GINO SADistribution Channel Management

(HBR Case Study Analysis)

Introduction

Current Issues

Knowing Market Analysis

Alternatives

Evaluation Decision

Implementation

What is Gino SA ?

IntroductionIntroduction

Gino Burner Co. is ...• One of the world’s largest burner manufacturer• Founded in Paris, France in 1931• Company that offers over 50 models of burners

in the domestic, commercial and industrial range

IntroductionIntroductionIntroduction

Who are the

Players ?

Introduction

• David Zhou (China Marketing Manager of Gino SA)

• Henry Gong(General Manager of Jhingua’s MEC)

• Jean – Michel Pierre (Asia-Pacific Area Manager of Gino SA)

IntroductionIntroduction

Current Issuesof

Gino SA in 2000

Tianjin Feima Boiler Company had requested permission to Zhou, Gino China`s manager, to purchase burners directly from Gino instead of from Jinghua, Gino’s largest distributor.

Current Issues

Gino had six weeks to decide between granting Feima OEM status, harming its relationship with current distributors or denying the request and risk losing Feima as a customer.

Current Issues

Aspects to Consider while deciding…

Relationship with Jinghua Feima`s response The possible response of Gino`s other distributors (FUNG`s

& Wayip) The attitude of Gino`s corporate management The message that the decision will send to the competitors

Current Issues

• Become a leader in the industrial range, the most robust and vigorous market

• Achieve annual combined sales volume of 15,000 units• Achieve annual sales of industrial burners of over 200

units• Optimize distribution channels• Develop a minimum of two OEM accounts and two end

user key accounts within two years• Improve service and spare supply• Build brand image

Next three years goals …Current IssuesCurrent Issues

Market of Burner Industry

About Burner Industry…

SEGMENT BOILER CAPACITY USES

Domestic Upto 0.5 ton households/saunaCommercial 0.5 to 2 ton Offices/shops/restaurants

Industrial >2 ton Absorption type chillers/boilers

• The industry does not follow a single standard to classify burners

• Becket is the market leader in U.S.• U.S. market has high entry barrier.• China is a rising star.

Knowing Market

• Worldwide market in thousands

• Developed markets of Europe and U.S. have become saturated

• Highest growth in Asia, Middle East and Africa• Demand was increasing in domestic and commercial

Area Market Size Gino SalesEurope 574 276

North America 433 45

Asia 291 36

Rest of World 250 24

Total 1548 381

Market AnalysisKnowing Market

Before 1990

China rich in coal-low efficiency

and polluting-

coal combustion boilers and

hence no burners

1990-1995• Emphasis on pollution

control, replaced with oil combustion boilers

• Weishaupt (Germany), Baltur & Ridello(Italy), Elco (Germany), Quenod (France), Corona (Japan)

1995-1998• New applications for burners & demand for

commercial range began to increase• Price became an issue-Local manufacturers-

only 5000 units-5 years to become a threat-small burners

• Gino- price leader in domestic range (reference point for competitors)

• Despite offering 10% to 20% less than Weishaupt low penetration in industrial burners

Post 1999• Domestic-

price wars ; commercial mainstream market

• Industrial burners growth expected at 20% for next 5 years

Burner Market in ChinaMarketMarket AnalysisKnowing Market

Gino’s position in Burner Market

• Competitive Advantages

In-house production capability

Well established channel network

International Exposure

MarketMarket AnalysisKnowing Market

Market Analysis

Gino’s position in Burner Market (contd..)

• Gino had cost advantage and was known for providing & best value

• Gino was best known for its domestic burners

• Margins were higher in developing countries

SEGMENT OUTPUT RANGE(kcal/hour) GINO PRODUCTION - 1999 MARGINSDomestic 50000-3,000,000 329 <20%

Commercial 3,000,000-20,000,000 49 25%Industrial >20,000,000 3 30%

Total 381

Knowing Market

Analysis of Situation

1.GINO’s Burner Channels in ChinaAnalysis

Analysis

2.Consumer Buying Process• Most manufacturers relied completely on

distributors• Weishaupt : own sales force and distribution

networks OEM’s often tried to bypass distributors

• Manufacturers refrained from giving quotations

• Issues: Services, spares and pricing going to OEM

• OEM Customers and End user customers

3.SEGMENTATIONDomestic Boilers & Water heater

• 310 Major manufacturers; Avg. Price: RMB2,500; Size: RMB194 million

Commercial Boilers & Industrial applications• Avg. Price: RMB9,000; Size: RMB198 million

Domestic Boilers &amp; Water heaters

• 60 Major manufacturers; Avg. Price: RMB65,000; Size: RMB221 million; Weishaupt

Analysis

3.SEGMENTATION(contd..)

