Gino SA: Distribution Channel Strategy

Case Analysis Report

April 2, 2012
By Sanket Sao (1192439)

Gino SA: Distribution Channel Strategy Sanket Sao

Table of Contents
Executive Summary .............................................................................................................................................................3
Introduction & Statement of Key Issues ......................................................................................................................4
SWOT Analysis .....................................................................................................................................................................4
Strengths ..............................................................................................................................................................................4
Weaknesses.........................................................................................................................................................................4
Opportunities .....................................................................................................................................................................5
Threats ..................................................................................................................................................................................5
Alternatives..............................................................................................................................................................................5
Alternative 1 Decline Feimas offer .....................................................................................................................5
Alternative 2 Accept Feimas offer for Industrial segment and other segments to Jinghua ............5
Alternative 3 Offer discounts to Feima from Ginos current contribution margin. ............................6
Evaluation of Alternatives .................................................................................................................................................6
Recommendation of Strategy ...........................................................................................................................................7
Action plan and Implementation .....................................................................................................................................7
Contingency Planning .........................................................................................................................................................8
Appendix 1 .........................................................................................................................................................................9
Appendix 2 .........................................................................................................................................................................9
Appendix 3 .........................................................................................................................................................................9
Appendix 4 ...................................................................................................................................................................... 10
Appendix 5 ...................................................................................................................................................................... 11
Appendix 6 ...................................................................................................................................................................... 12

Gino SA: Distribution Channel Strategy Sanket Sao

Executive Summary
Gino SA manufactures burners and sells in market via distributors channel. Three distributors are
responsible for selling 95% of Ginos burners in China and hence acquired a major bargaining
power. The distributors have been assigned regions and have to sell only in their specified regions.
Feima, a leading boiler, offered Gino for direct sales to get additional discounts of atleast 10% and
in return would give purchase 100% of domestic burners, and 50% of commercial and Industrial
burners from Gino. Gino is really excited about this offer as it meets its long term objective of OEM
accounts and Industrial segment penetration. Currently, Feima meets its burner requirement through
Jinghua, leading distributor of Gino, and hence Jinghua is opposed to this offer. Losing one out of
three distributers means direct hit on sales and hence Gino has to take this decision very carefully. If
Zhou, Marketing manager of Gino SA, decided to accept Feimas OEM business and deliver
burners directly to Feima, Gino is very likely to lose one of its main distributors in China, and
ultimately harm future sales. It could also have a negative impact on other 2 distributers. If Zhou
doesnt accept Feimas offer, Gino will lose the potential opportunity to create an OEM business in
China and potential sales, primarily in Industrial segment. Moreover, it will have to succumb to
demands of distributers again, hurting sales in all segments including lucrative Industrial segment.
To solve this problem, we found several alternatives and evaluated them not only to resolve the
current issue but to address other concerns such as distributors bargain power, Industrial segment
penetration, and acquiring OEM accounts. Alternative 2, which suggest signing OEM contract with
Feima in industrial segment and offering discounts on other segment via Jinghua, is the best
alternative and it also meets Ginos long term goals.

Gino SA: Distribution Channel Strategy Sanket Sao

Introduction & Statement of Key Issues
Gino SA, one of the worlds largest manufacturers and exporters of burners, faced a dilemma about
its distribution channel to Feima. Whether to acquire OEM contract of Feima and disappoint its
existing distributor or to forgone extra revenue from sales was a difficult choice Gino has to make.
The decision was bound to have larger impact on Gino sales in China. Gino has to make sure any
decision should address following Key issues or Concerns. A) Resolve the existing conflict in a
possible win-win situation for both parties. B) Control the distributers bargaining power C)
Penetrate into high growing Industrial segment of burners D) Revenue and high profitability
SWOT Analysis
Strengths
Gino SA is a market leader in Domestic burner segment and almost impossible for any competitor
to challenge on domestic segment. It also enjoys in-house production capability for lengthy product
line mix (about 50 models), and hence offers low margins. The cost advantage in comparison to its
competitors is about 10-20% and hence Gino build its reputation for offering best value to its
customers. Gino also enjoys strong market share is largest European market and hence financially
stable. The emerging markets like China were growing rapidly and Gino had strong distributer
relationship in China, a major advantage in burner market.
Weaknesses
Ginos primary weakness was its poor market penetration in Industrial segment. It was difficult for
Gino to shift priorities of distributers that directly impact sales in industrial segment because it
doesnt have direct sales force and has to depend on distributers for sales. This leads to increasing of
distributers bargaining power. Ginos recent strategy to get more OEM accounts and penetrate in
Industrial segment were in direct conflict with distributers goals and distributers increase in
bargaining power means it was difficult to achieve Ginos goals in near future. Other major concern
for Gino is it has to depend on distributer for its sales and services.
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Gino SA: Distribution Channel Strategy Sanket Sao

