This case was written by Assistant Professor Irfan Amir under the supervision of Professor Waseem Azhar at the Lahore University of Management Sciences to serve as a basis for class discussion ra ther 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.

1993 Lahore University of Management Sciences

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ALLIED MARKETING (PRIVATE) LIMITED, LAHORE

Since January 1992, Ahmad Hasnain, Director of Allied Marketing (Private) Limited (AML), one of the Lahore distributors of Pakistan Tobacco Company Limited (PTC), was under constant pressure from PTC to increase sales. AML sales of PTC brands over the last few years were showing signs of stagnation. The PTC management wanted AML to increase its sales force to boost sales, but Hasnain was not sure that this increase would improve the profitability of his Company. He was also concerned about the effect this increase in sales force would have on the average compensation of his salesmen. In June 1992, Hasnain decided that it was about time he had a detailed assessment of the optimal size of the sales force for PTC distribution. Another issue which currently occupied Hasnain’s attention was to reduce his Company’s dependence on the wholesaler. After considerable effort, he had reached a level, in December 1991, where only 20% of the distribution of PTC brands was through the wholesaler; the remaining being through the retailer. Hasnain deemed the wholesaler as a ‘necessary evil’ but wanted to reduce dependence on him even further. He knew that in the issue of increasing the sales force, there was a trade-off in this strategy. While less dependence on the wholesaler would minimise the adverse effect of some of the practices of the wholesaler on AML’s trade, significant costs were being incurred in increasing the penetration of the retail channel of distribution. Hasnain wondered how far he should go in reducing his dependence on the wholesaler. EARLY DEVELOPMENTS Hasnain’s family was in the trading business for nearly 100 years. It was the year 1898, when Haji Sheikh Mohammad Din, Hasnain’s great grandfather, started a business of chinaware in Dabbi Bazar, which at that time was the centre of commercial activity in the walled city of Lahore. This business later developed into a firm known as S.M. Ilyas and Sons. Sheikh Mohammad Din, actively assisted by his son, Sheikh Mohammad Ilyas, gradually expanded his business into the manufacture of steel trunks. According to Hasnain, business flourished in both fields, and yielded handsome dividends. S.M. Ilyas and Sons was granted an agency business of Scissors brand cigarettes for the entire Punjab Province by Bakhsh Elahi and Company, Dehli, in 1905. At that time, Bakhsh Elahi and Company was the sole agent of the Imperial Tobacco Company Limited of India.

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In 1914, Lever Brothers, a major multi-national company, gave the distributorship of their famous Sunlight soap to S.M. Ilyas and Sons for the Lahore market. Subsequently, the distribution of other products of Lever Brothers was also given to S.M. Ilyas and Sons. These products included soap and toiletries, and vegetable oil. In 1927, S.M. Ilyas was given the distribution rights of several brands of Imperial Tobacco Company Limited for the Lahore market. After independence in 19471, Imperial Tobacco Company and Lever Brothers established separate companies for Pakistan. Imperial Tobacco Company started trading under the name of Pakistan Tobacco Company Limited and Lever Brothers became Lever Brothers Pakistan Limited. S.M. Ilyas and Sons continued to handle the distribution of these two companies. Over the years, S.M. Ilyas and Sons also managed the distribution of several other popular products for the Lahore market. These products included Lipton Tea, A. Wander’s Ovaltine, Abbott Pharmaceuticals, ICI Pharmaceuticals, Pakistan Industrial Development Corporation (PIDC) cement and fertilizer, and Fauji Cereals. The distribution for these products was discontinued due to policy changes of the manufacturers and S.M. Ilyas and Sons. For a number of years, Sheikh Mohammad Ilyas managed the entire business himself. In 1938, his eldest son S.M. Ikhlas joined the firm. Two years later S.M. Ilmas, the second son, also joined, as working partner. The two younger sons, S.M. Riaz and S.M. Fayyaz joined the firm in 1950 and 1953 respectively. In 1959, this joint family business was converted into a private limited company. The four brothers were appointed as working directors, with Sheikh Mohammad Ilyas as the Chairman of the Company. The Company continued to receive guidance and directions from the Chairman, till his death in May, 1969. After the death of Sheikh Mohammad Ilyas, Sheikh Mohammad Ilmas (Hasnain’s father) took over as Chairman. S.M. Ilyas and Sons continued to be the distributors for PTC and Lever Brothers Pakistan Limited. Over the years, the area assigned for distribution had decreased. According to Hasnain, this was the result of several factors, including increase in population, changes in manufacturers’ policies with regard to coverage, and productivity. ALLIED MARKETING (PRIVATE) LIMITED In 1984, S.M. Ilyas and Sons was divided into two companies: Allied Marketing (Private) Limited (AML) and United Marketing Limited. S.M. Ilmas became the Chairman of Allied Marketing (Private) Limited. AML was given the distribution of Pakistan Tobacco Company Limited (PTC) for part of the Lahore market. United Marketing Limited was assigned the distribution of PTC brands for a part of the Lahore market not covered by AML. The distribution of all products of Lever Brothers Pakistan Limited for part of the Lahore market was also given to AML.

