Module Name: Global Marketing (Level: MBA)

Final Examination: Assignment for spring 2020.

Date:
Module Code: MKT 631
Section: 01
Name Enter your name:
ID: Enter you ID
Total marks: 25%
 Assignment on Global Marketing: Distribution Channel Selection and Pricing Strategy
Overview of the Company Structure and Strategy:
Ms. Majumder, head of the consumer healthcare division of XYZ Brands, looked across the table at her
category and brand managers. She had a determined look. "Our sales in our traditional markets of
Western Europe, North America, and Australia are performing well. But these markets are mature with
lots of competition and aging, slow growing populations. On the other hand, we've been too slow in
developing our business in the newly emergent economies around the world, such as the BRIC nations
(Brazil, Russia, India and China). Our board believes, and I agree, that to generate the kind of growth
needed to drive our stock price, we need to develop a stronger market presence in these types of
countries. Our plans will be rolled out on a regional basis, with Asia being the first region to consider.
What I need from you is an analysis of this regional market and a plan of entry. You need to tell me
where we should be, when we should be there, and how we will need to manage the business. I want us to
be in at least one country in the region next year. Each of you has been assigned one of the country within
this region and I’ve provided you with some background information to get you started."
XYZ Brands is a multi-national consumer products company that produces and sells ethical (prescription)
pharmaceuticals, OTC (over-the-counter or nonprescription) drugs, and consumer products. It is an $10.9
billion firm that was formed in 1924 and competes with a variety of larger and smaller firms, depending
on the product market. It has a number of leading brands in various product categories, including (in the
OTC division) All round, the leading liquid cold remedy in North America, and Zemlef, a heartburn
remedy soon to be converted from prescription to OTC status. The consumer products division includes
various types of packaged goods: hand and beauty soaps, laundry detergent, shampoo, toothpaste, shaving
cream, etc. Over the years, it has expanded its product category width through internal new product
development and acquisition of brands and companies around the globe.

The company had been historically organized into three divisions (Ethical Pharmaceuticals, Consumer
Products, and International), but recently reorganized into a global product management structure with
three major divisions (Ethical Drugs, Consumer Healthcare, and Consumer Products). A group of
category managers exists within each division. For example, the Consumer Healthcare division has an
oral care category manager, a vision care category manager, etc. Most major brands also have their own
brand manager who reports to the category manager. Under the new structure, each division is responsible
for its own international operations and, to some extent at least, can pick the products and categories to
pursue internationally. The country managers are responsible for the selection and marketing of products
in a particular country.
You play the role of Toothpaste Category Manager for a major consumer products company about to
enter the Latin American market. You play the role of Toothpaste Category Manager for a major
consumer products company about to enter the Latin American market. For the next ten years, your
team will build the “Allsmile” brand in one country market and, ultimately, expand into other Latin
American markets: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela. Each market has
unique environmental, buyer, competitive, and distribution characteristics. The ultimate goal is to
develop a REGIONAL presence in Latin America, doing so through a sequential market entry
approach. However, to enter in the market, you role is to emphasize distribution channel design in ways
to reach your products to the customers properly.
The type of retailer that stocks toothpaste varies by country. In general, distribution in Latin America is
undergoing rapid development. Also, while there is increasing consolidation of retailing globally, it is
reasonable to generalize that there is less concentration in most of the rest of the world compared with the
United States, Western Europe, and Australia. That is particularly true in developing markets where
traditional "mom and pop" retailing remains the norm.

Distribution Strategy:
Distribution channels in Latin America have been grouped historically as traditional, self-serve, and
hypermarket. Traditional channels are small, independent stores or open market areas almost exclusively
served by wholesalers (indirect distribution). Self-serve is a more developed store where customers serve
themselves, but that typically offers a narrow line of merchandise. These may be independent or part of a
regional chain but are almost all locally owned. Convenience stores and grocery stores would fall in this
category. Hypermarkets are a new style of channel that is found primarily in cities. These are usually
large stores with a wide variety of goods and typically purchase items directly from the manufacturer
(direct distribution). Many of the hypermarket chains are foreign owned or allied with a global distributor,
such as Wal-Mart or Carrefour.

A fourth type of distribution channel is emerging around the concept of home delivery. Home delivery of
household products and groceries is more common in Latin America than in the United States, which
points to the possibility of a website-based channel of distribution once a higher percentage of the
population has access to the Internet. Tables 1 and 2 provide retail channel data for each country.

