Mint Explainer: Why Nestle failed to raise royalty payments while rivals did
Mint takes a look at how recent proposals to increase royalty payouts fared in the consumer goods space in India. The Indian subsidiaries of major foreign fast-moving consumer goods, or FMCG, companies often pay a fee known as royalty to their parent companies. This grants them access to resources, including globally recognised brands, technology, research and development capabilities, and shared services used throughout the entire organisation.
In the case of Hindustan Unilever Ltd, Nestle India and Colgate-Palmolive India, the royalty ranges from 3% to 5% of their net sales, analysts at Jefferies said in a note last month. In absolute terms, this implies an annual payout of ₹300 crore for Colgate-Palmolive, ₹900 crore for Nestle, and ₹1,900 crore for HUL, they added. Also read | Why royalty payout as a percentage of revenue needs to be relooked While investors appreciate the access to brands and tech know-how that Indian businesses gain from the parent, increases in royalty payments have always been an area of contention for them, Jefferies said in its note.
“A strong parentage by itself does not guarantee outcomes as local strategies and execution play a very important role," analysts at Jefferies said. “Also, it is not that MNC firms in India have outperformed peers on growth over the years. Companies like ITC, Tata Consumer have been able to generate significant scale at investments which are perhaps lower than what MNCs would have done in these categories." In January last year, HUL's board approved an increased payout to European parent Unilever Plc for providing technology, trademark licences and services.
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