Don’t Err On My Margin

ondering why your brand of soap, toothpaste or TV isn’t available at that big multi-brand store? Probably because the retailer and the branded company are duelling over margins. This fight is now moving beyond FMCGs to consumer durables. In the latest round, Reckitt Benckiser—makers of such household brands as Brasso, Lysol and Dettol—has slashed margins on some of its products by two per cent. Discussions are on, but the “uncalled-for move” has provoked a strong reaction from the biggies in organised retail.

Then, organised consumer durable retailers are asking brands like Samsung and LG to reconsider their margins. Big retail’s confidence obviously stems from the growing heft of inhouse brands that are “eliminating the intermediaries”. Where a retailer earns anywhere between 7 and 10 per cent margins across categories by selling brands, he manages far higher margins of up to 20-25 per cent by selling inhouse brands in some categories.

Most experts agree that as the share of organised retail in a company’s trade increases, such conflicts will keep arising. As Vineet Kapila, president of Spencer’s Retail, says, “Modern retailers put in considerable efforts to push consumption. In such efforts, the profits have to be equitable.” It’s also easy to understand the lure of reducing margins from the branded players’ viewpoint. In an environment where input costs are rising, there’s more and more pressure to deliver profits without passing on price increases to the customer.

And what of the consumer? While she benefits because this conflict keeps tabs on pricing, she also loses out on choice at the organised retail outlet. Eventually, experts say, the conflicts will get resolved since inhouse products can’t straddle all categories, cater to all price points, and brand loyalty linked to “aspirational segments” is unlikely to change overnight. Even so, powerful companies are eating some humble pie.