Falling orders from Army canteens drag sales of consumer goods companies

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Mumbai: Falling order volumes from the Canteen Stores Department (CSD), India’s largest organized retailer, continued to drag down FMCG companies’ sales even as they reported volume-led growth returning in the September quarter.

Companies said they do not expect CSD to return to normal order volumes even in the coming quarters as confusion on a government directive to put quotas on CSD sales persists.

Hindustan Unilever Ltd (HUL), India’s largest consumer packaged goods firm, said after its earnings call on 25 October that overall growth in underlying volume for the quarter was restricted to 4% as the CSD did not place orders for 15-20 days in July this year, essentially “cancelling out” the positive impact of other trade channels restocking post implementation of the goods and services tax on 1 July. HUL said the CSD channel has recovered 85-90% of its normal levels of inventory.

“CSD for us is a big channel,” Sanjiv Mehta, chief executive officer and managing director of HUL in the earnings call cited earlier. “The key point here is that we’ve called about a recovery that is gradual. We’ve gone through a turbulent period. You’ve got about 15 days of CSD not buying,” he said. The channel makes up 7% of HUL’s sales, the company’s management said in the call.

Marico Ltd, which sells Parachute hair oil and Saffola edible oil, also said the CSD has reset its inventory.

“CSD has done two things,” said Saugata Gupta, Marico’s CEO and MD, in an earnings call on 31 October. “There has been a one-time stock correction and they have been given some kind of outlay (quota),” Gupta said. “Yes Saffola has got much more impacted. A lot of things will come back to normal by Q4 (quarter ended March 2018) is what we are hearing from the CSD,” he said.

Among the sharpest hit was Dabur Ltd, makers of Dabur Chyawanprash, honey and toothpaste.

“In this quarter, we were down 27% (volumes) in CSD—both CSD and para (paramilitary forces’ canteens) had a very sharp decline,” Sunil Duggal, CEO of Dabur said in an earnings call on 31 October. “The quantum of this decline will slow down, but I don’t see growth happening in Q3 and Q4. We have no visibility on how they’re planning to rework their business model. Also, they are putting quotas which is all enforceable through smart cards. So overall, the entire consumption from the CSD channel will drop,” Duggal said. Sales from the army canteen channel for Dabur fell 10% year on year for the quarter.

Even personal care products maker Emami Ltd saw CSD sales decline 20% year-on-year, even though its brands BoroPlus cream, Navratna hair oil and Kesh King oil posted double digit growth. The company cited the government’s policy to reduce CSD sales going forward.

This comes at a time when consumer demand is showing revival across urban and rural India, following several quarters of depressed demand following demonetisation in November last year and the implementation of GST in July this year, Mint reported on 3 November.

CSD will continue to cause pain because shoppers at the retail chain may not immediately move to modern retail and other trade outlets because the CSD offers sharp discounts to market retail prices.

Dabur’s Duggal said during the investor call cited above that while affecting revenues, decline in CSD sales may help margins because fewer goods will be sold at high discounts.

However, CSD chairman and general manager Air Vice Marshal M. Baladitya said that disruptions in the canteen network are temporary and there are no plans to reduce orders in the long term.

“We keep 45 days of stock, which was paid for under the VAT regime during the 1 July changeover. If I had continued placing orders, I’ll have the same product selling at 2 rates. I’ll have to wait to get rid of that stock, which was communicated to all the companies. They all accepted it,” he said, adding that the whole country reduced orders in the month of July, right after the GST was rolled out. He also added that there is no government directive to reduce overall sales in the canteens. “Our orders are now back to normal,” he said.