FMCG & retail: Changing equations

Is FMCG retailing suffering a dent on facing the harsh blow from the downsliding modern retail business? It’s true that big retailers like Future Group’s Big Bazaar, Aditya Birla promoted More and Tata-Trent’s Star Bazaar have always been the lucrative customers of the FMCG manufacturers for their enormous buying capacity. For their bulk buying strength they leverage on the FMCG manufacturers’ selling policies. But this golden era of big retailers has not last long. The retailers, whose uprise was the result of booming modern retail in the initial stage, lost the foothold and many of them shut their stores or sought refuge to re-location as the stark contrast of expectation and unfulfillment made them review their business policies. Subhiksha and Sabka Bazaar are two such grim cases. The aftermath is FMCG companies’ wary approach towards big retailers. It is something like the bankers who were, a couple of years back, extended special treatment towards corporate retailers, but time has taught them and SMEs has replaced the big shots for special favours.

 

Private labels and national brands

While coming to terms, the big retailers realised the necessity of introducing their in-house brands which instantly caught up with the customers, especially for the FMCG products. The increasing demand of private labels or in-house brands has now become a matter of concern for the FMCG manufacturers losing the importance in merchandise assortment in stores, pushed back in some inconspicuous shelf space.

 

The contribution of big retailers in FMCG business

“Modern trade still accounts for a miniscule part of the FMCG industry’s total sales with traditional trade still accounting for over 90-95% of the business”, informs Mr Byas Anand, the spokesperson of Dabur India Ltd. A different view can be construed from the words of Mr Lalit Agarwal, CMD, V-Mart - “The composite format of V-Mart, a mix of both the lifestyle & apparel format and supermarket format, houses FMCG products that account for 20 per cent of entire merchandise. From analysis of our sales data over a period, we have seen that in top selling ten categories across FMCG segment in the country, we have fared quite well. In certain categories, percentage of our sales is better than normal market average. So, we do contribute a considerable chunk (in terms of purchases) in the primary market.”

 

Better deal, but lesser sales

The better deal with big retailers always translates into better discount schemes for the consumers. Admits Mr Agarwal, “Due to higher volume of purchase and on time payment track record, we get better margins and credit period. Hence, we are in a position to offer more competitive prices to the customers. Since our team continually discusses and works in tandem with all national level FMCG players, we can offer newly launched products to customers earlier than kirana stores.”

Still the strategy is not always workable. The reason is the convenience these mom & pop stores provide. “In retail, consumers need convenience. The neighbourhood kirana store, by virtue of being the nearest store to the consumers, will always occupy that position of convenience. Unlike a developed market where consumers need to travel some distance for shopping, Indian consumers in most parts of the country have the kirana stores to service them on all days, throughout the year”, explains Mr Anand from a manufacturers’ perspective.

 

Shifting focus

Considering the demand of this particular product category in the market, manufacturers are bound to bear the brunt when large retail chains take the cost cutting initiatives. The recent closure of 39 “more” stores too reflects on this grim reality.

The FMCG manufacturers are now shifting their focus from modern retail to small retailers. The rural market, where modern retail couldn’t reach out, is now the latest interest of the FMCG manufacturers, who are capitalising on every possible strategies to explore this virgin market. It is seen that though the products sold here are of low ticket sizes, they are sold more frequently in the rural market. According to Mr Anand, “For the FMCG industry in general, rural India would account for about 35 per cent of total turnover. Rural India contributes to almost 50 per cent of Dabur India’s total sales.”

 

Finding new avenues

It is recently observed that the single store retailers are making considerable contribution in FMCG retailing.  With well-defined target community, these retailers become the more easily manageable client for the consumers. They constitute the key accounts. This is the reason why Himalaya Drug Company does most of its sampling and testing activities with these small retailers. Emami has a separate sales and distribution team for handling these accounts. The flexibility of the mode of operation has made these one-store retailers dearer to FMCG manufacturers.

When big retailers could not live up to the big expectations, FMCG manufacturers leave no stone unturned to sell their products. Himani has sold a record number of Fast Relief brand to kanwariyas in Bihar in one month which is equivalent to the total sales of the brand in the remaining 11 months. The company set up massage parlours for the pilgrims. These unusual retail encouragers are dabbawallas in Mumbai, barbers in Meerut and highway dhabas, who, beside their core businesses, have transformed themselves into successfully-run retail zones for low ticket items.

 

Coming to terms

The present retail environment surely indicates the disillusionment of the spell created by big retailers, and the manufacturers are aligning their strategies accordingly. “In August 2007, for instance, Dabur India had rolled out a Key Grocery Relationship Programme that is aimed at building a long-term relationship with key neighbourhood grocery stores across major cities. Under this initiative - christened “Parivaar” - special discounts, margins and rewards are offered to participating outlets. In the bargain, Dabur India gets structured point-of-sale visibility, which can ensure faster offtake at outlets. Apart from buying shelf space, shopkeepers are offered retail solutions and merchandise that help them add value and keep pace with changing times. Under the initiative, Dabur India also invests in merchandising and creative elements in these outlets” reveals Mr Vyas. 

For FMCG companies, there is an obvious shift from glamourous propaganda to the down-to-earth marketing policies making them realise the importance of traditional retailers. The fact that is never going to wane.          

 

Slipping on a retailer’s shoes

Private labels have attracted a lot of attention in the last couple of years, which have coincided with the fragmentation and subsequent consolidation in the retail industry. It is a well established fact that private labels offer superior margins (especially in food retailing), besides greater control on the supply chain.

One wonders why there can’t be a reversal of roles. Why can’t an FMCG company also be a retailer? While there have been some instances like Amul, Nestle (Nescafe), etc., largely this is an unknown phenomena. Let us look a little deeper into why it is so:

- Size & Range: India is yet to see dominant FMCG companies which have the range and the size to satisfy variety of customers across categories. Hindustan Unilever and P&G are the two companies which can be classified as having the necessary wherewithal.

- Lack of cooperation: To be a retailer requires cooperation amongst FMCG companies, which is missing at the moment. In an aggressive environment, most companies would rather focus on themselves instead of thinking as an industry.

- Focus: The biggest parameter of success for an FMCG company is market share. And hence FMCG players consider it prudent to invest in influential Point-of-sale (POS) initiatives instead of going the long mile and reaching out to the final customer.

- Lack of clarity on financial viability of retail: Majority of the retailers are yet to see any sort of operating profits and hence, cash-strapped FMCG companies rightfully consider it a losing venture. No wonder the primary reason for retailers to launch private labels is to increase margins.

- Low penetration of retail: 96 per cent of India is still comfortable with the idea of grocery-shopping at the nearby kirana store. The retail culture or the idea of shopping in self service atmospheres is yet to gain frenzy in India.

It is also pertinent to note certain humble beginnings which have been made in the right direction. In addition to the ones mentioned above, Hindustan Unilever Ltd. (HUL) undertook the Super Value Store (SVS) initiative whereby large stores in residential localities were branded as SVS and provided marketing support by HUL in return for placements and displays in the store. Dabur India also launched its health-and-beauty retail venture called New U focusing at the upper-middle and premium segments.

It remains to be seen how the FMCG companies take up the challenge of venturing into the retailers’ terrain, but for sure there are exciting times ahead for consumers.

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