Estimated Sizes in Units Sold

Analysis

79,900

20,080

2,920

Domestic

Commercial

Industrial

102,900Total:

4. Distribution NetworksAnalysis

• Three distributors were set up in 1995• Revenue: burners/spares : by 80/20 rule

• Operates in Gungzhou• 100% Gino (HVAC)Wayip• Operates in Shanghai• Textile Machinery(90% rev.)Fung• Operates in Beijing• 50% boilersJinghua

4. Distribution Networks (contd..)

Distribution 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

Analysis

Credit Function: Line of Credit

Sales & Service function: customer interface function

Stock function : 10 major models is accounted for 80% of sales

5.Distributor FunctionsAnalysis

6.PRICING

Percentage USD RMB

Transfer Price

Import Duty 15

Value Added Tax 17

Shipping & Insurance 5

Domestic Transportation 3

Misc. & Handling Fee 2

Transfer Price in USD*12.32 gives

Base Price 142 1232

60% Grossing up of Base gives the

Public Price or Listed Price 227.2 1972

Contract Price is equal to a discount of 20% to 25% on Public Price

Contract Price 181.81 1578

Gross Profit to the distributor = (contract price – base price) 39.87 346

Profit % 28

Analysis

Demand for better

Stolen Sales

Reluctance to stock industrial burners

7.Distributor BehaviorAnalysis

8. FEIMA AnalysisRange Volume Currently

from GINOOffer

Domestic 1055 350 1055

Commercial 163 50 81

Industrial 71 3 35

Total 1289 403 1171

Analysis

So what can we do ? What are our options toapproach ?

Options Generated

3. Proceed with Feima as an Original Equipment Manufacturer

1.Deny Feima’s request and Refuse to bypass distributors2.Approve Feima’s request but only for its industrial segment

Alternatives

Deny Feima’s request and Refuse to bypass distributors

Option #1

GINO can deny the Feima’s Request for status as OEM . It would preserve the interest of distributors but may affect relationship with Feima . GINO may lose Feima as a customer Gino will also possess a heavy opportunity cost for industrial segment. Moreover, the bargaining power of distributor will be difficult to control

Alternatives

Option #1

AdvantagesDisadvantages

• Strengthen distributor-manufacturing relationship

• No threat to domestic leadership position

• Shortened cycle time• Industrial Segment Sales promoted• Three-month forecast

• Loss of OEM Account• Opportunity Loss in terms

of incremental sales from Feima

• Will increase distributor power

• Loss of opportunity to enter in account handling with OEMs in industrial segment

• High investment• Continuation of

Distributors; bad behavior

Alternatives

Option #1

AdvantagesDisadvantages

• Strengthen distributor-manufacturing relationship

• No threat to domestic leadership position

• Shortened cycle time• Industrial Segment

Sales promoted• Three-month

forecast

• Loss of OEM Account• Opportunity Loss in terms of

incremental sales from Feima• Will increase distributor power• Loss of opportunity to enter in account

handling with OEMs in industrial• segment• High investment• Continuation of Distributors; bad

behavior

Alternatives

Option #2Approve Feima’s request but only for

its industrial segmentFeima wants to get into OEM contract with Gino mainly for reduction in prices. With this alternative, Gino should sign OEM contract with Fiema for industrial segment only with 10%additional margin in Industrial segment, and push Jinghua for 10% discount to Feima’s commercial and domestic burners. Jinghua can compensate the 10% discounts from additional sales of domestic burners. The warehouse will be built by Gino for these additional 33 industrial burners to Feima. The service contracts can be given to existing distributors. This alternative is also consistent with Gino’s goals of OEM accounts and market penetration in Industrial segment.

AlternativesAlternatives

Option #2

Advantages• Achieving long term unit sales

increase• Penetration in Industrial Segment• Partially satisfies both Jinghua and

Feima• Improved service Standards• Maintain Distributor relationships• New OEM accounts

Disadvantages

• High investment • Distributor

bargaining power remains

• Difficult to convince Feima and Jinghua

• Difficult to determine price

Alternatives

Option #2

Advantages• Achieving long term unit

sales increase• Penetration in Industrial

Segment• Partially satisfies both

Jinghua and Feima• Improved service

Standards• Maintain Distributor

relationships• New OEM accounts

Disadvantages• High investment • Distributor bargaining power

remains• Difficult to convince Feima and

Jinghua• Difficult to determine price• Can impact the entire profit

margin of industry

Alternatives

Option #3Proceed with Feima as an Original

Equipment Manufacturer

Gino can Proceed with Feima as an OEM which would strong step in accomplishing its goal to OEM’s accounts but primarily it will destroy the relationship with Jinghua and Gino will lose Jinghua as distributor which will affect the GINO position in domestic burner market .

