Thursday, July 15, 2010

Who disrupts the disruptor?

Asit Kumar Jain, Venture Analyst, Innosight Venture

We can all recall the Aamir Khan Starrer “ThandaMatlab Coca-Cola” campaign which was a genuine attempt by Coca-cola to reinforce its leadership in the cola market. Similarly Pepsi tried hard to match Coca Cola through its Youngistan and now the My Game campaign. But can these leaders with their marketing ploys survive the onslaught of time and virtual competition!!! In the language of value & volume they might be the largest, but hang on; we really don’t know the size of the unorganised (beverage) market thriving at every nook and corner of the country. The article is nothing about numbers or ranking, but unravelling a new development taking place at the bottom of the market. It’s a fight between two unorganised disruptors which ultimately confirms a theory that a disruptive substitute is always replaced by another disruptor. Let’s see how it goes…

The beverage market at least in India has gone through lots of ups and downs. It’s simply because it is not yet the replacement of water as is the case in the western market. Unable to change the behaviour of Indians, consequently all major cola companies began to sell packaged drinking water. As a result they have begun eating away the market share of Bisleri. Many liquor manufacturers are also following their footsteps. (It’s better to sell plain water with more profit then the colored spirit with lots of regulations). But still their biggest competitor is not just water, but many other beverages sold locally, by unnamed manufacturer.

Think of their volume/value of sales in India’s tier 2 and tier 3 cities and you will definitely get a feel of their presence. I am not advocating that they are as big as the branded ones, but they have the capacity to disrupt these incumbents. When packaged water made its entry into India, people were skeptical about its survival but now every other manufacturer is making money and they have also started serving Himalayan glacier water to us Indians! But do they know how susceptible they are to disruptors?

After the entry of the packaged drinking water which is served at around rupees 10 per bottle, there was one similar entry focused only for the people at the bottom of the market. These were water pouches, a sachet cousin of shampoos and masalas. Although they are unfriendly to environment (plastic pollution), they have followed a perfect path of disruption and so are the ones who disrupted them, about whom I will explain later So these water pouch manufacturers started in very small scale, selling only in their localities. The big brands took a notice of the development but chose to ignore it, since it was not hurting their customer base. There was only Bisleri and some other brands which were available in the road side shops and railway stations and Bisleri even became synonymous with bottled water. But the pouch manufacturer without bleeding, continuously served the bottom of the pyramid (1 rupee pouch) and raked in enough capital to march into the next phase of disruption. They started manufacturing bottled water and served the local market. The transportation as well as marketing cost worked in their favour as compared to the branded one’s, eventually which they passed on to the retailer. The retailer was happy enough to sell the local bottle water making double the profit as compared to selling a branded one that too at a low price point. The consumer too was happy enough to take away the local product in the name of Bisleri (bottle water = Bisleri). So what I found is nothing but a trail of disruption working over the years to challenge the incumbents. As explained by Clayton Christensen, the distinguished professor of Harvard and the one who coined the term Disruptive Innovation, disruption works whenever there are underserved or overshot customers. It works in the way as explained below:
1) The incumbent ignores the entrant as their customer base is not affected
2) Rather it gives space to the entrant to grow, as serving the bottom of the market is less profitable
3) It moves upward serving more profitable customers giving the less profitable ones to the new entrants
4) In the mean while the entrant with a very cost effective business model makes profit and passes through a techno-managerial development
5) It goes up-market and starts serving the customer base of incumbent with simplicity, affordability and convenience
6) The customer responds to the call of the entrant and the incumbent does nothing but again flees up market for better profitability with very high quality products and the race continues till the other calls it quit.

We can rightly equate the development of bottled water industry with the theory explained above. Now they have started selling mineral water (an expensive product). Again, the branded players may be growing at double digits but their local colleagues are not way behind. Certainly a time will come when they will be left with no other option but to acquire these local units at sky rocketing prices to quench their thirst for profitability.

Similarly for the cola companies there are disruptors as well, but not working in the right direction. Rather they have become a disruptor to the water pouch industry. These are again locally manufactured soda water or sweet water available at similar price point to the water pouches. Recently I found that water pouches were being banned in one of the major city of Orissa and the biggest beneficiaries of this development were not the bottled water manufacturer but these local made soda/sweet water companies who were certainly a weak disruptor to the cola companies, but finally worked somewhere.

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