GINO SA: DISTRIBUTION CHANNEL STRATEGY

A DETAILED CASE ANALYSIS

COMPANY BACKGROUND

Gino Burner Co., a leading manufacturer of burners is

headquartered in Paris,France.

The company is a leader in Europe but growth is becoming stagnant. The new frontier is Asia and China

is the rising star.

GROWTH OF MARKET SHARE OF GINO IN CHINA

DOMESTIC- 1% TO 14%COMMERCIAL-0% TO 8%INDUSTRIAL-0% TO 3%

PEOPLE INVOLVED

1)DAVID ZHOU- CHINA MARKETING MANAGER OF GINO

2)JEAN-MICHEL PIERRE- ASIA PACIFIC AREA MANAGER OF GINO

3)HENRY GONG- GENERAL MANAGER OF JINGHUA

SWOT ANALYSIS

STRENGTHS

• Good range of products in product line• Financially Stable• In-House production capabilities• Reputation of manufacturing best value

products for customers.• Cost advantage of 10-20% lower margin.

WEAKNESSES

• Less market penetration in industrial segment• Dependency on distributor for sales and

services• Distributor unable to manage Industry

segment demand.• No Warehouses of its own

OPPORTUNITIES

• China is the rising star in the global arena, huge potential to raise revenues as well as profits

• High growth in industrial segment – about 20% annually for next 5 years

THREATS

• Growing power of distributors• Losing any of the distributors• Presence of large local manufacturer having

strong political connections in area

GOALS OF GINO CHINA

• ACHIEVE ANNUAL SALES OF 15000 UNITS INCLUDING ATLEAST 200 INDUSTRIAL ONES

• DEVELOPING MINIMUM 2 OEM ACCOUNTS AND MORE DISTRIBUTORS

• IMPROVE SERVICE AND SPARE SUPPLY

SITUATION

EITHER ACCEPT FEIMA’S OFFER AS AN OEM(ORIGINAL EQUIPMENT MANUFACTURER)

CUSTOMER AND MOVE TOWARDS ITS GOAL BUT IT CAN HAMPER THE RELATIONSHIP WITH

ITS LARGEST DISTRIBUTOR, JINGHUAOR

REJECT FEIMA’S OFFER AND CONTINUE ITS EXISTING RELATIONSHIP WITH ITS

DISTRIBUTORS

AIMS FROM THE SITUATION

• Resolve the existing conflict in a possible win-win situation for both parties

• Control the distributers bargaining power • Penetrate into high growing and high margin

Industrial segment of burners• Increase Revenue and Profitability

HOW TO SALVAGE THE SITUATION?

WE CONSIDER 2 ALTERNATIVES

ALTERNATIVE 1

GINO REJECTS FEIMA’S PROPOSAL AND MAINTAINS ITS STRONG RELATIONSHIP WITH

DISTRIBUTORS AS IT CANNOT AFFORD TO LOSE ANY DISTRIBUTOR. BUT GINO RISKS

LOSING FEIMA AS A CUSTOMER.

ALTERNATIVE 2

GINO SIGNS OEM CONTRACT WITH FEIMA FOR INDUSTRIAL SEGMENT ONLY WITH 10% ADDITIONAL MARGIN AND PUSH JINGHUA

FOR 10% DISCOUNT ON FEIMA’S COMMERCIAL AND DOMESTIC BURNERS.

Forecasting Number of Units for the coming fiscal year (GINO does not sell directly to FEIMA)

ALTERNATIVE 1 Current Estimated Market Growth (in %)

Projected sale of units

Domestic 10887 5 11432

Commercial 1877 10 2065

Industrial sale through distributors

137 20 165

Assumptions: 1. FEIMA continues to buy the current amount of units from Jinghua 2. The no of units sold by GINO is assumed to rise same as the net market growth

Forecasting Number of Units for the coming fiscal year (GINO sells only the Industrial burners directly to FEIMA)

ALTERNATIVE 2

Current sales – Sales to FEIMA

Estimated Market Growth (in %)

Projected sale of units (except to FEIMA)

Sales to FEIMA Net sales

Domestic 10537 5 11064 1055 12119

Commercial

1827 10 2010 82 2092

Industrial 134 20 161 36 197

Assumptions: 1. FEIMA boiler production remains the same as the last year.2. The no of units sold by GINO to all except FEIMA is assumed to rise same as the net market growth

These much units are sold directly to FEIMA by GINO

FINANCIAL ANALYSIS OF ALTERNATIVE 1

Financial Analysis of GINO when GINO does not directly sell to FEIMA

ALTERNATIVE 1

Domestic Commercial Industrial Total Sell

Units projected to be sold by all distributors

11432 2065 165

Transfer Price (RMB) 2,500 9,000 65,000

Revenue from Burners sale

28,580,000 18,585,000 10,725,000 57,890,000

Revenue from sales of Spare parts (80/20 split)

7,145,000 4,646,250 2,681,250 14,472,500

Net Revenue (in RMB)

35,725,000 23,231,250 13,406,250 72,362,500

Total Contribution Margin (20%;25%;30%)

7,145,000 5,807,813 4,021,875 16,974,688

Assumptions:1. FEIMA continues to buy same amount of units as the previous year from Jinghua2. US$1=RMB8.3 IN 20003. Multiple of exchange rate= 1.484*(RMB8.3) [For Taxes, Transportation,Shipping ,Insurance etc.]

