The future of Telecom distribution.

Over the years, Telecom distribution has closely mirrored FMCG distribution format both in its structure and operational processes. With the improvement in technology sales and distribution operations are getting increasingly digitised both in FMCG and Telecom. Even with all the technology, in case of FMCG, physical product still needs to be moved to the retailer location for the final sale to the customer. But in case telecom, in the coming days, that may not be required. It is important to note that in telecom most of the business volume comes from the recharges; and recharges are moving online.

A.   Improvement in the enabling ecosystem.

1. Growth in the share of 4G smartphones on the customer base. Current estimate is that over 60% of the customer devices are 4G smart phones. 2. Strong growth in digital payments both in terms of number of users and the number of transactions. 3. Increase in the number of customers with operator self-care app and wallets.

B.   Customer Convenience.

Customer can recharge from the comfort of her home without having to visit a retailer. She can compare offers online and choose the best one.

C.   Channel Costs.

Operators are under tremendous cost pressure. Channel commissions on recharges amount to about 5% of the recharge value and channel overheads form another 2%. Telcos are actively looking to reduce this cost. Commissions on recharges through online payment platform are typically 1% and technology overheads cost an additional 0.5%.

D.   Consumer Promotions.

1. Moving recharges online helps operators to cut costs. Hence operators are running promotions to encourage online recharge habit. Telecom operators are offering discounts of up 10-15% for online recharges in the form of coupons. 2. Online payment players striving for customer growth offer 10% to 30% discounts on mobile recharges using their platform.

Implications of the new trends on Telecom distribution:

Recharge amount is mostly in electronic format, to avoid unnecessary costs, physical paper coupons have been discontinued by the Telecom operators. Thus, SIM, customer application forms (CAF) and devices are the only physical elements that get distributed through telecom distribution infrastructure.  

Devices: Device (Mobile Handset) distribution was the main stay of the CDMA operators like Reliance communications and Tata Tele. With these players moving out, high volume handset distribution by Telcos has come to an end. Currently, only devices that are sold through telecom distribution channel are 4G dongles; the numbers of which are negligible.

CAF: Telecom industry has moved to electronic CAF (eCAF) system wherein customer enrolment is done through a mobile app. At the time of customer registration, customer ID and address proofs are scanned and a live photo of the customer is taken. eCAF has helped operators to save significant amount of costs. Entire machinery involved in collection, scrutiny, data entry, storage and retrieval of CAFs has been disbanded.  

SIM: SIMs are still physically distributed. More handsets are getting launched with eSIM feature. Very soon, eSIMs will become the main stay; thus physical SIM distribution would soon become redundant.

In the light of the above factors, in the near future, distribution partners of Telcos shall be left with the only task of “distribution of recharges”. Because of the increase in online recharges, recharge distribution volumes are de-growing every month. Thus profitability of distribution partners is dwindling. At this point in time, some of the distributors in the low volume rural areas are making negative returns and,  Telecom operators are extending viability support to them. It is only a matter of time, when the Telecom operators will be forced to abandon the current FMCG format distribution model.

Full service Telecom operators like Jio and Airtel can aspire to offer additional the lines of businesses to their distribution partners and hope to keep a skeletal FMCG format distribution infrastructure operational (Full service means Telcos that provide DTH, Broadband and Payments Bank services). These additional lines of business are relatively small and hence, managing the channel overheads with small business volumes smaller would be a challenging task.  

Payment banks have not taken off in a way anticipated by the Telcos. In the current scenario, payment wallets have gained traction and most consumers prefer to use them. RBI mandate for interoperability across the wallets would largely diminish the distinction between the two categories. Further, payments bank business does not need large distribution infrastructure, one or two banking outlets in a village would suffice the business requirement. Also the margins in Payments bank business are thin.

Telcos which are attempting to get their in-house content and self-care apps downloaded through retail channel, have not benefited in the form of spectacular spurt in the app installations. App downloads have largely been led by the content. Thus the argument that distribution infrastructure shall be used for app penetration does not justify the costs.  

The argument that pure play Telecom outlets are a must for growing the customer base is no longer relevant. Tariff plans are similar across all the Telecom operators and customers are no longer buying SIMs for getting a particular operator offer. Choice of operator is largely being made at the time of purchase of mobile handset. At this point in time, handset selling outlets are perhaps the single largest group of "trade influencers" of Telecom operator selection by the consumers.  

Thus, FMCG format distribution by Telcos would no longer be neither functionally useful nor economically viable.

The new distribution Model : The distribution would move to own brand retail outlets; company branded outlets shall become the primary points of presence. In urban areas, the economics justifies their establishment. But in the rural areas, economics of such stores can perhaps be justified only in the large feeder markets.  These own brand stores will be highly digitised and would offer sales and customer service using AI enabled tools. They would also act as a banking points for Telecom operator’s payment banks, collect cash and provide cash management support for the sectors that are still cash heavy.

As mentioned earlier, handset selling outlets would continue to play an important role. In-store demonstrators  or promoters in these outlets may perhaps become the most important aspect of channel strategy. But, handset outlets themselves are under stress from the online market places. Growth of last mile delivery apparatus, road and transport infrastructure, and increased penetration of online payments would further contribute to the rapid growth of online market places. Virtual reality and augmented reality based online sales tools can give customers immersive shopping experience from the comfort of their homes. Thus, we can conclude that in the future, Telecom distribution would be far less outlet intensive, highly digitised, virtual and online.