Slowdown Is Driving Consumer Goods Distributors Out Of Business

Softening demand and a changing buying pattern have left the central artery of India’s consumer retail chain clogged. Distributors, the conduit between manufacturers and millions of mom-and-pop outlets, have seen inventory bloat and working capital shrink. The distress is causing shutdowns.

Volumes have fallen because of the slowdown and companies are increasingly supplying to modern stores directly, hurting business, Dhairyashil Patil, president of the All India Consumer Products Distributors Federation told BloombergQuint. Around 5,000 businesses, he said, left the trade in the last six months.

Bulk suppliers are the mainstay of the approximately Rs 4 lakh-crore FMCG industry as, according to Nielsen India estimates, they contribute 90 percent to the factory-gate sales. While shutdowns are minuscule considering the distributors’ lobby has 4 lakh members, they underscore how the slump has compounded troubles when the traditional supply chain faces disruption.

Smaller retailers in cities are ditching distributors to buy directly from hypermarkets, supermarkets and cash-and-carry outlets that offer deep discounts. This shift in demand for distributors comes when sales are declining as Indians have cut spending, pulling the nation’s GDP growth to its lowest in six years.

Fast-moving consumer goods industry’s volumes rose 3.7 percent in July, slower than the worst growth in seven quarters seen in the three months ended June, according to data shared by Dabur India. That coincides with a liquidity crunch as non-bank lenders turned cautious after the surprise defaults by IL&FS group a year ago, making borrowing costlier. That worsened the slump.

To counter the slowdown, FMCG companies are making a desperate bid to meet targets by putting pressure on distributors to pick up more inventory, said Patil. The bulk suppliers are over-stocked and their finances are stretched, pushing them out of business, he said.

BloombergQuint’s August survey had revealed that distributors now carry stock for 20-40 days, compared with 15 days till about four months ago and 10-12 days a year earlier.

According to a Nagpur distributor who shut shop, inventory piled up as demand weakened. But companies keep increasing targets, making it difficult to push the stock, he said on the condition of anonymity out of backlash concerns. It’s no longer profitable to run the business, he said, adding even his son doesn’t want to take it forward even if the situation were to improve.

Hindustan Unilever Ltd., India’s largest consumer goods maker, decline to comment on queries regarding supply chain, inventory and sales volumes. Emami Ltd. said it hasn’t seen any dealer attrition. Marico Ltd. and Dabur India Ltd. have yet to respond.

A senior executive from an FMCG company, speaking on the condition of anonymity, admitted that manufacturers have been pushing stock down the chain to boost sales. Moreover, they are also slowly switching to directly supplying to hypermarkets, supermarkets and through cash and carry chains, which has hurt the distribution channel, he said.

In Gujarat, over 600 distributors have exited the business in the last few months as they lost business to modern retail outlets amid softening demand, said Arun Parikh, the state head for All India Federation of Distributors Association.

Ganeshram, a Tamil Nadu-based bulk supplier, said they take working capital loans by mortgaging personal properties and lack of demand has turned businesses unviable.

In Telangana, 125 suppliers have quit, a large distributor from the state said seeking anonymity. Companies keep increasing targets every year by 15-20 percent, putting enormous pressure, he said. As inventory piles up, profits suffer because retailers pay only after selling the existing stock, he said.

Another distributor from Tamil Nadu said due to weak demand, they have started extending credit for 25-30 days to retailers compared with 7-15 days earlier, worsening their working capital situation.

Dhanraj Bhagat, consumer and retail partner at consultancy Grant Thornton India, however, expects this to be short-lived. “This is an immediate reaction to the slowdown in the economy and the system will recover as soon as demand starts to witness a pick-up,” he said. Hypermarkets, supermarkets and cash-and-carry stores exist only in the metros, tier 1 and 2 cities, he said. “Demand for consumer goods comes from across the country and the distribution channel will continue to have a significant relevance.”