Credit Payment Defaults by Organized Retailers

A promoter of an Indian processed foods co further claimed that not only were credit payments to companies being delayed but some were also defaulting on payment.

Some large fast moving consumer goods (FMCG) companies are planning to form an alliance to take on established modern format retail chains. This informal grouping has been prompted by repeated defaults on credit payments by organized retail players. Move Follows Repeated Credit Payment Defaults by Organized Retailers

A CEO of a leading FMCG firm told that the idea of forming such a coalition was a response to the ‘unfair’ trade practices of organized retailers. FMCG manufacturers allege that large retail chains are delaying credit payments because of the prevailing cash crunch. This, they claim has gummed up the entire supply claim which includes raw material suppliers, packaging companies and other small scale vendors.

The alliance although still in an embryonic stage is being contemplated by the FMCG sector to fight these unfair trade practices. They hope that it will give them the muscle power to cut a better deal with organized retail. All we want is that modern retailers stick to contractual obligations on payments to companies. If the contract requires a retailer to pay credit in 30 days, they should renege on it. If it is 90 days, then they should stick to 90 days.

These FMCG companies are openly displaying a rebellious attitude, in marked contrast to their traditionally placatory stance towards the retail trade. The on-going credit drought seems to have forced their hands. A senior official in one of the companies said the FMCG sector would also take up the issue with industry bodies such as the Confederation of Indian industry or as an extreme step, even boycott modern retail, if the situation worsens.

A promoter of an Indian processed foods company further clamed that not only were credit payments to companies being delayed, but some retail chains were also defaulting on payment. A few supermarkets have extended credit payment periods by 15-20 days, as retail chains struggle to meet overheads and pay salaries.

A Delhi-based FMCG company recently denied the request of a national retail chain to extend its credit period. Sources told that almost all leading retail players have initiated discussions with FMCG companies and vendors to seek longer credit periods.

There are also payment issues with big retailers. A senior Procter & Gamble official said: There could be some pressure on the retailers and distributors. But retailers’ claims that they face a capital crunch on account of inventory pile up are not true. They face a capital crunch mainly because their retail expansion plans are going haywire. Vice-president (finance and product development) with Hyper-city in Mumbai confirms the trend.

Retailers are asking suppliers or manufacturers as the case might be, to extend the credit period by 2-3 weeks. As of now, FMCG companies have the bargaining power, but if the economy slows down further this may not last.

For investors looking to make fresh investment, FMCG funds are definitely not the option. If already invested money in an FMCG fund and can afford to wait for a year, the investor may be able to cut his losses.

Speaking about FMCG funds here. For example, Franklin FMCG and Magnum FMCG funds have given a return of -11.95% and -16.19%, respectively, in the last one year. The only saving grace is Prudential ICICI FMCG, which managed to stay out of the red with 2.29%. Compare this to the top five performers among diversified equity schemes, which managed returns between 21-27% in the last one year. It has been a great sector, but it has been under-performing the overall market in the last year.