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Last Updated : Nov 15, 2019 11:18 AM IST | Source:

These 2 consumer stocks could benefit the most from disruption in wholesale

Traditional wholesale lost half of its revenue share after demonetisation and GST, while modern trade and e-commerce have made significant gains, Centrum Broking has said.

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The traditional wholesale distribution model has taken a huge beating following demonetisation and implementation of goods and services tax (GST), losing half of its revenue share—from around 40 percent to 20 percent. The loss has meant gains for other channels that now control around 28 percent of the B2B and B2C share, Centrum Broking has said.

The brokerage house, which held discussions with more than 30 channel partners across the FMCG value chain, found significant changes in the system following the near-collapse of the traditional wholesale distribution model that operated on cash transactions.

In this scenario, the brokerage believes the companies best placed to gain are Britannia and Dabur, while the worst affected is Colgate.


Bakery-product maker Britannia has low wholesale dependence and focus on central India belt, and FMCG major Dabur uses a cluster-based distribution strategy in rural areas and follows power brands strategy.

Colgate has a weak wholesale channel and is yet to build full direct distribution, the brokerage said.

It has a buy call on Britannia and Dabur, with target price of Rs 3,418 (6 percent potential upside from current levels) and Rs 555 (upside 20 percent), respectively. However, it has a sell rating on Colgate, with a target of Rs 1,257, a downside 19 percent.

Given the disruption in traditional wholesale, modern trade and e-commerce have cashed in and increased their revenue share, it says.

Modern trade did this by impressing on companies their strengths (growing footfalls) and wider reach to gain larger discounts and promotions.

After interactions, the brokerage found that such modern-trade outlets could rarely distinguish between consumers and retailers, leading to retailers ordering through them.

In addition, companies were deep discounting their premium and regular products on e-commerce channels to capture the new tech-savvy consumer, it said.

Hence, its calculation suggests that these two channels have increased their revenue share to 18 percent from 8-9 percent.

The not-so-new but now-significant channels organised wholesale (Metro, Walmart, Reliance Market, Lots and other similar regional start-ups) and cash-and-carry could be the new disruptors in the sector. In the past three years, they have doubled their store count to over 100, according to the brokerage.

In rural towns and villages, wholesale accounts for around 60-70 percent of sales. However, demonetisation and GST nearly crippled this channel, which is still reeling. Recent liquidity issues have delayed the recovery.

Therefore, the brokerage found massive inventory correction in this key channel over the past few quarters and currently, they operate with minimal inventory, which has fallen from 10-12 days to five-six days.

Its discussions with channel partners indicated that inventory correction was happening because of:
(1) Change in consumer behaviour, which was skewed towards modern trade and e-com.
(2) Emergence of organised wholesale that can supply as per requirements.

(3) Liquidity issues resulting in investments only in fast-moving products.

As these channels account for the majority of companies' revenue (around 70 percent), the correction impacted firms’ overall sales, it said.

Centrum says New Rural is growing 1.3x faster than companies’ average revenue growth. "However, channel partners stated that there is higher pain in the north because of liquidity issues, erratic seasons, weak consumer sentiment and falling wholesale contribution. Consumption in deep rural towns (more than 10,000 population) is under severe pressure. The fastest growing are the top 10 metros," it said.

With an above-normal monsoon, fair visibility on advance estimates for the kharif crop and positive sentiment around the festive season, most channel partners believed consumption may change for the better in Q3FY20, it said.

Disclaimer: The views and investment tips expressed by investment expert on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.

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First Published on Nov 15, 2019 11:18 am
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