Recent conversations with key retail accounts suggest that brands to carry, along with allocation of shelf
space and facings, are affected by four key variables: product turnover, slotting allowances, sales force
support, and advertising support. Hypermarkets and chain self-serves are more apt to focus on allowances
as well as turnover, whereas traditional stores and independent self-serves seem to pay greater attention to
sales force support. Many retailers will buy from wholesalers (indirect) rather than direct from the
manufacturer. For instance, it may be that 80% of traditional retail stores purchase their product through a
wholesaler and 20% purchase direct from the manufacturer. Generally, wholesalers serve smaller,
independent retailers, whereas larger hypermarket chains would purchase directly from the manufacturer.
Table 3 gives the breakdown by channel of retailers buying direct and through wholesalers.

Distribution through the wholesale channel has the potential to reach any retailer who buys product
indirect. To reach both retailers who buy direct and those who buy indirect, you will need to select the
specific retail channel for distribution as well as the wholesale channel. Wholesalers are most influenced
by product turnover, allowances, and promotions, and to a lesser extent, sales force support.

Pricing Strategy:
It is industry practice for manufacturers to set a suggested retail price (MSRP) and provide volume
discounts to the channel. Retailers have discretion over the final price set in the store, though many
follow the MSRP quite closely. MSRPs must be provided for each SKU, and vary by size, delivery
system, texture, and formulation of the product. The country manager must consider both product
costs and market conditions when determining the MSRP. Table 4 lists the MSRP for the leading
brands in the markets under consideration for a 75-gram tube of toothpaste with fluoride and any
additional ingredients listed.

Table 4: MSRP for Leading Brands by Country (Local Currency) – 75-g (M) size
Manufacturers typically offer volume discounts of 15–30 percent off the MSRP, depending on the
volume purchased and channel selected. For example, if the MSRP for a large tube of Allsmile is
$3.50 and the channel receives a 25 percent discount, a retailer would pay $3.50 x (1 – 0.25) =
$2.62/tube. In the case, discounts are not a decision of the manager, but depend on the distribution
channels chosen. The discounts for the different distribution channels are as follows:

• Wholesalers 30%
• Hypermarket Direct 25%
• Internet/Home-based Direct 25%
• Self-Serve Direct 20%
• Traditional Direct 15%

Because wholesalers typically purchase in very large quantities, they receive the highest discount.
Thus, Allsmile’s per unit revenue is typically lower when products are sold through wholesalers and
on to retailers. Consider again a large size tube of Allsmile with a MSRP of $3.50. A wholesaler
would pay $3.50 x (1 – 0.30) = $2.45/tube. Wholesalers generally offer retailers 20 percent off the
MSRP so that the wholesaler would sell to retailers for $3.50 x (1 – 0.20) = $2.80/tube. In this
example transaction through a wholesaler, the unit revenue for AllSmile (and the wholesaler unit
cost) is $2.45, and the unit revenue for the wholesaler (and the unit cost for the retailer) is $2.80. In
general, there is an incentive for retailers to order through wholesalers if they place small orders and
to order direct if they place large orders.

In setting prices, managers need to consider the segment being targeted in a country for insight into
price sensitivity, competition within the segment, and their costs. In addition, large price differences
between country markets for the same brand can lead to product diversion through gray market
distributors from higher priced to lower priced markets.

Basic tips to solve the case study questions:

 No matter how high your awareness, desirable your products, etc., if consumers can't find
AllSmile where they shop, they can't buy your products. As such, you need to review and
improve, as necessary, your distribution coverage in order to maximize desired channel
penetration.
 If you are trying to sell in a channel but your coverage is low, why might that be the case?
 Be sure you understand how products move through the distribution channel.
 What percentage of each type of retailer buys direct from the manufacturer?
 What percentage does not? If a retailer does not buy direct from the manufacturer, then how
do they get their products? Examine Figure 1: Distribution Structure – Direct vs. through
Wholesaler (Indirect) in the case, and the related text.
 Students evaluate the impact of their decisions on their gross margin, and calculate the impact
of channel discounts on retail price. Both direct sales to retailers and indirect sales through
wholesalers are considered.
 Gross Margin: The difference between sales and costs that vary directly with units sold
(allowance expense + COGS + shipping and tariffs). This infers, revenue less the cost of
products sold. Here, the unit cost includes cost of goods sold, allowance expense, and
shipping/tariffs. (Price - unit cost) x units sold

