Case Report

An Irate Distributor: The Question of Profitability

Jiramate Chanaturakarnnon 5502640245

Manopat Boonmana 5502640401

Woraphong Kingkawkantong 5502641300

Jinjuta Pheanpitayagul 5602640152

Pepe Arunanondchai 5602640780

 Irate Case

India is, throughout the country diverse in terms of culture and language. It possesses over 1

billion population spread countrywide. The nation is divided into five major regions; east, north,

northeast, south, and west India. Having two third of the citizens living the rural area, accounting for

about one third of the national income, everyone has the opportunities to barge into rural sectors.

Regarding the cultural diversity, the retail industry in India that presents lucrative opportunity, is also

very unorganised. Seeking for business success, organisations are to select the right method to

penetrate into the market, either in rural or urban areas.

Companies in Indian FMCG industry, the fourth largest economy sector of the country, is

among the those to face with the challenges of choosing the right distribution and retail formats to

achieve market penetration. while there are many types of retailing system, the distribution of FMCG

products in India can be listed down into levels.

1. Supplier : (NutriPack)

2. C&F : carrying and forwarding agency, who provides logistic service to the companies. It will

hold the stock inventory for the companies in its own warehouse, and is responsible for

dispatching the goods to the distributors. This service provider is an augmented service

which is not mandatory for all the distribution channels to possess.

3. Distributors (or super distributor to sub-distributors) : the distributors purchase stocks from

the companies and resell them to either the retailers or the wholesale outlets within the

designated areas of distribution. They usually own or lease the outlets to widen the

redistribution capability while being given margin of profit from the companies of their

service.
 4. Wholesalers : receiving the products from the distributors, wholesalers resell the products to

the smaller retailers or individuals. This type of company usually gain high volume but

receive small margin.

5. Retailers (urban and rural) : receiving the products from either the distributors or the

wholesalers, the retailers are the outlets that resell the products to the end or final

consumers. They usually have small stock-keeping units (SKUs).

● Self-service outlets : these outlets hold large quantity of SKUs while reselling the products to

the final customers. These customers are able to touch and feel the products before them

being purchased.

From the case, we have to bear in mind of distribution is the key success in FMCG

industry in India. FMCG products are growth dramatically in India, due to the emerging of

population and economy, especially the middle class, especially in the suburban area. The

market tends to be established with a total market size of US$13.1 million in 2012 with a

potential to growth up to US$33 million in 2015. However, the product faces consumer behavior

uncertainty in penetration rate in the northern and western part of India. People are health

conscious though sticks with drinking traditional tea, instead of adopting the new products.

Therefore, currently the penetration for HFD growth really low in the first few years. However,

growing of disposable income leads people to yearn for a better choice, a quality product. New

generation are adopting branded nutritious products, which cause a growing in demand and

also the retail.

NultriPack had to penetrate into small family-management shops such as grocers, paan

shops and hawkers along with the supermarket and teleshopping. The band wanted to target

the middle and lower class income, which consist of ⅔ of the total population. In order to reach

the consumer, there are almost 5 intermediaries before NultriPack product actually reaches the
final consumer. To do this, the company needs a good distributor that could understand the

local market in order to distribute the product to the largest number of retailer possible.

NutriPack India had managed to approach to distribution and retail channels in order to

widen the possibility to win over the market. However, the implementation can be more

complicated than just growing in distribution channel. Keeping the risk in the manageable level,

the company has to build the infrastructure and coverage while expanding into only one territory

at a time.

After the analysis of the growth other previous years, business contributed by each

district against population, number of population, spending power, market share of product

lines, outlet coverage, etc., the company was able to identify the territory that do not perform up

to the expectation, and there is a huge possibility for growth.

