FMCG cos accuse big retailers of pushing own labels

The tension between modern retailers and consumer product makers has intensified, with the latter flatly turning down a renewed
demand for higher margins from the likes of Future Group, Reliance Retail and Aditya Birla Group’s More.

With a spate of contracts up for renewal in January, about 10 fast moving consumer goods (FMCG) companies have ruled out higher margins, accusing big retailers of pushing their own labels at the expense of their established brands and not meeting the sales and expansion targets as per the contracts.

“Modern retail today is not offering us the kind of throughput to demand such margins. Also it doesn’t help us when retailers promote their own labels and competing brands at our expense,” said Hoshedar K Press of Godrej Consumer Products (GCPL).

FMCG sales from modern formats, which recorded a growth of over 30% in the past two to three years, had dropped early this year mainly due to closure of several retail outlets as part of a strategy correction by retailers, with consumer demand in urban areas dropping dramatically as the world slipped into its worst economic crisis since the 1930s.

“The scale-up (expansion of stores) in terms of outlets has not happened, as was told to us in the initial contracts. Also, the contribution of modern trade in terms of sales targets remains far below projections,” said an official at a leading Delhi-based FMCG firm, requesting not to be named.

Things have improved since and retailers such as Future Group, Reliance Retail and More have started expanding their operations on the back of improved consumer sentiment in urban centres that is helping high-end, high-margin products to stage a comeback.

And they have renewed their demand for higher margins from FMCG companies. When contacted, Kishore Biyani, CEO of Future Group, said, “Margins will always be an issue. Both sides have to mutually look at ways of growing profitability.”

Traditionally, modern retailers roughly operate on margins varying from 10-15% while the traditional trade operates at around 10-12%, depending on the product category. The face-off is expected to make the two industries to continue working against one other’s interest.

While retailers are giving higher visibility to private labels and smaller brands that offer higher margins, manufacturers are helping traditional grocers (kiranas) to use the best practices of modern trade such as category layout and standardised units.

Retailers’ own brands are 10-20% cheaper than established brands and offer higher profit margins of over 40% than other brands. Aditya Birla Retail’s private labels include Feasters brand of biscuits, fruit juices, noodles and pasta; Enriche shampoo, Kitchen’s Promise spices and Fresh-o-dent toothbrushes and toothpaste. Spencer’s sells private labels under the Spencer’s Smart Choice while Future Group’s private FMCG brands include Fresh n Pure, Cleanmate, Tasty Treat, Caremate, Sach.

Also, smaller companies such as Garden Foods, Capital Foods, Cremica, Fena, Ghadi among others in the FMCG space are making rapid strides and giving the bigger players a run for their money. Manufacturers, in turn, are taking kiranas under their wing and helping them offer better service, pricing and variety to take on competition from modern formats.

Grocers are giving discounts on branded products like detergents, shampoos, soaps,oil, atta and other grocery products from 5-20% by collectively sourcing or aligning themselves with corporates like Hindustan Unilever, P&G and others to be their ‘preferred suppliers’, who are adopting these stores and working with them to manage inventory better.