channel management study lg final

MARKETING MANAGEMENT - II END TERM PROJECTBATCH OF 2013-2015PGDM (BM) - 1

A Field study of effective channel management in both unorganized and modern trade carried out by LG Electronics India at Bhubaneswar.

Presented By:

U113190: Aniroodh GaneriwalaU113197: Chiranjeeb MohantyU113200: Digant BhattU113225: Shaurya GulatiU113229: Siddharth MazumdarU113233: Stalin Mohapatra

REPORT OUTLINE

1. INTRODUCTIONA. Objectives of the studyB. CompanyC. Research MethodologyD. Limitations of the study

2. PROFILE OF THE ORGANIZATIONA. LG ELECTRONICS - An OverviewB. Product Line of LG ELECTRONICS

3. DISTRIBUTION MODELS/CHANNELS OF LG ELECTRONICS

4. ANALYSIS OF DIFFERENT LEVELS OF DISTRIBUTION NETWORK

5. CONCLUSION AND LEARNING

1

INTRODUCTION

2

A. OBJECTIVES OF THE STUDY

PRIMARY OBJECTIVEThe primary objective is to perform a field study for “Channel Management in Unorganized and Modern Trade”. It is thus required to understand the channel management principles and dynamics in distribution of electronic items via traditional channel and modern trade channel in Odisha region, particularly with respect to Bhubaneswar.

SECONDARY OBJECTIVES Complete study at the Retailer/Sub-Dealer Level and Distributor level Company’s sales mix at various levels Comparison with Competitors’ pricing Margins allowed at various levels

B. COMPANY

We have chosen LG Electronics as the company for our extensive market study. We have particularly dealt with practices in washing machines and refrigerators product categories.

C. RESEARCH METHODOLOGY

The most essential part of any research is its methodology. In our field study, we conducted primary research to analyze the market share and understand the distribution channel relationships.

We visited each of the following primary research point: 1. One Authorized and Sole LG Distributor2. One Exclusive Multi-Brand store3. One Exclusive Single-Brand store4. One Retail Chain(Modern Trade) store5. One Sub-Dealer/Retailer.

COLLECTION OF DATAData collected is basically through primary source by survey method using a simple question booklet and getting information from the company correspondent at each location.

D. LIMITATIONS OF THE STUDY

Research was restricted only to Bhubaneswar region. During research at Distributor-Level, the distributor was hesitant in mentioning the exact

figures for sales and profit margins. At the sub-dealer level, the respondent didn’t seem very much interested in the survey and

stated figures that seem a bit exaggerated.

3

PROFILE

OF

THE

ORGANIZATION

4

A. LG ELECTRONICS – AN OVERVIEW

The history of LG Electronics has always been surrounded by the company's desire to create a happier, better life. It was established in 1958 and the company since then has led the way into the advanced digital era, thanks to the technological expertise it has acquired by manufacturing many electronic appliances. Applying new technologies in the making of mobile devices and digital TVs in the 21st century, LG Electronics has unveiled many new products and continues to reinforce its status as a global company.

Headquartered in Yeouido-dong, Seoul, LG Electronics is a multinational electronics company, and a member of the South-Korean multinational conglomerate LG Corp. The two Korean companies, Lucky and GoldStar, merged to form LG. The abbreviation comes from this. But before it got its name as LG, Lucky was the brand name under which household products were sold, and Goldstar sold the electronic products under its brand name.

LG Electronics was one among the Top 100 global brands in 2005, and LG recorded a brand growth of more than 14% in 2006. The display manufacturing affiliate, LG Display, is today the world's largest and best plasma panel manufacturer. LG Electronics, today, is the world's second-largest television manufacturer and the world's fifth-largest mobile phone maker by unit sales.

B. PRODUCT LINE OF LG ELECTRONICS

5

DISTRIBUTION

MODELS/Channels

OF

LG ELECTRONICS

6

ROLE OF MARKETING CHANNELS

Successful value creation needs successful value delivery. Holistic marketers are taking a value network view of their businesses. The marketing channel performs the work of moving goods from producers to consumers. All channel functions have three things in common:

C. Use up scarce resourcesD. Can be performed better through specializationE. Can be shifted among channel members

After a company has selected a channel, the intermediaries must be selected, then trained, motivated and finally evaluated.

