HUL douses distributor ire over low margins, says will do whatever it takes

Apart from battling an all-time high inflation, low volume growth and degrowth in rural markets, FMCG giant, Hindustan Unilever (HUL), in the third quarter of FY22 also had to deal with the resentment of its general trade distributors. The latter's concern was the low margins they were getting in comparison to new-age distributors and wholesalers such as Udaan, Jumbotail, Metro Cash & Carry and Reliance Jio. Last month, HUL distributors had even stopped distributing their products until the management intervened and promised to give them a fair return on investment. "General trade is our most important channel and we will do all that it takes to take care of them," HUL chairman and MD, Sanjiv Mehta, said at the company's Q3FY22 earnings call.

"We are supporting them with technology and will continue to do so unabated. The sales from the Shikhar app for instance, doesn't come to us, it goes directly to the distributors," Mehta further explained. Since the new age companies (most of them flushed with private equity money) buy in bulk from the FMCG majors and pay them almost immediately (unlike the traditional distributors who operate on a 10-15 day credit cycle), they are able to attract margins as high as 17-18%, as opposed to the 10-12% margin that a traditional distributor gets.

In Q3 of FY22, HUL has reported a domestic consumer growth of 11% and profit after tax growth of 17%. Its volume growth was at 2%, and Mehta claimed that in the current inflationary environment, the FMCG major has done better than its peers in terms of volume growth. "These are unprecedented times and we have never seen such high inflation," said Mehta. The FMCG industry, in the last three quarters has been witnessing an increasing de-growth in volumes, with rural being the worst impacted. "In value terms we have grown 2x," said Mehta. According to Ritesh Tiwari, CFO, HUL, the company has seen the highest market share gains in over a decade.

The FMCG major has taken a 7%-10% hike across product segments. Despite the FMCG major trying it's best not to tamper too much in the pricing of its value brands and resorting to grammage cuts, the value conscious rural consumers have cut down consumption. "People are not buying products such as body sprays, fairness creams, noodles and biscuits. They are buying essentials, and that too in reduced quantities," says Sushil Sharma, a kirana store owner in the outskirts of Vidisha, Madhya Pradesh.

The second wave of Covid-19 had badly impacted people living in tier 2-3 and rural India, and despite monsoons being good, consumers preferred to save money for healthcare and controlled their daily spends.

So, what was Mehta's advice to step up consumption? "The consumers need more money in their hands. All the relief provided by the government in the rural areas will have to be extended. MNREGA outlay may have to be extended too." He expects to see a moderation in inflation by the second half of 2022. "However, one has to remember that the economy is in recovery mode. At the end of this fiscal year the economy will be the same size as it was two years ago."