gino sa: distribution channel management

GINO SA

Distribution Channel Management

Gino Company Burner MarketSituation in

ChinaGino in China Challenges Analysis

Overview Understanding Background data provided

Major issues addressed

1. Whether setting up a warehouse in shanghai is good move?

2. Whether to accept or reject Feima’s Business offer?

3. How to resolve issues related to distributors?

4. How to increase sales of Industrial burners?

Searching for possibilities

Suggestions



Gino Burner Co.Headquarters in Paris, France

Largest Burner manufacturer and exporter in the world

Products

Domestic Burners

Commercial Burners

Industrial Burners



World wide production in 1999 (in thousands of units)

TABLE

1



David Zhou – Marketing Manager at Beijing office

Jean-Michelle Pierre – Gino’s Asia Pacific Manager who works

corporate headquarters in Paris

Functions:

Marketing research and campaigns

Administration of distribution channels,

Technical support,

Key end user accounts and OEM business development

People

Gino Beijing Office



Traditional markets like Europe and US have become saturated

Emerging markets like Asia, Middle and East parts of Africa are

posing great demand

World Markets for Burners in 1999(in thousands of units)

TABLE

2



From 1990-1998 market for burners increased tremendously

creating heavy competition among manufacturers

Gino became price leader achieving a market share of 14%.

It grew well in range of commercial burners but performed poorly

in Industrial burners due to dominance of competitor Weishaupt

Market situation



Customer Buying Process Manufacturers are solely dependant on distributors for sales

Flow chart of how burners can be purchased by end users and

intermediaries



SegmentationProduct type Average price per

unit (transfer price in RMB)

Market size(in value as RMB)

Profit margin

Domestic 2500 194 million <20%

Commercial 9000 198 million 25%

Industrial 65000 221 million 30%

TABLE

3



Gino’s Distributors Wayip Trading Co.

FUNG’s Co.

Jinghua Mechanical Engineering Company

Distributor’s

functions

Sending Letter of credit for an order to avoid risk for manufacturer

Stock function- Should forecast an order 3 months in advance

Should provide after sales services like installation and starting up

1

2

3



Distributor’s performance statistics in no. of units sold – in 1999

TABLE

4



Pricing of burners from manufacturers to end users Transfer price-

sold to distributors

Base price-converted to local currency

Public price-sold to public

Contract price-if sold at discount

Say 100$

100* 12.32

=1232 RMB

60% mark up

=1972 RMB

20% discount

(Max.- 25%)=1578 RMB

8.4 is conversion factor

1$= 8.4RMB

The rest 1.484 includes

Shipping charges, VAT,

Import duty, Transportation

and handling fee



Troubles with distributors

Demand for better prices

• Distributors began to bargain for better prices and marketing support

Stolen sales

• They began complaining that other distributors are poaching sales by offering more than permitted discounts

Reluctance to stock Industrial burners

• Due to high prices and inability to forecast demand they are unable to provide industrial burners when competitor’s customers turned to them



Achieving goals assigned

Achieve annual combined sales of 15000 units

Achieve annual sales of 200 units Industrial burners

Develop a minimun of two OEM accounts and two end user key accounts within 2 years



Current problem Feima Boiler Co. Limited – a leading boiler factory

Feima (main supplier-Weishaupt) is important for Gino.

Feima’s Boiler production in 1999 (number of sets)

TABLE

5



Business with Gino

Gino Jinghua Feima

Jinghua offered 25% discount for Feima

Sales to Feima form Jinghua in 1999

350 sets of Domestic burner

50 sets Commercial

3 sets Industrial



Gino

Jinghua

Feima

But Feima wants direct purchase without distributor

Reason- Better prices (at least 10% greater discount)

In return it offered to buy 50% of its burners from Gino.

Jinghua strongly opposed this.

OEM (original Equipment Manufacturer customer)



Accepting the proposal

Can Combat bargaining power of

distributors

Chance to acquire industrial

burner sales of Weishaupt

Obtain OEM and increase sales to

Feima which Jinghua cannot



Risk of losing Jinghua which

accounts for 40% of Gino china’s

revenue

Damage to trust and loyalty with

distributors

Bad relations with distributors which

may act to competitors’ advantage

Central Idea

Management of distribution channels



Warehouse set up

Estimated costs (in RMB)

Capital cost- 200000

Monthly operation cost- 30000

Capacity – 1200 units

Cost per year- 200000 + 30000*12 = 560000 RMB



Estimated revenue from selling to distributors

(From table 3 and 4)

Total= 12338250 RMB

Profit per unit sold= 12338250/12901 = 956 RMB



To cover up the cost of warehouse we need to sell 560000/956 =

586units per year.

Total sales in china are 12901 units per year. So it can easily

break-even.

Hence setting up ware house doesn’t harm.

We can compensate for the problem of reluctance of distributors

to stock burners. So even if the distributors don’t have stock

for competitors customers, warehouse can provide them required

burners.



Alternatives

The ware house can be formed exclusively for OEM and end users.

It can gain huge profits by selling at contract price and simultaneously

develop its sales force. It’s presence will also help improve it’s brand

image and distributors will be in check.

Or It can use it for direct selling as well as to provide back up for

distributors when necessary.



Profit from accepting the offer (from tables 3 and 5)

Type No. of units sold

(n)

Transfer price

(RMB)(i)

Revenue(RMB)

(i)*(n)

Baseprice(ii)=(i) * 1.48

Public list price(iii)=1.6* (ii)

Contract price with 10% more discount (iv) =0.65*(iii)

EstimatedRevenue(RMB)(iv)*(n)

Domestic 350 2500 875000 3710 5936 3858 1350300

Commercial

50 9000 450000 13320 21312 13853 692650

Industrial 3 65000 195000 96460 154336 100318 300954

1520000 2343904

Overall additional Profit= 823904RMB = 54%

Business with Feima



Present Purchase of Commercial and industrial burners by Feima

is 53/234=22.6%. If increased to 50%, more 46 units will be sold.

Increase in sales of commercial and industrial burners as promised

by Feima gives only 0.356% increase in overall sales volume.

But disadvantages weigh large against profits.

If Jinghua leaves Gino there is risk to 40% of its china revenue.

It’s overall sales may get affected varying the market share.

Gino doesn’t want this for sure.



Even if Jinghua doesn’t leave there will be agitation in relations with

distributors which may effect the brand image of Gino and can send

wrong signals to competitors. This is a huge price to pay just for the

sale of few Industrial units.

Gino will have to provide after sales services also and it lacks direct

sales force.

Feima’s offer can increase sales and provide OEM account but

Gino cannot afford to go against distributors who have

strong local influence.



Feima’s main concern is price.

So Gino can offer that by selling Jinghua at low Transfer price so

that it can sell to Feima at desired discount.

Disadvantage: Other customers will start demanding more discounts

Or It can allow distributors to charge for after sales services.

Or It can increase the mark up for public list price.

Alternatives



Suggestions

Gino should forgo setting up OEM now and plan well for it in future.

Going after OEMs may develop mistrust with distributors and

seem like taking control over sales. It should patiently grow its

sales force and then develop OEMs.

Gino should first resolve differences between distributors by keeping

a check on discount offerings they make.

Since Gino wants to increase industrial burner sales , it can

try to decrease price and improve performance of the models to

penetrate into Weishaupt’s market share.

Created by

A.KruthikaIndian School of Mines, Dhanbad

During an internship with Prof. Sameer Mathur, IIM Lucknow.www.IIMInternship.com

gino sa: distribution channel management

Marketing

china gino

manufacturers gino

market share

rmb market size

sales of industrial

range of commercial

price leader

great demand world markets