GINO SA

Distribution Channel Management

(HBR Case Study Analysis)

Introduction Evaluation Decision

Current Issues Alternatives Implementation

Knowing Market Analysis

Introduction

What is
Gino SA ?
Introduction

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
Introduction

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)
Current Issues
of
Gino SA
in 2000
Current Issues

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

Next three years goals …

• 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
Market of
Burner Industry
 About Burner Industry…
Knowing Market

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

SEGMENT BOILER CAPACITY USES

Domestic Upto 0.5 ton households/sauna

Commercial 0.5 to 2 ton Offices/shops/restaurants
Industrial >2 ton Absorption type chillers/boilers

• Becket is the market leader in U.S.

• U.S. market has high entry barrier.
• China is a rising star.
Market Analysis
Knowing Market

• Worldwide market in thousands

Area Market Size Gino Sales
Europe 574 276
North America 433 45
Asia 291 36
Rest of World 250 24
Total 1548 381

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

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

Burner Market in China

Before
1990 1990-1995 1995-1998 Post 1999

• Emphasis on pollution • New applications for burners & demand for • Domestic-
China rich
commercial range began to increase price wars ;
in coal-low control, replaced with
• Price became an issue-Local manufacturers-
commercial
efficiency oil combustion boilers
only 5000 units-5 years to become a threat-
mainstrea
and • Weishaupt (Germany), m market
small burners
polluting- Baltur & Ridello • Industrial
• Gino- price leader in domestic range (reference
coal (Italy), Elco (Germany), burners
point for competitors)
combustion Quenod (France), growth
• Despite offering 10% to 20% less than
boilers and Corona (Japan) expected at
Weishaupt low penetration in industrial
hence no 20% for
burners
next 5
burners
years
Market Analysis
Knowing Market

Gino’s position in Burner Market

• Competitive Advantages

In-house production capability

Well established channel network

International Exposure
Market Analysis
Knowing Market

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
SEGMENT OUTPUT RANGE(kcal/hour) GINO PRODUCTION - 1999 MARGINS
Domestic 50000-3,000,000 329 <20%
Commercial 3,000,000-20,000,000 49 25%
Industrial >20,000,000 3 30%
Total 381

• Margins were higher in developing countries

Analysis of Situation
Analysis

1. GINO’s Burner Channels in China

Analysis

Consumer Buying Process

2.

• 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
Analysis

3. SEGMENTATION
Domestic 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
2,920

20,080
Domestic
Commercial
79,900 Industrial

Total: 102,900
Analysis

4. Distribution Networks

• Three distributors were set up in 1995

• Revenue: burners/spares : by 80/20 rule

• Operates in Gungzhou
Wayip • 100% Gino (HVAC)

Fung
• Operates in Shanghai
• Textile Machinery(90% rev.)

• Operates in Beijing
Jinghua • 50% boilers
Analysis

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

Distributor Functions
5.

Credit Function: Line of Credit

Stock function : 10 major models is accounted for

80% of sales

Sales & Service function: customer interface

function
Analysis Percentage USD RMB

6. Transfer Price

P Import Duty
Value Added Tax
15
17
R Shipping & Insurance 5

I
Domestic Transportation 3
Misc. & Handling Fee 2

C Transfer Price in USD*12.32 gives

I
Base Price 142 1232
60% Grossing up of Base gives the

N Public Price or Listed Price

Contract Price is equal to a discount of 20% to 25% on
227.2 1972

G Public Price
Contract Price 181.81 1578
Gross Profit to the distributor = (contract price – base price) 39.87 346
Profit % 28
Analysis

7.Distributor Behavior

Demand for better

Stolen Sales

Reluctance to stock industrial

burners
Analysis

8. FEIMA Analysis
Range Volume Currently Offer
from GINO
Domestic 1055 350 1055
Commercial 163 50 81
Industrial 71 3 35
Total 1289 403 1171
So what can we do ?
What are our options to
approach ?
Alternatives

Options Generated
1.Deny Feima’s request and Refuse
to bypass distributors
2.Approve Feima’s request but only
for its industrial segment
3. Proceed with Feima as an Original
Equipment Manufacturer
Alternatives