Alternatives

Option #3

Advantages• Eliminate middleman• Distributors’ bad behavior• Inline with management strategy goals• Penetration into high growing

Industrial segment & relationship with OEM’S

• Combats increasing distributor bargaining power

• Increase in Overall Sales & profitability

Disadvantages• A possibility of losing

out Jinghua as a distributor

• Outside core competencies

• Sensitive distributors• Annual sales targets• Difficult to determine

prices• No ideal replacements• Destroys confidence

Alternatives

Option #3

Advantages• Eliminate middleman• Distributors’ bad

behavior• Inline with management

strategy goals• Penetration into high

growing Industrial segment & relationship with OEM’S

• Combats increasing distributor bargaining power

• Increase in Overall Sales & profitability

Disadvantages• A possibility of losing out

Jinghua as a distributor• Outside core competencies• Sensitive distributors• Annual sales targets• Difficult to determine prices• No ideal replacements• Destroys confidence

Alternatives

CurrentIndustry growth

(2%,5%,20%)

Addn in Feima Sales

Proj. Dec 2000 Sales

2001 2002

Domestic 10887 11105 705 11810 12047 12288

Commercial 1877 1971 32 2003 2104 2210

Industrial 137 165 33 198 238 286

Forecasting Of Number of Units

Evaluation

GINO Financial Evaluation for Alternative 1:Domestic Commercial Industrial Industrial

Direct Sell

Total

Units Sold by all distributorsTransfer Price(RMB)

10887

2500

1877

9000

137

65000Revenue from burners (RMB)Revenue from Spares(RMB) (80/20 split)

27,217500

6,804,375

16,893,000

4,223,250

8,905,000

2,226,250

53,015,500

13,253,875Net Revenue of Gino(RMB)Net Revenue of Gino (USD)

34,021,8754,099,021.08

21,116,2502,544,126.51

11,131,2501,341,114.46

66,269,3757,984,262.05

Total Contribution Margin(20%,25%,30%) $819,804.22 $508,825.30 $268,222.89 $1,596,852.40

Evaluation

GINO Financial Evaluation for Alternative 2:Domestic Commercial Industrial Industrial

Direct SellTotal

Price per unit for Gino Burners (RMB)Forecasted Units

2500

11810

9000

2003

65000

165

120575

36Revenue from burners(RMB)Revenue from Spares (RMB)(80/20 split)

29,525,000

7,381,250

18,027,000

4,596,750

10,725,000

2,681.250

4,340,7000

1,085,175

58,277,000

14,569,250Net Revenue of Gino (RMB)Net Revenue of Gino (USD)

36,906,2504,446,536.14

22,533,7502,714,909.64

13,406,2501615,210.84

5,425,875663,719.88

78,272,1259,430,376.51

Total Contribution Margin(20%,25%,30%) $889,307.23 $678,727.41 $484,563.25 $196,116.96 $2,248,713.86Gino’s Extra Cost for OperatingIndustrial Selling $152390.01*

Net Contribution $889,307.23 $678,727.41 $484,563.25 $43725.96 $2,096,323.85*Sum of Cost of Setting up warehouse(30000*/8.3) ,other cost of shipping etc.(48.4% of CM), Outsourcing Cost of Sales And Services(5% of SP)

Evaluation

GINO Financial Evaluation for Alternative 3:Domestic Commercial Industrial Industrial

Direct Sell

Total

Price per unit for Gino BurnersForecasted Units

2500

11810

9000

2003

65000

198Revenue from burners (RMB)Revenue from Spares (RMB)(80/20 split)

29,525,000

7,381,250

18,027,000

4,596,750

12870,000

3,217,500

60,422,00

15,105,500

Net Revenue of Gino (RMB)Net Revenue of Gino (USD)

36,906,2504,446,536.14

22,533,7502,714,909.64

16,087,5001,938,253.01

75,527,5009,099,698.80

Total Contribution Margin(10%,15%,20%) $444,653.61 $407,236.45 $387,650.69 $1,239,540.66

Evaluation

Jinghua’s Financial Evaluation for Alternative 1:Domestic

(2500RMB/8.3*1.484)

Commercial (9000RMB/8.3*

1.484)

Industrial(6500RMB/8.3*1.484)

