Winning and losing: Distributors make or break FMCG companies fortunes

Distributors perform one of the most important supply chain functions: the distributor has to ensure the utilisation of space at the retailer’s shelf; it has to make sure the retailer does not run out of inventory at anytime, said the official. DESIGN: TALHA AHMED KHAN

KARACHI: 

A general slowdown in consumer spending may have forced fast moving consumer goods (FMCG) companies to revise their sales targets, but a comparison of the recent performance by some major FMCG players shows it is an efficient distribution network, that distinguished winners from losers in these challenging times.

Take the example of Engro Foods, a subsidiary of Pakistan’s largest private sector conglomerate Engro Corporation, whose revenues declined 4% year-on-year (YoY) to Rs18.9 billion during the first six months of calendar year 2013 (CY2013). The negative growth was a result of a troubled distribution network.

The local food giant had been trying to fix its distribution arm for a couple of years now. While acknowledging this problem, its CEO, Sarfaraz A Rehman had told The Express Tribune that they were trying to put in new distributors.

On the other hand, Procter and Gamble Pakistan – a subsidiary of the Ohio-based consumer goods giant Procter and Gamble – has had three consecutive years of high growth. The company had a turnover of Rs22 billion in fiscal year 2012 (FY2012), which according to the officials was then highest growth year in the company’s history, recording a 50% YoY increase in its turnover.

Procter and Gamble engaged a single distributor in Pakistan, Abudawood Group, according to the company’s country head Faisal Sabzwari. This distributor, according to Sabzwari, gave them unprecedented ability to reach the right standards of accessibility in the retail stores.

Continental Biscuits Limited (CBL), a joint venture between family of Hasan Ali Khan and Kraft Foods – now Mondel-z International – is another example of the difference a distributor can make in the FMCG sector.

With Rs10 billion in sales during FY2013, CBL’s revenues have been growing by 50% for the last two years, the company officials say. The recent expansion in CBL’s distribution network gave it larger market penetration by taking the products to rural markets, said the company’s Director Marketing, Rafey Zuberi.

In all three examples, it was the distribution network that played an important role in driving, or hampering, the growth of these companies.

Selling capability is the function of distributors, said an official from a logistics company. Distributors perform one of the most important supply chain functions: the distributor has to ensure the utilisation of space at the retailer’s shelf; it has to make sure the retailer does not run out of inventory at anytime, said the official.

In a standard supply chain, the official said, a manufacturer produces and markets its products while the logistics firms transport, store and deliver the product to the retail outlets while distributors take orders and manage sales on behalf of the manufacturer.

By contrast, most companies try to integrate this function into their existing operations, expecting the third party to only provide storage, the official said. This sometimes leads to problems. For example, when Engro Foods launched its ice cream brand Omore, the refrigerators reached the outlets but the ice cream didn’t, said the official.

Responding to a question about Engro’s distribution problems, the official said they initially had a single distributor, Agility, but that didn’t work for them. Agility was mainly a logistics company but also acted as a distribution company for them. Later on, he said, they separated logistics and distribution by hiring other distributors zone-wise.

If the logistics industry can develop itself, the official said, it can perform distribution function efficiently.

Players like Abudawood are already doing that by offering value added services. A subsidiary of Jeddah-based Abudawood Trading Company, Abudawood Pakistan has established itself as a sales management company. In the near future, according to its website, their services will also include special packaging of goods, repacking, promotion handling and merchandising related services.

The company, according to an official, has a robust IT system for efficient supply chain management. It covers 95% of the categories in rural and 100% in urban markets. It is perhaps this efficiency, which helped the company grow phenomenally within three years of its entry in the Pakistani market – it grossed Rs24 billion in revenues during FY2012 and is growing at a compound annual growth rate of 22%.