Opportunities
The emerging markets such as China have lot of potential for growth and profit margin was
generally higher in such markets. Also, Industrial segment is expected to grow at 20% annually for
next 5 years. Gino can capitalize in these opportunities and convert itself into major player. OEMs
were ready to purchase directly from manufacture rather than distributor to get better prices.
Threats
China has large presence of local burner manufactures and some of them have strong political hold.
They pose the threat primarily in government projects. Other major threat can be loosing any of the
distributors, which will directly impact the sales.
The detailed SWOT analysis can be found in Appendix 1.
Alternatives
Alternative 1 Decline Feimas offer
As mentioned in SWOT, losing any of the distributors would be a major threat for Gino. It can also
impact its current dominant position in domestic burner segment too. Hence this alternative would
be a conservative approach to maintain the good relationship with distributor and retain the current
competitive advantage. As per our financial analysis (Appendix4), this alternative would lead to net
revenue of $8 million and a contribution margin of $1.5 million for Gino. However, with this
alternative Feimas relationship with Gino and Jinghua can get impacted and Feima can go to
Ginos competitors. Gino will also possess a heavy opportunity cost for industrial segment.
Moreover, the bargaining power of distributor will be difficult to control. The detailed financial
analysis can be found in Appendix 4, while pros and cons can be found in Appendix 5
Alternative 2 Accept Feimas offer for Industrial segment and other segments to Jinghua
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 Feimas commercial
and domestic burners. Jinghua can compensate the 10% discounts from additional sales of domestic
5

Gino SA: Distribution Channel Strategy Sanket Sao

and commercial burners Feima. As per financial analysis in Appendix 4, Jinghua can still achieve
profitability of $1.16 million with 10% discounts on domestic and commercial and losing industrial
segment sales of Feima. 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 Ginos goals of OEM accounts and market penetration in Industrial segment. The
detailed financial analysis can be found in Appendix 4, while pros and cons can be found in
Appendix 5. The Pro-forma income statement with this alternative is shown in Appendix 6.
Alternative 3 Offer discounts to Feima from Ginos current contribution margin.
Feima is already happy with Jinghuas service and offered Gino OEM contract to get 10%
additional discounts. Gino can offer these discounts to Feima via distributor Jinghua. However,
offering discount to one OEM, which is one among other 20, will open a Pandora s Box where
other distributors OEM accounts will ask for same margin and eventually the margins of entire
industry will be affected. The detailed financial analysis can be found in Appendix 4, while pros and
cons can be found in Appendix 5.
Evaluation of Alternatives
Naturally, resolving the current problem should be a priority, followed by increasing revenue and
profitability for Gino as well as for Jinghua. According to our financial analysis (Appendix 4),
alternative 2 yields contribution revenue of $2 million as compared to alternative 1 & alternative 3
of $1.5 million and $1.2 million respectively. Hence in decision matrix (appendix 3), alternative 2
ranks highest in profitability, It is also a win-win situation for all the parties. Since Gino will have
its own sales force for Industrial segment with this alternative, the bargaining power of distributers
will be reduced. Alternative 3 targets the bargaining power and also address the current problem but
is not good with respect to other primer factors. Overall, alternative 2 is best decision.

Gino SA: Distribution Channel Strategy Sanket Sao

Recommendation of Strategy
As seen from decision matrix, we recommend alternative 2 to acquire Feimas OEM account for
industrial segment and push Jinghua for 10% reduction in domestic and commercial margin for
Feima. In todays business environment, its very important for any business to take decision
consistent with its strategy and with long term objectives. This alternative is completely aligned to
Ginos long term strategy and achieves its target of 200 industrial burner sales. Appendix 4 shows
Jinghua can compensate 10% discount by additional sales of 705 domestic and 32 commercial
burners at a mere loss of 3 industrial burners. The warehouse will also house industrial burner
inventory to reduce the inventory cycle time for other distributors orders, giving a strong
competitive advantage to Gino. The Sales and services contract can be outsourced to distributor
with appropriate SLA contracts. The final price (120,575RMB) is set to be 48.4% above transfer
price (65,000 RMB) plus a markup of 25%. The forecast for sales for 3 years is shown in Appendix
2, while Pro-forma income statement in Appendix 6.
Action plan and Implementation
Before the global distributors meeting, Gino need to convince Jinghua about this offer highlighting
its increase in profitability. The contract between Jinghua and Gino gives right to Gino to enter into
OEM deal, and hence Jinghua has to understand this. During the same period, Gino should keep
FUNGs and Wayip into confidence with this action plan. FUNGs and Wayip will also benefit as
their high inventory cycle time for industrial burners can be reduced from Ginos warehouse. The
warehouse to house the inventory would also built a good competitive advantage as compared to
other competitors.
Immediately after the meeting, Gino should start working on preparing the terms of contract with
Feima as OEM account for Industrial burners. The terms of the contract should include the promised
sale of burners. It would take approximately 1 month for legal formalities and to sign the contract.
By 2000 april end, Gino should start building a warehouse. It can take approximately 3 months to
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Gino SA: Distribution Channel Strategy Sanket Sao