Option #1
Deny Feima’s request and Refuse to
bypass distributors
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

Advantages
Disadvantages
• Strengthen distributor- • Loss of OEM Account

manufacturing relationship • Opportunity Loss in terms

of incremental sales from

• No threat to domestic leadership

Feima
• Will increase distributor
power
position • Loss of opportunity to
enter in account handling
• Shortened cycle time with OEMs in industrial
segment

• Industrial Segment Sales promoted •

•
High investment
Continuation of

• Three-month forecast
Distributors; bad behavior
Alternatives
Option #1

Disadvantages
Advantages • Loss of OEM Account
• Strengthen • Opportunity Loss in terms of
distributor-
manufacturing incremental sales from Feima
relationship • Will increase distributor power
• No threat to
domestic leadership • Loss of opportunity to enter in account
position
• Shortened cycle time
handling with OEMs in industrial
• Industrial Segment • segment
Sales promoted
• Three-month • High investment
forecast • Continuation of Distributors; bad
behavior
Alternatives

Option #2
Approve Feima’s request but only for
its industrial segment
Feima 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.
Alternatives

Option #2

Advantages Disadvantages
• Achieving long term unit sales • High investment
increase • Distributor
• Penetration in Industrial Segment bargaining
power remains
• Partially satisfies both Jinghua and • Difficult to
Feima convince Feima
and Jinghua
• Improved service Standards • Difficult to
• Maintain Distributor relationships determine price
• New OEM accounts
Alternatives

Option #2

Disadvantages
Advantages
• High investment
• Achieving long term unit
sales increase • Distributor bargaining power
• Penetration in Industrial
Segment remains
• Partially satisfies both
Jinghua and Feima • Difficult to convince Feima and
• Improved service
Standards Jinghua
• Maintain Distributor
relationships • Difficult to determine price
• New OEM accounts
• Can impact the entire profit
margin of industry
Alternatives

Option #3
Proceed 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 Disadvantages
• Distributors’ bad behavior • A possibility of losing
out Jinghua as a
• Inline with management strategy goals distributor
• Penetration into high growing • Outside core
competencies
Industrial segment & relationship with • Sensitive distributors
OEM’S •
•
Annual sales targets
Difficult to determine
• Combats increasing distributor prices
No ideal replacements
bargaining power •
• Destroys confidence
• Increase in Overall Sales & profitability
Alternatives
Option #3

Advantages Disadvantages
• Eliminate middleman
• Distributors’ bad
• A possibility of losing out
behavior Jinghua as a distributor
• Inline with management
strategy goals • Outside core competencies
• Penetration into high
growing Industrial • Sensitive distributors
segment & relationship
with OEM’S
• Annual sales targets
• Combats increasing
distributor bargaining
• Difficult to determine prices
power • No ideal replacements
• Increase in Overall Sales
& profitability • Destroys confidence
 Evaluation

Forecasting Of Number of Units

Industry Addn in
Current growth Feima Proj. Dec 2001 2002
(2%,5%,20%) Sales 2000 Sales

Domestic 10887 11105 705 11810 12047 12288

Commercial 1877 1971 32 2003 2104 2210

Industrial 137 165 33 198 238 286

GINO Financial Evaluation for Alternative 1:
Evaluation

Domestic Commercial Industrial Industrial Total

Direct
Sell
Units Sold by all 10887 1877 137
distributors
Transfer Price(RMB) 2500 9000 65000
Revenue from burners
(RMB) 27,217500 16,893,000 8,905,000 53,015,500
Revenue from
Spares(RMB) (80/20 split) 6,804,375 4,223,250 2,226,250 13,253,875
Net Revenue of Gino(RMB) 34,021,875 21,116,250 11,131,250 66,269,375
Net Revenue of Gino (USD) 4,099,021.08 2,544,126.51 1,341,114.46 7,984,262.05
Total Contribution
Margin(20%,25%,30%) $819,804.22 $508,825.30 $268,222.89 $1,596,852.40
GINO Financial Evaluation for Alternative 2:
Evaluation

