Thursday, September 13, 2007

Life on the margins- Brandline 4/5/06

Turning the tables on FMCG players who have so far dictated margins that retailers earn, the country's biggest organised retailer, Pantaloon Retail, is making a case for better margins from the top companies in the business.

Trying to replicate Wal-Mart's model of determining margins, the country's largest retailer recently decided to demand 5 per cent higher margins from FMCG companies for its Big Bazaar and Food Bazaar outlets.

Considering modern trade still comprises a fraction of FMCG sales, some of the players have been opposing the move while others see it as an opportunity to get better service with assured volumes, resulting in a win-win situation for both.

Justifying the move to hike margins, Damodar Mall, President, Food Bazaar, Pantaloon Retail, claims, "The FMCG companies have been enjoying higher profit margins in the modern trade format since we are giving them benefits accruing to their brands. But our cash expenses are not being met. All this time, the trade margins were lower and realising the consumption patterns of tomorrow, we have decided to hike our margins from FMCG players." Considering Mall himself has moved from Hindustan Lever, he should be equipped to pass judgement on the terms of trade imposed by both the parties involved.

Pantaloon, the largest retailer in the country, reportedly has asked 20-odd FMCG players, including HLL, Procter & Gamble, Marico, Colgate Palmolive and CavinKare, to immediately hike the retail margins by 5 per cent or face the consequences of their products being debarred from its stores.

Not wanting to be equated to kirana stores by earning the same margins, Pantaloon's move is seen as a growing trend in which modern retail brands are calling the shots instead of the companies which are supplying to them. The roles have been reversed from the days the brands were perceived to be stronger than the kirana stores and they were almost bullied into accepting stipulated margins.

Observes Arvind Singhal, Managing Director, KSA Technopak: "While a retailer is justified in commanding higher margins since the operating costs are higher, FMCG players have all this time been commanding higher margins than their counterparts abroad. The fragmented nature of the retail distribution network does not exist in other parts of the world where brands have conceded to part with higher margins to retailers. Not that all the FMCG retailers are doing it willingly, but most of them realise they cannot do without the shelf space given by such retailers. In India, this is beginning to happen and retailers have begun to flex their muscles and get stronger. At the same time, the share of traditional trade is still much higher today and companies such as ITC and HLL still have a small percentage of their turnover coming from modern trade."

Pantaloon has gone ahead and signed deals with eight FMCG companies which include the likes of Amul, Rasna and Nirma. Assuring such companies more business, Pantaloon recently signed Memoranda of Understanding (MOUs) at a two-day vendor fair in Ahmedabad. For instance, the deal with Amul would mean Pantaloon Retail would generate business of over Rs 50 crore against the current Rs 15 crore - Rs 20 crore.

Even regional players such as Ankur Salts, Bharat Vijay Mills and Jindal Worldwide have struck alliances with Pantaloon to make the most of the hiked margins. After Ahmedabad, Pantaloon expects to strike similar deals in Delhi, Kolkata and Bangalore.

In fact, the companies which have signed the MOUs see it as a strategic fit. Piruz Khambatta, Chairman, Rasna, says, "It is a matter of give and take. As long as they take and give something in return in terms of shelf space and visibility, we don't mind. Margin increase is going to happen and store brands are getting powerful. Nobody is really getting stronger as both are likely to gain."

Adds Sunil Duggal, CEO, Dabur, "We are open to negotiations. Modern day retailers have the right to enhance their margins. As long as it is a win-win situation for both the parties we don't mind the higher margins."

Certain FMCG companies have been finding it difficult to accept the new terms of trade. Claims an official at HLL, "If such retailers are assuring us a fixed sum of business, maybe we will consider these raised margins. At the same time, they should realise that they cannot do without our brands and we still have some amount of bargaining power."

Officials at other FMCG companies are not welcoming this new move either. "It's still premature to ask for increased margins. They still do not have significant scale to get the volumes that we are looking for," claims an FMCG player.

Pantaloon is also upping the ante by deciding not to stock GlaxoSmithKline's brands following the company's refusal to accept the new margins. Officials at GSK, however, did not divulge the exact outcome of this move. According to GSK officials, "Commercial discussions between two organisations are confidential business and GSK is therefore unable to provide any further information in this regard. However, GSK always has and continues to strive for a win-win relationship with all its business partners."

The fact that Pantaloon has decided to make public its decision to hike margins is in itself a surprising move.

As KSA's Singhal adds, "No retailer actually makes public announcements of its commercial terms of trade. It is surprising in Pantaloon's case. For most retailers, such negotiations are done on the side in a variety of ways with different FMCG companies. In fact, such deals are generally not divulged since there are no benchmarks. In fact, all buyers continue to strike such deals on a daily basis."

Says Neeti Chopra, Marketing Head, Trent Ltd, "There is an ongoing dialogue in such cases and no one makes such cases public. It is good for both — when you get good margins, it is possible to pass them on to the consumers who get better value. There is a symbiotic relationship in most cases where the margins of the players are offset with increasing volumes through the sales from such retailers. At the moment, such margin deals are done on a case-to-case basis but eventually it will become a norm with the retailers."

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