FMCG (Fast-Moving Consumer Goods) distributors in India express dissatisfaction and resist Hindustan Unilever’s (HUL) changes to their margin structure. They claim that the FMCG giant is pursuing a “draconian agenda” to boost profits at the distributors’ detriment.
The All India Consumer Products Distributors Federation (AICPDF) has expressed concerns about Hindustan Unilever’s (HUL) recent decision to reduce distributor margins, particularly amid sluggish sales growth in challenging market conditions, as reported by PTI.
This move by HUL has sparked apprehension within the federation, leading to discussions about potential courses of action. The AICPDF is even considering measures such as suspending purchases, a strategy previously employed to address analogous concerns within the industry.
“AICPDF strongly opposes this move, labelling it as a double standard approach, seemingly driven by a draconian agenda to boost company profitability,” the association said.
As per a news report, Hindustan Unilever (HUL), the proprietor of brands such as Lux, Lifebuoy, Surf Excel, Rin, Pond’s, and Dove, has decreased the fixed margin by 60 basis points. Concurrently, the company has elevated the variable margins for its distributors, marking an increase of 100 to 130 basis points.
“This decision, coupled with the offer of increased variable margins, suggests a shift in management strategy that may jeopardize the entire distribution network. Distributors fear being pressurized and blackmailed into compromising their rightful margins,” said AICPDF, which claims to represent over 4 lakh distributors and stockists pan India.
FMCG companies commonly provide distributors with two types of incentives: fixed margins and variable margins. Fixed margins typically fall within the range of 450 to 600 basis points and remain stable. In contrast, variable margins are contingent on factors such as performance and can vary accordingly. These incentives constitute a substantial aspect of how FMCG companies bolster their distributor networks.
“Drawing parallels with past instances, notably Mondelez, AICPDF highlights how similar structures and complex parameters can make it challenging for distributors to achieve the promised variable margins,” said AICPDF.
It also raised doubts about the company’s motives, “calling on them to reconsider and uphold a 5 percent base margin while providing incentives separately.”
Hindustan Unilever adjusts royalty fee:
In January 2023, HUL announced that the royalty fee it pays to its parent company, Unilever Plc, will increase by 80 basis points. This increment will be implemented gradually over the course of three years.
This marked the first instance in a decade where the parent company opted to increase the royalty fee. The preceding arrangement, encompassing technology, trademark licenses, and central services, was forged with the parent company in January 2013 and was slated for a 10-year duration.
HUL recorded a 4% increase in its standalone net profit, reaching INR 2,717 crore for the quarter ending September 2023, compared to INR 2,616 crore in the corresponding quarter of the previous year.
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In the reported period, the company saw a 4% year-on-year (YoY) rise in sales, reaching INR 15,027 crore. The company’s profit surpassed expectations. Nonetheless, its revenue fell slightly below the anticipated figures.
In the September quarter, the reported underlying volume growth was 2%, falling below analysts’ projections of 3%. However, the EBITDA for the quarter reached INR 3,694 crore, maintaining margins at 24.18%, exceeding the estimated figures of INR 3,609 crore and 23.5%, respectively.