Domestic Commercial Industrial Industrial Total

Direct Sell
Price per unit for Gino Burners 2500 9000 65000 120575
(RMB)
Forecasted Units 11810 2003 165 36
Revenue from burners(RMB) 29,525,000 18,027,000 10,725,000 4,340,7000 58,277,000
Revenue from Spares (RMB)
(80/20 split) 7,381,250 4,596,750 2,681.250 1,085,175 14,569,250
Net Revenue of Gino (RMB) 36,906,250 22,533,750 13,406,250 5,425,875 78,272,125
Net Revenue of Gino (USD) 4,446,536.14 2,714,909.64 1615,210.84 663,719.88 9,430,376.51
Total Contribution
Margin(20%,25%,30%) $889,307.23 $678,727.41 $484,563.25 $196,116.96 $2,248,713.86
Gino’s Extra Cost for Operating
Industrial 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)
GINO Financial Evaluation for Alternative 3:
Evaluation

Domestic Commercial Industrial Industrial Total

Direct
Sell
Price per unit for Gino 2500 9000 65000
Burners
Forecasted Units 11810 2003 198
Revenue from burners 29,525,000 18,027,000 12870,000 60,422,00
(RMB)
Revenue from Spares (RMB) 7,381,250 4,596,750 3,217,500 15,105,500
(80/20 split)
Net Revenue of Gino (RMB) 36,906,250 22,533,750 16,087,500 75,527,500
Net Revenue of Gino (USD) 4,446,536.14 2,714,909.64 1,938,253.01 9,099,698.80
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 Commercial Industrial(6500 Total
(2500RMB/8.3*1.4 (9000RMB/8.3* RMB/8.3*1.484)
84) 1.484)
Jinghua’s Cost to $1,946,185.54 $1,409,621.20 $430,002.41 $3,785,809.16
Acquire
(Q*2500*1.484/8.3)
Jinghua Revenue $2,552,256.46 $1,826,869.08 $557,283.12 $4,906,408.67
(5% public , 95%
Contracts)
Jinghua’s Profit $576,070.92 $417,247.88 $127,280.71 $1,120,599.51
Segmentation 51% 37% 11%
Share of profit
 Evaluation

Jinghua’s Financial Evaluation for Alternative 2:

Domestic Commercial Industrial(6500 Total
(2500RMB/8.3*1.4 (9000RMB/8.3* RMB/8.3*1.484)
84) 1.484)
Jinghua’s Cost to $2,261,312.05 $1,461,114.22 $395,137.35 $4,117,563.61
Acquire
(Q*2500*1.484/8.3)
Jinghua Revenue $2,930,660.41 $1,892,604.03 $512,098.00 $5,336,362.44
(5% public , 95%
Contracts)
Discounts to Feima $47,157.23 $8,783.13
Jinghua’s Profit $662,191.14 $423,706.68 $116,960.66 $1,162,858.47
Segmentation 54% 36% 10%
Share of profit
 Evaluation

Jinghua’s Financial Evaluation for Alternative 3:

Domestic Commercial Industrial(6500 Total
(2500RMB/8.3*1.4 (9000RMB/8.3* RMB/8.3*1.484)
84) 1.484)
Jinghua’s Cost to $1,946,185.54 $1,409,621.20 $430,002.41 $3,785,809.16
Acquire
(Q*2500*1.484/8.3)
Jinghua Revenue $2,226,436.26 $1,612,606.66 $491,922.76 $4,330,965.68
(5% public , 95%
Contracts)
Jinghua’s Profit $280,250.72 $202,985.45 $61,920.35 $545,156.52
Segmentation 51% 37% 11%
Share of profit
Decision

Decision Matrix
Resolve Revenue Industrial Bargaining
Jinghua’s And Segment power of Total
problem Profitability Penetration Distributors

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
Implementation
 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.
 Recommended Plan…
Implementation

 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
 July , 2000 to August ,2000 Implementation
• 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.

 From August ,2000

• The delivery of industrial burners should start.

 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%)
 Implementation

Better Marketing Strategies

To build a better brand image

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
Expanding the business
GINO should expand its business to emerging Asian markets
like 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
Himank Airon
IIT-BHU
These slides were created by Himank Airon , IIT-BHU
as part of an internship done under the guidance of
Prof. Sameer Mathur (www.IIMInternship.com)"