It is widely believed that the margins of large consumer companies will be hurt due with local kirana stores going digital. However, this narrative might not hold true, according to ICICI Securities.

The brokerage house is of the view that consolidation of general trade channels (wholesale), modern trade (MT) and e-commerce is unlikely to impact consumer companies' operating margins.

“There is a narrative that grocers now partnering with Kirana stores will consolidate the general trade and serve a very large consumer base. The expectation is that this will provide higher bargaining power over consumer companies and enable grocers to negotiate better margins from these consumer companies,” ICICI Securities noted.

Moreover, the collaboration actually results in a win-win situation. The brokerage noted an example of possible conflict between channel partner (Wal-Mart) and consumer company Procter & Gamble (P&G) in the 1980s in the US when the former was the fifth largest customer of P&G.

Although Wal-Mart managed to get better margins from P&G due to its bargaining power, the game changer from P&G’s perspective was the data sharing arrangement between the two companies. Through this collaboration, P&G was able to see inventory levels, store-level sales data, when it shipped the product and when the product was sold at the register, which helped them save costs (in-turn higher margins from this channel) by improving their production and distribution strategy.

The success of this collaboration has made Wal-Mart P&G’s largest customer contributing 15 percent (CY2019) to P&G’s overall revenue and one-third of its US revenue, it said.

To understand the bargaining power that consumer companies could potentially have over the supply chain, the brokerage used Herfindahl-Hirschman Index (HHI), which is a commonly accepted measure of market concentration.

It was found that HHI of 13 categories out of 20 categories is above 2,500, which is considered a highly concentrated market. Also, each category has a clear market leader with ~40 percent+ market share.

A high Herfindahl-Hirschman Index (greater concentration of market shares with few brands) in most consumer categories in India allows strong negotiation power for the brands/market leaders.

“Therefore, we believe that this tips the scales back in favour of staples companies – a retailer cannot really sell toothpaste without stocking Colgate or a premium detergent without Surf!,” ICICI Securities said.

Analysts also believe that the instances of conflicts are resolved soon as both retailers and consumer companies need each other.

First Published:Aug 31, 2020 4:13 PM IST