Developing the channel design, recruiting intermediaries and inducting them into company are not everyday tasks in channel management. It is the administration and management of the distribution network that constitutes the everyday task here. We shall examine task in detail.
- Component Tasks in Managing the Intermediaries: The task of managing a distribution network has several components as shown in the below chart
- Determining the Trade Relations Mix: Evidently, developing the trade relations mix is the first task in distribution management. As shown in the chart A the trade relations mix or relations between a firm (principal) and its members revolve largely around the following four factors:
- Territory of operation
- Trade margin
- Functions which the channel member have to perform
- Functions which the firm has to perform
Territory of Operation: The firm must settle the issue of territory in a fair manner. Territory has significance at wholesale as well as retail levels. Different businesses have different requirements and different practices in this regard. FMCG businesses, for example, supply their products to practically all retail outlets; they do not assign any territory as such to any retailer; they assign territories only to distributors, redistribution stockiest, and C&F agents. Durables marketers on the contrary, operate through a limited number of dealers in each town. Usually in these lines, territories are assigned to the dealers; even where territories are not exclusively assigned, an understanding is often worked out.
| Chart – A Component Tasks in Managing the Network | |
| ü Fixing the trade relations mix ü Territory of operation ü Trade margin ü Functions which the dealers have to perform ü Functions which the firm has to perform ü Servicing the dealer | ü Securing shelf space and merchandising support from dealers ü Dealer motivation ü Performance appraisal of dealers ü Dealer training and development ü Resolving channel conflicts |
In some cases, manufacturers supply their products directly to certain specialized channels select consumers bypassing the appointed wholesale functionaries in the territory; Such buyers usually prefer, as a matter of policy, to deal with the principal rather than the wholesaler of the area. The wholesaler of the area often expects some compensation for such sales that take place in his territory: The manufacturers sometimes cover the wholesalers with an overriding commission for such sales. At other times, they do not provide any compensation whatsoever. The important point is that the firm must have settled in advance the policy in this regard with their wholesalers. The agreement between the firm and the wholesaler must specify whether and to what extent the wholesaler will be covered on such sales.
Trade Margin
Trade margin is the No.1 element in trade relations mix. Channel member invariably look for whole-some, juicy margin. The principals invariably try to peg it as modest as possible. The point to be noted here is that the margin must be sufficient to enable the dealer to gain a reasonable return on his investment.
- Present-day dealers as a rule, expect larger margin: In the earlier days, dealers managed to operate their outlets with modest trade margins. First, their investment in infrastructure was relatively low and they were able to make a profit even with a modest margin. Second, their expectation of profit was also relatively low. In recent years, the position has been changing rapidly; first, the new generation dealers adopt a more contemporary approach to retailing. Accordingly, their investment in the business infrastructure is much larger. They go in for attractive shops/showrooms; they periodically renovate and redecorate the premises; they also employ skilled and better trained salesmen. All this naturally pushes up their investment in infrastructure and their overheads. Running costs too have been going up. Added to this, the expectation of the new generation dealers in the matter of profit is also considerably higher compared to the earlier day dealers.
- Paradigm shift from ‘gross margin’ to ‘retained earning’: Thus, in the contemporary scene, in most cases, the manufacturers have to willy-nilly settle for a higher outflow towards dealer margin. It also becomes necessary for them to accept a paradigm shift in this matter-from ‘gross margin’ to ‘retained earning’. They are required to hike the dealer margin to a level that would fetch the dealer a reasonable ‘retained earning’ after meeting all his normal expenses. They are also required to collaborate with their dealers and help them achieve a larger turnover and greater retailing productivity, so that at a given level of trade margin, their retained earning is higher.
In the matter of margins, the way it is structured and allocated among the different tiers/levels in the channel is as important as the total quantum. There are several instances where firms have suffered in their marketing endeavor on account of defective structuring and improper allocation of the margin among the different levels of the channel.
