Explained: Why are FMCG distributors up in arms against companies?

by 5paisa Research Team Last Updated: Dec 11, 2022 - 10:39 am 44.5k Views
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Come 2022, and India’s fast-moving consumer goods (FMCG) sector could see some significant disruptions as the apex body of distributors is up in arms and is demanding price parity between traditional distributors and organised B2B distribution companies.

In the distributors’ crosshairs are companies like Mukesh Ambani-led Reliance JioMart and some other online and offline players that have entered the market over the last few years. 

What exactly are distributors demanding?

Traditional distributors say that higher margins or lower prices being offered by FMCG companies to the likes of JioMart, Metro Cash & Carry, and Booker, and to e-commerce B2B companies like Udaan and ElasticRun, are hurting are hurting their businesses.  

How big is the distributors’ lobby?

The All India Consumer Products Distributors Federation (AICPDF) is big, with more than 450,000 members. It wants a meeting with the FMCG companies over the issue. 

What is the lobby essentially saying?’

“Deep discounts offered by other players create a monopoly and destroy the traditional trade, which still handles the crucial supply chain for all FMCG companies,” Dhairyashil Patil, president of the Federation, told Business Standard, adding that the situation was pushing up unemployment.

“We don’t object to benefits given to the consumer, but at the trade level, it is unethical cash burn by offering predatory pricing to retailers,” Patil said, according to the report. 

Traditional distributors offer retailers margins in the range of 8-12% compared with 15-20% offered by big-box B2B stores and online distributors.

In a letter specifying its list of demands, distributors have asked for uniform pricing and schemes across distribution channels in the country.

Distributors have demanded that all schemes be offered on a primary basis, and that margins be re-worked taking into account all incremental costs or linked with the wholesale price index. The letter states that all secondary schemes (offered to retailers) should be in the form of financial credit notes, and enterprise resource planning (ERP) should be defined as post tax and not pre-tax, as this would release its capital blocked in input tax.

It has also asked companies to take back damaged, expired stock and launch failure at margins (new product launches which have not done well in the market) equivalent to the base margin. The Federation has also asked for fresh agreements and a draft committee, with representatives from all parties concerned, besides a regulatory body in each state.

The AICPDF letter states that every FMCG company should appoint an independent ombudsman to look into complaints from the entire trade channel consisting of clearing and forwarding agents, distributors, and dealers.

Which companies could this issue impact?

If the imbroglio is not resolved, it could impact some of India’s biggest counters. These include the likes of Hindustan Unilever, ITC Ltd, Dabur, Marico, Nestle India, Britannia, Colgate, Mondelez India, Godrej Consumer Products, Reckitt Benckiser (India) and Pidilite. 

What have the distributors threatened?

The AICPDF has said if its demands are not met, then it will start a “non-cooperation movement” against FMCG companies from January 1.

The distributors’ body has said if they are not given the same margins as new-age distributors, irrespective of volumes, they will not sell products or stock keeping units (SKUs) sold by organised B2B channels.

“If the company is not able to give us a level-playing field, then we will drop the products sold by Jiomart/B2B companies from our portfolio,” the letter said. Traditional distributors will also not supply new launches by companies to retailers.

They will also refuse to meet the primary sales target set by companies to distributors but will continue to service retailers, it said. The AICPDF has also said the traditional distribution channel will not pick up expired stock from retailers.

Is the threat of disruption by distributors the only thing worrying FMCG companies?

Not really. The looming threat of another wave of coronavirus, with cases of the highly transmissible Omicron variant rising in India, is also weighing on the FMCG companies. If the country goes in for regional lockdowns or other disruptions, it could mean that supply chains could be significantly hit at least for a short while. 

How have the markets reacted to these developments?

On Monday, as the markets in general slipped, the entire FMCG pack was down. The markets have been jittery on the spread of the new virus variant that was first detected in the southern African region.

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