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| FMCG firms have the edge in battle with retailers |
| Viveat Susan Pinto & Raghavendra Kamath / Mumbai Dec 21, 2009, 00:59 IST |
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Organised retailers and fast-moving consumer goods (FMCG) firms have begun their slugfest yet again as the time approaches for redrawing of annual sales contracts.
Both sides are sparring over issues like margin, supplies and credit period to be given for payment of goods purchased by retailers.
Though some retailers have taken a firm stand against the FMCG companies, the balance of power continues to be skewed in favour of the latter, because modern trade is not a large contributor to overall sales of a company.
“It continues to be 7-12 per cent of overall sales,” says Hemant Kalbag, partner and vice-president at international business consultancy A T Kearney. “Retailers still need these firms to fill their shelves. So, the negotiating power clearly rests with the companies,” he adds.
Saugata Gupta, chief executive officer (consumer products) of Marico Ltd, says, “The picture becomes clear if you look at the percentage of sales coming out of modern trade.”
This is precisely why retailers were left with little or no choice last year but to accept the terms and conditions laid down by the FMCG companies. This was on account of the toll that the slowdown, which began in October last year, had taken on organised retail.
This year, retailers have managed to put the slowdown behind them.
For the current quarter, most retailers, experts say, are likely to see double-digit growth in net sales. This is in keeping with the momentum, which began in the previous quarter. Retailers such as Pantaloon saw mid-to-high single-digit growth in sales for that quarter, which is likely to pick up in this quarter — a crucial one for most of them.
But will it translate into anything significant on the negotiating table? “Not much,” says Jaibir Singh Sethi, analyst, consumer & retail, Noble Group. “They are not likely to get much, though most of them, especially the big players, are likely to negotiate hard.”
Typically, margins enjoyed by organised retailers for categories such as foods is anywhere between 6 and 8 per cent, they say. “Expecting an increase of margin is logical,” argues a retailer, on condition of anonymity. “If the cost of occupancy of 4-5 per cent is deducted from these margins, that leaves us with a balance of 2-3 per cent, which is hardly substantial,” he says. “There are allied costs to be deducted as well. What we are left with is hardly anything,” he says.
Besides, the credit period of 7-14 days is not enough as well, some retailers argue.
Observers say that what Indian retailers are actually looking for is margins in the region of 20-25 per cent on various product categories and a credit period of over two weeks, something that is offered to international retailers like Walmart and Tesco.
For this expectation to be achieved, certain things have to fall in place, argue FMCG firms. “The supply chain of retailers has to get organised. The delay in receiving goods as well as making payments has to come down,” says an executive from a consumer goods company. As Sunil Duggal, chief executive officer of Dabur Ltd says, “Expectations have to be in line with what is achievable.”
On an average, organised retailers are paid 15-17 per cent in terms of margins on most product categories, barring food, which is a high-footfall-segment and must-carry for most retailers. “Retailers cannot miss out on food and certain other discounted product categories like soap, detergent, oral care,” says Sethi. “They generate footfalls, which eventually leads to sales conversions.”
Traditional trade, incidentally, which remains the key driver of sales for most FMCG firms, takes away the margin of 10-15 per cent. “But their cost structures are lower than organised retailers,” says Susil Dungarwal, a retail expert in Mumbai.
“Does it mean FMCG firms have to land up paying for the retailers’ huge costs?” argues Duggal. “Inefficiencies have to be weeded out and the approach has to be collaborative,” he says. “We all are learning along the way,” a point reiterated by Sunil Sethi, executive director (sales & customer development) of Cadbury India.
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