The Unresolved Conflict: Modern Retail vs. Consumer Goods Companies

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Published by February 22, 2016

It’s war! Multi-brand retailers and companies supplying their brands to the retailers are always in conflict.
This tug of war over ‘margins’ between consumer goods companies and the retailers is a ubiquitous phenomenon world over and has been experienced by generations of business people. In some markets, retailers have an upper hand and in others like India, consumer goods companies have the upper hand. But the battle lines always stay drawn!

In India, where the retail sector is largely unorganized and fragmented, retailers are mere Davids to the Goliaths that are the large consumer goods companies. Since these consumer goods companies sell to hundred odd distributers and they in turn cater to multitude of retailers, there is no single entity in this chain with the buying clout to negotiate for more favorable terms. Even the largest organized food and grocery retailers in the country typically have only a 14%1 gross margin while internationally many retailers command a far higher figure. The friction between the duo over margins and shelf space hit the headlines when Future Group, the country’s largest retailer pulled Kellogg’s breakfast cereals off the shelves of around 150 Big Bazaar2 outlets. But such instances are very rare and moreover with modern retailers contributing just 6-7% to the total sales, most consumer goods companies in the country aren’t overly worried because their overall margins don’t get impacted drastically.

But the terms of trade are slowly tilting in favor of modern retail. Steadily improving scale is enabling them to seek higher payouts from suppliers. While not all consumer product companies have increased margins, retailers say that margins from some FMCG companies have gone up to 17-19 per cent in some categories (breakfast cereals, shaving systems, etc.) where modern trade accounts for 30-40 per cent of sales for that brand3. Obviously with rise in volumes sold through the channel, modern retailers will increasingly exercise their influence. In time, India too is expected to move to a scenario similar to that experienced in more advanced nations. In these countries where organized retail is more mature and consolidated, it’s the retailers that are the giants and have the upper hand in the relationship over their many suppliers.

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