TRADITIONAL DISTRIBUTION CHANNEL OF LG ELECTRONICS IN BHUBANESWAR

MODERN TRADE DISTRIBUTION CHANNEL OF LG ELECTRONICS IN BHUBANESWAR

7

Company Office

(Kolkata)LG Area Office

(Bhubaneswar)

Exclusive Single-Brand

Retailer SpectraVision

Distributor

Exclusive Multi-Brand

RetailerKalinga Sales

Raj ElectronicsHindustan

Electronics Dealer Sales Officer (DSO)

Retailer Sales Officer (RSO)

Sub-RetailerElegant

Electronics Sub-Retailer

Retail Chain Local Outlet Pantaloons

Store (Bhubaneswar)

LG Electronics Headquarters

(Mumbai)

LG Electronics

Regional Warehouse(Bhubanesw

ar)Delivery Order to Local Warehouse

Stock Requisition Order

Deliver Goods

Purchase Order

Retail Chain HQPantaloons

Headquarters (Mumbai)

ANALYSIS

AT

DIFFERENT LEVELS

OF

DISTRIBUTION NETWORK

8

STUDY AT DISTRIBUTOR LEVEL

FUNCTIONS AND RESPONSIBILITIES OF AN AUTHORISED DISTRIBUTOR

We visited M/s. Mahaveer Agencies at Ruchika Market, Baramunda which is the sole distributor of LG Electronics products in Bhubaneswar. All the dealers/retailers in and around Bhubaneswar get their products requirements supplied from Mahaveer Agencies and it carries out its distribution activities on a daily basis. Being the sole distributor, it is very essential for Mahaveer Agencies to ensure proper stocking and effective functioning for the smooth and fast movement of LG products across the channel.

DELIVERY AND TRANSPORT OF GOODS

LG Electronics has its own warehouse, situated at Chandaka Estate, where it maintains a large inventory of its products across all categories. Mahaveer Agencies places purchase orders on a daily basis, depending on the movement of products in the market, and these orders are supplied from this company warehouse, which is about 10 kms away from location of Mahaveer Agencies. For any delivery of goods to Mahaveer Agencies, the company uses its own transport, contracted under Chourasia Roadways, and the entire cost of transportation from warehouse to the distributor location is borne by the company itself.

REORDERING SIZE, ORDERING FREQUENCY AND TRANSIT TIME

Mahaveer does perform order transactions with the LG Electronics regional office on a daily basis. The transit time for each order to be starts with the agency placing the order to the regional warehouse supplying the order after the payments are cleared. The entire transit time is about 3 to 4 hours. As soon as the LG regional office receives the payment through wire transfer from Mahaveer Agencies, goods are sent from the warehouse.

In our study, we have focused particularly on Washing Machines and Refrigerators product categories. The Reordering Size under both the categories is heavily dependent on the time of the year viz. in-season time and off-season time. The following figures illustrate the reordering size for different product types under both the product categories. The difference in the reordering sizes during in-season and off-season times is apparent from the figures.

9

33%

27%

39%

Washing MachinesAverage Orders

(30 - 35 pcs) Per DayOff-Season Top Loading

Front LoadingSemi Automatic

34%21%

45%

Washing MachinesAverage Orders

(320 - 400 pcs) Per DayIn-Season Top Loading

Front LoadingSemi Automatic

SUPPORT FROM SALES/MARKETING PEOPLE OF COMPANY

LG Electronics regional office has helped by deploying its employees at Mahaveer Agencies. This has helped in better grooming of sales personnel and better presentation of products in front of consumers as well as when they are dealing with other sub-dealers. The company also bears the cost for advertising and promotion of the brand to the tune of about 50% in most cases and to the tune of 90-100% in some special cases.

MARGINS ALLOWED

Mahaveer Agencies has set different profit margins when selling to subsequent dealers and sub-dealers. The profit margins vary depending on the product category in terms of how slow/fast the products moves.

