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Executive Summary: Make Credit Terms Consistent
Executive Summary: Make Credit Terms Consistent
Racer is one of the leading players in Indian market for lube oil.Racer sells its products using two channels dealer channel and Bazaar or distributor channel. Dealers are either company owned stores or franchise stores, which sell directly to customer. A distributor buys products from Racer and then sells these products to retailers after adding its mark ups, retailer in turns adds its margin and sells racer products to customers or small garages. Racer has 6750 dealers and 2500 distributors. Over a period of time, Racer has been losing its market share to competitors. This decline in market share has been caused by leakage across channels, low brand recall for the racer products and lack of incentive for retailers to sell racer products. Retailer earns lower margin on racer product compared to similar product from competitor. Another problem is that Racer products have price variations across different retailers even in small neighbourhood. Based on our analysis, we propose that Racer should implement uniform credit terms of 30 days across channelsand price Racer product to dealer at `170and to distributor at`160.This will help in plugging leakage across channel. Racer should also move to volume based tier pricing to provide incentive to distributor to increase sales volume. Simultaneously Racer should invest more on advertising which will help Racer to improve brand recall to the customer. A detailed problem analysis and recommendations have been provided in the following sections.
Analysis
For the analysis of this situation we are assuming that presently no credit is being given to the distributor. A 60 day credit is given to only the dealers.
Racer Lube
Customer
volume increases and distributor moves to next tiers its margin will increase. But to increase his own volume distributorwill also pass some part of this incentive to retailers, so he will start tier pricing for retailer. Racer lube can have 2 tiers to start with
Tier 1- sales volume up to 26 KL , price to distributor - `170 Tier -2 - sales volume above 26 KL , price to distributor - `165
Different packaging
Racer lube can change the packaging for different distribution channels. The packaging of the product that is sold through dealers can contain warnings like Not to be sold through retailers. This will reduce the motivation for the retailer to purchase from dealers and only official channel left for them to purchase material is through distributors. Different packing will greatly reduce the leakage between the channels in any direction.
Recommendations
Our recommendation is to have combination of above mentioned approaches.
and retain `160 price at which lube oil is sold to distributor. This will reduce/ remove the arbitrage opportunity for dealer to sell to offload their inventory to bazaar channel.
Dealer Distributor