Jalgaon and Distributor

Jalgaon, Maharashtra, western India, is a district of major productive agricultural center

and major trading hub. Jalgaon, with the population of 4.2 million, 2nd highest district or 16% of

the total population in Central Maharashtra, it does not only grow internally, but it also feeds the

surrounding villages which results in its strong distribution market. Sachin Agency is a major

operator in distribution business in India for over 18 years, and is a distributor of Nutripower

(NutriPack) for the entire Jalgaon area since 2005. In 2011, Sachin Agency became the largest

distributor in central Maharashtra. The agency is keen to keep up with up with the current

performance in order to maintain its status of being exclusive distributor in Jalgaon for NutriPack

India.

While increasing reach to many more outlets in the territory is the path to move forward

and grow, Sachin Agency’s involvement and investment are the key success of the process.
However, with the thin profit margin of 4.5 percent, Sachin Agency is doubtful of further

expansion and higher investment. The company is to provide justification of 2011 investments.

Finding

Sachin Agency, in the Jalgaon, Central Maharashtra, West India, had been

underperforming. Jalgaon had been growing at 15% and over 16,000 annual income per capita

of over 4 million people. Even though the agency had been meeting the company’s target

keeping up with the competitor. The agency only manage to distribute to only half of Healthy,

the direct competitor of Nultripack.

Kumar desires capital this potential territory by selling more products to the current outlet

base, and adding newer outlets to his coverage. Sachin Agency also feel the challenge that the

consumers are becoming more demanding, as they are willing to go for new products and

desire higher incomes. This results the retailer demanding better service from the distributor.

However there are various problems that Sachin Agency had, both internally and externally. We

have to help agency solve his problem and convince that by investing more in the distribution,

Sachin can get an even higher return.

Nutripack

Nutripack is a multinational organization marketing FMCG product. Nultripack India was

expanded in India to take an advantage of the emerging market. The brand success in

launching nutritious drink, following with the nutritious jam. These two products lead its portfolio
in generating revenue. Companies also own another two products under its portfolio, energy

drink and honey. These 2 products has its own distribution and different market share.

Analyzing each product separately help us understand the problem better. Nutripower is use to

convince that there are opportunity for the distributor to earn more, and Nultrijam is use to

identify the problem that the distributor underperforming

Nutripower

Nutripack root in the HFD category with its brand “Nutripower”. The products are well-

perform in its market, with it quality and brand image. In favor with the incoming demand, the

brand is success with a 25 percent growth annually. The product is priced at 200 indian rupee,

which is quite high comparing to other players in the market.

Maharashtra is a state in the west-central India under the authority of Amit Kuma, the

new sales area manager. He is facing with an intense situation, to give an incentive for Sachin

Mandore, his dealer in Jalgaon, to invest further in his responsible area. Sachin Agency is

granted for a 4.5 percent margin, in which he claimed that it is too low that he couldn’t expand.

Sachin is a sole distributor in Jalgaon area, responsible to distribute the Nutripower

product, while other regions are runned by multiple dealer. Jalgaon is a populated business

district in Maharashtra. Sachin agency is operated with 3 salespeople, in which they are already

handful with their capability to cover the whole district.

Winning the number of distribution channel determines the success of Nutripower.

Currently, Nutripower is the market leader in Maharashtra areas with a total distribution outlets

of 12,710 stores in total. However due to inactivity from the lower incentive on Jalgaon dealer,

Nutripower is able to capture only 729 outlet stores, or 46 percent of the total number of outlets

in the market. Healthy, the market leader, is able to capture a total 1,418 stores on hand, which
is 89 percent market share in Jalgaon area. With this in mind, there are another 54 percent

untapped market for the company to expand.

Nutripower distribution outlets were growth at a steady rate of about 3.6 percent annually

from last year, while the number of retails in Jalgaon increase up to 10.7 percent. Kidenergy, a

new premium players with a retail price of 300 indian rupee, is an upcoming major competitor,

due to it high growth in term of product existence.

To convince Sachin agency that there is so much potential on expanding, it is the job for

Kuma to show the margin which Mandore will receive after covering more market share. We

assume that after giving incentive regarding our recommendation, Mandore will take an action

on investing in gaining more outlet stores for placing Nutripower products.

