Work Group Members: - WG – AD1

21F514 MR. ANURAG PANDEY

21F523 MR. DURGA SAI TEJA KOKA
21F528 MS. ISHWIN KAUR
21F560 MS. VIDUSHI CHAPLOT
21F561 MR. VINAY KUMAR AKHILESH PANDEY

A. Am I in the right business?

Karan took up Cavin kare distribution line and after the first few months of enthusiastic
selling he wondered
“Here I am with Rs.10 lacs monthly turnover, 50 days investment in stock, 7% gross margin
and Rs.40000 Opex.
And then we have the retailer enjoying 30 days credit, no incremental or dedicated Opex for
my line, Aggregated Opex ranging from 6 % to 10%, but earning a gross margin of 15%+
additional schemes at 5% weighted on all products
Will someone tell me what is going on

Why is the Retail Margin higher than the Distributor Margin?

 The major factors that differentiate between the margins of retailer and distributors
are the direct costs involved in selling the products, volume of product sold, risk of
business and the overhead costs.

Direct Costs

 Generally, the direct costs, also known as cost of goods sold, is higher in case of
retailers. The distributors normally have a particularly fixed set of buyers whose
behaviour of placing orders depend mostly on the cost only.
 Distributor margins are usually dictated by the ability to move inventory and drive
sales to the retailers.
 On the other hand, the target audience for a Retailer is the general consumer whose
buying behaviour is more complex and depends of an array of factors.
 The retailer spends comparatively more amount on marketing the produce and
hence, the cost of goods sold is higher for retailers.
Overhead Costs

 The overhead costs are significantly higher in case of retailers as they have to spend
more money in almost every aspect.
 To start with, retail shops are normally located in prime location so that consumers
can easily access them. On the other hand, distributor warehouses have flexibility in
terms of location-cost aspect.
 This means that a retailer is likely to pay more in terms of rent.
 Similarly, other overhead costs such as setting up of billing system, maintaining
efficient inventory management system and maintaining an overall attractive nature
of store is important for retailer.
Volume of Sales

 The key factor that differentiates between the two models is the sales volume.
 A distributor normally has multiple number of retailers to whom they sell the
products. This means that for the same product, the number of units sold will be
very high for a distributor. Hence the overall revenue is higher.
 So, in absolute terms, a distributor is likely to generate more profit by selling the
same product at a lower margin.
Risk of doing business

 Furthermore, the nature of market generally dictates that a distributor could sell not
only large number of product but also sell it more frequently.
 On the other hand, retail market is dependant largely on consumer behaviour.
 It is not easy to predict the demand for a particular product for retail businesses.
Therefore, the retailers also have a tendency to buy products on credit.
 They might have to give higher incentives to consumers such as discounts or offers in
order to sell the slow-moving products in future.
 There is a risk of incurring a loss on these products and retailers normally increase
their margin to cover up for this loss.

Am I in the right business?

 The dilemma faced by Karan is a typical argument of absolute profit v/s marginal
profit. Even though distributor has a lower margin and probably higher investment,
the absolute profit that they earn is significantly higher than a retailer. Distributors
also have well established customer base and less fluctuating and predictable
demand. So, Karan is in the right business.
 A. Skew in channel margins-1?
Now that you have hopefully explained the factors that explain the skew between Retail and
Distributor, please consider the next question opn skew in margins across product category

 Retail Margin
 Prepaid Recharge :2.5% to 3%
 Maggi Noodle :9%
 Distributor Margin
 Prepaid Recharge: 1.5% to 2%
 Maggi Noodle: 6%
 What explains this difference?
Answer

Product Retail Margin Distributor Margin

Prepaid Recharge 2.5% - 3% 1.5% - 2%
Maggi Noodle 9% 6%

Comparison of Retail Margin

 A retailer decides the price of a product mainly on the basis of ability to sell the
product, how easy it is to store and durability of the product.
 Although both the products are easy to sell as they have good demand, the space
required to store a prepaid recharge card is way less. Also, a recharge card is less
likely to be damaged. Hence it can be sold at a lower margin.
Comparison of Retail Margin

 Distributor margin is decided with respect to ease of moving the product from
manufacturer to the retailer and frequency of orders received.
 The reason for profit margin being higher for Maggi is that the risk involved is higher.
It has to be moved carefully from one location to other.
 Simply put, if a recharge card gets damaged, another card with same serial number
could be created with almost no additional cost. But, a damaged packet of Maggi is
total loss. Hence, because of risk involved, margin is high for Maggi.
 B. Skew in channel margins-2?

 Retail Margin
 Prepaid SIM
 Product Price: MRP Rs.100 for new SIM activation+ Rs.100 recharge;
Effectively SIM is free
 Retail Margin: Rs.70; that is 70% margin!
 Nestle Chocolates :15%
 Product Price for 100g bar: MRP Rs.100
 Retail Margin: Rs.15; that is 70% margin!
 What explains this difference?

Answer

 The difference in retail margin seen in these products arises due to absolutely
opposing type of products sold.
 The major source of revenue for a SIM card company is not the SIM card itself, but
the mobile recharge coupons or the mobile bills generated after a consumer buys it.
 A SIM card company follows a “Razorblade Marketing Strategy” by incentivising
retailers to sell SIM cards at higher margin and then effectively gain profit from these
sales for years.
 On the other hand, Nestle chocolates need to be competitive with their pricing as
they are part of a highly competitive market. If they keep the retail margin high, it
will increase the selling price, which will not be good for the company.