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`Organised retail can put FMCG cos' sales margins under pressure'

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Mr K.S. Ramesh, CEO and Executive Director of CavinKare, delivering the BL Club lecture at the ICFAI Business School.
Mr K.S. Ramesh, CEO and Executive Director of CavinKare, delivering the BL Club lecture at the ICFAI Business School.

Our Bureau

Chennai, Sept. 8

THE emergence of modern trade (or organised retail) is currently the biggest challenge facing FMCG manufacturers, who could see increasing pressure on sales margins as a result.

This was stated by the CEO and Executive Director of FMCG company, CavinKare Pvt Ltd, Mr K.S. Ramesh, who, however, said the growth in the contribution of modern trade to total FMCG sales here has not been as rapid as in other developing countries.

Citing as an example the situation in the US where retailer Wal-Mart is much bigger than any of the FMCG companies, he said such a scale would give modern trade the power to negotiate. "Today, I give 13 per cent (margin). Modern trade won't settle for anything less than 20 per cent," he said, addressing students of the ICFAI Business School as part of a BL Club lecture.

The nearly Rs 52,000-crore Indian FMCG market is still predominantly driven by the traditional retail format, which accounts for 97 per cent of the category sales. Modern trade has made some strides; it accounted for 6 per cent of the FMCG sales in urban India in 2004, compared with 2 per cent in 2003.

While the emergence of modern trade could hurt margins, dealing with the traditional format is not cost-effective either. Mr Ramesh said the cost of coverage is increasing. Super-stockists, who cater to smaller towns, are offered higher margins than normal stockists. Also, the "increasing fragmentation of outlets is driving the need for cost-effective ways to get maximum reach."

He said one such urban-centric model was developed by P&G, which limited its presence to cities and towns where it is profitable to operate. The model involves combining the C&F and stockist functions. However such a model will not help CavinKare, as about 85 per cent of its business are from packs that are equal to or less than Rs 5.

On emerging trends, Mr Ramesh said, "Companies will move from a geographic segmentation to customer-type segmentation in terms of selling efforts. This recognises the need for specific skill sets to handle modern trade and the different types of outlets." In addition, the traditional stockist of today will give way to a "professional distributor," there will be a stronger foray into the rural markets, and the sales function will emerge as a strategic business driver.

(This article was published in the Business Line print edition dated September 9, 2005)
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