GINO SA:DISTRIBUTION

CHANNELMANAGEMENT

HARVARD CASE STUDY ANALYSIS

What isGINO SA ?

GINO SA

• One of the largest burner manufacturer and exporter in the world and enjoys up to 14% market share

• Set-up in France

THE PLAYERS• David Zhou - China marketing manager

of Gino SA• Jean Michael Pierre - Asia Pacific Area

Manager• Henry Gong - Gino’s largest distributor

Jinghua’s general manager

MarketSegmentation

SEGMENTS• Domestic Boilers• Commercial Boilers• Industrial Boilers

Segments Manufacturers Average Price Market Size

Domestic Boilers and

Water Boilers

310 RMB 2500 per unit

RMB 194 million

Commercial boilers

RMB 9000 RMB 198 million

Industrial Boilers 60 RMB 65000 RMB 221 million

RANGE SYSTEM• Estimated sizes in unit sold

RANGE MARKET SIZE

Domestic 79,900

Commercial 20,080

Industrial 2,920

Total 102,900

DISTRIBUTION NETWORK

• The distributors: 1. Jinghua (also sold boilers) 2. FUNG’s (textile industry) accounted 90% of annual turnover 3. Wayip (sold only GINO burners)• Revenue split between burners and spare

was 80/20

DISTRIBUTION NETWORK

• Performance Statistics

Jinghua FUNG’s Wayip Total

Domestic 4,354 3,075 3,458 10,887

Commercial

876 433 568 1,877

Industrial 37 48 52 137

Total 5,267 3,556 4,078 12,901

What isthe problem?

THE PROBLEM

• Choosing between an OEM proposal from Feima and agitating its well- established distribution channel, especially Jinghua.

WHO ARE INVOLVED?

• GINO- the main producer• Jinghua- largest distributor of GINO

in China and accounted 40% of GINO’s China revenue - the distributor

• FEIMA- potential OEM and major client of Jinghua - the buyer

AIM

• Grow its annual unit sales by 20%, industrial sales by 200 units

• Build two OEM & end user channels by improving service standards

RISK INVOLVED

• Feima’s OEM businesses may lead to frayed relationship with existing distributor, Jinghua.

OBJECTIVE

• Choose between pleasing distributor or setting up OEM.

• If OEM: create a pricing strategy for potential OEM’s including Feima.

What can bethe advantages?

ADVANTAGESWhy Zhou wants Feima’s OEM business?

• Developing OEM business was one way to combat increasing power of distributors

• Good opportunity to break into a well-entrenched customers in industrial burners

ADVANTAGES• Success with Feima would make it

easier for Gino to develop OEM business in other distributor’s territories

What can bethe disadvantages?

DISADVANTAGESWhy Jinghua was adamantly opposed?

• Jinghua strongly believed that Gino should not develop distributor’s existing costumer as OEM

• The practice would set a bad example, which could destroy their confidence in co-operating with Gino

SWOTanalysis

SWOT ANALYSIS

STRENGTH

• Global presence, well established channel network and strong brand reputation

• Price gap from competition of up to 30%

• Contribution margins (30%- industrial, 25%- commercial, less than 20%- domestic)

• Reputable employee base

WEAKNESS

• Reliance on oligopolistic distribution channel for meeting the sales targets

• Unable to take over industrial burner market

• Unable to steal major market from competitors

OPPORTUNITIES

• Increased demand (20% higher in the next five years) in industrial range.

THREATS

• Political influence of local manufacturers leading to increased output and selling power

• Declining growth in western markets

What can be done?

ALTERNATIVES (1/3)

1. Reject Feima’s offer

ADVANTAGES• Strengthening of ties between

manufacturer and distributors• Maintain its leadership position in

Domestic Segment

DISADVANTAGES• Revenue lost from potential new orders• Conflict with strategy of adding more

OEM accounts• Opportunity cost in high margin

Industrial Segment• Increase in distribution power

ALTERNATIVES (2/3)

2. Accept Feima’s offer for industrial segment and leave other segments to Jinghua

ADVANTAGES• Increase in revenue and profits with

penetration into industrial segment• Completely in line with management

strategy goals• Jinghua also making more revenue and

profit• Warehouse will solve inventory

problems

DISADVANTAGES• Getting distributors on their side can

be a tough task despite more profits

ALTERNATIVES (3/3)