France told to reform labour market after second credit rating downgrade

The French president, François Hollande, meets the IMF chief, Christine Lagarde, the day Standard & Poor's downgraded France's credity rating. Photograph: Ian Langsdon/EPA

President François Hollande's beleaguered administration came under pressure on Friday to push through far-reaching labour market reforms after a surprise downgrade in France's credit rating.

Standard & Poor's cut its rating by one notch to AA from AA+, in a move that puts France on a par with Belgium and two notches above Italy in the agency's estimate of creditworthiness.

France's reliance on tax rises to reduce its annual budget deficit had run out of steam while limited reforms of business subsidies, red tape and labour restrictions had failed to lift the country's growth prospects, S&P said.

Hollande's critics jumped on S&P's analysis and called for more flexible labour markets and an end to the 35-hour week.

The ratings agency said: "We believe the French government's reforms to taxation, as well as to product, services, and labour markets, will not substantially raise France's medium-term growth prospects."

"Furthermore, we believe lower economic growth is constraining the government's ability to consolidate public finances."

In essence, S&P has accused Paris of locking itself into a slow decline after a brief period of public goodwill towards reform evaporated. In a second downgrade since France lost its top AAA rating in 2012, the ratings agency chiefly blamed a lack of labour market reforms needed to raise employment levels and cut the number of people on the unemployment register for the drop in public support.

It said: "Ongoing high unemployment is weakening support for further significant fiscal and structural policy measures."

The European commission has urged Paris to make structural reforms in return for giving it an extra two years to bring its public deficit within EU targets.

Paris hit back at the criticism, saying it ignored the slow burn effects of several initiatives, especially reform of pensions, welfare benefits and other long-term government commitments.

The finance minister, Pierre Moscovici, also insisted that France's debt remained among the safest and most liquid in the world and challenged what he said were inaccurate criticisms of the French economy.

"They are underestimating France's ability to reform, to pull itself up," he told France Info radio. "During the last 18 months the government has implemented major reforms aimed at improving the French economic situation, restoring its public finances and its competitiveness."

Last year France's prime minister, Jean-Marc Ayrault, delighted business and angered union leaders by suggesting the 35-hour work week was not sacrosanct, although he stressed the Socialist government had no plans to change it.

All three major rating agencies have stripped France of its top-grade triple-A status, though S&P is the first to downgrade it for a second time.

Hollande has set himself the target of limiting France's debts to 86% of GDP in 2015 and his stance was rewarded by S&P with an upgrade in the outlook from negative to stable – however, a stable outlook also effectively rules out a recovery in the next couple of years.

The Hollande government has faced unrest in Brittany and widespread fatigue with higher taxes among both corporations and households, as well as a number of clashes with members of his own party who resist reform.

Hollande, who has had some of the lowest poll ratings in recent French history, has relented in the face of protests against some business taxes, but stood firm following the threat of a footballers' strike against high personal taxes – clubs have warned the 75% rate on earnings over €1m threaten "the death of French football". At 46% of GDP, French workers pay the highest aggregate tax rate in the EU, though tax avoidance is widespread.

Ratings agency Fitch last week upgraded the outlook on Spain's credit rating, pointing to a convergence between France – typically considered a core eurozone member – and Spain, usually described as a peripheral state.

Philippe Waechter, head of economic research at Natixis Asset Management, said the downgraded reflected views that the French government was not implementing reforms needed to repair its economy.

But, he said: "I don't think there will be a dramatic impact on French debt in the short term, because S&P is not expressing alarm and the outlook is stable

Eddie Jordan and Alain Prost paid $10m each in key F1 deal, court told

Bernie Ecclestone, the F1 chief executive, arrives at the high court in London for the latest day of the damages suit against him. Photograph: Barcroft Media

Three team principals including Eddie Jordan and Alain Prost were paid personally in order to ensure the signing of the key commercial agreement that binds Formula One together, the high court heard on Thursday.

