Market dynamics to change as organised retail starts flexing its muscles
The fight for margins between fast-moving consumer goods (FMCG) companies and organised retailers could intensify with the government opening the retail sector to foreign investment.
Currently, FMCG companies derive about 8-10 per cent of their revenue from modern trade, which has traditionally given them a slight edge while negotiating annual sales contracts or purchase agreements with retailers, since they have an alternative in traditional trade. But that could change in the next few years as organised retail begins to flex its muscle, thanks to foreign investment, say experts.
Harminder Sahni, founder and managing director, Wazir Advisors, a retail and management consultancy based in Gurgaon, says: “This is a reality that companies will have to deal with not in the immediate future, but certainly a few years down the line.”
Most retail experts say that in about five-seven years, FMCG sales from modern trade will increase to about 15 per cent. Already in categories such as personal care as well as packaged foods, modern trade is considered a better vehicle than traditional trade.
Most consumer goods companies work hard to ensure there is enough visibility in modern trade in the hope of inducing trials. Companies also have dedicated sales teams for modern trade and traditional trade today, with pack sizes varying depending on the channel.
For instance, super-value and large packs are pushed heavily in modern trade, while traditional trade has regular pack sizes dotting shop shelves.
As foreign investment begins to flood the sector, retailers are expected to demand more than they now do. Already, retailers such as Future and More from the Aditya Birla Group have had run-ins with FMCG companies over margins in the past.
Last year, British consumer goods major Reckitt sparred with Future over margins, with the result that the latter stopped taking fresh orders of their products, notably Dettol. Future had also famously cut off Cadbury some three years ago and Frito-Lay and Kellogg’s before that over margins.
In consumer durables, too, the scenario has been no different with retailers such as Croma from the Tata Group asking manufacturers such as LG, Samsung, Nokia and HP last year to raise their margins. More recently, Samsung was at loggerheads with regional and national chains over margins. Samsung was looking to rationalise payouts to channel partners by as much as six to seven percentage points, in a bid to reduce the price differential between retailers of home appliances. Samsung was keen to bring margins to about 17-18 per cent across formats. But this did not go down well with regional and national chains since they enjoyed margins of about 24 per cent.
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