3. Offer the discounts to Feima through

Jinghua

ADVANTAGES• Good relationship with Jinghua and

other distributors• Continuation of the existing relation

with Feima

DISADVANTAGES• Alternative not aligned to Gino’s

strategy• Can impact the overall margin of the

industry• Other distributor’s OEM accounts will

ask for same margin

Financial analysis of alternatives

FINANCIAL ANALYSIS FOR ALTERNATIVE 1

Domestic Commercial Industrial Total

Units sold by a distributor

10887 1877 137 12901

Transfer Price (RMB) 2500 9000 65000

Revenue from burners (RMB)

27217500 16893000 8905000 53015500

Revenue from spares in USD (80/20) split

6804375 4223250 2226250 13253875

Net revenue of Gino in RMB

34021875 21116250 11131250 66269375

Net revenue of Gino in USD

4099021 2544126 1341114 2984262

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

$819804 $508825 $268222 $1596852

FINANCIAL ANALYSIS FOR ALTERNATIVE 2

On the next page

Domestic Commercial

Industrial Industrial Direct

Total

Forecasted Units 11810 2003 165 36 13978

Transfer Price (RMB) 2500 9000 65000 120575

Revenue from burners (RMB)

29525000

18627000 10725000 4340700 62617700

Revenue from spares in USD (80/20) split

7381250 4506750 2681250 1085175 15654425

Net revenue of Gino in RMB

36906250

22533750 13406250 5425875 782772125

Net revenue of Gino in USD

4446536 2714909 1615210 653719 9430376

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

$889307 $678727 $484563 $196115 $2248713

Setting up warehouse(30000*12/8.3)

$43373

Shipping, Insurance etc. (48.4% of Cm)

$94920

Outsourcing cost (5% of CM)

$14096

Net contribution $889307 $678727 $484563 $43725 $2096323

FINANCIAL ANALYSIS FOR ALTERNATIVE 3

Domestic Commercial Industrial Total

Forecasted Units 11810 2003 198 13978

Transfer Price (RMB) 2500 9000 65000

Revenue from burners (RMB)

29525000 18627000 12870000 60422000

Revenue from spares in USD (80/20) split

7381250 4506750 3217500 15105500

Net revenue of Gino in RMB

36906250 22533750 16087500 75527500

Net revenue of Gino in USD

4446536 2714909 1938253 9099698

Total Contribution Margin (10%, 15%, 20%)

$444653 $407236 $387650 $1239540

FORECASTING NUMBER OF UNITS

Current Industry Growth

(2%, 5%,

20%)

Addition in Feima

sales

Projected sales 2000

Projected sales 2001

Projected sales 2002

Domestic

10887 11105 705 11810 12047 12288

Commercial

1817 1971 32 2003 2104 2210

Industrial

137 165 33 198 238 286

EVALUATION OF ALTERNATIVES

Resolve Jinghua’s problem (0.35)

Revenue and profit

(0.3)

Industrial Segment

penetration (0.25)

Bargaining of

distributors (0.10)

Total

Alternative 1

1 1 2 1 1.25

Alternative 2

3 3 3 2 2.9

Alternative 3

2 2 1 3 1.85

Recommendation of strategy

RECOMMENDATION• From financial analysis & pros and cons

of all Alternative 2 is recommended• It is aligned with Gino’s long term

strategy and achieve the target of 200 Industrial burners.

RECOMMENDATION• The warehouse will house Industrial

burner inventory which will reduce inventory cycle time for other distributors giving Gino a competitive edge.

Contingency Planning

IMPLEMENTATION• Feima would be happy about the deal

as it is getting the percentage discount it demanded

• If Jinghua does not agree to the plan due to fear of losing the industrial market a contract may be signed stating that Gino will not acquire any industry burner OEM contract for 2 years

IMPLEMENTATION• If Other OEMs ask for the same margin

then the discount must be compensated by increase in purchase

Presentation created by-ROHIT, NSIT Delhi

During an internship by-Prof. Sameer Mathur, IIM Lucknowwww.IIMInternship.com