HUL Defends Margin Structure Amid Boycott Calls From Distributor Lobby

Hindustan Unilever Ltd. has defended its new margin structure, insisting that distributors can potentially earn more money, irrespective of sales.

The country's largest consumer goods company is facing flak for rolling out a revised margin structure across the country after testing the model in about 110 cities. The new model involves a 60–100 basis point reduction in fixed margin for distributors from 3.9% to 3.3%, while the variable payout—based on performance—has been upped by 1% to 1.3%.

“The basic margin for distributors should be a minimum of 5%," said Dhairyashil Patil, president of the All India Consumer Products Distributors Federation. The association represents over 2,000 HUL distributors.

HUL made the move "to create a situation pressuring distributors for extra sales and stock dumping," said AICPDF. It raises concerns about fair business practices and sustainability in distributorships, the association said.

The Surf Excel maker, however, called the new structure a "future-fit distribution model." It argued that the new model is in line with the changing consumer habits that necessitate general trade to redefine service levels by offering a wider assortment, high line-fill with quicker delivery, and availability of credit.

"We believe the creation of a proper incentive structure for distributors will ensure that they go the extra mile," an HUL spokesperson said in an emailed statement.

The new model gives its distributors an opportunity to earn healthy returns and, hence, is a win-win, the spokesperson said.

With the ‘pay for performance’ principle, HUL distributors can potentially make 70 basis points more. The criteria for this additional variable incentive are chosen to prioritise the quality of service to the stores, such as retail servicing, range availability of market development packs and next-day delivery, according to the company.

The fixed margin, which is given on invoice, has been reduced by up to 60 basis points to ensure fair play between the distributors who focus only on wholesale (low-cost service) and those who strive for higher-cost retail service with a wider range of availability. "To compensate for this reduction in the fixed margin, the variable margin has been increased by up to 130 bps," the company said.

HUL said the new margin structure was tested for a year.

"We observed significant improvement in service, including next-day delivery, range availability and services to small Kirana stores, leading to better output. Based on the result, the model has been scaled up in big cities."

FMCG companies typically offer distributors a fixed margin of 4–6%.

The AICPDF has written to HUL, seeking restoration of old margin structures. They have warned of boycotting its products in Maharashtra, starting with Taj Mahal Tea. If demands are not heard, the association may consider extending the boycott to brands such as Kissan foods and Rin detergent.

The AICPDF on Thursday shared a statement from the Maharashtra Consumer Products Distributors Federation, in which the latter said it plans to keep the Taj Mahal Tea brand "inactive" till Jan. 25, which "should be kept frozen so that it does not get booked and billed." "If the company does not pay attention to our legitimate demand, then Kissan brand, along with Taj Mahal tea, will be inactive from Jan. 25 to Feb. 10," the MSCPDF said.

“We have a one-to-one relationship with our distributors. Our progressive and distributor-inclusive model is designed to better serve the needs of neighbourhood stores," the HUL spokesperson said.

This isn't the first instance where the AICPDF is at loggerheads with HUL over margin parity. Two years ago, the distributors' umbrella body stopped supplying HUL products to protest against differential pricing offered to new-age players like Jiomart and business-to-business companies like Udaan. The federation, however, called off the boycott later on.