/or other local delivery agents) in a real time basis to optimize last mile micro distribution in rural markets.

c) A hybrid model of EV’s along with fossil fuel goods carriers may have to be adopted. Over a period of time, incentivize EV distribution over fossil fuel goods carriers with more distribution opportunities.

Testing the hypothesis

Our initial work was focused on surveying and collecting information from beneficiaries, FPS owners, retailers and CPG brands. There is a significant interest among all the stakeholders along with the senior government officials.

As a next step, we would like to deploy an integrated Platform-as-a-service (with AI-Blockchain system) in place and test the system on 1000+ beneficiaries, 10+ FPS outlets and 3 CPG brands.

Conclusion

We reviewed and presented two options for achieving cost effectiveness and sustainability at scale of the direct-to-home and/or decentralized distribution of ration.

a) Consumer Packaged Goods [CPG] & Fast Moving Consumer Goods [FMCG] brand partnership for reducing and cross-subsidizing distribution costs

b) Electrical Vehicles for reduced cost of operations and greener delivery

We studied, surveyed & researched the feasibility, operational aspects and cost modelling for these options. We have presented our next plan of action.