Dec 10, 2008

Business - India;FMCG companies turn the heat on retailers

Sapna Agarwal & Raghavendra Kamath

Slash supplies to payment defaulters.

Major fast moving consumer goods (FMCG) companies such as Godrej, Marico and Dabur have curtailed supplies to select leading modern trade retailers, following default in payments.

"We have curtailed supplies to those modern retailers who are not paying according to terms of the contract," confirmed Adi Godrej, chairman, Godrej Group. He, however, was reluctant to share names of the companies that are defaulting on grounds that these are "long-term relationships". Marico's Chief Executive Officer (Consumer Products Business) Saugata Gupta, too, affirmed that his company was being cautious in dealings with such retailers. "Select retailers are facing liquidity problems and we are being cautious in our dealings with them," he said.

FMCG companies work on tight credit cycles. On the other hand, modern trade retailers such as Aditya Birla Group's More, RPG's Spencer, Mukesh Ambani group's Reliance Fresh, Subhiksha and Vishal have been expanding aggressively over the last couple of years.

Due to the economic slowdown and tight credit squeeze, "a few retailers are seeing their working capital cycles get stretched as they struggle with high real estate, rental prices and face a slowdown in business offtake," explained Anand Shah, an FMCG sector analyst with Angel Broking.

Purnendu Kumar of business consultancy firm Technopak Advisors noted, "The working capital for retailers is normally stuck for one or two months as retailers expand their stores, buy inventories and book properties."

To beat the liquidity crunch and to stay afloat, modern trade retailers are now looking at getting more bargaining power with FMCG companies. "We are negotiating for credit lines of a month with FMCG companies and two-and-a-half months with apparel and other suppliers," said Manmohan Agarwal, chief executive, corporate affairs at Delhi-based Vishal Retail.

FMCG companies, on their part, are doubtful of certain business models of modern retailers. For instance, most retailers such as Subhiksha and Reliance Fresh have their presence in close proximity to each other.

"Organised retailers are competing for a limited density of population in a crowded market space. Hence, they have a low velocity in movement of goods and are facing payment issues," explains an executive from a leading FMCG company who has also curtailed supplies to select stores and certain retail chains.

A McKinsey report states that organised retailing accounts for around 5 per cent of the estimated $350-billion Indian retail market, and is expected to expand its share to 14-18 per cent by 2015.

"The tug of war between FMCG and retail sectors will continue as modern trade picks up in the country and we ask for better terms and conditions," says Agarwal.

Meanwhile, consumers visiting modern retail outlets may find their favourite brands at their neighbourhood kirana stores rather than the major retail outlets.

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