The second wave of Covid19 makes it an interesting time for the Indian Fast Moving Consumer Goods (FMCG) companies. By and large demand was back (even in non-essentials) and was being primarily driven by rural demand as against urban rebound. If we refer to the recently published Nielsen numbers, FMCG sector grew at 9.4% rural and semi urban areas grew by approx. 14%, while the urban areas lagged behind at around approx. 2% over the previous quarter during the period January to March.
Now with the second wave not sparing the rural pockets and with us witnessing lockdowns across states, a lot of the historical learnings of last year don’t hold true anymore. At the beginning of the 2nd wave things seemed fine, as there were still pockets in the country that were unaffected which could continue as Business as usual for FMCG companies. However, given that the focus is back on essentials now, FMCG companies have begun to re-think their strategies.
Another headwind here is the challenge that FMCG companies face from private labels sold over eCommerce channels. Most online channels have an incentive to push sales for their private labels to unlock more margins and also accumulate more ’value’ in their core business. For the FMCG companies, it is important that General Trade (the retailers) survive and thrive to ensure their business continues to grow profitably.
This context was important, as the decisions now taken by FMCG companies will have far reaching impact in the short term for the last leg of their sales channel i.e., the retailers. Most prominent FMCG companies are rarely out of money and get paid by the trade (their stockists / distributors) on delivery/ in advance for the goods sold. Also, these companies tend to have very limited visibility on the downstream trade from the stockist through to the retailers.
A reaction that we have seen from a few of these companies given the focus on essentials is to hike the prices of non-essential Stock Keeping Units (SKUs) to ensure there is no net revenue drop. Also knowing the traditional sales process in FMCG, the incentives for the channel are higher for selling the slower moving SKUs vis-à-vis the faster moving ones. This is resulting in a lot more bundled pushes through the sales teams. Given that now more money is needed to purchase the fast-moving SKUs – as a result of bundling and hike in price on non-essential SKUs, a lot of cash gets blocked through the sales channel. As we all know, a small retailer thrives on fast rotation of goods and has very little bargaining power against these behemoths. This is resulting in blocked up capital, lower purchasing power and poorer margins for these retailers – creating a vicious cycle.
To put things into context, let me quote another Nielsen report of April 2021 that states that 70+% of SKUs within a category account for less than 2% market share. These are the SKUs that are currently dragging everyone down and need to be rationalised asap for the collective greater good of everyone. The current knee jerk response of bundling and/or increasing pack sizes is slowing down rotation and pulling everyone down together.
In these tough times, the supply chain such as Stockist, Distributor and Retailers needs as much support as they can get from the FMCG companies. These companies are beginning to realise this and have begun accommodating by extending informal credit periods for their tier 1 buyers Clearing and Forward and Stockists). As this is being done without appropriate systems, this in turn is creating overheads and efficiency losses for FMCG companies.
As a stakeholder in the sales channel during this lockdown, there is a need to resist the temptation of avoiding stocking too much of the higher margin but slower moving SKUs. Unless it is a high frequency daily use essential item, it is unlikely that retail consumers will block capital for larger volume and higher priced bundled items. It is therefore important to push back strongly against the mis-incentivised sales channel that insists on pushing slower moving goods. Given that the mix of SKUs have changed and rotations could be slower, it is important that the sales channel move themselves onto unsecured modes of formal finance. This ensures that they do not risk their hard assets (in case of genuine business loss) and also that they do not borrow at unsustainable higher rates of interest from the informal market.
One way to secure this finance is to restrict the number of companies that you deal with as a sales channel participant. As a higher dependent sales channel participant on FMCG companies, it is more likely these companies will offer you these formal lines of finance to drive sales and consolidate credit risk. It is important for Small and Medium Enterprises to choose wisely and work with FMCG companies that don’t push slower moving SKUs along with their faster moving King/Queen products.
To summarise, the FMCG ecosystem needs to urgently prioritise/rationalise their slow-moving SKUs, re-look at their sales channel incentive structure and reduce target pressure on goods that are by their inherent nature not moving fast enough. Another important intervention is to support the Sales Channel through dedicated exclusive use purchase lines, but it is important that these lines are enabled ONLY for fast moving SKUs. By routing all payments through a dedicated limit, FMCG companies reduce their accounting overheads related to informal credit significantly while also providing the supply chain the much desperately needed credit period extension and liquidity.
Let me conclude by saying, I am optimistic that the balance in the ecosystem will prevail to ensure the precious general trade sales channel participants that have been established with significant effort are protected before too much collateral damage.
The author is Aljo Joseph, Co-founder & Chief Business Officer, Finovate Capital
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