Category Killers Good

BetterBest

0.00%2.00%4.00%6.00%8.00%

10.00%12.00%14.00%

5.50% 7.50% 9.50%12.50%

Margins while selling to Dealers and Sub-Dealers

Margins

10

50%

46%

4%

RefrigeratorsAverage Orders

(20 - 30 pcs) Per DayOff-Season

Side-By-Side Door

Double Door

Single Door3%

52%

45%

RefrigeratorsAverage Orders

(200 - 270 pcs) Per DayIn-Season

Side-By-Side Door

Double Door

Single Door

CREDIT POLICY

When procuring the goods from LG warehouse, Mahaveer Agencies doesn’t practice any credit policy. Goods are sent from the warehouse to the distributor only after the payment is made to the regional sales office.

Although Mahaveer Agencies has its own credit policy while distributing products to dealers and sub-dealers. It allows a grace period of maximum of 7 days within which the payment is to be made in full by the dealer or sub-dealer.

NB: - The distributor, Mahaveer Agencies didn’t reveal the figures for profit margins that it is allowed by LG.

CASH AND VOLUME DISCOUNT

Mahaveer Agencies gives a cash discount of maximum of 1% and volume discount of maximum of 5%.

MANAGING OF DAMAGED GOODS

If Mahaveer Agencies finds any good to be damaged or that it needs repairing, then it requests repair the damaged good within 15 days from the company or gets it replaced within the same time frame.

LOCAL PROMOTION AND BUDGET

Promotion is done locally and the budget is reimbursed in the range of 50 to 100% (in some cases) by the company.

OPERATIONAL DIFFERENCE BETWEEN WHOLESALER AND DISTRIBUTOR

In Bhubaneswar, the concept of wholesaler doesn’t exist.

NAME AND ADDRESS OF DISTRIBUTOR

M/s Mahaveer Agencies, Ruchika Market, Baramunda, Bhubaneswar

(Mr. Stalin Mohapatra with Mr Sudhir, LG correspondent at Mahaveer Agencies, at the agencies location)

11

STUDY AT SUB-DEALER (RETAILER) LEVEL

SALES MIX OF THE SUB-DEALER

For the purpose of studying sale of LG products (only in Washing Machines and Refrigerators categories) at sub-dealer/retailer level, we choose a multi-brand locally based agency called Elegant Electronics. The agency primarily deals in products by LG, Samsung, Panasonic and Godrej, that it procures for the distributors of the respective brands.

Under the Washing Machines category, it primarily sells products of LG, Samsung and Godrej, while in the Refrigerators category it sells products of LG, Samsung and Panasonic.

RATIO OF FAST MOVING AND SLOW MOVING

The TV, Audio and Video segment of LG is the slowest moving of all the product categories under the brand. On the contrary, in Refrigerators, Washing Machines and Air Conditioners segment, LG is one of the fast selling brands and has been a market leader in this region.

COMPETITORS’ PRICE OF LEADING BRANDS

The comparison of selling prices of Washing Machines and Refrigerators of LG with those of other leading brands is illustrated below. The prices are average of the selling prices of both, high and low end models for all product types, for better comparison against competitors’ prices.

Comparison of Prices of Refrigerators

Comparison of Prices of Washing Machines

NB: - All figures are in INR.

12

Top LoadingSemi Automatic

05000

100001500020000 16000

10500

14000

1200017000

9750

Washing Machine Prices

LGSAMSUNGPANASONIC

Models of Washing Machine

Price

in IN

R

Double DoorSingle Door

0100002000030000 22500

15000

23000

1475019500

13750

Refrigerator Prices

LGSAMSUNGGODREJ

Models of Refrigerator

Price

in IN

R

MARGINS ALLOWED

Elegant Electronics has a consistent profit margin of maximum of 2% on all products for all brands that it sells.

CURRENT PROMOTION SCHEME

Currently there are no sales promotions schemes on any product category by LG.

WINDOW DISPLAY AND MERCHANDISING

Elegant has managed well to display the products and different product variants of LG.

