Business Standard, Mumbai March 18, 2011

Raghavendra Kamath & Viveat Susan Pinto

Cost pressure and conflict over margins see products of companies like Reckitt Benckiser taken off shelves.

The racks meant for toilet cleaners at Future Group’s Big Bazaar outlet in Lower Parel, Mumbai, are filled with Hindustan Unilever’s (HUL’s) Domex, Future’s own Clean Mate and other brands. The one missing in the segment is Reckitt Benckiser’s popular product Harpic.

The case is the same in the section meant for handwash liquids. Here, HUL’s Lifebuoy gets most of the space, then come Future’s Caremate, Colgate-Palmolive and others. Here also, Reckitt’s Dettol is missing.

“There are some issues between us and Reckitt. We are not stocking their products,” says a salesperson at Big Bazaar.

The margin “issue” between retailers and manufacturers has resurfaced big time — whether between Reckitt and Future or consumer durables giants and Tata group’s Croma.

After Reckitt wrote to retail chains saying it would cut their margins two per cent to offset the increase in input costs, Future Group held back purchases from the FMCG company, while others expressed their intent to follow suit.

A senior Future executive tries to play down the issue: “We believe we will be able to find a middle ground.”

Chander Mohan Sethi, chairman & managing director, Reckitt Benckiser, remained unavailable for comment.

Such fights are not new for Future Group. In early 2007, it had boycotted Pepsi’s Frito-Lay products over commercial terms, including margins. About two years ago, it had pulled Kellogg’s off its shelves at Big Bazaar outlets after the breakfast cereal maker refused to increase margins.

Though retailers as well as manufactuers agree that costs have gone up in the last one-and-a-half years, putting pressure on their margins, both the parties say the other side should work better on efficiencies.

“Manufactuers tend to pass on their inefficiencies in the supply chain by squeezing retailers’ margins. Many consumer durables and FMCG companies can do much better on this front,” says Vineet Kapila, chief executive officer, Spencer’s Retail.

Thomas Varghese, chief executive of Aditya Birla Retail, adds: “We are actually subsidising costs. If the cost of keeping goods is 24 per cent, many companies are giving only 16-18 per cent margins. Only those who give 27 to 28 per cent margins help us make some profits.”

But manufactuers have a different take on this. “Modern retailers should manage their costs better. While they are well within their rights in demanding higher margins, the point is whether it is acceptable. I think they need to manage efficiencies better,” says Ravinder Zutshi, deputy managing director, Samsung India.

Manish Sharma, director (marketing), Panasonic India, agrees: “Modern trade retailers typically have high overheads, since they are into providing a better consumer experience. Steep rentals, better ambience, hiring costs, training and development — all push up overheads. This puts pressure on margins.”

Devangshu Dutta, chief executive of retail consultancy firm Third Eyesight says the conflict between the two parties is “inevitable”, given the increasing cost burden.

Modern vs traditional trade

Manufacturers and retailers also differ over the contribution of modern trade to manufacturers’ volumes.

The percentage of consumer goods sales coming out of modern trade in India is about 8-9 per cent for a manufacturer, while traditional trade contributes the lion’s share, at 87 per cent. The remaining 4-5 per cent comes from company-owned outlets.

Compare this with China, Thailand or the US and Europe. It varies significantly. In China, the contribution to sales from modern trade is close to 30 per cent. In Thailand it is a whopping 50 per cent, while in the developed economies of the West, including the US and Europe, it is close to 70 per cent of total sales to a company.

“Naturally, modern retailers there have better bargaining power,” says K S Raman, director of Videocon-promoted Next Retail, a durable and IT chain. “Typically, the margins commanded by modern trade retailers and traditonal retailers vary in these countries. You have different yardsticks for the two and different teams that manage the two distribution channels,” he adds.

While Indian companies are also beginning to understand the importance of having separate teams to service the two distribution channels, when it comes to margins, the relationship remains frosty between manufacturers and modern trade retailers.

Ajit Joshi, chief executive officer & managing director, Infiniti Retail, which runs the Croma chain of stores, says: “The issue of margins is a serious one. We all wish to make profits. And, if a retailer is helping the manufacturer achieve volumes, besides helping him save costs, why can’t some of those savings be passed on to us.”

Ashish Nanda, partner, Ernst & Young, says: “The moot point here for manufacturers is to view their channel partners as business partners. The trouble begins when the relationship becomes transaction-based, not collaborative.”

Next Retail’s Raman says: “With the bulk coming from traditional trade, modern trade retailers tend to get side-stepped.”

Though both modern and traditional retailers enjoy margins of 8-18 per cent in consumer durables, the increase in costs of the former has led to a squeeze in their margins, bringing them down to about 4-5 per cent.

“As you keep increasing market share, you will ask for more margins. The balance in power will shift from manufacturers to retailers,” says Varghese of Birla Retail. “For instance, in CDIT (consumer durables and information technology), the modern trade contributes 15-20 per cent,” he adds.

Spencer’s Kapila argues, since modern trade saves the manufacturer the need to pay for the wholesaler’s margins, promotion expenses, warehousing costs and so on — which adds up to 20-25 per cent of product costs — retail chains would be more than happy if manufacturers pass those savings on to retailers as margins.

“Discussions on margins is an ongoing process, which is going to continue for the rest of our lives. Today, throughput required for break-even is very high. That’s why margins have become critical,” says Raghu Pillai, chief executive and executive board member, Future Group, who looks after the consumer durables format. “It is not correct to say that modern retailers do not give enough throughput to manufacturers. In urban centres, retail chains are giving large volumes. If they are able to convince manufacturers, there is room for passing on some margins to retailers,” Pillai adds.

But not all manufacturers are on a collision path with retailers.

GCPL Chairman Adi Godrej said: “We have no plans to cut retailer margins. Though organised trade comprises 8 per cent of our total offtake, it is still small.”

Though Nitin Paranjpe, managing director, Hindustan Unilever, declines to get into specifics, he says: “We have excellent relationships with all our modern trade customers. There are challenges, but we work together to create value. This creates win-win opportunities for both us and them.