MARKETING CHANNELS IN PAKISTAN’S PESTICIDE INDUSTRY

# Topic(s) To Be Covered
1 Types of Marketing Channels in Pesticide Industry
2 Franchise Model
3 Open Network Model
4 4C Model
5 Pesticide Industry In Context of 4C Model
6 Channel Power
7 Regulatory Environment
8 Marketing Channel Profitability
9 Emerging Trends & Scenarios
9.1 o Distributor Model
9.2 o Corporate Sales
9.3 o Web-Based Sales

TYPE OF MARKETING CHANNELS IN PESTICIDE INDUSTRY

The total number of dealers in the country is estimated to be about 10,000. The number of dealers working
through the franchise network is about 3000 in number.

Till the late 1990s pesticides were distributed mostly through open network shops where farmers could find
products from multiple companies. Syngenta pioneered the idea of exclusive franchise network which has
become hugely popular ever since.

Most of the top companies operating in the business have franchise networks. It is estimated that about 40%
of all pesticide sales are through exclusive franchise network while the rest is through open network.

The dealer plays an important source of information to the farmers and his input in the purchase decision is
considered to be crucial. The sales force cannot possibly reach all the farmers but almost all the farmers come
into direct contact with the dealer and therefore the dealer has a key role in advising the farmer in what to use
and how to use the products. It is estimated that sales personnel spend almost half of their time with the dealer
and the rest with a few selected farmers.

The dealer also plays an important role in terms of providing credit to the farmers. It is estimated that between
30% to 50% of the sales to farmers are on credit. The companies typically provide 10 to 25 % of sales on
credit and the rest of the capital is contributed by the dealer.

Pesticides are distributed through one of the two channels:

1. Franchise Model
2. Open Network Model

This note was written by Mr Muhammad Luqman Awan at the Lahore University of Management Sciences to serve as basis for class
discussion rather than to illustrate either effective or ineffective handling of an administrative situation. This material may not be quoted,
photocopied or reproduced in any form without the prior written consent of the Lahore University of Management Sciences.

© 2015 Suleman Dawood School of Business, Lahore University of Management Sciences

Marketing Channels in Pakistan’s Pesticide Industry

Franchise Model

The franchise network has been gaining momentum over the last one decade. Most of the top pesticide
companies like Syngenta, FMC, Ali Akbar, Warble, Suncrop, 4B, Auriga have franchise networks. These
franchise networks typically have a unique name which are given below:

1. Syngenta Niya Sawera

2. FMC Fmc Shop
3. Ali Akbar Target
4. Warble Agro- mart
5. Suncrop Tahafiz
6. 4B Tarzan
7. Auriga Sayban

The notable exceptions are Bayer, Arysta Life Science, Kanzo, UDL and Avari. These companies for various
reasons have not opted for an exclusive franchise model. Bayer and Arysta life science for example, have a
limited product range. UDL and Avari have weak management and irregular supplies and therefore it is
understood that they will not be able to have an exclusive network. The reasons for Kanzo not opting for an
exclusive network are not known.

The exclusive franchise network usually offers additional discounts on prices to the franchises. Typically this
is 2% additional discount over and above whatever an open network dealer would be getting. Exclusive
franchise networks also have dedicated field staff provided by the company commonly called a F.O (Field
officer). Usually the field officer is dedicated for annual sales of 5.0 million to 7.0 million. For bigger
franchises with sales exceeding 10 million rupees per year more staff are also attached with the franchise.
The field staff gives follow up calls to the farmers who have bought the products of the company and also
sometimes physically delivers the product to the farmers. The FO gets a monthly salary of Rs.12,000/ to Rs.
16,000/ from the company. In case of many companies he is hired on a seasonal basis for about six months
and then laid off. The F.O has a dual reporting arrangement and while he is dedicated to a franchise he also
reports to the Territory sales officer of the company.

The franchise agreement is subjected to a franchise fee which is paid by the franchise. The fee is actually a
security deposit which is refunded if and when the agreement is terminated by either party. Another model
that is followed refunds the security if the franchise keeps working for a minimum period which is usually 4
years.

The company bears the entire furnishing cost. This includes the tables, chairs, hoarding boards etc. The
location is an important decision for the company. Franchise shops in the main markets are awarded to
financially strong dealers and the business volume targeted is at least 10 million per year.

