The apex association of distributors warned on Friday about halting purchase of Hindustan Unilever Ltd.'s products after the FMCG major decided to cut margins amid low demand.
The Surf Excel maker has cut fixed margin from 3.9% to 3.3% and increased the variable one, which is based on performance, from 0.7% to 2% for its general trade distributors, according to documents seen by NDTV Profit.
For non-general trade distributors, the performance-based margin is hiked from 0.4% to 1.7%. The variable payout is divided across three main categories—sales, demand capture and demand fulfilment.
India's largest consumer goods maker has rolled out the new margin structure in 100 towns so far and plans to implement it nationwide from April, according to distributors.
HUL's decision comes at a time when the fast-moving consumer goods industry is struggling with declining volume growth. The move is seen as part of its strategy to increase general trade distribution, especially in rural areas, and optimise costs in this challenging phase.
"The decision to cut margins, coupled with the offer of increased variable margins, suggests a shift in management strategy that may jeopardise the entire distribution network," Dhairyashil Patil, president of the All India Consumer Products Distributors Federation, told NDTV Profit.
Patil said the approach was driven by a "draconian" agenda to boost profitability.
HUL made the move "to create a situation pressuring distributors for extra sales and stock dumping", said AICPDF, adding that the practice raises concerns about fair business practices and sustainability in distributorship.
The margins were squeezed, and it is a win-loss proposition, where the general trade distributors fear about being forced to compromise their rightful share, according to the AICPDF. It urged HUL to reconsider and maintain a 5% base margin while offering incentives separately.
The AICPDF will try to negotiate, but if HUL continues to be unreasonable, then the association will be considering actions like halting purchases, Patil said.
Drawing parallels with past instances, the AICPDF highlighted how similar structures and complex parameters could make it challenging for distributors to achieve the promised variable margins. In 2021, Metro Cash & Carry India Pvt. stopped doing business with Mondelez International after the Cadbury maker asked the wholesaler to procure goods at lower margins.
Shares of HUL were trading 0.99% higher at Rs 2,660 apiece on the NSE compared to a 0.26% decline in the benchmark Nifty 50 at 2 p.m.
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