Hawkins Pressure Cookers: Let us understand this with an example of Hawkins pressure cookers. They gained market dominance by recasting the margin structure.
| Hawkins Gains by Recasting Dealer Margins | |
| Till the 1970s, Prestige pressure cooker, manufactured by the TTK group, was the leader in the Indian pressure cookers market, outselling Hawkins. Prestige had a strong distribution network. Hawkins had in its favor a good product design. In spite of its superior product design, Hawkins’ sales were much lower than that of Prestige, largely as a result of its distribution weakness. The actual problem was that the retailers were getting only a small share of the total trade margin, while the sole distributor and the regional distributors were allowed to keep a large portion of the margin for themselves. In the 1970s, Hawkins overtook Prestige and became the market leader. It attained a market share of 30 per cent as against Prestige’s 21 per cent and United’s 10.5 per cent. It was by streamlining the distribution and recasting the margin structure that Hawkins achieved the feat. Till the 1970s, Hawkins was using Kellick-Nixon as the sole distributor for the product. It was paying Kellick-Nixon, 50 per cent of the list price as distribution margin. But, the latter was passing on just 17 per cent to the distributors, retaining 33 per cent for itself. The distributors in turn were passing on a mere 7 per cent to the retailers. | The actual costs to the sole distributor, Killick-Nixon, and the distributors amounted to just 2 to3 per cent. Yet, they were keeping a very high share of the margin for themselves, 33 per cent and 10 per cent, respectively. Against this, the retailers, who had to incur all major expenses on the distribution of the product— storage cost, cost of inventories, and cost of shop/personal— received only 7 per cent. In the revamping exercise, as a first step, Hawkins dispensed with the sole-selling arrangement with Killick-Nixon and took the distribution responsibility into its own hands. Then, it recast the margin structure thoroughly. It set up four regional distributors (subsequently, the number went up to 15) and increased their margins to 20 per cent. They were made to pass on 14 per cent to the retailers. The doubling of the margin to the retailers played a substantial role in the increased sales and market share of Hawkins. The company also introduced several trade promotion schemes to enlist the enthusiastic participation of the retailers in promoting the brand. |
Functions which channel has to Perform
They have to perform the following essential functions normally expected by their principals.
Functions are
- Help establish the brand in the market
- Help achieve the sales targets
- Provide adequate shelf space
- Provide merchandising support
- Provide service to consumers
- Make prompt payments
- Maintain fair trade practices
- Provide winning store image
Functions the Principals have to Perform
Building the Brand: Dealers always want their principals to provide them a winning brand. Discriminating dealers give far more emphasis to the firm’s performance on the brand front rather than the trade margin offered by the firm. They hesitate to take dealership of weak brands even if they offer very attractive margins. And, they are happy to deal strong brands even if the margins offered are low.
Functions, the Principals have to Perform
- Supply quality products
- Build the brand and keep it a winner
- Regular, adequate and prompt supply of the product
- Effective servicing
- Advertising and sales promotion support
They overwhelmingly vote for products/brands that move from the shelf without any need for pushing. Likewise, they vote for products and brands that make their customers come back to their shops with enthusiasm. They also prefer products/brands that provide them volume margins rather than value margins. Dealers have to put in a lot of their time. Effort. Shelf space and money on the various products that they deal in, and they certainly do not want to get stuck with a weak brand. In particular, when a company offers a new brand the dealers want to be sure that the company would continue with the brand and build it well.
- Regular; Adequate and Prompt Supply: Regular supply of the product by the principal is another major concern of the dealer. If the firm is unable to supply the product regularly after he has pushed the brand with his customers, he not only loses face with them, but also runs the danger of losing out his other business.
- Advertising and Sales Promotion Support: Dealers also expect adequate advertising and sales promotion support from the principal; In particular, they expect good point of purchase promotion support. Such support besides helping them to achieve higher sales, also serves as a good motivation.
- Trade Relations Mix must Provide Satisfaction to both Dealer and Principal: The name of the game is to ensure that the trade relations mix provides satisfaction to the dealer as well as the principal. The firm must offer a viable business proposition to the dealer. That is the baseline; It must also remember that dealers act more as a purchasing agent for the consumers than as a selling agent for the principal. And, it must hence enthuse the dealers by supplying products/brands. Which they would be happy to purchase on behalf of their customers.
- Servicing and Administering the Dealers: Dealers expect effective servicing from the firm. Prompt supply of the product is one part of effective servicing. Prompt supply of the product helps the dealers not only to achieve larger sales. But also faster turnover and lower cost on inventory carrying. Technical support is the other part. Technical support must be forthcoming promptly from the firm wherever necessary. In any bazaar, one can see several cases of retailers switching their loyalty from one company to another purely on the basis of their servicing standard.
