Why India’s Consumer Firms’ Fortunes Are Tied To This Non-Profit Retailer

Why India’s Consumer Firms’ Fortunes Are Tied To This Non-Profit Retailer

India’s largest network of department stores is mostly immune to economic cycles. For it’s a non-profit that caters to 12 million serving and retired defence personnel and their families. But the state-run Canteen Stores Department couldn’t avoid the disruption of the nationwide sales tax. And that pinched consumer goods makers even more.

The Ministry of Defence-operated retailer has outlets from Leh, Jammu & Kashmir in the north to Nagercoil, Tamil Nadu in the south—4,500 of them. Virtually wherever the country’s armed forces are stationed. There’s one even in Port Blair in the Andaman and Nicobar Islands off the eastern coast—an archipelago that’s closer to Myanmar than India. And it gives companies making everything from whiskey and sauce to washing machines and scooters serious business.

Hindustan Unilever Ltd. earned Rs 1,800 crore revenue from the department stores chain in the year ended March, Air Vice Marshal M Baladitya, chairman of CSD, told BloombergQuint in an interview. That’s about 5 percent of its total sales, and compares with 12 percent that India’s biggest consumer goods maker earns from a host of large and small retail chains put together. In fact, the two top-selling items at the canteen stores are HUL’s Fair & Lovely cream and Surf Excel detergent.

PRODUCTS
1 Fair & Lovely (HUL)
2 Surf Excel (HUL)
3 Lux Soap (HUL)
4 Colgate (Colgate Palmolive India)
5 Vaseline Lotion (HUL)

Not surprising then that fast-moving consumer goods contribute about half of the Rs 18,000 crore sales at the nearly century-old department stores. That brings it neck-and-neck with India’s No. 2 retailer by revenue—Future Retail Ltd.

Canteen stores sold consumer goods worth Rs 8,000 crore in the year through March, followed by white goods and cars worth Rs 2,500-3,000 crore. Then comes liquor at Rs 2,500 crore and other items like suitcases. Demand is high as products are sold at lower tax rates—half the applicable central and state GST. The retailer is also out of the ambit of e-way bills that are now mandatory to transport goods worth Rs 50,000 and more.

YEAR
REVENUE (RS CRORE)
2013-14 12,200
2014-15 13,700
2015-16 15,700
2016-17 17,100
2017-18 18,000

“Post GST, there has been a huge spurt in demand for white goods,” Baladitya said. The spike was such that CSD had to bring dealers of white goods on board to meet the demand. “But growth has been across the board.”

India’s Top Retailers

Yet, sales rose at their slowest in three years at 5.2 percent in the 12 months through March. That’s a second straight year of decline in growth—the first being when Prime Minister Narendra Modi’s cash purge took 86 percent of the currency out of the system, hurting consumption. Revenue grew at 9 percent in the year of note ban compared with 15 percent the previous 12 months.

Baladitya, however, said the November 2016 demonetisation had no impact. Defence canteens swiftly switched to cashless payments that now account for at least 75 percent of transactions.

The economy had barely stabilised when India rolled out its biggest indirect tax overhaul. Transition was disruptive. Like other retailers, the immediate challenge for canteen stores was to exhaust the inventory bought before the GST kicked in July last year as the nationwide tax subsumed a web of levies. India’s manufacturing activity slowed in the run-up to its rollout as dealers and retailers pared stock fearing losses stemming from changes in tax rates and refunds.

At any given time, canteen stores hold 30-45 days of inventory. “We had to expend that before we bought at GST pricing,” Baladitya said. “That was a challenge and most of the companies [supplying to it] felt the heat because we had to stop ordering for some time.”

Consumer goods makers including HUL and Jyothy Laboratories Ltd. had said as much in their conference calls with analysts and investors. Slower CSD sales dragged their revenue down too.

Then the tax rates changed multiple times in the initial six months. “Each time, we had to change the pricing,” Baladitya said. “We couldn’t have one product with dual price in different canteens.”

One aspect that still worries him is refunds. Canteen Stores Department bears the taxes upfront and claims refunds. In the erstwhile value-added tax, more than Rs 1,200 crore was due when he took over. “We made a lot of efforts to recover VAT money due from state governments.”

A similar situation of a much bigger magnitude may evolve if the refund mechanism is not robust, he said. “We are in touch with the Ministry of Finance and the GST Council to try and see how we can streamline the refund mechanism so that it becomes easier for us to get our money back.”

For now, demand is robust as sales picked up after the GST rates stabilised. The just-ended financial year 2017-18 was good, Baladitya said. “All the top FMCG companies that sell products at CSD canteen witnessed strong growth.”

Volumes of most consumer goods makers too picked up in the quarter ended December. Besides HUL, CSD is also a major contributor to the revenue of Reckitt Benckiser India Ltd., Procter & Gamble Hygiene and Healthcare Ltd., Glaxosmithkline Consumer Healthcare Ltd., Nestle India Ltd., Marico Ltd., Bajaj Electricals Ltd., Samsonite South Asia Pvt. and Jyothy Laboratories.

COMPANY
FY18
FY17
1 Hindustan Unilever 1,799 1,463
2 Reckitt Benckiser 367 319
3 P&G India 320 306
4 GlaxosmithKline Consumer Healthcare 300 285
5 Nestle India 270 207

One of the factors for increasing demand over the years was the implementation of the sixth and seventh pay commissions, which improved the purchasing power of armed forces.

People are more discerning in what kind of products they want to buy; there is a definite consciousness as far as brands are concerned; and there is a feeling that they would like to buy the latest brands.

                                                           M Baladitya, Air Vice Marshal & Chairman, CSD

That’s why Baladitya is particular about the products on the shelves. Canteen stores keep about 5,500 stock keeping units. That compares with 25,000-40,000 at a Big Bazaar outlet.

He’s looking to further prune the list. “If we have 50 types of sauce, I don’t see a reason why we should add more, unless that sauce is really something fantastic. Same is the case with soaps and other FMCG products,” he said. “So, we keep the latest brands, but not try to increase the inventory as such.”

The effort is not to make profits or push volumes. Set up in 1921, the Canteen Stores Department provides items of daily use to soldiers, sailors and air warriors. Yet, Baladitya said, the ability of people to spend more on better brands is driving volumes. And it now even sells items like refrigerators, air conditioners and cars. “Because each person has to set up his home.”

Source : https://www.bloombergquint.com/business/2018/04/27/how-indias-largest-retailer-managed-the-gst-disruption

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