Retail biggies’ surplus takes escape route to wholesalers

YOU have heard of yen carry trade. Now showing the retail ‘cash-n-carry’ trade. Mukeshbhai Chhadwa, a wholesaler who also runs a retail shop in Masjid, was witness to a curious sight a couple of months ago. Tempos carrying extra cases of ketchup, condensed milk, baby foods and other such products — the goods made by companies like HLL, Dabur, Nestle and Heinz — were doing the rounds of the wholesale market, selling at a discount even to the wholesale prices. Typically, wholesaler gets the best prices from the manufacturers. Soon the penny dropped. These goods were essentially excess inventory from companies in the modern organised retail. Says Mr Chhadwa, “I didn’t want to buy these products as my sales and demand from the customer are fixed. Besides, in areas like Masjid, it’s difficult to sell the kinds of items like condensed milk.” Unknown to some companies and — if some wholesalers are to be believed — with the tacit understanding of other companies, a parallel, informal cashand-carry market is taking shape. Both organised retailers and the stand-alone formats in Mumbai have been regularly moving stock back into the retail market. According to sources in the wholesale market, truckloads of goods come at night to Crawford Market and Masjid, but sometimes even individuals come in from outside Mumbai with two-three cases by train so they can avoid octroi. This happens predominantly with FMCG categories like foods and personal care. The scale of these operations isn’t small. Says a wholesaler who doesn’t want to be identified, “Every month we’ve bought goods worth Rs 30-40 lakh from the people who dump it back into the channel. There must be at least 50 wholesalers and semi-wholesalers doing the same.” This implies that goods worth Rs 15-20 crore are re-routed every month. Says former CavinKare COO KS Ramesh, “Dumping stocks back into the channel is a regular method to get rid of the excess inventory. But it’s mainly companies that don’t have a strong management direction that would let this continue.” Heinz India CEO Nilesh Patel said that he wasn’t aware of this but he was insistent that it wasn’t the company’s doing. Says Mr Patel, “This practice isn’t something that the company encourages. At the end of the day, both the small retailers and the consumers are getting hurt, and the brand suffers as well.” A reply from HLL to ET’s queries said, “There are adequate controls on our trade schemes and plans. The inference drawn is incorrect and speculative.” It’s not difficult to see where this comes from. Many companies offer trade discounts to both organised retailers as well as stand-alone formats. Typically, the modern trade including retail chains like Big Bazaar, Foodworld as well as the stand-alone self-service stores get a trade discount of up to 4% on FMCG on an average. For example, a jam costing Rs 100 to a kirana store will cost the big chains Rs 96 or less. This is where the arbitrage opportunity shows up. The big retailer sells his ‘unsold’ stock to the wholesaler at Rs 97. The wholesaler sells it to the kirana at Rs 97.5. The kirana guys, who would have otherwise had to buy the stock at Rs 100 and sell it to you and me at Rs 102 and make a profit of Rs 2, is now able to make Rs 4.5 per bottle of jam. This is great for everyone. The big retailer clears his unsold stock and keeps Rs 1 per bottle. The wholesaler makes 50 paise risk-free profit and the kirana person makes an additional Rs 3.5, which is also risk-free. Sometimes, discounts increase substantially if there are promotional offers running in retail stores. This is when huge stocks are then bought and dumped into the wholesale and semi-wholesale market in Masjid and Crawford Market in Mumbai and the price differential is huge between MRP and the actual price sold. For instance, according to a wholesaler, a hypermarket was offering Heinz Ketchup for Rs 49 for 1 kg bottle, whereas the MRP was Rs 85. The hypermarket shipped cases over to Masjid and sold them at exactly Rs 49 per bottle. Says a wholesaler who doesn’t wish to be identified, “I bought 150 cases of the ketchup. Local retailers bought these for Rs 52 per bottle, but they wouldn’t have got it for less than Rs 72 otherwise.” Another cause for this is the trade push involved, specially for stand-alone modern format stores. Companies often stuff the channel to show higher product sales. A Mumbai-based stand-alone retailer says, “Company salesmen often tell us to buy 20 cases of a certain product when we can at best sell only 10. I have to put the remaining 10 back into the retail channel, and retailers buy from me.” Eventually, encouraging such arbitrage will show up in the company’s bottomline. While sales volumes might continue to rise, the net revenues would actually be lower, since very few of the goods would sell at MRP. In fact, retailers do attest to the fact that a company, if diligent, could easily detect faults in sales volumes, specially if small retailers do not require fresh stock. But the stand-alone retailer says, “No company salesperson has even asked to see the monthly sales figures from my store.” There have been stray cases of companies actually transferring salespeople after they’ve stuffed the channel, but the retailers claim that these cases are few and far between, and sales targets are still most important, no matter how they’re met.

Courtesy: EconomicTimes
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