FMCG Distributors Stuck With Excess Stock On Muted Diwali Demand

The supply chain for fast-moving consumer goods is choked as retailers and distributors struggle to sell, and have extra stuff piled up in their stores and warehouses amid an unusual weakness in demand.

Contrary to expectations, this year's festive season sales were rather bleak, according to Dhairyashil Patil, president of All India Consumer Products Distributors' Federation.

"Diwali witnessed subdued enthusiasm, and the post-Diwali sales have been historically low, especially in categories such as biscuits, chocolates and confectionery," he said. A mountain of unsold gift packs from the festive period has also been piling up at stores. "Gift packs have not sold well this year and we have not been able to clear stocks till now," Patil said.

Within the non-food segment, beauty and cosmetic products are experiencing the worst downturn, followed closely by soaps and detergents, despite most companies rolling back price hikes, he said.

An inventory glut is turning out to be an expensive problem. "The overflow of excess stock is necessitating heavy investments and managing these funds is becoming increasingly difficult, further exacerbated by the mounting pressure from companies for primary sales," according to Patil.

Having to deal with excess stock—a problem that also raises costs—the retailers have extended distributors' credit days by up to 50 days, he said.

"The average inventory holding days has gone up to 25-30 days, compared to 7-15 days," according to AICPDF, which represents approximately four lakh distributors and stockists across the country.

Additionally, the average credit period to retailers for fast-moving stock-keeping units is now at 25–26 days. Retailers generally clear distributors' payments in about 7-8 days.

Higher payback days is also resulting in credit squeeze, forcing retailers to tell some of their suppliers to stop sending them new products. This rare case highlights the magnitude of the excess merchandise at the mom-and-pop stores as retailers huff and puff to match supply with demand.

Consumer goods companies, too, remain wary of the situation. But, subdued demand isn't the only problem, they said. The general trade is impacted because of the shift towards modern and e-commerce channels.

"There is negative revenue growth in general trade distribution system," Saugata Gupta, managing director of Marico Ltd., told analysts after the second quarter earnings. "The costs have gone up. Now, one of the areas which is creating an impact is the credit quantum in the market. And if credit is squeezed, obviously, retailers will stock less."

Gupta said the slow uptick in volume growth is not just because of muted rural consumption, but also due to steady erosion of general trade's contribution to overall sales. "If you look at all the new categories we have launched, we have a disproportionately high market share in modern trade and e-commerce where we have done a great job. But we haven't in GT."

Because of the weak return-on-investment situation in the general trade channel at top urban towns, there is STR loss, Gupta said. STR or sell-through rate is a metric that retailers use to predict demand for a product, purchase the right amount from suppliers, and maximise profit.

Marico expects general distributors to remain the backbone of the country's retail trade, at least over the next two decades. "It will continue to be important in India and it will be an ‘and’ growth and not an ‘or’ growth," said Gupta, adding that "it's important that general trade grows".

Marico said companies need to reinvest in general trade to rekindle growth in the sector. At Marico, "we will systematically address this general trade issue over the next few quarters", he said. He expects deflation tapering off in the second half of the current fiscal will also help. Marico will launch its digital brands like True Elements and Plix into general trade.

To revive sales in general trade, Dabur India Ltd. also plans to roll out more affordable packs in kirana stores, apart from expanding direct reach to 1.5 million outlets by the end of this fiscal from 1.4 million outlets at present.

Earlier, however, the distributors had raised concerns over the low-priced pack of biscuit, noodles, chips, soap and shampoo that were rolled out in the name of "bridge packs" to tackle competition from regional players. This strategy, they had said, was not working and was causing supply chain disruptions amid limited storage spaces across small mom-and-pop stores.

Other than the quarterly profit and revenue growth, the street will closely watch another number, too — inventory levels — in the upcoming earnings season. Inventory is typically just a factor, but investors may find this metric making more sense than the others in shaping companies' growth.