A pedestrian walks past the logo of HUL (File image: Reuters)
Packaged consumer goods companies such as Hindustan Unilever Ltd (HUL) and Colgate-Palmolive (India) Ltd have had a controversial start to the New Year.
Distributors in several states are threatening to boycott some brands of the two companies. In a recent turn of events, HUL finally decided to address the issue and met distributors association on Monday after ignoring them for almost a month. Colgate-Palmolive, meanwhile in an exchange filing on Tuesday said it is directly engaging with its distributors and trying to solve their challenges.
Analysts say such issues may keep cropping in the future too, as the so-called fast-moving consumer goods (FMCG) businesses are experiencing a phase of transition.
Here’s all you need to know about why distributors and FMCG companies are at loggerheads, why the issue has cropped up and how it will affect packaged goods makers.
Distributors demand parity
Reports of a conflict between FMCG companies and their distributors emerged in the first week of December when the All India Consumer Products Distributors Federation (AICPDF) wrote to 25 FMCG companies, demanding margin parity with online B2B platforms Udaan, Elasticrun, Jumbotail, and cash- and-carry players such as Walmart Best Price, Metro Cash- and-Carry and JioMart.
In its letter, the association alleged that the companies were offering higher margins to these platforms, hurting the business of its members. It also threatened a boycott of products being sold on these platforms from January 1 if the companies did not heed its demand.
The association also warned companies of other consequences. “We will not launch new products by FMCG companies and will stop collecting damaged and expired products from retailers if our demands are not met,” AICPDF said.
The ‘issue’ with margins
FMCG companies offer a margin of 3.5-5 percent to traditional distributors, but new platforms are able to negotiate 12-15 percent margins, given their bulk orders, distributors say. This is disrupting the market, Dhairyashil Patil, president of AICPDF, told Moneycontrol.
In turn, these platforms are able to offer discounts to retailers and kirana stores or general trade (GT) stores, who prefer to buy products from them instead of their regular distributors.
General trade, the largest channel for leading FMCG companies in the country, traditionally has worked on a model where companies supply products to their distributors, who sell these products to retailers or general trade stores.
GT accounts for about 80-90 percent of sales of leading FMCG companies; the rest is contributed by modern retail trade and e-commerce.
The new platforms are trying to disrupt this process and promise an organised, technologically advanced and cost-efficient system of procuring products for general trade stores.
Of late, several distributors have reported that sales representatives of these companies (B2B platforms) have been found approaching general trade stores and offering them discounts.
HUL at the centre of tussle
Towards the end of December, most companies were in talks with their distributors and AICPDF and were trying to resolve the problem.
The federation said HUL and Colgate-Palmolive were yet to pay heed to their demand. Moneycontrol was the first to report the development.
(Read: HUL, Colgate-Palmolive yet to respond on margin parity with B2B entities: Distributors’ federation)
“HUL and Colgate-Palmolive are two companies that have not reached out to us for further discussions. I believe these companies don’t believe in playing fair,” said Patil.
As FMCG makers overlooked the demands of their distributors, the distributors’ group in some states announced a boycott of certain brands sold by these companies.
The federation’s Maharashtra chapter last week said it will stop selling HUL’s Ariel detergent and Colgate’s Max Fresh toothpaste from January 1. State chapters in Gujarat, Odisha, Rajasthan and Tamil Nadu announced similar moves.
HUL, however, held a meeting with AICPDF on Monday.
In response to a query sent by Moneycontrol, the company in an email response said: “In response to the request we had received from AICPDF, company representatives met them to understand their concerns and feedback about the evolving route to market (RTM) models. HUL reiterates that general trade (GT) continues to be our largest channel and our distributors (redistribution stockists) are and will remain our valued partners in our quest to serve the needs of our consumers across India. HUL remains fully committed to ensuring that our distribution partners earn a fair return on their investments and work collaboratively in enhancing their capabilities to make them future-fit. As an organisation committed to the highest level of customer centricity, HUL will make all the efforts to address any specific issue bilaterally with its distributors to mutual satisfaction.
“HUL has a long-standing relationship with its distributors that is based on trust and mutuality of interest. Our distributors have overwhelmingly conveyed to us that they would continue to meet the needs of our shoppers and consumers in an uninterrupted manner,” it added.
Impact on sales?
As FMCG companies try to find a solution to the current disagreement with distributors, analysts point out that the issue is not new and similar differences had arisen with the entry of modern retail trade in the country.
The tussle, however, will not have an impact on the FMCG companies and their sales, some analysts say.
According to analysts, FMCG makers will ensure that supply of the brands being boycotted by traditional distributors is maintained by other channels and consumption is not likely to be impacted.
“We don’t expect any major disruption but will have to watch the developments closely,” said Manoj Menon, head of research and consumer analyst at ICICI Securities Ltd,
Menon added that going ahead, there could be disruption in the market and we may see more of these protests.
Edelweiss Securities Ltd chimed in.
“These issues have happened earlier also, and we expect HUL and distributors to come to an agreement soon since both need each other. In our view, these kind of differences and tussles would further drive consolidation in favour of organised players and online players,” said a note by Edelweiss Securities.
“This is a recurring issue, and we do not expect a permanent truce on this,” it added.