Philip Marshall QC, acting for the German media company Constantin Medien in its damages suit against Bernie Ecclestone and three other defendants, said that in 2001 Ecclestone's family trust, Bambino, had made the payments to smooth the signing of the Concorde Agreement that dictates how revenues are split between the teams, the FIA and the Formula One administration.

The prosecution claimed Vulper Holdings, a subsidiary of Bambino, had made the $10m (£6.2m) payments via banker's draft to the four-times world champion and former team owner Prost, to Jordan and to the late Arrows team principal Tom Walkinshaw during negotiations over the 1998 Concorde Agreement.

Ecclestone, who claims to have no control over his family trust, said he had no knowledge of the payments, did not know what happened to the money and the Formula One chief executive suggested that it may then have been paid into the company accounts of the teams concerned.

"Well, the right person to speak to is the person that was dealing with this, because I don't know whatever it is and didn't have anything to do with it," said Ecclestone, during his second day of giving evidence in the case. "I've not the slightest idea. However, I know these teams had $10m each."

Marshall took Ecclestone through evidence of the bank transfers and cheques that were issued. It was known at the time that the teams received a payment for signing the agreement, but not that they were made to the personal accounts of the principals.

The payments were also discussed by Luc Argand, a Swiss lawyer who was also a trustee for Bambino, in evidence to a trial in Germany in 2011 that resulted in the banker Gerhard Gribkowsky being sentenced to eight and half years in prison.

They came to light as Marshall described how Argand considered such payments to be normal, because under Swiss law they are not illegal unless made to a public official.

Marshall asked Ecclestone: "Did you regard the payment of a bribe to someone who is not a public official as something that is acceptable?"

The 83-year-old, who is alleged to have entered into a "corrupt agreement" with Gribkowsky to ensure that Formula One was sold to a buyer favourable to him in 2006, replied: "I'll have to think about that. I wish I'd thought about it before actually."

Ecclestone has been accused of entering into a "corrupt agreement" with Gribkowsky to facilitate the sale of the Formula 1 Group to a buyer "chosen" by him.

Gribkowsky, a former BayernLB banker, has been imprisoned in Germany for accepting the cash as part of a $44m (£27m) alleged bribe. The German court is still deciding whether Ecclestone will stand trial on charges of bribery and incitement to breach of trust.

The former F1 shareholder Constantin Medien AG is suing Ecclestone and other defendants including Gribkowsky for up to $144m, claiming F1 was undervalued at the time BayernLB sold its stake in 2006.

Ecclestone is accused of making a "corrupt bargain" with Gribkowsky, who was allegedly paid the $44m after ensuring the bank's 47% stake was sold in 2005 to a buyer of Ecclestone's choosing, the investment group CVC Capital Partners.

The Formula One supremo has claimed he was being "shaken down" by Gribkowsky, who he alleged had intimated that he would go to the tax authorities with untrue allegations regarding his family trust that could land him with a large bill.

Lawyers representing Ecclestone have outlined their case to the judge in written arguments and say the claim "lacks any merit" and is "an artificial, manufactured complaint".

US loses Unesco voting rights after stopping funds over Palestine decision

The Palestinian ambassador to Unesco, Elias Sanbar, at the agency's general conference. Photograph: Jacques Brinon/AP

American influence in culture, science and education around the world took a high-profile blow on Friday after the US automatically lost voting rights at Unesco after missing a crucial deadline to repay its debt to the world's cultural agency.

The US has not paid its dues to the Paris-based UN Educational, Scientific and Cultural Organisation in protest over the decision by world governments to make Palestine a Unesco member in 2011. Israelsuspended its dues at the same time and also lost voting rights on Friday.

Under Unesco rules, the US had until Friday morning to resume funding or explain itself, or automatically lose its vote. A Unesco official, who was not authorised to speak publicly about the issue, said nothing was received from either the US or Israel.

