Margin system rollout in right direction: HUL

Consumer goods company Hindustan Unilever Ltd (HUL) that is facing resistance from distributors over the roll-out of a revised margin structure said there are “no adverse effects” of the move, which is designed to incentivize and offer them higher earning potential.

Earlier this month, distributors asked the fast-moving consumer goods company to review the new margin structure, and threatened to halt the distribution of some of its key brands.

Allaying concerns, Rohit Jawa, CEO and managing director, HUL, said the company has a long-standing and a mutually beneficial relationship with its distributors. The company has been investing behind its distribution capabilities.

“Insofar as this specific case is concerned—number one, we have a progressive margin model, and it’s a process of evolution of the margin structures and commercial arrangements with our distributors to improve and make our distributors future fit. This margin structure is designed to incentivize and offer higher earning potential, to get to smaller stores, to sell more new future-ready lines or market development packs and to offer delivery the next day. All of that makes our distributors competitive to various options available for retailers to buy. So, it’s good for the distributor. Having done this test over one year, the response has been very favourable. Our distributors have earned more, so there’s not just a high earning potential, but higher earning realized. And that’s the reason why we have now scaled it to the top 100 cities over the last three months,” Jawa told reporters after the company’s earnings announcement on Friday.

In October, HUL rolled out a revised margin structure in over 100 cities—this included a 60-100 bps reduction in fixed margins for distributors from 3.9% to 3.3%, and increasing the variable margin by 1-1.3 percentage points. However, distributor associations have been seeking a revision in the basic margin to a minimum of 5%.Though it is still at an early stage, the roll-out of the new structure is “going in the right direction”, Jawa added. “As of now, there’s no adverse effect. On the contrary, I would expect this model to actually incentivize higher growth. Effectively, it will be a win-win for our customers who get better service, for our distributors who earn more…and the company, of course, that grows more,” he added.

The roll-out is a “well-tested transition”, he added. “We are making sure that they also see the benefit in this and also realize the same as we go forward,” he added.

HUL’s brands such as Surf Excel detergent and Lux soaps reach over 9 million outlets in India. It works with over 3,500 distributors, according to the company’s FY23 annual report.