GINO SA: Distribution Channel Management

GINO SA
Distribution Channel Management

Gino Company Burner Market
Situation in
China
Gino in China Challenges Analysis
Overview
 Understanding Background data provided
 Major issues addressed
1. Whether setting up a warehouse in shanghai is good move?
2. Whether to accept or reject Feima’s Business offer?
3. How to resolve issues related to distributors?
4. How to increase sales of Industrial burners?
 Searching for possibilities
 Suggestions

Situation in
China
Gino Burner Co.
Headquarters in Paris, France
 Largest Burner manufacturer and exporter in the world
 Products
 Domestic Burners
 Commercial Burners
 Industrial Burners

Situation in
China
 World wide production in 1999 (in thousands of units)
T
A
B
L
E
1

Situation in
China
 David Zhou – Marketing Manager at Beijing office
 Jean-Michelle Pierre – Gino’s Asia Pacific Manager who works
corporate headquarters in Paris
 Functions:
 Marketing research and campaigns
 Administration of distribution channels,
 Technical support,
 Key end user accounts and OEM business development
 People
Gino Beijing Office

Situation in
China
 Traditional markets like Europe and US have become saturated
 Emerging markets like Asia, Middle and East parts of Africa are
posing great demand
World Markets for Burners in 1999
(in thousands of units)
T
A
B
L
E
2

Situation in
China
From 1990-1998 market for burners increased tremendously
creating heavy competition among manufacturers
Gino became price leader achieving a market share of 14%.
It grew well in range of commercial burners but performed poorly
in Industrial burners due to dominance of competitor Weishaupt
Market situation

Situation in
China
Customer Buying Process
 Manufacturers are solely dependant on distributors for sales
 Flow chart of how burners can be purchased by end users and
intermediaries

Situation in
China
Segmentation
Product type Average price per
unit (transfer price
in RMB)
Market size
(in value as RMB)
Profit margin
Domestic 2500 194 million <20%
Commercial 9000 198 million 25%
Industrial 65000 221 million 30%
T
A
B
L
E
3

Situation in
China
Gino’s Distributors
Wayip Trading Co.
FUNG’s Co.
Jinghua Mechanical Engineering Company
Distributor’s
functions
Sending Letter of credit for an order to avoid risk for
manufacturer
Stock function- Should forecast an order 3 months in
advance
Should provide after sales services like installation and
starting up
1
2
3

Situation in
China
 Distributor’s performance statistics in no. of units sold – in 1999
T
A
B
L
E
4

Situation in
China
Pricing of burners from manufacturers to end users
Transfer price-
sold to
distributors
Base price-
converted to
local currency
Public price-
sold to public
Contract price-
if sold at
discount
Say 100$
100* 12.32
=1232 RMB
60% mark up
=1972 RMB
20% discount
(Max.- 25%)
=1578 RMB
8.4 is conversion factor
1$= 8.4RMB
The rest 1.484 includes
Shipping charges, VAT,
Import duty, Transportation
and handling fee

Situation in
China
Troubles with distributors
Demand for better
prices
• Distributors began
to bargain for
better prices and
marketing support
Stolen sales
• They began
complaining that
other distributors
are poaching sales
by offering more
than permitted
discounts
Reluctance to stock
Industrial burners
• Due to high prices
and inability to
forecast demand
they are unable to
provide industrial
burners when
competitor’s
customers turned
to them

Situation in
China
Achieving goals assigned
Achieve annual
combined sales
of 15000 units
Achieve annual
sales of 200
units Industrial
burners
Develop a
minimun of
two OEM
accounts and
two end user
key accounts
within 2 years

Situation in
China
Current problem
 Feima Boiler Co. Limited – a leading boiler factory
 Feima (main supplier-Weishaupt) is important for Gino.
 Feima’s Boiler production in 1999 (number of sets)
T
A
B
L
E
5

Situation in
China
 Business with Gino
Gino Jinghua Feima
 Jinghua offered 25% discount for Feima
 Sales to Feima form Jinghua in 1999
 350 sets of Domestic burner
 50 sets Commercial
 3 sets Industrial

Situation in
China
Gino
Jinghua
Feima
 But Feima wants direct purchase without distributor
 Reason- Better prices (at least 10% greater discount)
 In return it offered to buy 50% of its burners from Gino.
 Jinghua strongly opposed this.
OEM (original Equipment Manufacturer customer)

