India’s Biggest Retailer Is Buying Less From Consumer Goods Makers

As demand continues to recover from the twin shocks of note ban and goods and services tax, consumer goods makers face a concern. Sales to India's largest retailer, the Canteen Stores Department of the Ministry of Defence, are falling.

The CSD, which reported a revenue of Rs 18,000 crore in the year ended March, contributes 5-8 percent to the revenue of Indian fast-moving consumer goods companies. That's a substantial chunk from a single buyer. The CSD provides supplies to armed forces and their families through more than 4,500 department stores across the country—the most for a retail chain in India.

Lower demand from the canteens can be partly attributed to smart cards issued to armed forces' personnel and their families. The cards introduced this year allow monitoring of procurement and is aimed at curbing the practice of people buying more than their quota and to check pilferage. Companies felt the impact.

Hindustan Unilever Ltd., in its July-September earnings press conference, said the contribution from the CSD has been on the decline for the last few quarters. The canteens now contribute 6 percent to its revenue of the country's largest FMCG company compared with more than 7 percent before demonetisation. There has been a shift as consumers now buy from modern trade, said Sanjiv Mehta, chairman of HUL.

While Godrej Consumer Products Ltd. didn't give the reasons for a fall in its sales from canteen stores, the maker of Good Knight mosquito repellent said in its earnings presentation that floods in Kerala and a decline in demand from CSD had a 1 percent impact on its revenue.

Emami Ltd.'s sales from canteens fell 3 percent compared to an 11 percent rise in the year-ago quarter, according to the company's presentation post announcing its July-September results.

Marico Ltd., in its earnings call, blamed lower demand on lesser stock kept at the canteens as buying pattern changed after the introduction of smart cards among defence personnel and their families. “There is a stock correction,” Saugata Gupta, managing director and chief executive officer of Marico, told investors. Moreover, procurement by canteens has been centralised instead of individual stores ordering stock depending on the requirement earlier, he said.

The maker of Parachute coconut oil, however, expects the demand to return to normal in the second half of the financial year.

The restrictions after the introduction of smart cards has had an impact on the quantity that the armed forces buy, admitted Brigadier Amir Singh, officiating chairman and general manager of CSD. “[That] has caused us to order less from FMCG companies,” he told BloombergQuint. Sales, however, picked up in the ongoing quarter.

(Corrects an earlier version that misstated the designation of Saugata Gupta)