Hindustan Unilever Ltd (HUL), India’s leading fast-moving consumer goods (FMCG) player, remains unfazed by rising discontent among distributors over structural changes made to its margin policy for them.
Implemented after an initial pilot, the revised template reduces fixed margins but offers higher variable payouts linked to market penetration and sales quality.
HUL Claims New Structure Incentivizes Market Development, Distributors Cry Foul
As per the updated margin structure applicable from January 2024, fixed baseline margins for distributors have been reduced 60-100 basis points from 3.9% to around 3.3%. However, variable performance-linked payout has been raised from 1% to 1.3%.
HUL contends that this realignment incentivizes distributors to drive deeper market penetration and focus on premium products/packs rather than volumes. It allows them to potentially earn higher profits despite lower fixed commissions.
But the All India Consumer Products Distributors Federation (AICPDF) has opposed these moves, arguing that distributor base margin should remain at 5% minimum to ensure business sustainability.
Is HUL’s Aggressive Growth Strategy Putting Immense Pressure on Distribution Chain?
AICPDF alleges that HUL’s relentless focus on bolstering profits is overburdening distributors, forcing them to adopt unfair tactics. experts argue whether its aggressive growth agenda amidst inflationary pressures and consumption slowdown makes unreasonable demands on the distribution chain.
By slashing fixed payouts and introducing stringent sales clauses, HUL risks severely eroding distributor loyalty, reveals sectoral observers. With rural growth also sluggish, its unrealistic expectations could jeopardize distribution infrastructure.
However, HUL CFO Ritesh Tiwari told Indimarket.in that the “future-ready model matches how shoppers buy” in a fast-evolving market. The company maintains its optimism that distributors can potentially earn 10-15% higher returns under the new policy.
Is HUL Undermining Its Social License to Operate With Such Moves?
But leading channel partners argue that FMCG major risks severely undermining its social license to operate by unilaterally enforcing potentially unfavorable terms on distributors who lack bargaining power.
They feel betrayed and exploited after being compelled to promote the company’s interests under increasing duress while their own profitability is attacked.
By repeatedly using its dominant position to arm-twist stakeholders, HUL could lose tremendous grassroot-level goodwill.
Sector watchers predict HUL’s strong-arm tactics could increase regulatory scrutiny around its business ethics and trade margin policy. If widespread dealer resentment escalates into existential threats for neighbourhood kirana ecosystem critical for HUL’s India growth blueprint, political intervention cannot be ruled out.
Mounting allegations around HUL ‘abusing’ market dominance to unilaterally dictate unfavourable conditions may also attract antitrust probe regarding violation of competition laws. Tensions around alleged abuse of bargaining power seem likely to exacerbate.
Is HUL Under-Estimating Risks of Destroying Key Distribution Linkages?
HUL possibly bets that dealers cannot afford to sever ties given the brand heft and scale it provides. But industry veterans caution that recklessly exploiting partners could backfire badly in the long run.
Eroding trust and loyalty in the company’s quest for profits may sow the seeds of future disruptions that benefit rivals, even if business impact is not immediately visible.
While HUL remains India’s most valuable FMCG company, its future prospects are closely intertwined with prosperity of the traditional distribution network it seems to be undervaluing currently.
Rebuilding distributor faith by reverting to more favorable terms could unlock significant productivity benefits and rural reach. Else, HUL risks ceding competitive edge to challenger brands in an intensely dynamic sector.