GST will be a turbulent period for wholesale: Sanjiv Mehta

Wholesale channel is yet to bounce back in terms of growth seen prior to demonetisation, said Mehta

Earnings of Hindustan Unilever (HUL) recovered in the March quarter, in line with what parent Unilever had indicated a month ago. In a media interaction on Wednesday, managing director and chief executive officer Sanjiv Mehta talked about the way forward and how the company was dealing with risks emanating from the goods and services tax (GST). Edited excerpts:

There has been some concern pertaining to the wholesale FMCG channel and the manner in which it was impacted during note ban. Has it bounced back now and how prepared are wholesalers for the GST? 

The wholesale channel is yet to bounce back in terms of growth seen prior to demonetisation. There has been a level of channel reset, resulting in the contribution of wholesale coming down. The GST will be another turbulent period for wholesale since there will be some level of destocking by the channel. While it will take a quarter or two to stabilise, destocking in my view will not significantly impact consumer offtake. The channel will be cognizant, I believe, in not allowing last-mile sales to get affected due to the implementation of the GST. 

What has been the rate of growth of rural? This has been another area that was impacted due to note ban. Has it improved in the March quarter?

Rural continues to be lower in terms of rate of growth vis-a-vis urban. It still hasn’t bounced to levels where it would be ahead of urban a few years ago. So, yes, there is some stress there. But it will bounce back in my view in the next few quarters. Seventy per cent of our population is located there. Penetration and consumption of consumer goods is low. So, there is headroom for growth.

How are you mitigating the risk of GST? That will be something crucial in the near term.

The challenge of the GST is at three levels. One is related to transition, where the bulk of the work pertains to wiring up your systems to the new regime, ensuring that you can effectively move from the old system of taxation to the new one. The sender challenge pertains to the tax-over credits, what are the new rates etc. For us, to put a cohesive strategy together, it is important to get those crucial bits of information, which should happen shortly. Once these two are in place, the third challenge will be extensive engagement with customers, explaining what all this means and what are the things they need to do to handle the change. 

What is the level of direct distribution reach now in urban and rural? You were doubling it a few years ago.

It is a few million outlets. I cannot give you the precise number for competitive reasons. But, it’s a pretty extensive reach and is as good as it can get. We have a large portfolio and turnover and hence have the scale to go directly. We have controlled distribution in large parts of the market and can see what is happening in the pipeline.

Volume and price-led growth were both on almost an even keel in the March quarter. Is this sustainable?

Much will depend on how the commodity (price) cycle behaves. Yes, the ideal situation for us is when price and volume growth is equal, but it is not something that we can predict, since commodity prices fluctuate a lot. We have seen the commodity price peak moderate in the fourth quarter. I would say commodity prices have stabilised, though we did take price hikes in personal wash and home care in the fourth quarter. Let us see how the commodity cycle pans out in the future.