Biz associates gripe over payments

It’s not all hunky dory between the large retail formats and their vendors. What promised to be a long lasting marriage has turned sour, and the two are now locked in an awkward embrace. The bone of contention is payments to vendors. Large retail formats who invested tens of crores and opened stores by the dozens in the initial euphoric days of the retail story, now find that their business models are flawed, they have not adapted to the Indian consumer, there are problems of huge overheads not to mention the unrealistic real estate rentals. Incomes earned are first funneled into operating costs leaving little to pay to the vendors.

 

Overdue payments

Subhiksha, the poster boy of the retail phenomenon, owes about Rs 33-35 crore to vendors even as it tries to pick up its fragmented and now defunct business. Vishal Retail, which caught the attention of consumers and investors alike owes anything between Rs 1-2 crore to leading vendors in the country. Express Retail, started by the Express Group is not behind. Payments outstanding range from Rs 2-10 Lakh to different vendors. Sabka Bazaar which dazzled consumers with its chic stores in the neighborhood has defaulted on payments to the tune of tens of lakhs. Not only this, the issue of delayed payments is plaguing big names as well. Spencers, Big Bazaar, Reliance Fresh, More, Reliance Retail are no more keeping to the terms of trade as signed between the vendors and retail formats. Credit which normally extends to one-two months is often extended up to 6-12 months leaving suppliers and vendors in a dilemma.

 

Owner, retail differences

Things have come to such a pass that FMCG companies led by HUL and P&G are contemplating forming an association and appealing to the regulatory body for intervention to release their outstandings from the retail formats which often run into hundreds of lakhs or tens of crores. Their grouse is that the large retail formats are more organized and well knit and use their camaraderie to wrest undue advantage from suppliers and vendors.

Not far behind are the mall owners. Roughly 70 mall owners have formed the Association of Mall Owners of North India (AMONI) to think of ways to get retailers to pay their rents in time. According to the terms of contract, leases which were signed for 1-3 years are now lying dishonoured and retailers are not paying rent. Retailers on the contrary argue that rentals in the last 6 months have fallen across the country by 30-40 per cent as the real estate industry in the country goes through a slowdown and want that benefit of reduced rentals be extended to them. Mall owners counter that rentals must be honoured as per the contracts signed although in recent months there have been renegotiations of rentals between the two and also of a new trend about rentals being fixed as per the percentage of sales which retailers make.

 

Vendors vent anger

Vendors and suppliers are angry and make their discomfort apparent. Says, Shekhar Agarwal, Executive Director, Surya Food & Agro Ltd (manufacturer of "Priyagold" brand of biscuits): “We are dealing with all modern retailers. We have faced payment problems with 'Subiksha', which is still outstanding for the last 6 months and has been blacklisted for further supplies. We also faced some problems in the past with 'Sabka Bazaar’ but now we have resumed supplies to them after they cleared the outstanding payment.   Rajesh Patwari, Proprietor, Shrishti Creations says: “All the big retail formats like Big Bazaar, Vishal Retail and Gokul’s Megamart are delaying on payments. The payments are late by anything between 2-4 months. The outstanding amount due is anything from Rs 8-12 lakh. The retail formats ask for extensions. We do eventually get  payments but it is late. There is a economic meltdown in the markets and we can’t do anything.” Ankur Jain, International Marketing Manager, Jagdamba Exports adds: “Vishal Retail is defaulting on payments and the outstanding amount due from them since Sept 2008 is Rs 1 crore. Further, Pantaloon, Reliance Retail and Subhiksha are all delaying payments and are sending back goods. They cite the slowdown, recession and weak consumer sentiment as the reasons. “Vishal Retail is not giving us the payment plan so we are thinking of suing them.” Bakul Sharma, Managing Director, Chintamani Foods says: “Spencers and Express Retail have been delaying our payments for one year and the outstandings run in lakhs of rupees. They ask for extensions and dispute the issue. They say that payments will be made on sales being completed. This is contrary to the sales contract and payments are not made according to the terms of trade (TOD). We are planning to send them notice - make payments according to the terms of trade (TOD) or face legal action. Express Retail tops the charts in terms of defaulting on payments but rest are fine. They initially asked for one month’s extension, now they have asked for 2-5 months extension and they have not paid. I can’t disclose the amount, we are contemplating approaching the lawyers.”

The association of fruit and vegetables suppliers of Azadpur Mandi in North Delhi, which is also one of the largest wholesale market in Northern India says, “Payments outstanding to their big vendors by large retail formats extend to Rs 1-2 crore and is often delayed by 6-12 months. Kapil Chawla of S Naresh Kumar & Sons, vegetable and fruit suppliers in the Azadpur Mandi says,  “Subhiksha, More and Reliance Fresh are defaulting on payments in  a big way. “The retail formats ask for one month extension and from the date of supplying, payments are received after 3 months. If our payments are not received in time we talk to their superiors and send them an email and ask them to make part payments or in installments,” adds Chawla. A spokesperson of Bhagwan Das & Sons, in Azadpur Mandi, suppliers of fruits and vegetables to retail formats says that Subhiksha has stopped payments and outstandings for each vendor is to the tune of Rs 1 crore. “Subhiksha stores have closed and they have stopped making payments for the last one year. Reliance Fresh is another case which has delayed payments to our vendors by more than 2-3 months. As a result we suffer from a loss as we get payment from vendors after giving them a discount of 30-40 per cent,” he adds.