- Effective servicing; example of Electrolux: In the white goods business, Electrolux has scored an edge through effective servicing of dealers. They have picked up one crucial aspect in servicing-replenishment of stocks-and have scored high. They have enabled their dealers to achieve larger sales and simultaneously reduce their inventory. Now, they can draw their supplies from a ring of warehouses around the country and receive the stocks within 24 hours. Electrolux has actually reached a point where its dealers need not carry any inventory at all; the company delivers the products directly to the consumer, once the dealer enters the order on his computer, which is connected to company’s stock points. Earlier, the dealers had to wait for two weeks or more; they had to carry heavy inventory; to avoid ‘lost sales’ due to ‘stock outs’.
- Regular visits by field force: Largely, the field sales force of the company/its C&F agents stockiest provides dealer servicing. The dealers expect regular visits by the field sales force, so that seated in their shop they can have all their problems addressed. The dealers also expect to be kept updated on all vital matters relating to the business. This is possible only if the salesman visit the dealers regularly.
Securing Shelf Space and Merchandising Support from Dealers Securing shelf space and merchandising support from dealers is another important aspect of dealer management. By enlisting the willing cooperation of the dealers in the merchandising effort, the firm derives multiple benefits. Effective merchandising accelerates the buying process as it serves as an on-the-spot reminder to the consumer to buy. A quick glance at the way in which the dealer aids/point of purchase promotion materials supplied by a firm are used in a retail shop, can help one judge the firm’s dealer management.
In the contemporary Indian context, getting shelf space and merchandising and display support from the retail outlets is of special significance as competition among brands is fast building up at the retail level. For example, in CTV’s s since a number of firms compete for the limited shelf space available at the retail shops, the ones who score in this matter enjoy an overall edge in marketing.
- Even big firms and major brands have to fight for shelf space: With the growing competition and the explosion in branded FMCG products, the premium on shelf space has been going up steadily: The competition for grabbing shelf space usually becomes more intense during stagnant market conditions. Even big firms and well-known brands have to earn their shelf space and display the hard way; they are not in a position to demand it as a matter of right from the retailers. For example, some time back, even a firm like HLL was not in a position to demand from its retailers’ shelf space and display arrangement for its internationally acclaimed brand Denim, by merely citing that it was a Lever product and an international brand. Nor could it get it by touting its bazaar power of a million retail outlets. The dealers wanted to be convinced about the consumer preference for the brand before he considered it for shelf space and display. After all, he now had the choice of a whole host of products brands with international affiliations and he could pick and choose the products/brands to which he would allot shelf space.
Many companies are now running special communication programmers with a view to acquainting retailers with their products and brands, and convincing them of the benefit that would accrue to them if they patronized them. Companies are also now forced to meet a major part of the expenses involved in display in the shops. In fact, they are even expected to meet the expenses of general decoration of the shops. ITC, for example, has been earmarking a substantial portion of its promotional budget to the decoration of retail outlets. The company now sets up at its cost special counters, which add considerable glamour to the shop and serve as point of sale advertising.
Today, in most companies, merchandising accounts for more than 15 per cent of the total marketing spend. Many companies are also devising their own quality control checks on merchandising fronts. Kellogg has about 20 staffers doing the rounds of the outlets once every fortnight. And, at Pepsi, the merchandising teams stir out every two or three months and, even more frequently during the peak season, carrying with them scissors, cello tapes, dusters, nails, board pins, hammers, thread and, of course, the usual POP material. They clean the bottles, dust the racks, put up new posters and rearrange the bottles so that the brand fails the customer.
Ensuring Right Store Image: The competitive edge a firm derives from its retailers extends far beyond shelf space, merchandising and display: The store can be a total communication tool for the company. We shall be discussing the communication role of marketing channels in detail in the chapter on Marketing Communications. Suffice to point out here that the retail points are not mere outlets form where the products flow out. They serve as communication tools as well. It is a fact that consumers patronize certain stores and discard certain others. The store image does the trick. Today, more and more companies are realizing the communicative significance of the stile image and are concentrating their attention on the ‘store image’ of their retail shops.
It was mentioned earlier that in many businesses the marketing war is fought and won at the dealer level. Better servicing of the dealers, better communication and better motivation and training bring in superior dealer loyalty. And, with this loyalty, the firm can win markets. A firm enjoying superior dealer loyalty usually gets a bigger slice of the market.
It is aptly said that a wise firm gets a good band of dealers and good dealers settle down with a wise firm. And a wise firm is one that provides right motivation to its dealers.