REORDERING SIZE AND FREQUENCY

The agency, Elegant Electronics, reorders stocks on a monthly basis, based on previous sales records and future forecasts. The average reordering size for refrigerators and washing machines of different brands is illustrated below.

NB: - The figures are average number of sales per month.

PAYMENT TERMS AND CONDITIONS, CASH AND VOLUME DISCOUNTS

Elegant Electronics procures its products from distributors on credit and exercises a grace period of about 5-6 days before repayment. It also gets an average cash discount of maximum of 1% and average volume discount of about 5% from its distributors.

13

Refrigerators Washing Machines02468

1012141618

171715

7

13

7

LGSAMSUNGGODREJPANASONIC

NAME AND ADDRESS OF THE SUB-DEALER

M/s. Elegant Electronics, Bapuji Nagar, Bhubaneswar

(Mr. Chiranjeeb Mohanty outside the showroom location of Elegant Electronics)

14

STUDY OF DIRECT RETAILING MODEL (SINGLE BRAND)

LG Electronics has recently adopted a franchising model, wherein direct company-billing and retailing is allowed alongside the regular Distribution method. In this channel, the retailer directly purchases goods from the Company and sells them with some amount of risk involved. In Bhubaneswar, Spectra Vision has an exclusive franchised LG store called ‘LG Shoppe’ in Unit IV (near Haka Restaurant) where it sells only LG Electronics goods through the Direct Sales model. Here LG Electronics is responsible for providing M/s. Spectra Vision with the company trademark/logo for promotion and merchandising.

SALES MIX OF THE RETAILER

The agency primarily deals with all kinds of goods which LG Electronics has to offer. Being an exclusive shop unlike various other multi branded players the variety is obviously vaster and also depth of the offerings is very high here.

RATIO OF FAST MOVING AND SLOW MOVING CATEGORIES

The TV, Audio and Video segment of LG is the slowest moving of all the product categories under the brand. On the contrary, in Refrigerators, Washing Machines and Air Conditioners segment, LG is one of the fast selling brands and has been a market leader in this region.


In this model of direct exclusive retailing, there was no scope of comparison of prices with the other competitors as LG Shoppe is an exclusive LG store.

MARGINS ALLOWED

LG Direct Retailing has different margin levels for various Product Categories. There are 4 Product Categories as identified by LG:

1. Category Killers2. Good3. Better4. Best

Category Killers Good

BetterBest

0.00%

5.00%

10.00%

1.00% 4.50% 7.50% 10.00%

Maximum Margins in Direct Retailing (Company Billed)

Margins

There is absolutely minimal scope of margin when it comes to Category Killer products at less than 1% and about 10% for Best category products.

15


Currently there are no sales promotions schemes on any product category by LG.


LG Best Shoppe has managed well to display the products and different product variants of LG.


For Direct Retailing, LG strictly has no Credit, Cash and Carry kind of a model. The overall margins of wholesaling are intact, but unlike the Distributor model, here there is no scope of any credit in the transactions.


LG Shoppe, reorders stocks on an entirely requirement basis, based on previous sales records and future forecasts. The Agency was not ready to share its entire Sales and Purchase Records with us but a brief idea about previous month’s data was provided .The average reordering size for refrigerators and washing machines and other products were as follows.

NB: - The figures are average number of sales per month.

16

Product Cat-egory

05

10152025303540

36

30

20

15

Refrigerators

Washing Machines

Air Conditioners

Microwave


LG Best Shoppe, Unit-4, Bhubaneswar

(Front Entrance of LG Best Shoppe

Name of the LG Executive :

Mr S.K.Swain)

17

STUDY OF DIRECT RETAILING MODEL (MULTI BRAND)

LG Electronics has exclusively allowed direct retailing for a few specific regional players that deal in multiple brands and products categories. In Bhubaneswar, M/s. Kalinga Sales is one such agency that deals directly with the LG Sales offices for procurement and sale of LG products apart from stocking and selling other brands like Samsung, Sony, Whirlpool, IFB and Panasonic. In refrigerator category, the agency maintains a brand portfolio primarily comprising LG, Samsung and Whirlpool, while for washing machine category it stocks brands like LG, Samsung, Whirlpool and IFB.