In order to catch up with the market leader, Nutripower need to grow way higher than

what the market perform. With this ambitious plan, it requires Sachin agency to invest in its

assets in order to be capable of catching up with expanding the market. The number of

resources are increasing proportionate to the growing number of stores (Exhibit1.1). With this,

the cost is increasing, however the margin which the company and agency will receive, is

significantly increasing.

Nutrijam

Being one of the most well received product, Nultrijam with the highest market share in

the Maharashtra state; with over 34% in volume and 42% in value and growing; Even though its

distribution is 2nd to Mazaa, with around 500 more distribution in 2011. This shows that our

products is selling more per each distribution. So we are assuming that it is the most popular

product in the Maharashtra as compare to the competitor.

However, this is not the case for the Jalgaon. As one of the most populated district in

Central Maharashtra it should be showing, more or less, the same trend as the total market.
NultriJam is the only brand that had a continuous decrease in its distribution from 2008 to 2011

and it only able to capture around 25% of the distribution where the competitor can capture up

to 75%.

As the Indian market KPI weigh heavily on the retail distribution, the low level of

distribution means the product cannot perform to its full potential. This might be caused by

various reason. one of the more significant course is the distributor. with the total retail

distribution increased, from 1060 in 2008 to 1270 in 2011, and the competitor also increase

accordingly, there is no reason for Nultrijam to be the only brand that reduce its distribution.

The reason for this underperformance might be caused by the distributor feeling that

there is no need for them to do any better as they had already achieve the target and reducing

the necessary risk. As seen on the Market share table, NultriJam manage to catch around 25%

of the total market volume and up to 30% in term of value; Which is only 2nd to only Mazaa. The

distributor might be satisfy with this number as it is almost the same as the total market, and

hence do not put in more investment to improve the situation. (Exhibit 2.1)

Another reason from this is that Jalgaon has a lot of smaller retail store as compare to

Central. According to the case, the company fear that the smaller store in the sub district cannot

pay up in time and hence do not deliver the goods to them. As a result, the number of

distribution in Jalgaon do not increase; and the reason that the volume and value remain high is

because the distributor only give the 15 days credit to the retailer along the main route which is

sure to have high sale margin and guarantee of payment when the time comes.

This is a problem with the distribution also causes the market margin to drop

accordingly. This can pose a huge problem for the band itself in the near future.

Credit change
 A trade credit is an agreement where a client can purchase products on account (without

paying cash), paying the supplier at a later date. Trade credit applies to business-to-business

trade, and has been essential approach to finance short-term growth. Merchants or suppliers do

not typically extend trade credit to businesses that have yet to establish good credit, or have not

proven that they are able to make payments on time. However, trade credit is a useful option for

businesses to receive supplies crucial to growth without paying immediately. Along these lines

they can sell their product before payment is due, or utilize the freed up cash flow for other

business purposes.( exhibit 1.1,1.2,1.3)

Looking at our case, Sachin Mandore offers 15 days credit to his retailers, equivalent to

his average closing stock. However, the smaller retailers under his distribution channels

complained of not receiving any credit. If they failed to pay on delivery of stock, the delivery

would not be made, and they would have to wait for the next visit, which sometimes was in two

weeks. The complaints were overwhelmingly strong. Since the channels in India are high

complexity, losing stock to small retailers the smaller retail like paan shops and hawkers might

not find our product to sell in their merchants. Nutripack extended trade credit for only 14 days

to Mandore, maybe this is the reason that Mandore or his salesrep did not offer trade credit to

small vendor. Some might think that this issue as a small problem, but talking about the number,

if Mandore fail to collect the money, agency will face about 54 INR million itself. If we do not

increase the distributor credit to 15 day, this means that they will have to use their own money

to pay for the supply. This put a lot of risk on the distributor, if they cannot collect the money

back from the retailer. this is the reason why they are reluctant give credit to those who are

more likely not able to pay back.

