BENGALURU | NEW DELHI | MUMBAI:
 Fast-moving consumer goods (FMCG) companies such as Hindustan Unilever, Procter & Gamble and Colgate-Palmolive that had altered manufacturing and pricing strategies in anticipation of the goods and services tax are now reaching out to wholesalers and retailers and offering them product and cash discounts.

With GST set to be rolled out on July 1, companies want to make sure that any initial uncertainty over the levy doesn’t mean shops temporarily halt stocking consumer wares as they get accustomed to the new regime.

These firms are also keen to dispose of as much inventory as possible in May and June so that they are not saddled with unsold inventory on July 1.

"We cannot manage and evaluate inventory across millions of outlets in the pre-GST and post-GST scenario. It will be too complex since rates are different across different products," Dabur chief executive Sunil Duggal said. Dabur makes Real juices and Vatika shampoo.

While Colgate is said to have promised to double margins to retailers and wholesalers for May and June, Santoor maker Wipro has promised its distributors compensation for excess stock and difference in tax, said people aware of the matter. India’s biggest consumer goods company said clarifications are required to make for a glitch-free shift to the new regime.

"HUL is working closely with its extended ecosystem of vendors and customers to target a cutover by July 1," it said in an email. "However, for smooth and timely transition we require an early clarification on a few open items like formal communication on cutover dates, reimbursement of fiscal, operational items like GST return formats, etc." Convincing the trade could be difficult.

"Companies such as Colgate and P&G are luring us to buy more by giving 2-4 per cent margin incentive, but I don’t want to carry a burden on my shoulders," said Vasudev Chutwani, owner of Rajasthan-based Shankar Shree Enterprises, who has reduced his stock by 20 per cent across products of companies such as Dabur, Marico and HUL, and is planning to further bring it down to half in June, especially after June 15. "Even small shopkeepers are reducing purchases by 25 per cent ."

For wholesaler JT Brothers, the story is the same. "Almost every company such as Dabur and HUL is giving 3-7 per cent additional schemes, but we are not interested," said owner Kapil Advani, who has reduced stock by 50 per cent and will cut it by 75 per cent in June. Also, business is down by 50 per cent, he added, attributing this to overall slowdown.

"We are considering stepping up retailer margins," said Dabur’s Duggal.

MINIMISING IMPACT
Companies want to ensure the impact is minimised. "We are focusing on creating stock pressure for these two months (May and June) and have also increased our production by 10-15 per cent ," said Mayank Shah, marketing head at Parle Products. "We are talking to our distributors and helping them understand the advantage of keeping more stock now."


Colgate-Palmolive is offering bigger discounts than before, said people aware of the matter. Wipro is pushing detergent and soap brands through distributors with the offer to reimburse transition stock — in other words, the stock left unsold with the retailer before the GST rollout.

Colgate-Palmolive did not respond to ET’s queries. "There are going to be multiple costs associated with old stocks, compliances and increased cash flow requirements," said Sunil Wadhwa, CEO of Groupe SEB, the maker of electrical products and small appliances. "We also have to see how excise exemptions work out."

Companies have started offering discounts or product offers to wholesalers and retailers to push products that are in lower tax brackets under GST compared with the existing tax rates, said experts. Products such as toothpaste, soap and hair oil that attract a tax of 22-23 per cent currently will be taxed 18 per cent under GST.

This means companies have to move all the stock they have before July 1 to avoid the same product having two maximum retail prices (MRPs) — a higher pre-GST rate and a lower post-GST one.

"There could also be retailer-level schemes that would be passed on to customers on products like toothpaste, hair oil and soap," said MS Mani, senior director, Deloitte Haskins & Sells.


"The legal metrology provisions do not permit alterations to the printed MRP, hence there is need to adhere to these provisions in addition to the packaged commodities rules."

ET was the first to report on April 10 that many FMCG companies were either changing production strategies or raising prices to reflect the new tax treatment for their products.

Net benefits under GST will be passed on to consumers, HUL said recently while announcing fourthquarter results. In the current quarter, the company is expecting an inventory pipeline correction of 100-250 basis points ahead of the rollout of GST. A basis point is 0.01percentage point.


"The benefit to be passed on may not necessarily be in terms of price. It could be in terms of additional grammage," said Ulhas Kamath, joint managing director of Jyothy Laboratories.

There could be a month or so of short-term disruption at the level of trade channels.


"P&G continues to look at GST as a positive reform as it will benefit Indian economy and industry in the long term," a spokesperson told ET. "It will drive supply chain efficiencies and bring in a level playing field for the FMCG sector. We are working to ensure that we continue to delight our consumers with superior products and value."

SLASHING PRODUCTION
Insiders said many companies are also looking to slash production by 25-30 per cent in cases where the products are now in a lower tax bracket. Experts point out that there is also a fear that reducing manufacturing and adopting down-stocking supply chain strategies may affect market share.

Stocks are also being reduced due to complications regarding the rise in some costs, said experts. Many retailers and wholesalers are also demanding that FMCG companies underwrite losses they may incur when the new tax regime takes effect.

"Excise duty is embedded in the MRP in the products manufactured before July 1, and if this product is sold after this date, there would be a duty cost and probably a loss for the seller," Uday Pimprikar, partner, tax and regulatory services, EY India.

"Someone will have to underwrite this cost for the retailer, and it could be the manufacturer in most cases. To avoid this, companies will inter alia seek to reduce transition stocks in the supply chain — this could be done by pushing sales of products manufactured till June 30 before GST comes in. Further supplies to the supply chain will also be required to be regulated."

The big FMCG companies had increased product prices in anticipation of GST. In the past three months, HUL removed discounted offers as high as 15 per cent from detergents, soaps and shampoos, while Godrej Consumer raised the prices of Godrej No. 1 and Cinthol soaps by 11-13 per cent year-on-year. Colgate, which usually raises prices by 5-7 per cent every year, increased them by 10-18 per cent over last year.

Brokerage houses have given a mixed response to the consumer goods sector, with most saying GST taxes are neutral to positive, adding that since many companies enjoy excise duty exemption, clarity is awaited on these in the excise-free zones under GST.

According to a report by JPMorgan, GST will have a positive impact on categories such as soap, toothpaste and hair oil, while paints, skin creams, shampoos and laundry will be negatively impacted because of a 28 per cent tax slab.

A research report by Motilal Oswal Financial Services said with the implementation of GST, many companies in the FMCG sector will likely gain as a result of the potential shift from the unorganised to the organised segment.

 23 May 2017, 05:56 AM