RATIO OF FAST MOVING AND SLOW MOVING CATEGORIES

For a multi-brand store like Kalinga Sales, LG has been a slow moving brand in the TV and home entertainment category, but despite of stocking other brands LG products move very fast in the segments like refrigerator, washing machine and air conditioner segment.


Kalinga Sales, being the stockist for multiple brands, prices the products from different brands across any product category in a comparable manner. The comparison of selling prices of Washing Machines and Refrigerators of LG with those of other leading brands is illustrated below. The prices are average of the selling prices of both, high and low end models for all product types, for better comparison against competitors’ prices.

Comparison of Prices of Refrigerators


NB: - All figures are in INR.

18

Side-by-SideDouble Door

Single Door

0

50000

10000088000

2943015470

86000

2819015950

2720014790

Prices of Refrigerators

LGSAMSUNGWhirlpool


Price

in IN

R

Front Load-ing Top Loading Semi Auto

010000200003000026990 18800

10060

26070

17150 114301924010950

Prices of Washing MachinesLGSAMSUNGWhirlpoolIFB


Price

in IN

R

MARGINS ALLOWED AND COMPARE WITH RIVAL BRANDS

Based on the speed of movement of products, Kalinga Sales classifies the products categories as Category Killer, Premium and Luxury items, in decreasing order of movement speed in the market respectively. The following figure illustrates the best available profit margins for Kalinga Sales under each of them.

Category Killers

Premium

Luxury

0.00%2.00%4.00%6.00%8.00%

10.00%

3.00%7.00% 10.00%

Maximum Margins in Direct Retailing (Company Billed)

Margins


Currently, there is no promotion scheme running in the store.


LG Electronics being one of the primary revenue generating brands, the agency was able to aptly place different variants of various product categories of LG across the showroom.

19


Reordering is done periodically depending on the season. During in-season, reordering takes place in shorter intervals about 15-20 days, whereas during off-season interval, the company reorders in monthly or maximum within 40 days. The following figures shows the reordering quantities for refrigerators and washing machines category for different product variants.

Refrigerator

Side-by-Side Door Double Door Single Door0

5

10

15

20

25

30

35

40

Refrigerator

LGSAMSUNGWHIRLPOOL

Washing machine

Front Loading Top Loading Semi-Automatic0

5

10

15

20

25

Washing Machine

LGSAMSUNGWHIRLPOOLIFB

20


The agency offers no credit to any of its customers. Sales is transacted strictly on cash/cheque payment. For cash payment, the agency offers a discount up to 1% and the volume discount of 3 to 5 percent on bulk purchases.


M/s. Kalinga Sales, Sahid Nagar, Bhubaneswar

(Front Entrance of M/s. Kalinga Sales Agency)

21

STUDY OF MODERN TRADE CHANNEL

SALES MIX OF THE SUB-DEALER

To understand the functioning of a modern trade distribution channel for sale of LG products (only in Washing Machines and Refrigerators categories) we choose e-Zone, which is a multi-brand electronic store under Pantaloons Store. e-Zone is a nation-wide retail chain for selling of electronic products across different brands and categories under one roof. The e-Zone store in Bhubaneswar deals in products by LG, Samsung, Panasonic, Sony, Sharp, Philips, IFB, Whirlpool and Godrej among others.

PROCUREMENT AND DELIVERY OF GOODS

e-Zone marts at local Pantaloons stores do not directly procure any goods. For all the stock requirements, e-Zone places a stock requisition request to its headquarters in Mumbai. The Pantaloons headquarter verifies the requirement and subsequently issues a purchase order to the LG Electronics head country sales offices. Once the payment is made by Pantaloons head office in Mumbai, the country sales office of LG Electronics asks the regional sales office to issue the requisitioned products and quantities from has its own warehouse, situated at Chandaka Estate. For all the delivery of goods, the regional office of LG Electronics uses its own transport, contracted under Chourasia Roadways, and the entire cost of transportation from warehouse to the store location is borne by the company itself.