Performance Appraisal of Channel Member Appraisal of the performance of individual channel member is yet another important element of channel management. Performance appraisal must bring forth the strengths and weaknesses of the channel member. If the performance is below the desired level, remedial action must be taken promptly. The appraisal should specifically identify areas where improvement is called for.
The appraisal has to be based on pre-agreed standards of performance. Appraisal based solely on sales volume will be inadequate. The ranking done on this basis may not correctly reveal the contribution made by different channel member. The fact that channel member face varying environments in their sales operations should be taken into account while appraising their performance. A wider set of relevant criteria must be used in the appraisal. While the criteria may vary from company to company and product to product
Performance appraisal is intended to serve as a means of improving the performance of channel member. In extreme cases, however, the appraisal may lead to the termination of the channel member. When termination is the only alternative, the firm should not hesitate to take that course.
Basically, all channel members are evaluated on the basis of whether they have met their assigned targets or not. Customer satisfaction surveys are also conducted to evaluate the quality oft service provided by the channel member.
Weaknesses Commonly Noticed in Networks
- The Network is inadequate size-wise
- The network is inadequate, qualitatively
- The network is not properly spread out.
- The interior markets are not covered properly
- A part of the network is inactive
- Quite a few links in the network are unviable
- The network is excessive for the task on hand
Review of the Dealer Network as a Whole In addition to performance appraisal of individual dealers, the firm must also carry out periodic reviews of the dealer network as a whole. Removal of weaknesses in the network is the objective of such a review. All such weaknesses must be overcome if the channel has to function as a vital instrument of marketing.
Training and Development
Training is another important part of channel management. The primary purpose of training is to improve the performance of the channel members through a sharpening of their sales skills and product knowledge. Upon the channel members rests the responsibility of sensing, serving and satisfying the needs of the customers. The intermediary cannot fulfill this role unless they are equipped with the requisite knowledge, skills, techniques and attitudes. Any progressive firm will, therefore, make training an integral part of its channel management Endeavour.
The content and methodology of training should be framed so as to suit the back- ground of the channel member and the contextual requirements. The prime purpose of the training is to impart to the channel member knowledge about customers, about products, about competition, and about merchandising and sales techniques. In addition, essentials of inventory management, credit management and sales promotion can also form part of the training content. When competing companies match each other in the marketplace in every aspect, it is the training provided to the channel member that makes them different. And that’s why most companies are now concentrating their energies on training. They now consider it a necessary investment.
Hyundai Motors India, for example, took all its 70 dealers to Korea a before the launch of its Accent model. Daewoo and Hyundai both conduct regular in-house training programmers for their dealers. Concorde, a Telco-Jardine Matheson JV; created for setting up the dealer network for Indica, conducts in-house training for Indica dealers. And, Maruti has tied up with National Institute of Sales for training its dealers.
Resolving Channel Conflicts Sometimes, there may be unhealthy competition and conflicts among the different channels/ channel tiers employed by a firm. There may also be conflicts among the channel members within a given channel type/channel tier. These conflicts must be handled with tact and fairness.
In managing marketing channels, firms will usually encounter some ‘bottom-up pressure’. The retailers would exert pressure on the wholesalers/stockiest, and the latter would pass it on to the firm. Sometimes, the wholesalers/stockiest may have their own problems with the firm. Wise firms anticipate the pressures that can emerge from the different layers of the channels and formulate appropriate channel policies.
Tackling dealer conflicts-Wipro-lnfotech: Wise firms follow a sound policy with regard to dealer conflicts. Wipro-lnfotech Group (WIG) can be cited as an example. In the first place, it makes a conscious effort to reduce the scope for conflicts among dealers through dealer/product class/marketing segment alignment. It has reduced the scope for conflicts among dealers, by explicitly defining the territories of operation of each. Often, there is stiff competition among WIG dealers and they frequently under-cut each other. The under-cutting is com- pounded by the fact that different dealer categories have varying margins. For example, an A + category dealer will be able to easily under-cut a B category dealer. This de-motivates the smaller dealers. So, the company strictly enforces the sales territories. The scope for cannibalisation is also removed. And when conflicts do occur, WIG tries to resolve them in a fair and firm manner. When overlapping does occur, then it negotiates with both the dealers, evaluates as to which of them is capable of satisfying the needs of the particular customer more efficiently and entrusts the customer with him. And while doing this, it takes care to protect the sentiments of the losing dealer.