FINANCIAL ANALYSIS OF ALTERNATIVE 2

ALTERNATIVE 2 DOMESTIC

COMMERCIAL INDUSTRIAL INDUSTRIAL DIRECT SELL

TOTAL

PRICE PER UNIT(RMB)

2500 9000 65000 120575

FORECASTED UNITS 12119 2092 161 36

REVENUE FROM BURNERS(RMB)

30297500

18828000 1046500 4340700 63931200

COST OF SHIPPING,INSURANCE ETC.(48.4% OF TRANSFER PRICE)(RMB)

- - - 1132560 1132560

REVENUE FROM SPARES (80/20 SPLIT) (RMB)

7574375

4707000 2616250 802035 15699660

NET REVENUE(RMB)

37871825

23535000 13081250 4010175 78498250

CONTRIBUTION MARGIN(20%,25%,30%,30%) (RMB)

7574375

5883750 3924375 1203052.5 18585552.5

ALTERNATIVE 2(CONT.)UPFRONT COST OF WAREHOUSE(RMB)

[USEFUL INVESTMENT]= 200000

ANNUAL OPERATING EXPENSES[DEAD INVESTMENT]

=30000*12= 360000

NET MARGIN(RMB)=

18585552.5-360000= 18225552.5

CLEARLY HIGHER THAN ALTERNATIVE 1

COMPARATIVE FINANCIAL ANALYSIS OF JINGHUA

ALTERNATIVE 1

Financial Analysis of Jinghua in case where GINO refuses to directly sell to FEIMA

Current Sales Expected Growth rate (%)

Projected sales

Selling price/unit

Total Revenue

Domestic 4354 5 4572 4,453 20,359,116

Commercial 876 10 964 16,031 15,453,884

Industrial 37 20 44 115,778 5,094,232

Net Revenue 40,907,232

Assumptions and Calculations:1. FEIMA continues to buy from Jinghua 2. The selling price is calculated by marking up the base price by 60% and then giving a 25% discount on the

same

ALTERNATIVE 2

Financial Analysis of Jinghua in case where GINO directly sells industrial units to FEIMA

ALL – (To FEIMA) To FEIMA Net

Projected sales

Selling price/unit

Total Revenue

Sales SP/unit Revenue

Domestic 4204 4,453 18,720,412 1055 3,860 4,072,300 22,792,712

Commercial

909 16,031 14,572,179 82 13,893 1,139,226 15,711,405

Industrial 41 115,778 4,746,898 0 100,341 0 4,746,898

Net Revenue 43,251,015

Assumptions and Calculations:1. FEIMA buys domestic and commercial units from Jinghua at a 10 % discount more2. The selling price is calculated by marking up the base price by 60% and then giving a 35% discount on the

same

Significantly higher than the previous case

ALTERNATIVE 1

PROS• STRENGTHENING OF TIES

BETWEEN MANUFACTURER AND DISTRIBUTORS

CONS• DISTRIBUTORS DICTATING

THE TERMS• OPPOSITE TO GOAL OF

CREATING NEW OEM CUSTOMERS

• REVENUE LOST FROM POTENTIAL NEW ORDERS

• OPPORTUNITY COST IN HIGH MARGIN INDUSTRIAL SEGMENT

ALTERNATIVE 2

PROS• STRATEGY IN LINE WITH GOAL

OF CREATING OEM ACCOUNTS AND 200 INDUSTRIAL BURNERS

• INCREASE IN REVENUE AND PROFITS WITH PENETRATION INTO INDUSTRIAL SEGMENT

• INVENTORY PROBLEMS WILL ALSO BE LESS WITH ESTABLISHMENT OF WAREHOUSE

• JINGHUA ALSO MAKING MORE REVENUES AND PROFITS

CONS• GETTING DISTRIBUTORS ON

THEIR SIDE CAN BE A TOUGH TASK DESPITE MORE PROFITS

RECOMMENDATION

AS CAN BE SEEN FROM THE FINANCIAL ANALYSIS OF GINO AND

JINGHUA AS WELL AS PROS AND CONS OF BOTH ALTERNATIVES

ALTERNATIVE 2 IS RECOMMENDED

THESE SLIDES WERE CREATED BY AMOD BANSAL,THAPAR UNIVERSITY

AS PART OF AN INTERNSHIP DONE UNDER THE GUIDANCE OF

PROF. SAMEER MATHUR,IIM LUCKNOW(www.iiminternship.com)

THANK YOU