Much tough talk, but compromise likely before things go very far.
The showdown between retailers and fast moving consumer goods (FMCG) companies has resurfaced, with both camps hardening their stand on the issue of margins.
Big retail chains such as Future Group, Aditya Birla Retail and Reliance Retail are vehemently opposing the recent move of FMCG major Reckitt Benckiser to cut by two per cent the margins it gives on some of its products. This, Reckitt has said, has been done to offset the increase in input costs.
While Future Group has already held back purchases from Reckitt, others are planning to follow, by replacing Reckitt's products with the competition's and their own private labels.
“If they (FMCG firms) can unilaterally cut margins, we can unilaterally stop stocking their products,” says a chief executive of Mumbai-based retail chain, who does not want to be named.
Retailers say FMCG companies should increase prices instead of cutting margins as these are already thin. Though retail chains get gross margins of 10-20 per cent in consumer products, these are as low as three per cent after deducting various costs.
Arvind Singhal, chairman of business consultancy Technopak Advisors, supported this view. “Though a price increase is not in the interest of anybody, if it becomes inevitable, it is inevitable,” Singhal said.
But FMCG executives say the strategy of raising prices in an inflationary scenario is anyway followed. “If retailers are unreasonable, you have to take harsh measures at times,” says an FMCG company head, on condition of anonymity. FMCG companies also say with traditional trade, most companies still control the supply chain and margins. That's not the case with organised retail.
Battle limits
Yet, many say this is just shadow boxing, as both FMCG companies and retailers need each other and will come to a solution. On an average, organised retail accounts for seven to eight per cent of FMCG companies’ total sales and this is steadily growing. And, despite their public display of bravado, retailers will find it difficult to fill their racks with private labels.
The chief executive of a Mumbai-based retail chain says some products can be easily replaced. “The level of replacement varies. If a retailer does not a keep a product for three months, it is as much a loss for a manufacturer. If a customer is loyal to a store, he can skip the product. Then, FMCG firms lose three to five per cent of loyal customers for a life time,” he said.
Two years ago, the Future Group clashed with chocolate maker Cadbury over alleged discrimination in matters of trade. Its main contention was that Cadbury was insisting on payments only after an external audit and giving lower fill rates. The group also locked horns with other FMCG firms such as Frito-Lay and Kellogg's on similar issues.
Fill rate means the proportion of orders that can be immediately met with stock in hand. Retailers say FMCG companies meet a fill rate of 60-65 per cent in India versus 90-95 per cent in US and European markets.
Some signs of reconciliation is already visible, as some executives are guarded in their approach to the issue. “Whether or not to cut retailer margins depends from case to case. There is no one-size-fits-all,” says an FMCG head. Adi Godrej, chairman of Godrej Consumer Products, says his company has no plan to cut retailer margins. “We are not contemplating that. Though organised retail comprises eight per cent of our total offtake, it is still small,” he said.