Usually the franchise shops are managed by dealers who are relatively new to the business. Average
experience is 10 years. The franchises have far lesser tendency to offer products on discounts than their open
network competitors. Similarly the dealers working in a franchise network also tend to give less credit than
open network.

Open Network Model

Most of the well established dealers work through the open network. Working in open network means that
the dealer is carrying products from many companies. On average the dealer carries product from 5 companies
(Survey carried in Rahimyarkhan & Okara; sample size 30 in each district). On average these dealers had
been in business for the last 15 years. 70 % of these dealers carry some other input item like spray machinery,
seed and fertilizers.

Open network dealers have tendency to give products on credit. Though dealers were reluctant to share
specific information it was observed that more than 50% of the pesticides were sold on credit. The credit
extension varied from a week to end of crop.

Open network dealers typically carry products of one multi-national, two top national companies and products
from two smaller national companies which are mostly restricted to their district.
Based on a payment-to -company criteria these dealers work in two ways.

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Marketing Channels in Pakistan’s Pesticide Industry

1. Advance bookings for Kharif

2. Net rates

In the month of December, the pesticide companies launch what is called the advance booking policy. Under
this policy the dealers are encouraged to deposit cash or bank guarantee to the pesticide company. The
discounts are applied on what is called seasonal rates. A discount slab is also introduced which means that
the more a dealers pays in advance the more his percentage discount is. For example, a 10 % discount is
offered on seasonal rates for a dealer depositing 500,000 rupees. The discount percentages increase to about
18% for amounts of 10 million.

There are several advance booking policies. The December advance booking phase is followed by two or
three more advance booking polices till the wheat harvesting time. The benefits to the dealers are
progressively decreased so that the maximum benefits shall always remain with the dealers who submitted
cash/ bank guarantee in December.

Companies also offer year end incentive to dealers in addition to the advance booking discounts. The
objective of the year end incentive which range from 4% to 10% on all business is to keep the dealer engaged.
Most of the companies offer products in lieu of the value of the accrued incentive or in other words the
incentive is not paid in cash. This means that the true cost to the pesticide company is less since the products
given in lieu are sold at seasonal rates. The percentage of the year end incentive increases with the volume of
the business and the idea is to encourage the dealer to get to a bigger sales figure. Typically the year end
incentive starts with 4% for a million rupees of business and goes as high as 10% for a total business of 10
million or more.

Special policies to promote product is additionally launched by many companies. Such incentives are mostly
on products with high margin. Micro nutrients are one such category where special incentives are not
uncommon. The company would usually offer these incentives on a per pack basis.

The policies offered (Advance booking, year-end incentives, special incentives etc) are not much different
among the national companies. Mostly the prices (seasonal rate list) are in a plus/minus 5% range for generic
products but maybe larger for differentiated products. The cumulative effect of these policies falls in the
range of 25% to 30% on the seasonal rates.

The multi-nationals usually do not follow each other’s sales polices as they tend to rely more on technical
sales and the brand image. The cumulative effect of the policies is usually in the range of 6% to 15%.

As the Kharif season reaches it’s peak the sales are based on rates what are called Net rates. The net rates are
based on the assumption that the dealer would be paying cash to the company. The Net rates are supposed to
be always more than the advance booking rates so that there is an incentive for those dealers who paid in
advance.

Dealers typically pay 30% to 40 % in advance during various stages (1/3 in December advance, 1/3 in January
or February and 1/3 on wheat for example). The rest of the sales i.e 60% to 70% are on the net rate basis.

4C Model (Customer, Competitor, Channel Capability, Company)

a. Start with your Customer

The first step starts with managers developing a better understanding of customer requirements. For any
channel design exercise, it is important that managers clearly understand how the customers would want the
products to be delivered to them.

b. Benchmark your key Competitor

After understanding your customers, a firm also needs to bench mark itself with competitors. A
comprehensive overview of competitors’ structures to assess its channel service competitiveness and costs
associated with it will be useful.

c. Measure Channel Capabilities

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Marketing Channels in Pakistan’s Pesticide Industry

Channel capabilities are best measured with customers’ perspective i.e. which channels perform which
functions the best for the intended target segment.

d. Implementing Channels at Company Level

The last step involves evaluation of the 3Cs and its fit with the firm’s objectives. Major objectives for
distribution channel include maintaining market coverage, preserving product quality and ensuring the
integrity of the buying process at the lowest cost to firm. In addition, firms also aspire to develop channel
structures that can help reach untapped segments of the market.

