FMCG firms cut middlemen in run-up to GST

Demonetization has not just infused digital spending habits among people, but it's also changing the way companies do business.

Fast moving consumer goods (FMCG) companies such as Emami, Dabur and Bajaj Corp that rely on layers of middlemen are sprucing up direct networks to reach retailers.

The note ban which affected volumes growth led the companies to restructure distribution.

They say that decision to reduce dependence on the wholesale network while increasing focus on direct distribution will help mitigate similar challenges post implementation of the goods and services tax (GST) regime later this year.

Mohan Goenka, director, Emami Ltd, said the off-take of some its brands in the domestic business was impacted due to liquidity crunch and sales channel deception. "In face of this, we have initiated a massive distribution restructuring to reduce our dependence on the wholesale network and go for direct retailing," he said on a recent earnings call.

The Emami management has initiated 'Project RACE' and 'Project Dhanush' to enhance its urban and rural outlet coverage. "In rural areas, we have initiated van operations in nearly 1,500 routes covering more than 6,000 towns with population below 5,000. In urban areas, we have undertaken a study with Nielsen to identify relevant outlets in and around top 30 towns in India. In line with all these efforts, we increased our direct reach by 90,000 outlets to reach over 7.3 lakh in fiscal 2017. Our target to reach over 8.3 lakh outlets will be met by end of fiscal 2018," said Goenka.

Wholesale currently contributes 50% to 52% to Emami's overall sales, which has come down from 55%. "By next year, once we ramp up the entire distribution, it should be in the range of about 40% to 42%. That is the target. We have to wait and watch how GST pans out because we are also expecting that post-GST, the retail contribution would anyway go up," said Goenka.

Dabur India also plans to significantly increase its direct reach in this fiscal. Sunil Duggal, chief executive officer, said during an earnings call, "We plan to increase it (direct reach) by at least 20%."

Elaborating further, Lalit Malik, chief financial officer, Dabur, said, increasing the direct distribution reach will be largely in the urban centres. "We can do it in rural through sub-stockists, but there is a limitation, ultimately, nobody can really replace the wholesale channel," said Malik on the earnings call.

The wholesale channel for Dabur is currently around 35%. "We can bring it down to 30% or maybe 25%. But the last mile reach can only be done through some form of redistribution through wholesale. So I don't think wholesale is going to just evaporate, it's too entrenched, it is too much part of the landscape to disappear," said Malik.

The after-effects of note ban and government's decision to implement the GST regime has put a lot of strain on the primary sales volume of companies like Bajaj Corp. This, according to company management, is mainly due to de-stocking that continues in the wholesale segments as well as the rural markets and is expected to continue into the first quarter of the current fiscal.

"The wholesale sector is undergoing a major change in the way they do business. With the sucking out of cash during demonetization and the upcoming implementation of GST, the cost advantage of wholesale dealers is evaporating. On the other hand, the rural sector should see a reversal provided monsoon is good this year. With the strain on volumes and infrastructure, especially in the wholesale sector, the focus is back on direct distribution," Sumit Malhotra, managing director, Bajaj Corp, said in an earnings call.

The owner of Bajaj Almond Drops hair oil and Nomarks brands is also working on improving the efficiency of its sales force to be able to improve its direct reach. "Regarding focus on wholesale, currently around 47% of sales comes from wholesale. My guesstimate is that the reorganisation will see it drop to sub-40% in the next 12 to 18 months," said Malhotra.

...& ANALYSIS

• The note ban which affected volumes growth led the companies to restructure distribution
   
• The Emami management has initiated ‘Project RACE’ and ‘Project Dhanush’ to enhance outlet coverage