The Business of B2B Commerce

Part 1: Perception vs. Reality, Causes of Fragmentation and the Lowering of Constraints

Photo by Tim Mossholder on Unsplash

The Perception:

Platform, Marketplace, End-to-End Solution, Digital First, Cloud Based, Value Creation, Fragmented… are some terms commonly used by startups in the B2B commerce space in India.

These terms seek to highlight the purported inefficiencies in the value chain and improvements driven by these startups.

From the outside looking in (and thanks to those buzzwords), we’d expect these startups to:

1. Elimination of several layers of “inefficient” intermediaries
2. Digitise the buying and selling process entirely

• No paperwork
• One view dashboards
• Digital onboarding
• Digital discovery of buyers and sellers
• Digital payments, etc.

In summary, a seamless online experience — as easy as buying on Amazon and Flipkart.

However, the reality is much different.

The Reality:

It’s surprising to many that “new age” business models often bear striking similarities to traditional ones, at least at first

What are the reasons for that?

1. These platforms function as “new intermediaries”, vying for business against established players or trying to convince retailers/vendors to adopt their novel offerings
2. In order to achieve success, these new intermediaries must gain trust and consistently deliver high-quality service
3. Therefore, despite offering innovative approaches to business, they ultimately must perform the same functions as existing intermediaries — and do so as well as or better than their competitors.

B2B Supply Chain: Roles and Participants

Let us take a general look at the flow of services in B2B Business Models

• The images below represent flows for asset and service distribution models
• Arrows denote the flow of services

To understand new age B2B commerce is to understand “++”: Doing what the incumbent does (the basics) and more

Caveat: As investors, we believe that the key driver of success in B2B commerce business models lies in the element of differentiation or insight, which can be represented by the “++” in the value chain. While a basic intermediary business can be viable in its own right, it may not be a venture-fundable business

Fragmentation

A discussion about supply chains is incomplete without mentioning fragmentation. The term is often used but rarely explained. While it has a strong negative connotation and is synonymous with inefficiency and wastage, there are reasons for its existence.

Donald, it isn’t as simple as that!

In the following paragraphs, we hypothesize the causes of fragmentation, focusing on India.

Causes of Fragmentation

Traditionally, participants in many Indian supply chains have faced significant constraints, leading to fragmentation:

1. Geography: Prior to the implementation of the Goods and Services Tax (GST), selling goods across state and district borders encountered substantial friction and complexities.
2. Credit: A vast majority of the market faced challenges in accessing credit or capital, or the available options were limited and costly. This constrained the growth and expansion potential of businesses.
3. Catalogue Limitations: Limited product categories, stock-keeping units (SKUs), and a restricted customer base were prevalent due to the combined effects of geography and credit constraints.

The Result?

What we call Fragmentation.

As a consequence of these constraints, existing individual players in the supply chain operated at a small scale, with limited market reach and access to growth opportunities. They were unable to scale up their operations beyond a certain level.

The incremental demand is serviced by newer players, which may include other smaller businesses, possibly new ones, that are also subject to similar scale constraints eventually.

The Impact of Fragmentation

Let’s take a closer look at the impact of fragmentation and what it entails:

1. Unequal Distribution of Demand: It’s a bit unfair, you know? Players with access to capital tend to hog all the business, leaving small or mid-sized players yearning for a chance to get in on the action.
2. Disarrayed Market Structure: Imagine a handful of major players calling the shots while a long trail of small businesses struggles to keep up. This creates what we call the “Missing Middle”. It’s like having a few giants and a multitude of smaller players, but no one in between who can rise up and compete on a larger scale.
3. Stifled Innovation: Innovation? Not exactly flourishing. The big players often play it safe, unwilling to disrupt the established norms, while smaller players face limitations in resources and capacity to drive meaningful innovation. Consequently, we find ourselves stuck in the same old status quo.
4. “Structural/ foundational” constraints make it difficult for smaller players to grow despite superior business/ technical capabilities
5. Hidden Revenue Streams: Distributors are not just another cog in the wheel but also providers of credit, which, in several instances, is more lucrative than their main business. It’s like an unseen layer that reinforces the existing status quo.

So, can fragmentation be eliminated or solved?

We don’t believe that fragmentation should be “eradicated.” The existence of fragmentation in our distribution system is what allows for a large base of MSME manufacturers, retailers, and distributors.

Instead of complete elimination, a more realistic approach is to envision a “softening” of fragmentation by creating a level playing field. This would require weakening or eliminating one or more of the structural constraints and ensuring that most market participants have access to similar tools for business growth.

And guess what? This is actually beginning to happen in India! 😀

Constraints are being lowered

Lowering of Constraints

What does this mean for our understanding of B2B Commerce businesses?

Fragmentation isn’t a symptom, but a visible result of underlying issues

• This presents a unique opportunity for new businesses to emerge once the constraints are weakened, which is currently happening.

Upstarts (or startups 🙂) with a new approach can build a scaled business as the market structure changes

• Fragmented market structures don’t change overnight + incumbents are slow to respond — An opportunity for emergence of digital first marketplaces across categories
• Operate from Day Zero with a mindset that seeks to use technology to build a business for scale

While the market structure might change (new approaches win), the nature of business doesn’t (values remain unchanged/ minimally altered)

• Existing market needs must still be fulfilled, and therefore, businesses must focus on executing the basics effectively
• A B2B SaaS platform will not overpower long standing business relationships with a 2% discount as GTM

This is the first part of our series covering how we think about B2B commerce businesses; more to follow soon.