For the comparison of selling prices of Washing Machines and Refrigerators of LG with those of other leading brands, we have chosen the prices of highest selling brands across both categories against that of LG. The comparison is illustrated below. The prices are the average of the selling prices of both, high and low end models for all product types, for better comparison against competitors’ prices. The prices for all the products at e-Zone are in-store prices (e-Zone prices) which are lower than actual company mentioned MRP. Comparison of Prices of Refrigerators


22Front LoadingTop Loading

0

20000

4000031990

19550

25000

15490 17580

Washing Machine

LGSAMSUNGWhirlpoolIFB


Price

in IN

R

Side-by-Side Double

Door Single Door

050000

1000007599023950 19790

82990

22490 149902450013570

Refrigerator

LGSAMSUNGWhirlpool


Price

in IN

R

NB: - All figures are in INR. MARGINS ALLOWED AND COMPARE WITH RIVAL BRANDS

At e-Zone, Pantaloons has a maximum profit margin of 5%, which is adjustable according to the category of product that it is selling. In any case, prices are always maintained above the Minimum Operating Price (MOP) and some margin is kept in every transaction.


Apart from seasonal and festive sales promotion schemes, e-Zone has a few schemes that run consistently through the year. One is that, it prices all its products below the MRP stated on the product. Secondly, it provides the exclusive option of paying the price in EMIs of 6/9/12 months at almost 0% interest rate.


e-Zone has a exclusive floor space in the local Pantaloons store where at entire floor is dedicated to the display of products. These products range in different categories and different brands. Sales promotion offers/schemes (brand wise or product wise) are exclusively displayed.


e-Zone has a reorders on a monthly basis and as per sales forecasts. Due to the fact that prices are non-negotiable in multi-brand electronic retail chain stores,

23

the movement of products is relatively slower than stand-alone electronic retailers, the reordering size for e-Zone is relatively lower. The average reordering size for refrigerators and washing machines of different brands is illustrated below.

NB: - The figures are average number of sales per month for across all product types/variants.

PAYMENT TERMS AND CONDITIONS, CASH DISCOUNTS

Pantaloons HQ procure goods for e-Zone on direct payment and local e-Zone stores have no role to play in deciding the payment terms. Although e-Zone provides its customers an interest-free EMI option adjusted over different periods. It also provides a cash discount of maximum of 2% to its customers for payment through cash.

NAME AND ADDRESS OF THE RETAIL-CHAIN STORE

M/s. e-Zone, Pantaloons Retail, Elegant Electronics, Sahid Nagar, Bhubaneswar

(Mr. Chiranjeeb Mohanty outside Pantaloons Retail store in Sahid Nagar)

24

Refrigerators Washing Machines0

5

10

15

20

25

30

35

35

20

23

7

28

8 8

LGSAMSUNGWhirlpoolIFB

CONCLUSION

AND

LEARNING

25

CONCLUSION

Through our field study, we understand the unique distribution model that LG has put in practice, where it proprietorship of the distribution to a single agency like Mahaveer Agencies in a sales region, to carry out the distribution of its products to sub-dealers/retailers. Apart from that LG also has a Direct Sales Network where it narrows the distribution channel by handing out franchise rights of exclusive only-LG showrooms, called LG Shoppe, to an agency like SpectraVision that can stock/display/sell its products. This Direct Sales model is also open to specific agencies like Kalinga Sales that are large regional players in multi-brand electronic retailing.

Alongside the conventional distribution model for regional agencies, LG has also adopted a modern trade distribution system for electronic retail chains like e-Zone, Next, Reliance Digital, Tata Croma, etc. Under this model, the LG allows the movement of goods between the regional SKUs of both parties under the control of their respective HQs. This model is becoming more and more relevant with the advent of retail-chain stores in tier-II and tier-III cities.

LEARNING

At the end of the study, we are now able to appreciate the fact that a field survey is an exhaustive and comprehensive task, and here primary research is much more important and relevant than secondary data. We have also learned that undertaking a marketing survey requires us to effectively communicate with primary sources to be able to derive data out of them.

Overall, it has been a task that is rich in experience.

26

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