 

The cause

So why has this marriage between the vendors and large retail formats which was touted as the great association of our times gone sour? Says Samar Singh Sheikhawat, Vice-President-Marketing, Spencers Retail: “Most organized retail formats have stretched themselves ahead of volumes. They have invested ahead of value and have poor inventory management. The fixed and variable cost overheads are high. This has resulted in a cash crunch as stocks don’t move and this is blocking the working capital.” The money of the retail formats first goes to funding the costs towards salaries, rents, capital expenditure (capex), warehousing costs. Not enough money remains to pay back to vendors. The companies have invested too much in their businesses but do not have enough sales happening. The retail formats have stretched themselves beyond the limits and can’t support themselves, so vendors are the first to get affected, adds Sheikhawat.

Credit cycles are being dishounoured in all possible ways creating much strain on the vendors. Says Spencers Sheikkhawat: “The credit cycle is different for different categories. In case of fashion it is 6 months, FMCG is 30 days and electronic goods is 2 months. If your payment cycle is 30 days, you should not have 30 days stock. The inventory should be just enough to fulfill sales and payment requirements. The rule should be that no payment, no supplies, and full payment full supplies. If you have no products on the shelf this will lead to declining sales.” Says Agarwal of Surya Food “The normal payment cycle is 15 to 21 days and generally we receive the payment within 21 to 30 days from delivery of goods.  But we instantly receive the payments in traditional retail. We think traditional retail is covering majority of population and are conveniently located in every nook and corner of colonies.”

 

Organised vs unorganised

Given that organized retail is here to stay, how do suppliers view it compared to the unorganized sector?  Says Agarwal, “Our bulk of sales are through traditional retailers but modern retail is also catching up fast and sales trend will grow gradually according to growth of modern retail.” Modern retail is tempting buyers to shop more by showcasing their products on shelves, which is lacking in traditional retail outlets. But traditional retail scores over modern retail in terms of margins, break-even point, profitability & low cost of operations. Says Patwari, “60 per cent of our supplies are to the wholesalers. Of the remaining 40 percent, 20 per cent is to the organized retailers and another 20 per cent  to the unorganized sector. We get prompt payments from the unorganized sector but payments are withheld or are made late in the organized sector. We sell more to the organized retail since they buy in bulk. In the organized sector their property is all rented as they do not have personal property. If most of the income goes towards rent how will they pay the vendors. The customer base is small in the organized sector but it is large in the unorganized sector.” According to Jain, “We are basically doing organized retail and most of our sales are through organized retail. Regarding the organized players, the payment plan is poor and they are not fulfilling commitments. The unorganized sector is better in making payments. Organised players have much more bargaining power, they can delay payments by armtwisting suppliers and vendors. The unorganised players need the goods as they have the demand and so they make payments faster.” Different consumers feel differently. In the case of organized players consumers feel better and are tempted to buy as these players offer discounts and their promotional packages are attractive. Says Sharma, “Big Bazaar and all the other large retail formats get good response from consumers. In the organized retail our sales are 25-30 per cent and in the unorganized retail our sales are 70 per cent. The payment issues in the organized and unorganized areas depends on the terms of trade, by and large we have no problems. In the organized trade the environment is good and customers are happy. In the unorganized trade there are no such pleasures.”

So which category of retail formats and FMCG companies are likely to face this problem and what role does the financial or business model have to play in this. Says Sheikhawat, “Price discounters are likely to face problems as they operate on low cost and low margins. Due to this, footfalls get affected and sales too get affected. Companies in the low end of spectrum that are funded by debt or public money are more prone to succumb to the vagaries of economic downturn. If the retail formats are funded by internal accruals they are better placed. Mr. Sunil Duggal, CEO, Dabur India Ltd says,Offtakes in modern retail have shown some signs of slowdown, but we would not be in a position to comment on the same. That said, the fact also remains that traditional channels have shown a marked improvement in sales. Everyday use products that are priced at popular price points have not shown any signs of slowdown. Demand for such everyday use products are on the rise, both in urban and rural markets. In fact, the rural markets are witnessing faster growth when compared to their urban counterparts and this is largely driven by the growing affluence and consumerism in the rural markets. So, whatever little slack was witnessed in the modern trade outlets has been more than made up for by the traditional trade channels and rural markets.”

 

The way forward

If payments are withheld by the retail format what steps are the FMCG companies taking to protect their interests and maintain the cash flow? Says Duggal: “You must first remember that modern trade still accounts of a miniscule part of the FMCG industry's total sales with traditional trade still accounting for over 90-95% of the business. Dabur has already suspended supplies to many of the smaller retailers because of payment issues. So, we are either not supplying at all or we are supplying purely against cash. Some of the larger players are also showing a slowdown in offtake, but it does not really concern us much because we believe that traditional trade will more than take up the slack. As mentioned earlier, our area of strength has always been traditional trade.”

“The way to overcome this problem is to rationalize the business to come in line with the projected sales which includes shutting down non-productive and non-viable stores. The other thing is to right size the organization in terms of employee strength and cut all unnecessary costs. Further, the organization can reduce the inventory holdings in store so that you have only fast moving goods and can pay the vendors much more faster,” concludes Sheikhawat.

So, it is evident while the marriage between the large retail formats and vendors is certainly on the rocks, all is not lost and there is reason for hope. As R Subramaniam, Founder of Subhiksha said recently, “As soon as I receive funding, I intend to pay back all my debts including those to the vendors.” Comforting words, but when will the promise be fulfilled?

Stay on top – Get the daily news from Indian Retailer in your inbox