Consumer goods cos affected by crisis-hit modern retail sector

Consumer goods cos affected by crisis-hit modern retail sector

New Delhi: A cash crunch and slowing consumer demand not only forced retailers to shut stores and stall expansion plans, it also set back makers of home and personal care products that had hoped to widen their sales reach through chain stores.

Companies such as Hindustan Unilever Ltd (HUL) and Marico Ltd and Wipro Ltd’s consumer products division say the contribution of retail chains to their sales declined significantly in the two quarters ended March from the year-ago period.

The companies are also reviewing growth targets from modern retail in the short term.

“The economic downturn that resulted in a liquidity squeeze, coupled with the decline in consumer sentiment and spending, hit the modern retail business. As a result, some FMCG (fast-moving consumer goods) companies are not generating enough sales and inventories are piling up...," said Asitava Sen, director, retail consulting, at Nielsen Co., the market research firm. “In some exceptional cases, payments have not been made on time."

HUL’s managing director and chief executive officer Nitin Paranjpe cited slower growth in modern trade as one of the reasons for a decline in the company’s sales volumes. “March quarter was impacted by the slower growth in modern trade," Paranjpe told equity analysts on 11 May.

Wipro Consumer Care and Lighting (WCCL) said sales growth through chain stores had slowed.

“During the pre-recession period, (sales from) modern retail was growing at 60-70%, but now the rate has come down to 20-30%," said Anil Chugh, vice-president, WCCL. “Modern trade currently contributes about 6-8% to our total sales."

The rapid growth of retail chains in 2006-07 had encouraged consumer product makers to chart strategies to take advantage of that boom. Some, such as Wipro, GlaxoSmithkline Consumer Healthcare Ltd and Marico, set up separate teams to drive sales through modern retail outlets.

Several others changed their packaging and even pricing to suit the new retail format’s needs and some offered higher margins to organized retailers.

Experts say so-called discretionary or impulse purchases—products that people buy that they don’t necessarily need—had taken a bigger hit across organized formats.

“In a fair number of cases, especially in categories that comprise ‘essential buys’, we have found consumers usually prefer their neighbourhood retailer," said B. Sridhar, head of sales and business finance, Marico. “It’s the ‘discretionary’ categories where the sales from organized retail have taken the maximum hit."

Marico gets 6-7% of its sales from retail chains.

According to a March report by audit and consulting firm KPMG International, the slowdown in the retail business is expected to last for another 12-18 months.

The consultancy said sales growth from modern retail stores in December slowed to 11% from 35% in the same month a year ago.

Experts say investment in modern retail will produce results in the long term. “Potential FDI (foreign direct investment) relaxation in retail sector and revival of the economy would trigger consolidation and growth of modern trade. It would be prudent for FMCG companies, therefore, to continue to track and focus (on organized retail), even though the rate of transition could perhaps be slower than expected," said Nielsen’s Sen.