RBI Tightens its Monetary Policy; More in Offing

Effecting the first hike since the NDA government came to power at the Centre, the Reserve Bank of India (RBI) has raised its key policy rate, signalling the Monetary Policy Committee’s concern about inflation risks, mostly on account of higher input cost pressures.

The six-member Monetary Policy Committee (MPC) of the RBI in its first three-day bi-monthly policy meeting In June raised the key repo rate by 25 basis points (bps) for the first time since January 2014, in about four-and-a-half-years, to 6.25 per cent.

The last rate hike happened on January 28, 2014, when the repo rate was increased to 8 per cent. The last policy action was in August 2017, when the central bank had lowered the repo rate by 25 basis points.

Given underlying trends in inflation and financial markets, an interest rate increase this year was very much expected. RBI’s task is only going to get tougher in the months ahead. This is primarily on account of the need to support prospects for economic growth.

Further, the RBI once again has changed its inflation forecast, from 4.7-5.1 per cent for the first half and 4.4 per cent in the second half, to 4.8-4.9 per cent and 4.7 per cent, respectively. With MSP increases still not factored in, the acceleration of inflation in the second half can be more. According to the macro economic data, retail inflation rose sharply to 4.6 per cent in April from 4.3 per cent in March. Core inflation, which includes food and fuel, remained consistently high at 5.8 per cent in April, up from 5.23 per cent in March.

According to economists, the RBI might also have taken into account the fact that many other central banks in emerging markets too have raised rates in the face of rising inflation and weakening of their currencies with rising interest rates in the US and elsewhere, a strong US dollar and outflows.

The immediate fallout of RBI’s rate hike would be that interest rates might begin to firm up. Banks have already been hiking lending as well as deposit rates over the past few months. Some banks have already raised MCLR (marginal cost of funds-based lending rate). The cost of borrowing will go up. But banks will also hike deposit rates and it will be good for savers.

However, the RBI has exercised caution and has kept the stance neutral lest it signals a sharp interest rate increase that could run a risk of throttling the growing recovery process. The neutral stance also allows RBI to remain extremely data-driven and thus fine-tune its rate decisions given a large number of uncertainties – both domestic and global. Given the uncertainties, it becomes difficult to gauge the RBI’s next move.

Economists expect RBI to increase at least one more time in 2018, and a maximum of two times. In the event of oil and the rupee remaining more or less at the current levels and with monsoons not playing truant, the RBI would be willing to skip any rate decision in August and shift any further tightening to October.

Latin Manharlal Group

Changing Trends in Indian FMCG Industry

FMCG sector shifts focus to direct supply, aims to operate with zero-day inventory

FMCG companies plans to operate with a ‘zero-day inventory’ by ‘reducing distance between its distribution centres and retail stores that the company reaches directly.

The role of dealers and distributors is changing first. FMCG companies need them for local knowledge, logistics and credit collection. Plus, they would take the products to geographies where companies can’t reach direct in a commercially viable manner. This would further expand reach for FMCG sector.

The FMCG sector is adapting the “leanest possible” distribution model to directly “tailor-serve retail outlets” across the country in less than a day as part of the sector’s plan to multiply sales and expand retail reach. Currently, the process takes between one and three weeks.

At present, Britannia Industries directly reaches to 1.7 million retails stores of the 4.8 million outlets where Britannia products are sold. There are about 11 million retail outlets in India, of which around 8 million sell biscuits. In the new direct distribution model, the entire supply chain is controlled by Britannia. Every day, around 20,000 people who are on Britannia’s direct payroll, visit retail stores, analyse local demands, suggest required tweaks in product placements based on the company’s in-house analytics and take orders on their mobile phones through an app. The orders are then delivered directly by Britannia from the nearest distribution centre within a day.

Traditionally, Britannia stocks products at its distribution centres. Products first go to its exclusive wholesale dealers, then distributors and direct retailers. The entire process takes anything from one week to three weeks, depending on the distance between the retail outlet and the factory. Britannia wants to reduce this to less than a day. The new system is mapped real-time. It also reduces operational cost for dealers and distributors as they would not need to stock products.

According to a McKinsey and Co. report on the future of retail supply chains, companies can reduce costs by about 20% at the distribution centre level, while optimal deployment of inventory can reduce working capital by about 10%.

ITC has one of the most extensive distribution networks in India. Its products are available at 4.3 million of the estimated eight million retail stores in India. Of this, about 2 million are under ITC’s direct distribution network. ITC will replicate the new factory-to-retail point distribution in phases, and eventually bring all the 2 million retail points under the new structure.

Traditionally, ITC, like all packaged goods companies in India, stocks products at its distribution centres. Products first go to its exclusive wholesale dealers, then distributors and direct retailers. In some areas, mostly in rural India, the big retailers supply products to smaller retail outlets. The entire process takes anything from one week to three weeks, depending on the distance between the retail outlet and the factory.ITC wants to reduce that to a day.

