Fast moving consumer goods (FMCG) companies expect their margins to get squeezed due to the better bargaining power of big retailers and the threat from their private labels.
"The fight will get intense. There's no denying that. It won't happen immediately. But we are bracing for it," said the sales and marketing head of an FMCG company in Mumbai.
Harsh Mariwala, chairman of FMCG giant Marico Industries, said for many impulse buys such as corn flakes, chocolates or cheese, the ability of large retailers to display products innovatively has lead to substantial jump in growth. But for traditional products in the FMCG basket, margins are under pressure.
"Once retailers through consolidation reach a certain critical mass, they will have more bargaining power and squeeze margins. However, FMCG companies have to find ways to reduce costs-for instance they will save on distributor margins(around 5 per cent ), reduced cost of distribution to one warehouse etc".
Manufacturers and retailers have locked horns over discounts and margins in several instances. In February, retailers such as Future Group, Aditya Birla and Reliance strongly opposed British consumer goods maker Reckitt Benckiser’s two per cent cut in the margins to retail chains on some of its products. Reckitt said it had done so to offset an increase in input costs. In retaliation, Future Group among other retailers, cut purchases from Reckitt and replaced them with products from competitors, and its own private labels.
Though the dispute was resolved, it highlighted the acrimony between manufacturers and retailers on margins. A few years ago, the Future group stopped selling products made by Frito-Lay and Kellogg’s, again on the issue of discounts. The other threat will come from the cheaper private labels of big retailers. "It is a challenge, so it is essentially for the FMCG companies to maintain their leadership in the segment they are in. They have to innovate constantly and be ahead of the private labels," said Mariwala.
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FMCG companies say they do not earn much through big retail chains anyway. "We hardly make any money selling to big retail but they give us volumes,” said a leading beverage maker. “In India, for instance, at least there is a discounting of around 10 per cent to big retail. Our money comes from mom-and-pop stores, cinema and entertainment centres amongst others."
About 6-10 per cent of Indian FMCG sales come from organised retail. The number is as high as 70 per cent in developed countries. This can change as organised retail grows in India. Industry estimates say sales from organised retail can touch 15-20 per cent in the next few years.
Some FMCG companies say traditional trade will continue to be a force in India. "Traditional trade will continue to be bigger in India, despite the move to allow FDI," said Mohan Goenka, wholetime director, Emami Ltd. "I am not a worried man."