Pesticide Industry in Context of 4C Model

Customer

i) Dealer (Primary Customer for Organizations)

Following are the crucial factors stated by the franchises for opting for business with a company.

1. Product quality
2. Regularity of supplies
3. Field activities (Volume and quality of services)
4. Discounts offered
5. Overall price levels (to farmers)

Product quality has been ranked as the number one concern by the dealers. According to the Agriculture
pesticide ordinance 1971 the agriculture department has the powers to inspect the shops and adjacent
warehouses/stores. The department official may lift any product and send it to the central laboratories for
testing. Any failure of the sample results in the launching of criminal proceedings. If that happens an FIR is
lodged by the Agriculture department against the dealer and the company. The dealer in such eventuality is
in the direct firing range and therefore expects the company to arrange for his bail before arrest and to lead
the legal proceedings. Companies which do not do so are often shunned by the dealers.

The regularity of supplies is the second most important criteria. In the past several years many national
companies have failed to deliver products despite advance bookings. Companies which have had a poor track
record have lost business. In 2014, two major national companies could not supply generic products like
Cartap and Mono mehypo on time due to supply chain issues. These products are considered vital for rice
crop. The result was huge disappointment among the dealers of these companies and many of them severed
their business relationships.

Filed activity is also considered crucial by the dealers. Companies with established brands usually have a
strong field activity and are sought after by dealers. The field activities are led by the area sales officer usually
called the TSO (territory sales officer). A typical territory has acreage of 200,000 acres, has one main market
(say a tehsil head quarter) and three to four small towns. A TSO normally works with three to four main
dealers and has one to four FOs working with him. He is supervised by a region sales officer or RSM. The
RSM plays an important role in building the relationship with the dealers. Many of the dealers have had long
term association with the RSM or the TSO and any switching of job by him also results in the dealers
switching to the new company that he joins. The RSM- dealer nexus or the TSO- dealer nexus has been
growing stronger over the past several years as more and more companies have introduced products with
comparable performances in the field. This has really shifted the balance of power away from the companies.
The practice of RSM and TSO becoming an investor himself with the dealer is also on the rise. Some have
suggested that this is true for more than half of the sales staff. Under this arrangement the TSO or RSM invest
at the stage of advance booking with the dealer and then share the spoils. The administrative expenses are of
course borne by the company. Many of the companies are aware of this practice but have decided turn their
back and even encourage the sales staff to invest and take higher risks. This practice according to such
companies is “win/win situation”. However the practical problem in such arrangement is that the sales officer
and dealers together bargain with the company on ever bigger discounts.

The discounts offered by companies are usually in a narrow range. National companies compete among
themselves for offering ever better discounts to the dealers. The practice of giving undocumented special

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discounts to big dealers is not common. For example a policy may state that the dealer is eligible for 18%
discount, the RSM may negotiate a better discount of additional 2 to 3% to the dealer.

The overall pricing level is considered important by dealers who mostly sell the product on cash to the
farmers. The farmers in such case are in a position to dictate their terms and therefore the dealer often finds
himself defending the prices offered by the company. The dealers who mostly sell products on credit basis
are not much concerned about the pricing levels. The dealers in both case keep a close eye on the FRP (farmer
retail price) printed on the product label.

ii) Farmer (Secondary Customer for Organizations)

The farmer’s purchase decision is usually based on one the following factors.

1. Experience of the farmer

2. Experience of a fellow farmer
3. Availability of credit (from a dealer known to the farmer)
4. Recommendation of a dealer known to the farmer
5. Recommendation of a sales representative

The influence of the umbrella brand is significant yet it cannot be claimed to be the influencing factor.

Farmers make the purchase decision primarily because of the factors listed above.

It is often observed the farmers do not purchase all the products that they need from a single company.
Interestingly the purchase behavior of farmers to choose some brands from multinationals while others from
national companies is not uncommon.

Competitors

Predominantly, the break-up of key operating players in the pesticide industry is as follows: 3 Multinationals
and approximately 350 Generic Companies.