The suspension of US contributions, which accounted for $80m a year – 22% of Unesco's overall budget – brought the agency to the brink of a financial crisis and forced it to cut or scale back US-led initiatives such as Holocaust education and tsunami research.

Many in Washington are worried that the US will become a toothless Unesco member with a weakened voice in international programmes fighting extremism through education and promoting gender equality and press freedoms.

Some fear that a weaker US presence will lead to growing anti-Israeli sentiment within Unesco, where Arab-led criticism of Israel for territorial reasons has long been an issue.

"We won't be able to have the same clout," said Phyllis Magrab, the Washington-based US national commissioner for Unesco. "In effect, we [now won't] have a full tool box. We're missing our hammer."

The Unesco tension has prompted fresh criticism of US laws that force an automatic funding cutoff for any UN agency with Palestine as a member. The official list of countries that lose their votes was expected to be read aloud on Saturday before the entire Unesco general conference.

Israel's ambassador to Unesco, Nimrod Barkan, told the Associated Press that his country supported the US decision "objecting to the politicisation of Unesco, or any international organisation, with the accession of a non-existing country like Palestine".

Unesco is probably best known for its programme to protect the cultures of the world via its heritage sites, which include the Statue of Liberty and Timbuktu in Mali. But its core mission, as conceived by the US, a co-founder of the agency in 1946, was to be an anti-extremist organisation. It tackles foreign policy issues such as access to clean water, teaches girls to read, works to eradicate poverty, promotes freedom of expression and gives people creative thinking skills to resist violent extremism.

Among Unesco programmes already slashed because of funding shortages is one in Iraq that was intended to help restore water facilities. Also in danger was a Holocaust and genocide awareness programme in Africa to teach about non-violence, non-discrimination and ethnic tolerance, using the example of the mass killing of Jews during the second world war.

This loss is a particular blow to the US, since Holocaust awareness was one of the areas the country aggressively promoted in the agency's agenda when it rejoined in 2002 after an 18-year hiatus, during which the US had withdrawn from the organisation over differences in vision.

The Palestinian ambassador to Unesco, Elias Sanbar, said other countries were beginning to make up for the US shortfall.

"Is this in the interest of the US, to be replaced?" he asked.

The Unesco director general, Irina Bokova, lamented the change. "I regret to say that I'm seeing, in these last two years … a declining American influence and American involvement," Bokova said.

"I can't imagine how we could disengage with the United States at Unesco. We are so intertwined with our message. What I regret is that this decision became so divisive and triggered this suspension of the funding," she added.

Bokova said she accepted political reality and would find ways for Unesco to continue its work, despite a 2014 budget that is down by an estimated $150m.

Some worry about more serious consequences if Palestine joins other agencies such as the World Health Organisation.

Iberia will return to profit next year, IAG predicts

Spain's flagship Iberia airline. Photograph: Sergio Perez/REUTERS

British Airways's struggling sister airline, the Spanish carrier Iberia, will return to full-year profit in 2014, according to parent companyInternational Airlines Group.

Iberia moved into modest profit over the summer as IAG reported increased overall profits, bolstered significantly by its new acquisition, the Spanish budget carrier Vueling. While Iberia turned a profit of €74m (£61m) for the third quarter of 2013, in what is traditionally the busiest three months for airlines, Vueling contributed €139m at a startling margin of 25%.

Willie Walsh, the IAG chief executive, said Iberia's improved performance came in the strongest quarter of the year. "However, the airline must continue to implement its restructuring plan and reach agreement on productivity changes to bring about long term sustainable profits and growth." Walsh said Iberia would make a full-year profit in 2014.

Around 2,700 jobs at Iberia will go by the end of this year, with further redundancies stretching into 2015, as talks continue with unions.

BA made €477m, up more than €200m from the same period last year when revenue dipped during the 2012 London Olympics.

Vueling's full quarter results were included for the first in the group's accounts, sending IAG's operating profit up to €690m. Walsh said that the Barcelona-based low-cost carrier had been very successful in both adding capacity and growing traffic, with more seats being filled even as available seats grew 22%.

