| Retailers extract higher margins from FMCG firms | |
| Ranju Sarkar / New Delhi November 6, 2009, 0:42 IST | |
Cash in on scale & clout by seeking higher payouts from suppliers.
The terms of trade are slowly tilting in favour of modern retail. Despite going through a correction phase, which saw many retailers shutting stores, modern trade is beginning to cash in on its scale and clout by seeking higher payouts from suppliers.
Consumer product companies have increased aggregate payouts by 200-300 basis points over last year, say retailers. These include incentives for timely payment, meeting certain volume targets, and marketing inputs.
As many companies supply directly to modern trade, they are willing to share the gains. Retailers say that margins from FMCG (fast moving consumer goods) companies have gone up from 14-15 per cent to 17-19 per cent as they jostle for shelf space with retailers’ private labels.
“Earlier, FMCG companies were servicing us through distributors and the terms of the trade were not favouring modern trade. Today, they are servicing us directly,” says the CEO of a mid-size retailer. Not many FMCG companies are willing to discuss their terms of trade with retailers.
Kishore Biyani, chairman of India’s largest retailer Future Group, says margins are growing in categories where modern trade accounts for 30-40 per cent of sales for that brand. These are categories like breakfast cereals, or shaving systems. “FMCG companies are realising the importance of modern trade in creating demand for new products,” says Biyani.
H K Press, vice-chairman, Godrej Consumer Products, says it’s logical for margins to go up as retailers expect more by way of other incentives for promotions, timely payment or volume discounts. “Pressure will always be there to keep creeping up,” he says.
FMCG companies say that as retailers acquire scale, they provide a value proposition: Organised scale, through-put, supply chain efficiency. “If I get certain supply chain efficiencies by supplying directly to organised retailers, I am willing to share the savings with them,” says a Hindustan Unilever executive.
Anand Raghuraman, partner and director, Boston Consulting Group, feels FMCG companies are increasing margins as trade is growing again, pushing the FMCG companies harder.
“FMCG companies are increasing margins so that they don’t lose premium shelf space to retailers’ private labels,” he said. These accounted for an additional 3-4 per cent of the sales value of retailers. Internationally, retailers earn margins of 24-25 per cent on consumer products, which includes logistics as retailers pick up supplies directly from suppliers. The CEO of a North India-based retailer says modern trade needs higher margins to operate, which would rise with volumes. In Brazil, retailers earn 21 per cent margin.
But it’s not that every FMCG company has increased margins for retailers across the board. With a spate of contracts up for renewal in January, some of them say they have not raised margins and nor is there a case for raising them, as retailers have failed to scale up and meet targets.
Besides, FMCG companies accuse retailers of pushing their own labels at the expense of their brands. “The margin pressure is going to increase, but a chain should help me sell a more profitable assortment. It cannot be a one-way traffic,” says the sales head of an FMCG company.
Arvind Singhal, CEO of consultant Technopack, says it is unlikely that category leaders would have increased margins.
“Modern retail still accounts for 3-4 per cent of sales. It would account for Rs 250-300 crore of sales for a large company like Unilever and hardly offers traction. But, for every Unilever, there may be five other companies willing to offer higher margins,” said Singhal.
|
Content Guide
