Distributors may halt HUL stock buys amid margin structure change

Distributors consider halting purchases of Hindustan Unilever’s (HUL’s) goods because they are unhappy with the new margin structure the company has implemented, according to a statement by the distributors’ federation All India Consumer Products Distributors’ Federation (AICPDF).

This statement comes after HUL recently changed its fixed and variable margins in 100 towns for its distributors.

“Hindustan Unilever’s recent decision to reduce distributor margins amid challenging times and sluggish volume growth has raised concerns. AICPDF strongly opposes this move,” the federation said in its statement.

The statement also said, “This decision, coupled with the offer of increased variable margins, suggests a shift in management strategy that may jeopardise the entire distribution network. Distributors fear being pressurised and blackmailed into compromising their rightful margins.”

An email sent to HUL did not elicit any response till the time the story went to print.

HUL has cut the fixed margin from 3.9 per cent to 3.3 per cent (or by 60 basis points) and increased the variable margins across its different sets of distributors in the range of 1-1.3 per cent (100-130 basis points).

This change has been made across categories the company operates in.

FMCG companies typically give fixed margins of 4-6 per cent, while variable margins depend on milestones or performance parameters.

In the case of general trade distributors, HUL has increased the variable margin from 0.7 per cent to 2 per cent. For non-general trade distributors, the performance-based margin has increased from 0.4 per cent to 1.7 per cent.

The company has increased the variable margin for another set of distributors which fall under the category of non-general trade distributors from 1.1 per cent to 2.1 per cent.

The FMCG major ran a pilot across four to five towns from October 20 this year, and then implemented it in 100 a month later on November 20. This cluster of towns has been called “Bharat ke Shehar”.

The variable margin is divided into three main categories -- sales, demand capture, and demand fulfilment.

Under the variable structure some criteria distributors must meet to get the incentives include delivering 60 per cent of the orders placed by wholesalers/retailers within 24 hours and having retailer/wholesaler place orders via the company’s Shikhar app, while also achieving the targets for secondary sales and the extent to which HUL’s assortment of products are sold, among others.

According to a source, the company plans to implement the new margin structure across all its distributors in the country by the start of next financial year.