The Distributor Margin Rejig At Hindustan Unilever Is A Future-Proofing Strategy

When Hindustan Unilever (HUL), India’s largest fast moving consumer goods (FMCG) company, restructured its margins for distributors, they were up in arms. While some called it a “draconian agenda” to shore up profits, other distributors threatened a boycott.

Here’s what's changed. The fixed margin for urban distributors was slashed by 0.6%, from 3.9% to 3.3%. The variable margin was increased from 0.7% to 2%. With this, the earning potential jumped from 4.6% to 5.3%. For rural distributors, however, the fixed margin came down from 5% to 3.6% while the variable increased from 0.4% to 1.7%, shrinking the overall margin by 0.1% from 5.4% to 5.3%. 

Fixed margins are assured payouts given to distributors on their sales value, while variable margins are decided upon after assessing certain performance parameters. 

Variable margins that distributors earn depend on a range of service-related parameters such as ensuring delivery to retailers within 24 hours, utilising the company’s software, servicing larger networks of stores, ensuring availability of several new category packs and so on.

With this restructuring, HUL’s message to its distributors was clear — the plan is to sell well, not just sell more. 

“The assumption here is that if you have done all the qualitative aspects of your business properly, then your quantitative aspects are an outcome of the qualitative aspect. So it, in a way, builds the efficiency of the distribution system rather than giving flat margins,” Bhushan Lawande, founder and MD of E4 Development and Coaching Ltd, a sales capability consulting company, told The Core. He has trained and consulted various projects and sales initiatives across FMCG companies including HUL, Procter and Gamble, PepsiCo etc.

The restructuring comes at a time when urban markets have recovered well, but rural markets are still struggling to return to the pre-pandemic levels of growth. Competition from regional brands and sluggish demand have plagued the entire FMCG industry. The volume growth of HUL was stagnant at 2% in Q4FY24 and has been so since the past three quarters.

While distributors may be unhappy, industry experts believe that the margin restructuring is part of a larger shift in perspective for HUL, the makers of popular products such as Lux, Dove, Surf Excel, Pond's and Horlicks, among others. The shift is possibly stemming from a change in leadership after Rohit Jawa stepped in as the chief executive officer and managing director. 

In its December 2023 earnings call, Jawa said that the move was aimed at making their distributors “future fit” and making them “competitive versus other options the kirana stores have to access products like us”. In the long-term HUL wants its distributors to fall in line with the company’s digitisation efforts, ensure timely deliveries and increase product lines to improve efficiency as they compete with other distribution channels.

Shift In Goal Posts

Distributors are unhappy that the fixed margins — which take care of rent, delivery infrastructure, and operational expenses — have been slashed while the variable margin has been increased. “By cutting the fixed margins and increasing variables, the dependability of distributors on market conditions increases. They are already struggling with lower sales and meeting targets,” ​​Dhairyashil Patil, president of the All India Consumer Products Distributors Federation (AICPDF) told The Core.

The distributors’ body has held discussions with HUL and Patil expects a reassessment of the restructuring in June or July this year to monitor the impact of the new margins on distributors’ return on investment. 

Before this restructuring, the variable pay was 0.7% for urban distributors and 0.4% for rural distributors. At such small numbers, the impact of variable pay on the distributors’ earnings wasn’t much. “We used to get 0.3% - 0.4% of the variable margin on average. Although it fluctuates quite a lot,” a distributor told The Core requesting anonymity.

The parameters have remained almost the same, but the focus now is on the service that distributors provide to retailers and other stakeholders down the supply chain. “At that point of time (before the restructuring) the variable pay was a very small component. So, it really didn't excite people to become more efficient,” Rajeev Deshpande, a business advisor and formerly a supply chain partner of HUL in Maharashtra for 25 years, told The Core. 

HUL is clearly shifting goalposts for its distributors. By placing higher monetary incentives for maintaining the quality of service, the company’s metrics for rewarding distributors is now beyond just turnover numbers. In an email response, HUL spokesperson said, “It (the restructuring) improves overall service efficiency to stores and offers our distributors a higher earning potential.”