Situation in
China
Accepting the proposal
 Can Combat bargaining power of
distributors
 Chance to acquire industrial
burner sales of Weishaupt
 Obtain OEM and increase sales to
Feima which Jinghua cannot

Situation in
China
 Risk of losing Jinghua which
accounts for 40% of Gino china’s
revenue
 Damage to trust and loyalty with
distributors
 Bad relations with distributors which
may act to competitors’ advantage

Central Idea
Management of distribution channels

Situation in
China
Warehouse set up
 Estimated costs (in RMB)
Capital cost- 200000
Monthly operation cost- 30000
Capacity – 1200 units
Cost per year- 200000 + 30000*12 = 560000 RMB

Situation in
China
 Estimated revenue from selling to distributors
(From table 3 and 4)
Total= 12338250 RMB
Profit per unit sold= 12338250/12901 = 956 RMB

Situation in
China
 To cover up the cost of warehouse we need to sell 560000/956 =
586units per year.
 Total sales in china are 12901 units per year. So it can easily
break-even.
 Hence setting up ware house doesn’t harm.
 We can compensate for the problem of reluctance of distributors
to stock burners. So even if the distributors don’t have stock
for competitors customers, warehouse can provide them required
burners.

Situation in
China
Alternatives
 The ware house can be formed exclusively for OEM and end users.
It can gain huge profits by selling at contract price and simultaneously
develop its sales force. It’s presence will also help improve it’s brand
image and distributors will be in check.
 Or It can use it for direct selling as well as to provide back up for
distributors when necessary.

Situation in
China
 Profit from accepting the offer (from tables 3 and 5)
Type No. of
units sold
(n)
Transfer
price
(RMB)
(i)
Revenue
(RMB)
(i)*(n)
Base
price
(ii)=
(i) * 1.48
Public list
price
(iii)=
1.6* (ii)
Contract
price with
10% more
discount
(iv) =
0.65*(iii)
Estimated
Revenue
(RMB)
(iv)*(n)
Domestic 350 2500 875000 3710 5936 3858 1350300
Commerci
al
50 9000 450000 13320 21312 13853 692650
Industrial 3 65000 195000 96460 154336 100318 300954
1520000 2343904
Overall additional Profit= 823904RMB = 54%
Business with Feima

Situation in
China
 Present Purchase of Commercial and industrial burners by Feima
is 53/234=22.6%. If increased to 50%, more 46 units will be sold.
 Increase in sales of commercial and industrial burners as promised
by Feima gives only 0.356% increase in overall sales volume.
 But disadvantages weigh large against profits.
 If Jinghua leaves Gino there is risk to 40% of its china revenue.
It’s overall sales may get affected varying the market share.
Gino doesn’t want this for sure.

Situation in
China
 Even if Jinghua doesn’t leave there will be agitation in relations with
distributors which may effect the brand image of Gino and can send
wrong signals to competitors. This is a huge price to pay just for the
sale of few Industrial units.
 Gino will have to provide after sales services also and it lacks direct
sales force.
 Feima’s offer can increase sales and provide OEM account but
Gino cannot afford to go against distributors who have
strong local influence.

Situation in
China
Feima’s main concern is price.
 So Gino can offer that by selling Jinghua at low Transfer price so
that it can sell to Feima at desired discount.
Disadvantage: Other customers will start demanding more discounts
 Or It can allow distributors to charge for after sales services.
 Or It can increase the mark up for public list price.
Alternatives

Situation in
China
Suggestions
 Gino should forgo setting up OEM now and plan well for it in future.
Going after OEMs may develop mistrust with distributors and
seem like taking control over sales. It should patiently grow its
sales force and then develop OEMs.
 Gino should first resolve differences between distributors by keeping
a check on discount offerings they make.
 Since Gino wants to increase industrial burner sales , it can
try to decrease price and improve performance of the models to
penetrate into Weishaupt’s market share.

Created by
A.Kruthika
Indian School of Mines, Dhanbad
During an internship with
Prof. Sameer Mathur,
IIM Lucknow.
www.IIMInternship.com

GINO SA: Distribution Channel Management

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