Gino SA Distribution Channel Management

Case Analysis

By- Rahee Hardaha

Gino Burner Co.

Who are the Key Players•David Zhou

China Marketing Manager of Gino SA

• Jean-Michelle Pierre

Gino’s Asia Pacific Manager

•Henry Gong

Jinghua’s General Manager

•Feima Boiler Co. Ltd.

Current Situation

•To resolve conflict with Distribution Channel

•To decide whether to give OEM status to Feima

• Increase Annual combined sales

• Increase annual sales of Industrial burner

•Develop OEM accounts

• Improve spare and supply

•Build the Brand image

Facts and InsightWorld Market for Burners (in thousands of units)

Area Market size Gino Sales

Europe 574 276

North America 433 45

Asia 291 36

Rest of The World 250 24

Total 1548 381

Facts and Insight

Advantages:

• In house production Capabilities

• A well established channel network

• International Exposure

Range Output Range Production (in thousands of units)

Average Margin %

Domestic 50000-300000 329 20Commercial 300000-2000000 49 25

Industrial >2000000 3 30Total 381

Facts and Insight

Production and Margines

Gino:• Domestic Range Market: Price leader in that range and 14% market

share

• Commercial Range: Growth is impressive and nearly 8% market share

• Industrial Range Market: Very Disappointing even after offering prices 10% to 20% lower than it’s competitor

Estimated Size of Ranges (Total China Market)

Facts and Insight

Jingua Mechanical Engineering Company (Northern Region)Also made and sold boilers although margins on the boilers was less than that on burners

FUNG’s Co. (Central Coastal Region)Main product line was textile Machinery with over 90% of annual turnover

Wayip Trading Company(Sothern Region)100% Gino burners business

Facts and Insight

Jinghua FUNG’s Wayip Total

Domestic 4354 3075 3458 10887

Commercial 876 433 568 1877

Industrial 37 48 52 137

Total 5267 3556 4078 12901

Facts and Insight

• Transfer Price: Free on the board price in U.S. dollars

• Base Price: Price in RMB including import duty, VAT, shipping, insurance and domestic transportation

• Public Price: Grossing up Base price by 60%

• Contract Price: Actual Transaction Price

20% discount off the public price is provided by distributors

Gino had agreed to allow maximum 25% discount

Facts and Insight

Some Market changes in Distributor's Behavior in recent Months

• They were demanding for better terms

• Stolen Sales causing lack of service and technical support to new customers

• Reluctance to Stock Industrial Burners

lost at least 50 units sale due to lack of inventory

Facts and Insight

• Leading Boiler company in northern china

• Jinghua’s Customer and it allowed an average 25% Discount

• The primary purpose of approaching Gino for OEM treatment was to obtain at least 10% greater discount

• It will buy at least 50% of its commercial and industrial burners and all its domestic burners in return

Range Volume Burner from Gino Estimated After Getting OEM

Domestic 1055 350 1055

Commercial 163 50 82

Industrial 71 3 35

Total 1289 403 1172 Facts and Insight

• Henry Gong, Jinghua’s General Manager

• Aggressively opposing the deal between Feima and Gino for OEM account

• Threatened to reconsider the co-operation with Gino is Feima is touched and was famous for honoring what he said

• He was an expert in Networking and lobbying Gino’s other two distributors

Reason for opposing:1. Gino should not develop distributor’s existing customer as

OEM accounts2. It could destroy distributor’s confidence in co-operation

Facts and Insight

Zhou has to Decide whether he wants to sign OEM with Fiema?

1. What are the advantages?

2. Is it possible to give atleast 10% more discount to Feima?

3. Is it possible to charge prices higher than what it charges to Distributor?

4. How it will affect the Jinghua?

Advantages• Developing OEM business was one way to combat the increasing

bargaining power of distributors• Good opportunity to break into a well-entrenched customer(other

competitors) in industrial burners• Receive good reference account• Success with Feima would make it easier for Gino to develop OEM

business• It will help in developing Brand image

Advantages

Range Volume Burner from Gino

Estimated After Getting OEM

Difference

Domestic 1055 350 1055 705Commercial 163 50 82 32

Industrial 71 3 35 32Total 1289 403 1172 769

Advantages

Taking Difference and average Transfer Price

Range Difference Transfer Price (RMB) Average Margin % Average Margin (RMB)

Domestic 705 2500 20 3,52,500Commercial 32 9000 25 72,000

Industrial 32 65000 30 6,24,000Total 769 10,48,5000

Advantages

•Upfront Investment RMB2,00,00•Monthly operation Cost RMB30,000

•Total Cost in First Year RMB5,60,000

Will it be able to give 10% more discount?

• Lets assume the transfer price is $100.

• Base price will 100*12.32= RMB1,232

• So the public price will be 1232*1.6= RMB1,972

• At present Feima is getting 25% discount

• At 35% discount, it will cost 1972*.65 = RMB1,282

• It can charge $104

• 4% higher than what it charges to distributors

How it would affect Jinghua ?

• Jinghua has been placing much emphasis on Feima to develop better business relationship

•Let’s see how much Jinghua would lose…

Feima was customer of Jinghua…..

Jinghua To Feima Average Transfer Price from Manufacturer (RMB)

Domestic 4354 350 2500Commercial 876 50 9000

Industrial 37 3 65,000Total 5267 353

• Cumulative effect factor(including import duty , VAT, shipping , insurance and domestic transportation)= 1.484

• Margin Factor= (1.484*1.6*0.75) -1.484 = .30

Public Price Factor Discount

Jinghua’s margin and loss

LOSS= 3795006352200 = 6%

With 6% loss in profit , Jinghua is less likely to leave Gino.

Jinghua To FeimaDomestic 4354*2500*.3= RMB32,65,500 350*2500*.3=RMB2,62,500

Commercial 876*9000*.3= RMB23,65,200 50*9000*.3=RMB1,35,000Industrial 37*65000*.3= RMB7,21.500 3*65000*.3=RMB58,500

Total RMB63,52,200 RMB3,79,500

Alternative• DO not sign OEM with Feima and allow Jinghua to continue

business with it

• Applying pressure on Distributors to keep larger inventory of Industrial Burner

• Launching sales force to penetrate in Industrial Range

Disadvantage:• Loss of potential OEM• Higher bargaining power of

distributor• Increase in cost in order to launch

sales force

Advantages:• This will also reduce cycle time• Better relationship with

Distributors

Created by Rahee Hardaha,IIT Delhi, during an internship by Prof. Sameer Mathur, IIM Lucknow.

www.IIMInternship.com