1 In August 1947, The Indian Sub-continent was divided into two sovereign states: Pakistan and India.

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Two separate sales departments, headed by sales managers, were set up to cater to the two manufacturers: PTC and Lever Brothers Pakistan Limited (see Exhibit 1). The management of Allied Marketing (Private) Limited concentrated on developing its allotted sales territory, especially new areas like Defence, Faisal Town, and Green Town. In 1992, AML handled the distribution for a part of Lahore market of all products and brands of Pakistan Tobacco Company, Lever Brothers Pakistan Limited, and Mohsin Matches. The distribution for Mohsin Matches was awarded in 1988. However, AML did not have a separate sales set-up for Mohsin Matches. The salesmen for PTC brands carried the cartons of Mohsin Matches with them on their field visits. According to Hasnain, the distribution of matches used up only minimal warehousing space and other resources of the Company. For the distribution of products of Lever Brothers Pakistan Limited, the total cost of supporting the sales force (including salesmen salaries and commission, vehicles, and other direct selling expenses) was shared equally by Allied Marketing (Private) Limited and Lever Brothers Pakistan Limited. However, for PTC brands, all selling costs2 were borne by AML. PTC DISTRIBUTION PTC sold all its brands including Gold Leaf, Capstan, Wills, Player’s No. 6, Gold Flake, Embassy, and Scissors entirely through distributors. PTC had three distributors for the Lahore market: Allied Marketing (Private) Limited, United Marketing Limited, and Fair Marketing Limited. In 1991, market share by volume of these distributors was as follows: AML 37%, United Marketing Limited 33%, and Fair Marketing Limited 30%. AML worked on commission as a PTC distributor. AML’s main responsibilities were: proper market coverage, achievement of sales targets, providing distribution logistics such as godown, vehicles, and maintaining a trained and motivated sales force. PTC was responsible for product quality, advertising and promotion, pricing, and safeguarding AML against malpractices in the trade like cross-territory sales3, and cigarette smuggling. PTC put a lot of pressure on its distributors to meet sales targets. According to Hasnain, though the primary basis of distributor performance evaluation was sales volume, other criteria included target market coverage, and maintenance of adequate stock levels. The practice of cross-territory sales was a major problem. If a distributor whose territory had been infiltrated obtained some proof, like cash memos, he could complain to the manufacturer. There was no open price competition among distributors as prices were set by PTC. However, according to Hasnain, the distributor who operated in the cigarette ‘mandi’4, near Aibak Road, delivered products to the wholesalers at rates lower than the PTC’s scheduled rates for the wholesale market. This was a cause of concern for the other two distributors of PTC. PTC knew

2 The selling costs did not include advertising and promotion costs. All such costs were borne by PTC. 3 One distributor selling products in the territory allocated to another. 4 A wholesale market.