Primarily, Multinationals differ from local generic companies in one way: customer-focused approach.
Activities are specifically designed by these companies to target farmers and generate as much pull of demand
as possible. FAS (Farm Advisory Services) are one such instrument used effectively by MNCs. However,
FAS are a costly proposition and furthermore the return on these activities take a long time to realize, hence
local generic companies have a hard time in investing in such activities. Due to the ‘short-term’ mindset of
these local generic companies, we mostly find them unable to develop sustainable value with their core
customers i.e. the farmers.

Channel Capabilities

Given current customer and competitor analysis, it is safe to say that a franchise model would be best suited
to cater to current channel requirements. However, open network model is much better suited when
customers search for larger assortment pesticide choices and continuous availability of pesticide products.

Company

Finding a strategic fit between corporate objectives and channel design is essential to constructing an effective
marketing channel. If the strategy of the company is to sell differentiated products at higher margins, establish
brands, sell on value rather than on price attribute then it ought to choose the franchise model. The control of
the company over pricing is minimal in case of the open network where discounting by the dealers is a
common practice. Such discounting affects the image of the brand and long term sustainability also becomes
doubtful.

Companies which have adopted the strategy to sell differentiated products have been promoting their own
exclusive franchise network. The strategy of franchise network is more sustainable and profitable for the
company. It leads to the sales team having focused field activity. Sales personnel have to spend far less time
dealing with the dealers and therefore are bound for the field where actual demand is generated. Price
negotiations simply do not happen. Though this strategy for a startup is considered as slow progressing but
it is considered more fruitful in the long term.

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Marketing Channels in Pakistan’s Pesticide Industry

Channel Power

The balance of power in most cases in the industry is with the dealers. The more a company gets established
and by that it is meant that the brand names become well established the more the power shifts back from the
dealer towards the company.

The following criteria are usually used by companies while selecting a dealer

1. Local roots (prevalent credit terms)

2. Financial strength and credit worthiness
3. Business history
4. Ability to identify a good location for a shop

The selection of dealers is an important decision for the company. Almost in all case the dealer belongs to
the area and is socially well connected. The dealer belonging to the trading background often has a higher
business sense than a typical person belonging to farming background. Financial strength is a crucial criteria
and an investment of Rs. 3.0 million is considered to be a decent level of funds that should be at the disposal.

Regulatory Environment of Pesticide Industry

Pesticide distribution in Pakistan is governed by pesticide ordinance 1971. The law stipulates many conditions
on the companies selling and distributing these products and therefore any strategy has to be formulated
within the ambit of this law.

The most important aspect of this law as far distribution strategy is concerned is that no company can directly
sell products to the farmers. Hence a distributor/agent has to be in involved in the transaction. Such
agent/distributor has to obtain a license from department of plant protection after attending a week long course
and paying the legal fees.

Dealer Profitability

The average sales of a dealer working through the open network in the industry are Rs.5.0 million per year
(Total size of the industry is Rs. 50 billion; divide that by total number of dealers which is 10,000). The
average income of an average dealer in open network is assumed to be Rs. 0.8 million per year (assuming he
works on 25% G.P and cost of doing business is Rs. 450K per year). The rent of a typical shop is Rs.
10,000/month or Rs. 120,000/ year. The cost of Staff (1 or 2 workers) is assumed to be Rs. 150,000/year
while other expenses are assumed to be Rs.180,000/year. The default percentage in this business is assumed
to 5% of sales.

In case of franchise the G.P percentage is assumed to between 2% to 3% higher. In case of multi-nationals
the percentage offer to the dealer is between 10% to 15%. A typical franchise of a multi-national has sales of
Rs. 10 million.(Syngenta has sales of Rs.9.0 billion and a dealer network of 950 dealers). And therefore his
average income is 0.75 million (Assuming 12% G.P on sales of 15 million, expenses assumed to be 450 k).
The default percentage in case of franchise dealer is assumed to be 2% since a higher percentage of the sales
are on cash basis.