Total

Jinghua’s Cost to Acquire (Q*2500*1.484/8.3)Jinghua Revenue (5% public , 95% Contracts)

$1,946,185.54

$2,552,256.46

$1,409,621.20

$1,826,869.08

$430,002.41

$557,283.12

$3,785,809.16

$4,906,408.67

Jinghua’s Profit $576,070.92 $417,247.88 $127,280.71 $1,120,599.51

Segmentation Share of profit

51% 37% 11%

Evaluation

Jinghua’s Financial Evaluation for Alternative 2:Domestic

(2500RMB/8.3*1.484)

Commercial (9000RMB/8.3*

1.484)

Industrial(6500RMB/8.3*1.484)

Total

Jinghua’s Cost to Acquire (Q*2500*1.484/8.3)Jinghua Revenue (5% public , 95% Contracts)Discounts to Feima

$2,261,312.05

$2,930,660.41

$47,157.23

$1,461,114.22

$1,892,604.03

$8,783.13

$395,137.35

$512,098.00

$4,117,563.61

$5,336,362.44

Jinghua’s Profit $662,191.14 $423,706.68 $116,960.66 $1,162,858.47

Segmentation Share of profit

54% 36% 10%

Evaluation

Jinghua’s Financial Evaluation for Alternative 3:Domestic

(2500RMB/8.3*1.484)

Commercial (9000RMB/8.3*

1.484)

Industrial(6500RMB/8.3*1.484)

Total

Jinghua’s Cost to Acquire (Q*2500*1.484/8.3)Jinghua Revenue (5% public , 95% Contracts)

$1,946,185.54

$2,226,436.26

$1,409,621.20

$1,612,606.66

$430,002.41

$491,922.76

$3,785,809.16

$4,330,965.68

Jinghua’s Profit $280,250.72 $202,985.45 $61,920.35 $545,156.52

Segmentation Share of profit

51% 37% 11%

Evaluation

Decision MatrixResolve

Jinghua’s problem

Revenue And

Profitability

IndustrialSegment

Penetration

Bargaining power of

DistributorsTotal

Alternative 1 1 1 2 1 1.35

Alternative 2 3 3 3 2 2.9

Alternative 3 2 2 1 3 1.85

Decision

So after analyzing the Pro’s & Con’s of each option and as according calculated using Decision Matrix

Decision

Implementation

• Before the global distributors meeting, Gino should convince Jinghua about this offer highlighting its increase in profitability.

• During the same period, Gino should keep FUNG’s and Wayip into confidence with this action plan. FUNG’s and Wayip will also benefit as their high inventory cycle time for industrial burners can be reduced from Gino’s warehouse.

• The warehouse to house the inventory would also built a good competitive advantage as compared to other competitors.

Implementation

Recommended Plan… By End of March-• It would take approximately 1 month for legal formalities and to sign the contract.

By End of April-• Gino should start building a warehouse

3 – 7 months • To build a fully functional warehouse and hence the delivery date should set

accordingly while signing the contract.• Warehouse should be located in northern region of China because of close proximity to

Feima

Implementation

From August ,2000• The delivery of industrial burners should start.

July , 2000 to August ,2000• A service and maintenance contract should be given to Jinghua highlighting all the SLA

guidelines and frequent feedback should be collected from Feima about service &product quality.

End of Nov,2000• The building of warehouse should be completed by now

December 2000• Gino can start building its sales force in China for further industrial burners OEM Contracts.

Implementation

GINO Long Term Strategy (to achieve three year goals)

Formulate key account policy for future clients • Purchase of large number of units qualifies for direct

customers.• For existing OEM accounts go through Distributor OEM model.

Set ‘margin’ targets for distributors• Expanding industrial segment• Gross margin in industrial segment was 35% (commercial –

25% and domestic less than 20%)

ImplementationImplementation

Set up its own warehouse • Restrict it to key end users and OEM accounts• Backup for distributor stocks

Eventually develop & expand own sales force for industrial burners

Better Marketing Strategies To build a better brand image

Expanding the businessGINO should expand its business to emerging Asian marketslike India etc.

Implementation

Decrease cost of stocking industrial burners• Discontinue slow moving models• Incentivize distributors – multiple product line volume

discounts & incentives for stocking industrial burners

Build stronger relationship with distributors• Provide incentives , Mutual respect & Better credit

terms• Helping Distributors with Marketing and Technical

Support

Implementation

Himank AironIIT-BHU

These slides were created by Himank Airon , IIT-BHUas part of an internship done under the guidance of Prof. Sameer Mathur (www.IIMInternship.com)"