We would recommend Nutripack to extend the trade credit to Mandore to be 15 days, in

this case Mandore does not have to worry about late payment and provide credit to small
retailers. Also Mandore will perceive Kumar as a good guy, so he will open more to our

recommendation about expanding distribution channels. (exhibit 3.1)

Increasing Margin

Our objective is to increase the distribution of both our brand to increase our market

share in the Jalgaon district. In order to do so, we need to motivate our only distributor to invest

more into his business so as to increase the distribution. Currently, the distributor feels that he is

performing well enough and is unwilling to invest more. First we will show him that he is not

performing as well as he thought he was, by comparing it to the market growth and competitor

especially for NultriJam.

Then we will show him the reward that he will get if he invest more into his business. We

will not force him to put a huge sum of money in a single go. We had come up with a five years

plan to help our distributor cover at least 90% of the total distribution.

In the first year we are targeting at a 30% growth the distributor only needs to put in

29,000 more to buy another vehicle, driver and delivery boy , and a salesperson to maintain the

distribution. However, the distributor will get an increase in this margin; from originally 4.5% to

6%. Together with the 30%growth, the distributor is expecting to get 4 million gross profit. This

is 75% more than what he was originally getting. Assuming sale per store remain unchanged,

74,074.

For the next year, we will be increase the target to 35% growth. With another 29,000

investment, we will be giving him another increase in the margin to 7.5%. This will give the

distributor 7 million dollar in gross profit.

For the last 2 years we will ask the distributor to invest another 39,000 and 2,900

respectively, so as to get the distribution up to 90% of the total market in the final year. His
margin will increase to 9% and 10% and by the end of the fifth year he will be getting 15.7

million in gross profit, which is 500% of what he is earning now. (Exhibit 4)

Conclusion

Considering that winning the numbers of retailers is the key for company’s success in

India, Kuma, area sales manager of Nutripack, should convince Sachin immediately to take an

action on expanding the market. While expanding would cost a high investment cost, Nutripack

should encourage by showing the potential and growth in margin, which Sachin would get. In

order to trigger and motivate Sachin, increasing margin based on the performance of the dealer

would set a milestones for taking action. The company should remind himself of the

responsibility on taking action against bad debt receiving from the retailers, and should alleviate

the credit terms which creating tension on the transaction.

Exhibit 1.1)The table shows the projected growth in the distribution market in Jalgaon

Exhibit 1.2) Trade credit pros and cons of Nutripack India to Mandore

Pros Cons

Freed up cash for Mandore Risk of default

Incentivize Mandore to sell more of Late payment

Nutripack’s product

Reach small retailers and vendors to stock

our products
Exhibit 1.3) Trade credit pros and cons of Mandore to retailers

Pros Cons

More product sell High risk of default from small retailer

Freed up cash for small retailers Late payment

Small retailer won’t have to stay out of stock

for 2 weeks

Exhibit 2.1) NultiJam distribution

Exhibit 3.1) credit

 By giving the distributor the same 15 days credit, there is much lesser risk on the
distributor. they can pay back as soon as they are being paid. they are also be more willing to
give credit to have who have the lesser chance of paying up. if the retailer are not being able to
pay up, the burden will be place on the company not the distributor. This will give the distributor
more incentive to distribute the product to more retailer in the future.

Exhibit 4) The table below shows the projected growth and profit margin for us and the

distributor.

2011 2012 2013 2014 2015

#Store 729 948 1,280 1,800 2,150

margin 4.5% 6% 7.5 9% 10%

our revenue 53,999,946 70,222,152 94,814,720 133,333,200 159,259,100

distributor
revenue
2,429,998 4,213,329 7,111,104 11,999,988 15,925,910

Gross profit 2,354,048 4,108,379 6,977,154 11,827,038 15,723,960

 % increase 75% 70% 70% 33%
for the breakdown of each number find the table at the appendix page. (exhibit 4.1,4.2)

Exhibit 4.1) The table below shows the projected growth without any incentive
The overall increase in the profit is 195%

Exhibit 4.2) The table shows the projected income the distributor will get if we increase their

margine
The overall increase in profit is 567%