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Consumer goods firms may face long-term disruption in CSD channel

LiveMint logoLiveMint 10-08-2017 Soumya Gupta

Mumbai: Even as makers of consumer packaged goods help distributors transition smoothly to the goods and services tax (GST) regime, they have been facing trouble from Canteen Stores Department (CSD), a government-owned retail network catering to the defence forces, which have almost completely stopped taking stocks since June.

The department store network, the largest organized retailer in India, has been dragging down sales for FMCG firms across the board.

“De-stocking by the CSD channel led volumes to be about 2% lower than they would have been in the ordinary course of things,” Hindustan Unilever Ltd’s chief financial officer P.B. Balaji said in an earnings briefing on Tuesday. “The CSD stores have been shut for 45 days and now they have reopened, but only three depots,” he said. Balaji however declined to comment on how long it would take for CSD stock taking to stabilize.

HUL reported flat sales volume for the quarter ended June 2017, primarily because traders were de-stocking in June ahead of the introduction of GST on 1 July, the company said in the briefing.

Canteen stores in Delhi have not received stocks of home and personal care staples since 13 June, people aware of the matter said, adding that the stores received the last stock of alcoholic beverages on 22 June. In Mumbai, canteens last took stocks on 20 June and have since gone back to CSD depots on 6 July and 19 July, where they were told that new stock post-GST is still not available, said an armed forces officer aware of the development who did not wish to be named.

However, liquor stocks for the canteen stores have been available in depots, the officer added.

Canteen stores usually close in the last 2-3 days of every month to take new stock for the next month.

“The CSD channel had stopped making purchases in June and there have been negligible purchases made in July till date,” Sunil Kataria, business head, India and Saarc for Godrej Consumer Products Ltd, said in an email.

“However, the CSD authorities have now restarted purchasing at the local depot level and we expect business to pick up through the month. The wholesale channel continued to place orders, though in much lesser quantities than normal. We expect to see a full recovery in both channels only towards early August,” he said, adding that the CSD channel makes a “relatively smaller” contribution to the company’s India business.

Analysts say CSD channels will recover slowly and continue to weigh on earnings.

At Marico Ltd, institutional sales including those to CSD make up 7% of the total India sales, according to the company’s annual report. Of this, CSD is the dominant buyer.

“Along with CSD, this bucket includes sales to para-military forces, CPC (central police canteen for police forces) and a very small portion to other corporates (direct orders),” Vivek Karve, chief financial officer of Marico, said in an email.

“In anticipation of GST roll out, CSD significantly curtailed its orders in the month of June,” Karve said. “However we have started receiving orders from second week of July and business is expected to come back to normalcy during the quarter,” he said, adding that the CSD was managing a the transition to GST on its own. In contrast, most FMCG firms have been working with individual distributors and wholesalers to help them make this transition.

“The pace of recovery in wholesale is slow and it will take some time before the business regularizes and the channel partners figure out compliance under GST,” Karve said in the email.

“CSD canteens usually have inventory of close to a month and half,” said an analyst with an equities brokerage firm, requesting anonymity. “So, towards the end of May, the CSD told companies like Lever (Hindustan Unilever) that they will reduce inventory and sell only the earlier (pre-GST) stock. Lever (HUL) said in its analyst call on Tuesday this week that after GST was implemented, there has been no pickup in the first 15 days of the month. However, the pickup, when it does happen, will not just be for (stocks meant for) a week but for the entire month (of sales).”

Among the worst affected companies due to reduction in CSD stock taking will be GlaxoSmithKline Consumer Healthcare, nearly 9% of whose sales come from the CSD channel, the analyst cited above said. The company makes malt drink brands Horlicks and Boost that are a staple of daily rations provided to armed forces personnel across the country.

GSK Consumer Healthcare declined to comment.

Other companies that may be affected include Dabur (CSD contribution of 5-6%), Colgate Palmolive India Ltd and Marico, makers of Parachute hair oil and Saffola edible oil, the analyst cited above said.

Colgate Palmolive declined to comment.

“CSD makes up 5-8% of all FMCG firms’ sales, so it is a significant channel,” said Abneesh Roy, senior vice-president at Edelweiss financial Services. “But, this is not bigger than the wholesale channel that makes up 35-40% of sales for these firms,” he said, adding that it was difficult to commit to a precise time in which the CSD channel would recover.

“There has been some recovery now but it would take a few weeks for this to reflect completely,” Roy said.

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