Walsh claimed that Vueling was thriving due to being more efficient than rivals easyJet in costs and offering very different service to Ryanair. He said that in contrast to the Irish airline it had "a friendly image and friendly service culture".

In an apparent reference to the analysis offered by Ryanair's chief executive, Michael O'Leary, he added: "I don't think that you could have achieved those results in an environment quite as weak as some people would have you believe,

IAG announced on Thursday that it has streamlined its management teams with BA and Iberia's bosses leaving the IAG board to concentrate on running the individual airlines. BA's chief executive, Keith Williams, will also become the airline's chairman, while Iberia's chief executive will likewise become chair of the Spanish airline. The current chairmen, Sir Martin Broughton and Antonio Vázquez, will step down from the respective airlines' boards in January to continue exclusively in the roles at group level.

Thames Water price rise rejected

Despite Ofwat’s decision, Thames Water can still add 1.4% to customers’ bills for 2014-15. Photograph: Cate Gillon/Getty Images

Thames Water's request to raise customers' bills by 8% in 2014 has been rejected by the regulator Ofwat.

The company wanted to add £29 to the annual bills of its 14 million customers in London and the south of England, arguing that the one-off charge is needed to help pay for the Thames tideway "super-sewer" in the capital, as well as an increase in Environment Agency charges and a rise in unpaid bills. The rise would have taken the average annual bill to almost £400.

The regulator had already suggested it would block the rise, but gave Thames Water time to submit new evidence to back its case. Despite this it today confirmed it would not allow the rise. Its chief regulation officer, Sonia Brown, said: "We said we would challenge Thames' application in the interests of customers. We did just that and on the evidence provided we are not convinced an extra bill increase is justified."

Ofwat's decision means the maximum that Thames can add to customers' bills for 2014-15 is 1.4% above inflation, as set in a 2009 price review.

Thames Water had asked for this limit to be increased, arguing that it had experienced changes in costs since the price review. The terms of its licence state that it can do this where costs can be shown to have increased by an amount equal to more than 10% of appointed business turnover, although this contention was rejected by the regulator.

Recently, Ofwat's chairman, Jonson Cox, wrote to all water companies asking them to consider whether they needed to increase their bills for 2014-15 by the full amounts set in the last price review, given the hard time customers are facing.

It has also asked them to "reflect their customers' priorities" when submitting their business plans for the next review, which will cover the period from 2015 to 2020.

It said it believed there was "scope for reductions" in bills from 2015, and that companies which did not propose price cuts would need to explain why to their customers.

The environment secretary, Owen Paterson, has also written to company executives urging restraint on price rises.

Thames Water can now take its appeal to the Competition Commission. In a statement it said it would "review the decision carefully before deciding on our next steps"

Nissan might leave if UK quits EU

Carlos Ghosn suggested Nissan might stop making cars in Britain if an EU exit went ahead. Photograph: David Parry/PA

The head of Nissan has warned the car maker would reconsider its future in the UK if a push to leave the European Union succeeds.

Carlos Ghosn, chief executive of the Japanese motoring company, told the BBC his company would re-evaluate its position if the UK were to leave the EU.

Speaking at the launch of Nissan's new Qashqai model, he said: "If anything has to change we [would] need to reconsider our strategy and our investments for the future".

But he added that he considered such an exit unlikely.

The new Qashqai will be built at Nissan's Sunderland site, which employs 6,500 workers.

The prime minister, David Cameron, has promised a vote on EU membership in 2017 if the Conservatives win the next general election in 2015.

On Thursday, Lord Jones of Birmingham – the former director general of the Confederation of British Industry – said Britain must be ready to leave the EU to boost its competitiveness in the open market.

Writing in the Times, he warned that the EU was a "job destroyer" and that leaving would not be an "unattractive option".