Saturday, February 9, 2013

Unilever Sri Lanka war with Cargills Food City – self censored by our Media

Nowhere in the press has the full extent of the battle with Unilever, that Food City is raging been shown. Why? Obviously both Unilever and Food City spend Billions in Advertising that the Media, radio, tv and newspapers depend on and they want to conduct a secret war, out of the limelight!! Such is the power of Multinationals and Larger retailers in the Sri Lankan business world.

If any of the readers have been to a Food City store in the last month, one would notice that NO Unilever product is now being replenished once the old stocks run out. That is simply because Food City has demanded that Unilever reduce the net price of products which they invoice with VAT so that Food City do not lose out when they sell the same product and pay the VAT to the Inland Revenue after the imposition of VAT on businesses with quarterly turnover that exceeds Rs 500M.

Unilever is playing hardball as they DO NOT wish to reduce their margins by dropping their prices to Food City as the latter has committed NOT TO raise the prices owing to the new VAT rules. Who will win this tug of war is anyone’s guess, but I know there will be a compromise as both Unilever want Food City business that accounts for 12% of its turnover and similarly the sales of Unilever products account for 5% of Food City Turnover. In the interim the products of other competitors of Unilever are selling better at Food City, with many Food City customers getting fed up and deserting Food City to buy their products elsewhere at the smaller stores.

Another factor to take into account is that the smaller suppliers to Food City have had to eat the lower price that they are FORCED to sell to Food City. In some cases as Food City accounted for 80% of their sales, they are now making losses as they need the Food City business to keep their machines running until or unless they can find alternative businesses to sell their products to, which in a competitive environment is difficult to do in the short term. After all some suppliers did not have to have a large sales staff to sell to Food City as they had pre agreed quantities to pre agreed destinations that could be fulfilled without delay, and lower cost of transport and less need for sales trucks and related staff.

In this the consumer and the small producer suffer, whilst the Government gains. It is the government which must shoulder much of the blame in imposing VAT only on the four big retailers, as they believe it is easier to administer and is a tax on the big businesses with Sathosa the Jonah who should also be paying the VAT and I am sure through some quirk of Administrative order will wriggle out of their part.

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