By Niharika Reddy, Siddharth Parthasarathy, Spandana Chivukula

India witnessed the launch of a much anticipated reform, the Goods and Services Tax (GST), on the 1st of July, 2017. The new unified taxation mechanism is expected to drive systemic cost savings in supply chain through efficient input tax credits, warehouse consolidation & quicker logistics. In line with the expectation, many FMCG companies did state that benefits were passed on to consumers through lower MRPs[1]. However, six organizations received notices from the Directorate General of Safeguards (DGS) for non-compliance. DGS is the arm of the GST council responsible for ensuring that companies pass on GST led benefits to consumers[2]. These seemingly conflicting developments intrigued us at Singularium Technologies. We then commissioned this study to assess the impact of GST on consumers. A large part of this study focused on HUL primarily due to two reasons – (1) it was one the six organizations to receive the DGS notice and (2) its wide portfolio of products allowed for wider category representation. Evidence from this study suggests that consumers did benefit from GST – at least from HUL ! FMCG industry witnesses high churn in product portfolio (ex. mrp changes, new launches, promotions, withdrawals etc.) and the sheer magnitude of fluctuations is a key challenge area for both retailers and FMCG firms. A cursory glance will surface multiple examples of benefits & burden transference. Following exhibit lays out a few examples :

Forming a robust point of view on the net impact of GST requires deep understanding of two areas (1) changes across the product portfolio & (2) relative off-take ratios amongst products in the portfolio to balance benefits & burdens.

Our AI backed crowd-sourced product cataloguing platform e90 keeps live track of changes in product portfolio and IMPulse platform (Intelligence Market Pulse) periodically baselines relative off-take ratios. e90 deploys proprietary Natural Language Processing (NLP) and Machine Learning (ML) led solutions to track and standardize rapid changes in MRP and other SKU attributes. e90 platform is primarily used to keep our partner retailer systems up-to-date with latest product information.

Using e9o & IMPulse platforms we granularly assessed the impact of GST on MRPs. We reviewed 2 lakh+ transactions in Bengaluru market. We focussed on data pertaining to 4 months : Apr’17-May’17 (Pre-GST) and Dec’17-Jan’18 (Post-GST). Our analysis which covered MRP trends across 800 HUL SKUs led to the conclusion that consumers on an average spent 1-2% lesser in the Post-GST period. Pre-GST relative off-take was used as weights while calculating the average. We feel above estimates are conservative and expect the benefit transference to be higher as we did not factor grammage change based benefit transference.

Brand Collage Image Source – Sunsilk Marketing Blog

Also, HUL has offered to return to the government, a further GST reduction benefit of Rs.119 crore for the months of November and December, which it could not pass on to consumers citing lack of time and supply-chain issues[3]. For instance, price of Surf Excel Matic Top Load Detergent Powder 2kg Pack increased from Rs. 430 to Rs. 435 with GST introduction (tax rates changed from 23% to 28%) in Jul’17. With first revision of rates in Nov’17, taxes were lowered from 28% to 18%, however the MRP continued to remain at Rs. 435 (refer to appended invoice images titled – Potential case for further MRP reduction). We foresee further benefit transference through likely corrections in cases such as above. On a side note, while reviewing invoices of other leading FMCG companies, we observed that some of them made an extra effort to notify their trade channels about changed MRPs through their invoices. (Refer to appended invoice exhibits titled – Transparent call-out to channel partners).

Given the initial evidence, we strongly believe that consumers have started benefitting from GST and organizations, watchdogs are likely to ensure that further benefits are passed along to the consumer in the days to come.

Appendix

1. Potential case for further MRP reduction

1a. HUL distributor invoice (dated 13th Oct, 2017, i.e. before 1st revision) for Surf Excel Matic Top Load – 2kg Pack

1b. HUL distributor invoice (dated 20th Dec, 2017, i.e. post 1st revision) for Surf Excel Matic Top Load – 2kg Pack

2. Transparent call-out to channel partners

2a. Colgate-Palmolive distributor invoice

2b. Himalaya distributor invoice

2c. L’oreal distributor invoice

[1] https://timesofindia.indiatimes.com/business/india-business/fmcg-firms-slash-prices-post-gst-reduction/articleshow/61742077.cms

[2] https://economictimes.indiatimes.com/news/company/corporate-trends/dgs-slaps-gst-profiteering-notice-on-hul/articleshow/62526653.cms

[3] http://www.thehindu.com/business/hul-to-offer-tranche-of-jan-gst-benefits/article22870537.ece, https://www.bloombergquint.com/gst/2018/01/17/hul-offers-to-pay-rs-119-crore-after-gst-profiteering-notice