EMERGING TRENDS & SCENARIOS

Distributor Model

During the course of this research we also had the opportunity to explore the distributor model which does
not currently exist in the business. Under this arrangement a distributor can be appointed who holds the
inventory on behalf of the company and then distributes the products to the dealers (open or franchise). There
are two important roles that the distributor shall be playing

Storage- inventory management

Supply chain management

The storage cost in the industry is usually assumed to be around 1% of sales while the distribution cost (from
company ware house to dealer shops) is assumed to be around 2% of sales. Therefore if the distributor charges
less than 3% from the company then the company stands to gain financially.

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Marketing Channels in Pakistan’s Pesticide Industry

Besides the financial benefits the controls over the supply chain and distribution are not crucial for the
company as long as the distributors are monitored according to S.o.P.

Apart from potential savings, the distributors can also be an important source of working capital. Financially
sound distributors can be instrumental in participating at the advance booking stage and therefore can also
result in lowering of financial costs (which otherwise would have to be incurred). The global demand of most
pesticide products is not even through the year. In most cases, the manufactures offer attractive discounts
(usually in excess of 5%) to buyers willing to make the purchase a quarter ahead of the actual demand.
Therefore the company can leverage the financial position of the distributors to make purchases ahead of the
actual demand and share some of the spoils with the distributors.

However, managing the relationship between the distributor and the dealer is likely to be a challenge.
Distributors are likely to push products rather than contribute in brand building. It is also possible that they
would not push the dealers in building long term relationship with the farmers by investing in field activities.
Distributors are usually keen to explore the shortage scenarios and therefore would push the company for
supply of products in demand but not be interested in creating demand.

Distributor model may not be the best solution for the entire length and breadth of the country as the market
dynamics vary across regions. For example, the distributor model may work for multi-crop areas like Sahiwal
and Faisalabad but may not be as successful in areas with Wheat- Rice cycle. The multi crop areas has
frequent activities since there are at least three crops and the product demand in terms of value is also higher
compared to Wheat-rice cycle.

The distributor model is likely to be more successful and easy to manage in scenarios where there are
established brands, distribution costs are higher (5% plus in terms of sales value) and so are inventory holding
costs (2%/month or more).

Taxation is also an important factor which ought to be considered. In case of the distributor model the
company would be selling the product to the distributor and then the distributor would then be selling the
products to the dealers therefore additional tax (GST) would have to be paid and this will add the costs to the
farmers.

In this case, when the company is planning to introduce brands, the distribution costs are likely to be around
2% and inventory holding cost around 1% it may not be an attractive option to start with. However 3 to 4
years down the road it seems like a good option.

Corporate Sales

An important and emerging sales channel is corporate sales. Many of the businesses which rely on the
agricultural inputs to run businesses are supporting or are planning to support the farmers with the purchase
of agricultural inputs. The sugar mills especially those which are witnessing competition from other crops
and a declining or below average sugar recovery are engaged in such practice. Similarly tobacco companies
and companies requiring corn are also a potential strategic partner with pesticide companies which can
provide complete solution to their farmers.

Impact of Technology

The big move that can be a game changer for the industry is as and when the government allows the companies
to sell the products through the web. E commerce is on the rise not just globally but is also picking up in
Pakistan. Legally, companies cannot sell their products directly to the farmers but the vast gap between what
the company charges the dealers and what the dealer charge the farmers (25% on average) may change sooner
than later. Pesticide companies are not lobbying at the moment for an amendment in the law but this can be
changed and could become a lucrative new sales channel.

SUMMARY

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Marketing Channels in Pakistan’s Pesticide Industry

The pesticide industry is legally bound to sell it’s products through dealers. There are two common channels
of sales, the open network and the franchise network. There are an estimated 10,000 dealers in the business
out of which 3000 are franchise holders while the rest work with several companies.

The purchase decision of the farmer is significantly influenced by the dealer who is an important source of
information and credit to the farmers.

Dealer profitability among the two channels is comparable though the sales in case of a franchise dealer is
almost double as compared to an average open dealer (Rs.10 million for a franchise compared to Rs.5.0
million for an open network dealer). The average G.P of an open network dealer is 25% compared to 12%
for a franchise dealer.

It is recommend to have a franchise network so that the company can differentiate it’s products and avoid the
price wars. In the medium term it is also recommend exploring the direct sales to corporate clients like sugar
mills.

The company should also lobby with the government for allowing companies to sell directly to farmers
especially through the web.

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