Due to the tightening liquidity squeeze, fast moving consumer goods (FMCG) companies such as Godrej, Dabur and Emami are trying to de-risk their credit exposure to modern trade retailers by implementing measures like shorter and more frequent delivery cycles, delivery against cash payments and shorter duration credit policies.
Godrej, for instance, has increased the frequency of supply to modern trade retailers from once a week to two-three times a week.
"We are exercising greater flexibility with modern trade retailers with an 'on time in full' policy, wherein the orders placed by modern trade retailers are met on time and the full order is executed," says R K Sinha, chief operating officer (marketing and operations), Godrej Consumer Products, the maker of soaps like Cinthol, Godrej No 1 and FairGlow.
The companies, including Emami, are reducing the overall credit cycle. "Our policy varies for individual modern trade retailers. If a retailer is likely to default with payments the credit period is reduced," says Mohan Goenka, director of the Emami Group, which has brands such as Boro Plus and Sona Chandi Chyawanprash in its portfolio.
| TOUGH TRADE TALK |
| * FMCG companies are squeezing the credit exposure to modern trade retailers from 30 days to 21 days or even 15 days |
| * Godrej has increased the frequency of supply to modern trade retailers from once a week to two-three times a week |
| * The companies, including Emami, are reducing the overall credit cycle |
| * Dabur has adopted a tougher stance of delivering against cash payments to boycotting select modern trade retailers |
Dabur, meanwhile, has adopted a tougher stance of delivering against cash payments to boycotting select modern trade retailers. The home care to foods and personal care products company is increasing its focus on the traditional trade, the company's chief executive officer, Sunil Duggal, had said during a telecon with analysts to discuss the December 2008 earnings recently.
"There are two reasons that these changes are being effected," says Anand Raghuraman, partner & director, The Boston Consulting Group. "Firstly, due to the global financial meltdown, private banks in India are squeezing the credit lines even to financially viable companies. In turn FMCG companies are squeezing the credit exposure to modern trade retailers from 30 days to 21 days or even 15 days," he says.
The second reason is the reported incidences of large modern trade retailers like Subhiksha and Vishal defaulting on credit payments. "There is nervousness amongst the FMCG companies on the ability of the modern trade retailers to pay and fullfil their credit obligations," adds Raghuraman.
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However, besides credit de-risking, the frequent supplies and 'on time in full' policy of FMCG players like Godrej works well for retailers. FMCG companies are known to give preference to the orders of traditional retail stores (kiranas) as modern retail trade accounts for less than 5 per cent of their overall revenues.
"The fill-rate at the modern retail outlets in India is 65-70 per cent as compared to the global 90-95 per cent. This will now improve," says Damodar Mall, CEO (innovation and incubation), Future Group. Fill-rate is a ratio that tracks the supply quantity of an order placed. For instance if the order is placed for 100 items and only 60 items are delivered, the fill-rate would be 60 per cent.
The loss for FMCG companies on account of low fill-rate could be anything between 0-15 per cent as consumers visiting a full scale FMCG goods retailer could buy a competitors brand on account of a particular brand not being in stock.
"We are in talks with FMCG companies to change the way they service the modern trade retailers and improving on fill-rate is one of the issues being discussed," says Mall.
The way forward, Nitin Paranjpe, chief executive officer of Hindustan Unilever, in a recent interview to Business Standard affirms, "Is to understand how we can partner with modern trade retailers for a win-win solution."