Why Are FMCG Distributors in India Threatening to Halt Supplies from 2022?

FMCG distributors in India are threatening to halt supplies starting 2022 as they want price parity and equal treatment from companies. The agitation has been triggered by the preferential treatment given to few retail channels like JioMart, ElasticRun, Udaan etc. resulting in huge losses to traditional distributors to the extent of pushing some to bankruptcy.

The All India Consumer Products Distributors Federation (AICPDF), which is the apex body of FMCG distributors and dealers in India with around 400,000 members, has written an open letter to over two dozen FMCG companies like Hindustan Unilever, Procter & Gamble, and Dabur – highlighting grievances of traditional offline distributors. In the letter, the federation has put forth a set of demands to ensure a level playing field to all traditional distributors at par with JioMart and other B2B companies, failing which, they have threatened “non-cooperation” in product supply from January 1, 2022.

The main grievance is against the price disparity between traditional distributors and other organized B2B distribution firms, both online and offline, which have entered the sector in the last few years.

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According to AICPDF, higher margins (or lower pricing of products) offered by FMCG companies to players like Metro Cash and Carry, JioMart, Walmart, and Booker, and to e-commerce B2B companies like ElasticRun and Udaan, are “destroying the traditional distribution networks in India”.

Why are FMCG distributors aggrieved?

Citing research done by Reuters in its article “Princes to paupers: India’s salesmen face ruin as Ambani targets mom-and-pop stores”, the AICPDF highlight the unethical and predatory pricing offered by JioMart to the retailers, which is much lesser than the landing price of distributors. 

• AICPDF is concerned that the monopolization of distribution channels favors few crony capitalists at the cost of traditional distributors.
• The existing distribution channels, established at the request of large FMCG companies at huge financial and infrastructural costs, stand the risk of being disrupted, rendering waste such huge investments.
• AICPDF also claims that many of its members are facing bankruptcy.

The federation is thus demanding equal treatment for all those engaged in the distribution of FMCG goods as well as price parity to ensure continued sustenance of traditional distributors in the supply ecosystem.

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According to Dhairyashil Patil (President, AICPDF), “Deep discounts offered by other players create a monopoly and destroy the traditional trade, which still handles the crucial supply chain for all FMCG companies.” He further added that while the federation has no objections to the benefits of low prices offered to the consumers, it is primarily against the unethical “cash burn” by offering predatory pricing to retailers at wholesale trade level.

The AICPDF claims that preferential treatment is given to certain channels, based on order volume. In turn, while traditional distributors offer retailers margins in the range of 8-12 percent,  big-box B2B stores and online distributors are able to offer up to 15-20 percent margin to the giant retailers.

What are the main demands raised by distributors?

In the open letter, the AICPDF have released a “Charter of Demands”, which it requires to be met by the targeted FMCG companies. Failing to meet this could result in the federation refusing to cooperate in the supply of goods, starting 2022.

The AICPDF demands are as follows:

• Treating all consumers as one single entity – no distinction should be made between super stockiest, rural stockiest, JioMart, Walmart, Metro Cash and Carry, Booker, and Udaan etc. There should be similar terms of trade for all, with no preferential treatment to any enterprise, irrespective of the volume.
• There should be “one” pricing and schemes at pan India level to eliminate cross border flow of goods owing to differential pricing and schemes.
• All authorized dealers should receive products at the same prices as JioMart/B2B companies.
• Margins should be reworked, either taking into account incremental costs or should be linked to the Wholesale Price Inflation (WPI) index.
• For taking back stocks from the market on account of damage, expiry, launch failure etc., margin equivalent to base margin set by the distributors must be given.
• Fresh agreements should be worked out, for which a draft committee with representatives from all stakeholders must be formed.
• A regulatory body with representatives from all stakeholders in each state must be formed.
• Every company should appoint an independent ombudsman to look into the complaints from the entire trade channel consisting of companies, distributors, and dealers.

What actions are distributors threatening FMCG companies with?

The distributors have unanimously decided to call “non-cooperation” movement against all the FMCG companies:

• If the companies are not able to provide a level playing field to all distributors, they shall drop the products sold by JioMart/B2B companies from their portfolio.
• The distributors will not launch any new products of the company unless they get an undertaking from the company that the said products will not be available to JioMart/B2B companies in the future.
• The distributors will not distribute the products as primary target if JioMart and other B2B companies are selling the same products in the area.
• The distributors have refused to pick up expiry/damaged/replacement products from the retailers as they can’t differentiate between the products sold to the retailers by them and JioMart and other B2B companies.

How are FMCG companies responding?

The FMCG companies acknowledge that traditional distribution channels serve as the largest source of revenue for them and are willing to negotiate the terms of trade to build a harmonious relationship. However, they maintain that margins are given according to cost of operations and sales volumes across channels will always vary.

The bigger picture

E-commerce giant JioMart, which is a joint venture between Reliance Retail and Jio Platforms, is disrupting existing retail distribution networks across India. The Reliance model appears to be also challenging e-commerce giants like Amazon and Walmart and has sought to cannibalize offline distributors; the latter are protesting their prospects of bankruptcy, poverty, and unemployment.

The mom and pop/kirana stores across India account for four-fifths of a US$900 billion retail market and they have traditionally depended on offline distributors for supply of goods. At present, India has around 400,000 traditional distributors, who earn a margin of three-five percent on product prices and mostly take orders physically once a week, making deliveries to retailers within a few days.

However, JioMart has disrupted this channel by not only offering predatory pricing to the retailers, but also assuring delivery within 24 hours. Reliance further offers training on ordering, credit facilities, and free product samples for affiliated kiranas’ customers. Consequently, majority of these kirana shops are now turning to JioMart to stock up on domestic and foreign brands.

According to Reuters, as more kirana shop owners partner with JioMart, many distributors have substantially reduced their workforce and vehicle fleet, posing a threat to the employment of thousands of salesmen.

Industry stakeholders have flagged the Reliance model as predatory, which poses an imminent risk of monopolization of distribution channels across India – explaining the state of staunch opposition.

Foreign investors should note that these standoffs present new and likely intermediate supply chain risks, particularly in India’s dynamic consumer retail sector. It must be noted that traditional distribution channels account for 85 percent of India’s overall business in the FMCG industry and a prolonged tussle could severely dent sales. Moreover, added unemployment will also further cripple the overall demand.

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