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about this practice, but was unable to eliminate or reduce this problem due to difficulty in finding proof against cut-rate deliveries. The salesmen indulging in this practice issued cash memos at the scheduled selling price but passed discounts under the counter. Another level of competition was with the distributors of other tobacco companies. PTC competed for the share of the cigarette market with Lakson Tobacco Company, Premier Tobacco Industries5, Souvenir Tobacco Company, Saleem Cigarette Industries, Sarhad Cigarette Industries, and United Tobacco Industries. All these cigarette manufacturers sold through distributors. (See Exhibit 2 for a comparison of market performance of major tobacco companies). Smuggling of cigarettes was a major problem for cigarette manufacturers in Pakistan. Since over 70% of the retail price was due to taxes, sellers of smuggled cigarettes had a great price advantage over the legitimate sellers. Some PTC brands, especially Gold Leaf and Capstan were particularly affected by smuggled brands such as Dunhill, Rothmans, Marlboro, Benson and Hedges, State Express 555, and some Japanese brands (especially Mild Seven). According to Hasnain, the cigarette industry had lobbied the government to stop the flow of smuggled brands, but to no avail. Although the government had once announced a fine of Rs 5,000 for trading in foreign cigarettes, a lack of enforcement of this law allowed the cigarettes to be widely available in the open market. According to an industry estimate, in 1990, the cigarette industry had lost 20% of the higher-priced brands market to smuggled cigarettes. SALESMEN COMPENSATION AML increased its PTC sales force from 14 salesmen (called carriers) in 1986, to 21 in 1990. The total sales territory over this time period remained the same; the territory was reorganised to assign additional salesmen. However, the increase in sales through addition in sales force was small, resulting in a drop in average carrier’s compensation. By late 1990, the carriers expressed serious concern about the decrease in their average monthly take-home pay. The Company decided to review carriers compensation system. The claims made by the carriers with regard to decline in their take-home pay were evaluated (see Exhibit 3). The total take-home pay of a salesman had two components: ‘token money’ and commission. Each carrier was paid a fixed sum of Rs 500 as token money per month plus commission. The rate of commission varied across brands. For salesmen who were regular employees, employers had extensive obligations according to the Labour Laws6. AML had a legal agreement with the carriers which stipulated that they were not Company employees. They would act as carriers with limited obligations on part of the Company. In the agreement, it was stated that the carriers would be entitled to commission only.

5 Lakson Tobacco Company and Premier Tobacco Industries were under one management since 1986. The new company was called the Lakson Premier Group. 6 As stipulated in the Industrial Relation Ordinance, 1969.

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There was no mention of any fixed, token money. Legally, token money could be treated as a salary. In early 1991, the Company decided to abolish token money and increase the carriers’ rate of commission. Different rates of commission were set across carriers for the same brand on account of factors like seniority of the carrier, and area potential for the brand. The AML management deemed this change in the compensation system necessary as it would relieve the Company from the obligation of paying a carrier a fixed amount of money. The management also thought that the increase in the commission rates would result in an increase in both carriers average commission and Company sales. From early 1991, the carriers were on commission basis only. The monthly average compensation for a carrier increased from Rs 2,346 in 1990 to Rs 2,688 in 1991. Two incentive schemes were in operation at AML. An additional incentive was available to a carrier in the form of a fixed sum of money, typically, Rs 0.50 for each productive sales call. This incentive was used to increase brand availability, particularly for new brands. Another sales incentive was available to carriers for performance above sales targets. Sales performance above allocated sales targets for each of the 21 carriers was ranked and cash awards given to carriers who achieved first three positions. These awards were given every month. The monthly sales targets for carriers were set by adding a percentage to the average performance over the recent three months. Some adjustments were made for seasonal and market trends in cigarette sales. OPTIMAL SALES FORCE SIZE Hasnain restructured his carriers compensation system, but was not sure if he had the optimal number of salesmen. He was under constant pressure from PTC to increase the number of carriers. Ideally, he wanted to find out the level of sales force which could achieve the three objectives simultaneously: higher sales, higher profits, and higher average carrier’s compensation. To determine the optimal number of carriers, Hasnain asked his sales manager to gather some data about sales territories, carriers’ performance, and selling costs (see Exhibits 4 to 8). THE WHOLESALE-RETAIL SPLIT AML distributed PTC cigarettes through two main types of distribution channels: retailers and wholesalers. The retail channel included direct delivery (DD) outlets, army canteens, and outlets in villages. Through considerable effort, Hasnain had managed to achieve about 80% distribution through the retail channel and 20% through the wholesale channel by December 1991 (see Exhibit 9). The retail market coverage was increased by increasing the direct delivery sales force. For the wholesale trade, there was only one salesman. Hasnain wondered whether or not he could eliminate the wholesaler from his distribution network. Hasnain also felt strongly about some of the malpractices by the wholesalers. He mentioned the following specific activities on part of the wholesaler:

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• The PTC scheduled rates did not remain stable because wholesalers indulged in cut rates by selling to the retailer at rates lower than PTC’s scheduled price for sale to the retailer.

• ‘Cross-territory’ sales took place through the wholesale trade. While Hasnain was critical of these activities, he acknowledged that increasing emphasis on the retail channel was not easy. He noted that the retailers were inclined to contact the wholesaler because of the lower rates, availability of different brands, credit facilities, and longer working hours of wholesalers. Hasnain remarked: To cater to retail trade is tough in that you need more resources: carriers, vehicles,

etc. The overheads are high. However, the retail margins are better than the wholesale margins and perhaps worth the extra effort required to manage the retail trade.” Exhibit 10 shows margins for different channel members.

Implied in Hasnain’s remark, was a touch of ambivalence about the rationale of his strategy of cutting dependence on the wholesale trade and the degree to which he should pursue this strategy. Hasnain wondered up to what extent he could bypass the wholesaler.

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Exhibit 2 ALLIED MARKETING (PRIVATE) LIMITED

Market Share by Sales Volume*

(in %)

NATIONAL MARKET

1989

1990

1991

PTC 50% 46% 43% LAKSON + PREMIER 19% 13% 15% SOUVENIR 14% 15% 17% OTHERS 7% 26% 25% 100% 100% 100%

LAHORE MARKET

PTC** 44% 44% 54%***

LAKSON + PREMIER 14% 12% 13%

SOUVENIR 11% 12% 12%

OTHERS 31% 32% 21%

100% 100% 100%

* Accurate market share of cigarette companies by rupee sales was difficult to determine

because of the existence of two types of companies in the cigarette industry. The first type was the ‘organised sector’, where companies registered accurate sales figures. The second type was the ‘tax evaders’. These companies colluded with excise duty inspectors posted at the factory to record sales lower than their actual value.

** In 1991, percentage share of the volume sales of the three distributors was as follows:

AML 37%; United Marketing Limited 33%; and Fair Marketing Limited 30%. *** The market share soared because of high growth in the GOLD FLAKE brand. This

growth was due to a comparatively low price and promotional efforts.

Source: Information Collected from Leading Tobacco Companies in Lahore

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Exhibit 3 ALLIED MARKETING (PRIVATE) LIMITED

Monthly Average Compensation Per Carrier

Year Number of DD* Carriers

Monthly Average Compensation Per Carrier

(Rs)

1986

1987

1988

1989

1990

14

15

18

21

21

2,786

2,472

2,292

2,003

2,346

* Direct delivery.

Source: Company Records

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Exhibit 4 ALLIED MARKETING (PRIVATE) LIMITED

Market Coverage, Sales Staff, Vehicles

(December 1991)

LAHORE – B (MAIN AREAS) Gulberg, Defence, Cantt, Ferozepur Road, Walton Road, Officers’ Colony, Cavalry Ground, Model Town, Township, Green Town, Faisal Town, Garden Town, Samanabad, Multan Road, Sanatnagar, Krishan Nagar, District Courts, Sanda, Gulshan Ravi. COVERAGE (NUMBER OF OUTLETS) FREQUENCY OF COVERAGE DAILY THRICE PER

WEEK TWICE PER

WEEK RETAILERS

4,089

240

160

3,689

WHOLESALERS

58

-

38

20

Source: Company Records

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