FMCG firms may face long-term disruption in CSD channel

One reason why sales of packaged consumer goods makers declined in the June quarter was that the Canteen Stores Department (CSD) stopped purchases ahead of the 1 July switch-over to the Goods and Services Tax (GST). CSD, the largest organized retailer in India, caters to the armed forces and police personnel. Its move contributed to sales volume falling 2-15% for companies such as Hindustan Unilever Ltd, Marico Ltd, and Colgate-Palmolive India Ltd in the June quarter. Things are set to worsen with the ministry of defence seeking to reduce sales through CSD.

On 30 June, the ministry issued a notification to reduce the annual limit of goods sold through CSD by 30-40%, The Times of India reported. Emails to Air Vice Marshal M. Baladitya, general manager of the CSD, went unanswered and he was not available on his phone line. “The ministry of defence has said it has decided to reduce the size of the business in CSD which makes up 5-6% (of our sales),” said Sunil Duggal, CEO of Dabur Ltd. “(This was) to ration the volume of goods which are sold in the CSD, they (the ministry) felt it was being misused. That side of the business will shrink and it will shrink quite badly,” he said. CSD had already dragged down sales of major packaged consumer goods makers in June as it stopped taking stock right before the GST was implemented on 1 July.

“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’s chief financial officer P.B. Balaji said in an earnings briefing on 18 July. “The CSD stores have been shut for 45 days and now they have reopened... only three depots,” he said, but declined to comment on how long it would take for CSD stock taking to stabilize. Hindustan Unilever reported flat sales volumes for the June quarter on account of destocking across all channels. Similarly, sales through CSD and organized retailers of detergent and dishwash bar maker Jyothy Laboratories Ltd fell 4% sequentially in the June quarter, and 25% in July month on month. The company’s first CSD billing after the implementation of GST happened only on 2 August, managing director Ulhas Kamat said in a conference call with investors. Canteen stores in Delhi did not receive stocks of home and personal care staples after 13 June, people aware of the matter said.

Sales to the CSD in June and July almost completely stopped. In Mumbai, canteens last took stock before the GST on 20 June, and were turned away by CSD depots on 6 July and 19 July, where they were told that new stock post-GST was 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. Institutional sales including those to CSD make up 7% of the total India sales, according to Marico’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. Sales to this channel declined by 15% in the quarter ended June 2017, CEO Saugata Gupta said in an analyst call on 2 August. “CSD sales were almost negligible,” Gupta said in the call. “And by end-July there are (still) no CSD sales. We may not be able to recoup all these losses of Q1.” Karve said in his email that the company expected business to be back to normal during the quarter. “CSD canteens usually have inventory of close to a month and half,” said an analyst with a brokerage firm, requesting anonymity. “So, towards the end of May, 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 (18 July) 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).”

However, given the new ruling, this monthly stock-taking could be reduced significantly. Among other companies affected significantly by to reduction in CSD stock taking will be GlaxoSmithKline Consumer Healthcare Ltd, 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. “CSD makes up 5-8% of all FMCG (fast moving consumer goods) 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.