HUL changes distributor margin structure, increases variable components

Cuts fixed margins and increases variable margins for Bharat ke Shehar

Hindustan Unilever (HUL), the country’s largest fast-moving consumer goods (FMCG) manufacturer, has made changes to its structure of distributor margins by increasing the variable margins and reducing the fixed one.
 

While some distributors say it will not be easy to meet the conditions set, sector analysts are of the view that the move is to drive volumes and optimise distribution costs.
 

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

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 pay 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 towns a month later on November 20. This cluster of towns has been called “Bharat ke Shehar”.

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.

HUL, in an email response to Business Standard, said it was in closed period ahead of its October-December results and would not respond to the query.

The variable payout is divided across 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.

“The new margin structure has just been implemented and it doesn’t look easy to fulfil, especially when deliveries of goods are tied, which is expected to be completed within 24 hours,” said a distributor.

An analyst said FMCG companies had been pushing to increase their direct distribution in the market and, over a period of time, also bring down its indirect distribution, the latter to improve distribution and optimise costs.

These changes come on the back of demand, especially in rural areas, remaining a challenge not just for the company but for the industry on the whole.