Questions based on the case study:

1. Why the screening of foreign market is crucial for a firm? Which criteria would you
recommend to select a country to explore market opportunities? Marks: 5%

Screening of a foreign market is essential for a company looking to do business

internationally because before entering a new country, they must ensure that the overall
economic, business, political, legal, social, sales potential and other factors are suitable for
conducting the business activities and for selling the products or services in the country.
The factors must be favorable and must support the objectives of the business. For every
business, profit is the ultimate motive and the new market must ensure that there is enough
sales and growth potential to fulfill that criteria. For selecting a country in this case, I would
recommend emphasizing on the retail sales level and the growth potential. From my
observation and through the analysis from the data given above, Brazil seems to be the best
choice because of the highest level of overall retail sales and decent projected annual growth
rate. Even though tradition channel has a negative projected growth rate, it is still
acceptable because traditional channel still takes up bulk of the retail sales and is still the
most preffered retail channel.

2. Identify three channels in the country to analyze, and use the case study’s report to complete the
table outlining channel characteristics in the country. Marks: 5%

Channel 1 Channel 2 Channel 3

Channel name Traditional Hypermarket Web/Other Home
Delivery

Description of typical Small, independent Large stores with a In this channel, the
channel stores or open market wide variety of goods products are delivered
areas almost and typically purchase to the customers’
exclusively served by items directly from the homes after receiving
 wholesalers (indirect manufacturer (direct the order through
distribution). distribution). website, apps, social
media etc.

% of Consumers 42.8% 44.7% 0.9%

Shopping for
Toothpaste
# of Retail Outlets 43 45 1

Est. Toothpaste Sales $ 257.4 Million $ 268.9 Million $ 5.4 Million

per Retailer
% Buying Direct from 15.6% 64.6% 100%
Manufacturer
Projected Ease of Entry Moderate Moderate Easy

3. Based on your analysis, which channel is most critical for distributing your brand in the country?
What factors are important for distributing your product in the channel? Marks: 5%

Based on my analysis from the data given, Hypermarket is the most important channel for
distributing the brand in Brazil because it takes up the highest level of distribution share among
all the distribution channels which is 44.7%. Even though traditional market is not far behind in
terms of distribution share, projected annual growth is 15% for hypermarket which is much
higher than the projected annual growth of traditional channel. Therefore, it can be concluded that
hypermarket has a great growth potential as well as a high level of retail sales. Hypermarkets also
have large customer bases and it is mostly visited by families which is perfect for selling a daily
essential product like a toothpaste. Our brand will get a great exposure by selling through the
channel. Once our brand becomes popular among the customers, the hypermarkets will be willing
to purchase our toothpaste brand in bulk which will also lead to increase sales revenue for us and
eventually lead to greater profitability and success in the long run.

Pricing is one of the most complex decisions in marketing because it requires balancing multiple
objectives, including cost/margin, positioning in the mind of the consumer, impact on
channel/distribution partners, and competition. This assignment is designed to illustrate the effects of
the pricing decision in these different contexts
4. For each SKU in the following table, calculate the manufacturer’s selling price (MSP), the unit
gross margin, and the gross margin as a percentage of MSP. Marks: 5%

SKU #1 SKU #2 SKU #13

MSRP 8 10 12
Average Discount 25% 30% 28%
Allowance % 5% 8% 10%
Unit COGS 2.15 2.43 2.56
Shipping / Tariffs 0.33 0.36 0.37
MSP 6 7 8.64
 Gross Margin 3.22 3.65 4.85

Gross Margin % 53.67% 52.14% 56.13%

5. For retailers buying direct from the manufacturer, the MSP represents their product cost, which
they will mark up to set the retail price. Given that an SKU has an MSRP of 10.00, calculate the
MSP (cost to channel) and retail price for each channel in the table. Marks: 5%

Channel #1 Channel #2 Channel #3

Channel Discount 20% 25% 30%
Cost to Channel 8 7.5 7

Channel Margin 20% 20% 23%

Retail Price 9.6 9 8.61

I'm sure many of you learned global marketing lessons through up-front and ongoing analysis. That's the
beauty of a simulation based case study analysis that emphasize learning by doing, and not losing your
job when major mistakes are made! Many thanks for your participation to solve the assignment’s
questions.

Stay Safe at Home. Best of Luck!!!!!