In the earnings call for the December 2023 quarter, Jawa had said that the plan was to incentivise distributors in big cities to not only service more stores and improve delivery times but also to pick HUL’s premium products for market development. 

Deshpande believes that this illustrated HUL's shifting focus to build a better quality distribution network. This was also reflected in HUL’s executive director of customer development, Kedar Lele’s thoughts in an interview, where he said, “We are not asking people to sell more. We are asking people to service better.” 

But What About Distributors?

While HUL may have seen rapid growth through modern trade channels, like any other FMCG company, over three-quarters of its sales still come from general trade. Almost two-thirds of this, or 8 to 9 million stores, are in semi-urban and rural areas according to NielsenIQ. These regions are already struggling with slower sales. 

Naturally, the margin restructuring has put distributors in limbo. The company maintains that this structure is beneficial for them in the longer term, however, the AICPDF has demanded a fixed margin of 5%. 

Industry experts believe that while distributors may accuse HUL of arm-twisting them, the upper hand remains with the company by virtue of its market power. “From a retail perspective, any retail store, they (HUL) contribute anything between 15-20% of a store sale,” Upamanyu Bhattacharya, a retail business leader, told The Core, “Any large company would want to distribute the risk that it faces in the business and that can happen for an HUL and not for a smaller company simply because of the market power because no other FMCG company can give them the same revenues.”

Urban distributors of HUL that The Core spoke to remain optimistic about the increase in earning potential, but they maintain that the fixed margin shouldn’t have been touched. 

“The stock availability is unreliable at the moment. We place orders but get partial deliveries from the company so ensuring timely deliveries to retailers becomes a challenge which in turn will affect our variable margins,” a distributor in Maharashtra told The Core requesting anonymity.

However, HUL in its response said, “we continue to be committed to our distributor partners’ healthy ROI under this model, too.”

Bigger Shifts at HUL 

The margin restructuring has also come in the backdrop of HUL’s leadership focusing on modern trade channels, premiumisation, growth in urban markets and consolidation of distributors. All these combined are Jawa’s plans for growing HUL’s prospects. “We'll go where the growth is and work hard towards that, not wait for the macros to change,” Jawa said in an interview with The Economic Times.

The growth currently seems to be coming from the company’s premium portfolio, which now contributes to more than 25% of the company’s business and has grown double digits this financial year; urban markets, which contributes to 60% of the business and and has been more resilient in comparison to rural markets; and modern trade channels, where it is seeing better absolute growth than general trade. And these are exactly the distributor networks that the HUL is trying to fix with its rejig. 

“I'm seeing this trend pretty much all across that investment which is required to go to the next level and address the rural market, they (companies) are reluctant to do because they can get the same numbers a lot more easily from urban areas,” Bhattacharya said.

Another shift is the consolidation of touchpoints as business analytics and better connectivity enable companies to meet consumer needs quickly. Lead times in rural areas have reduced, allowing distributors to service much larger regions than they used to. This in turn, industry observers say, has led companies like HUL to consolidate their distributorships. 

“In the past two or three years, HUL has started reducing their distributor network by 40-50%, especially in rural areas where last-mile connectivity has greatly improved.
They have also consolidated or rationalised the warehouse locations by using the same logic,” Deshpande said. 

He also pointed out that the company was struggling with a shortage of distributors and this may have to do with the newer generation stepping into age-old family businesses but taking their distribution business to other industries for greener pastures. This margin rejig, he believes will attract more young people to get into the business when they see that IT skills are being rewarded. 

“They are driving the distributor to make use of more of the IT support system which the company provides,” he said. This is also in line with the company’s long-term plans of digitisation with the appointment of a chief digital officer who is expected to reimagine the HUL programme to align with the company’s digitisation efforts across its customers and supply chain operations.

“HUL is really very margin-focused, not so much because of just the Indian situation. But because their international share price is under pressure and their portfolio restructuring is happening, a lot of shareholder pressure is there,” Bhattacharya said, underlining the need for HUL to get its bottom line in place and keep shareholders happy, the margin restructuring is a step in this direction. 

Lawande pointed out that while it helps the company cut distribution costs, the advantage of slashing margins in a slowdown is that when the upturn comes, the company will be ready to reap the upside.