ITC is also in the process of automating all its 62  warehouses and its 1,550 wholesale dealers.  The distribution network includes over 1,550  wholesale dealers and a force of 25,000-plus  sales people who are IT-enabled and  empowered with hand-held devices, which  ensure that every member of the sales team  has access to real-time actionable information  on business imperatives and performance. The  supply chain mechanism is determined by  analytics based on real-time feeds and insights  for over 1,000 stock keeping units (SKUs). This  enables informed decision-making and helps determine inputs, while ensuring an efficient distribution based on store-level demand.

Marico had an enterprise resource planning (ERP) system from SAP AG, which it upgraded to SAP HANA to consolidate data, partly on the cloud. But the company also had to deal with unstructured data. Hence, the data from portable document formats (PDFs) and raw tables were copied from the existing system’s database into SAP HANA. Now it is possible to pull all that data and store it on the cloud, resulting in lower storage costs.

Marico also uses Tableau, a product from business analytics firm Tableau Software, which helps it analyse a large amount of data on retail behaviour, sales and marketing, inventory movement and procurement of key inputs, and get detailed insights into the company’s performance in a visual format. The company also uses sharepoint-based collaboration portals, ETL (extract-transform-load) tools, and R software.

Business analytics, digital and automation is helping to transform the core operations, improve the consumer insights and innovation processes as well as help in taking better decisions. All  data, including the outlet format and pin code, is fed into the software. The model then runs an algorithm and presents a hypothesis that needs to be tested on the ground. One such test would be to match the sales forecast against actual sales.

Marico is also going beyond traditional trend series analysis of data by taking into account “all your sales marketing spends, maybe other events which are being held like promotions or maybe some other activities like certain specific festivals, or even certain price increases”. “All these can be inputted to get an output and a forecasting accuracy that will result in better service and faster movement of goods.

Automated Machines at Distributors

Technology is a large part of Asian Paints' distribution success. According to a distribution strategy case study of Asian Paints, the company provided automated machines that mixed paint colors at the distributors to allow customers and consumers more range in color and more options. These machines use technology to produce colors that otherwise are unavailable, resulting in a wider range of selection.

Re-tooling FMCG sales and distribution for viable coverage

Driving retail universe coverage remains a priority for FMCG firms. Several firms are driving aggressive outlet addition agendas across regions. Even firms considered the gold standard in direct distribution (Hindustan Unilever: 3.2 million, ITC: 2 million, Colgate: 1.5 million, Marico: 0.9 million) are driving coverage initiatives in their distribution system. Reaching outlets directly and reducing wholesale dependence has three critical benefits:

·         Improving outlet sell-in

·         Increasing outlet throughput by range expansion

·         Building a platform for growth – ability to succeed in new product/category entries

This becomes critical for firms with a modest direct distribution. Tata Strategic’s research shows that cost-to-serve viability is one of the biggest challenges faced by firms in driving retail expansion. The outlets added by any coverage expansion drive typically have throughputs much lower than existing outlets. Hiring additional salesmen to service these new outlets increases the distributor’s cost-to-serve. This will negatively impact their return on investment (RoI) leading to escalating pressure from distributors to provide subsidies.

Sales leadership of most FMCG firms interviewed during a recent Tata Strategic study said their salesmen cover an average of 40 outlets a day on a weekly coverage frequency, around 240 outlets a month. Over several decades, this coverage norm of 40 calls per day for a distributor-salesman has remained unchanged despite changes in the outlet density, information technology and means of transportation.

Decreasing the non-productive calls of a salesman: The average productive calls of an FMCG salesman are 55-60%. Not all outlets place an order every week. Analysing this order behaviour can be used to intelligently re-structure the outlet visit frequency without affecting sales. The ordering pattern of outlets across the four weeks in a month varies significantly depending on outlet type. For instance, at an outlet placing 3-4 orders in a month, these orders are not evenly distributed across weeks and a few orders are just top-up orders to replenish sold-off inventory from the outlet. An alternative order-taking mechanism can be deployed for such orders at select set of outlets. The bandwidth thus released can be used to cover up to 50% more outlets per salesman.

Using both these levers, firms can achieve a coverage increase of up to 120% without hiring additional salesmen. Since the new outlets added are likely to have throughputs lower than existing outlets, the retail sales upside would be up to 70%.

Thus, by re-structuring their current sales process, firms can break the pattern and utilise the same salesman to cover additional outlets. Reducing the non-productive activities of a salesman will enable him to cover up to 70% more outlets per day. Simultaneously, analysing outlets’ order pattern to change visit frequency to fortnightly for a select set of outlets will enable the salesman to cover up to 50% more outlets in the month. Tata Strategic’s research shows that firms can thus achieve up to 2.2 times of existing coverage without additional salesmen thus driving a retail sales upside of up to 70% viably.

Latin Manharlal Group