prepare a fully functional warehouse and hence, the delivery date of Industrial burners to Feima
should be reviewed while signing the contract. The warehouse should be located in northern region
of China because of close proximity to Feima. The delivery of industrial burners should start from
August 2000. From 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 quality & product quality. Satisfaction of Feima is very important for Gino
because it can further build on industrial burners segment and improve its industrial burners
demand. By December 2000, Gino can start building its sales force in China for further industrial
burners OEM contracts.
Contingency Planning
1. Jinghua not agreeing to the plan: Jinghua, despite increase in profits will be worried about
its long term sales in industrial sector and hence can disagree with Gino. Gino can sign a
memorandum of understanding with Jinghua that Gino will not acquire any other industrial
burner OEM contract for 2 years. This will delay its sales force planning as well.
2. FUNGs and Wayips concern about loss of future industrial sales: This can be a
potential threat to FUNGs and Wayips future sales in industrial sector. Gino should convey
its intent to penetrate in industrial segment. They already have lost around 50 sales and
hence this action has been taken.
3. Feima not able to deliver on its promise: The contract should have a clause that protects
the special investment of warehouse for Feima and its future sales force. Other OEM
contracts should be also be encouraged to split the warehouse cost in high number of units.
4. Other OEMs of distributer ask for same margin: Any discounts in Industrial segment
should be compensated by increase in volume of industrial burners.

Gino SA: Distribution Channel Strategy Sanket Sao

Appendix 1
Strengths
- Good distributor-manufacturer
relationship.
- Good range of products in product line
- Financially stable
- In-House production capabilities
- Strong hold in large European markets
- Reputation of manufacturing best value
products for customers.
- Also known for its strong brand
influenced by people, leading edge
technology, and distribution channel.
- Cost advantage of 10-20% lower
margin.
Opportunities
- Strong emerging such as China can
increase its revenue and profitability.
- High growth in industrial segment
about 20% annually for next 5 years.

Weaknesses
- Less market penetration in industrial
segment
- Growing power of distributors.
- Dependency on distributor for sales and
services.
- Distributor unable to manage Industry
segment demand.
- Less scope of growth in European
market.
- Ginos new strategy goals of OEM
accounts and penetration in industrial
segment are in direct conflict with
distributors goals.
Threats
- Losing any of the distributors is a major
threat as it directly impacts sales.
- Presence of large local manufacturer
having strong political connections in
area.

Appendix 2

Current
Domestic 10887
Commercial 1877
Industrial
137

Forecasting of Number of Units

Industry Growth
Addn Feima
Proj. Dec 2000
(2%,5%,20%)
Sales
Sales
11105
705
11810
1971
32
2003
165
33
198

2001 2002
12047 12288
2104 2210
238
286

Appendix 3
Resolve Jinghuas
Problem

Revenue and
Profitability

Alternative 1

(0.35)
1

Alternative 2
Alternative 3

(0.3)
1

Industrial
Segment
Penetration
(0.25)
2

Bargaining
power of
Distributors
(0.10)
1

2.9

1.85

Total

1.35

Gino SA: Distribution Channel Strategy Sanket Sao

Appendix 4
Gino's financial Analysis for alternative:
Units Sold by all distributer
Transfer price(RMB)
Revenue from burners (RMB)
Revenue from Spares in USD (80/20 split)
Net Revenue of Gino in RMB
Net Revenue of Gino in USD
Total Contribution Margin (20%;25%,30%)

Alternative 1
Domestic
Comercial
Industrial
Industrial direct sell
10887
1877
137
2,500
9,000
65,000
27,217,500.00 16,893,000.00 8,905,000.00
6,804,375.00 4,223,250.00 2,226,250.00
34,021,875.00 21,116,250.00 11,131,250.00
$ 4,099,021.08 $ 2,544,126.51 $ 1,341,114.46
$819,804.22
$508,825.30
$268,222.89

Price Per unit for Gino Burners

Forecasted units (from appendix)
Revenue from Burners
Revenue from Spares(80/20 split)
Net Revenue in RMB
Net Revenue in USD
Total Contribution Margin(20%;25%;30%;30%) in USD
Cost of setting up warehouse (30000*12/8.3)
Other cost of shipping, insurance etc.(48.4% of CM)
Outsourcing cost of Sales and services(5% of SP)
Net Contribution

Alternative 2
Domestic
Comercial
Industrial
Industrial direct sell Total

2,500.00
9,000.00
65,000.00
120,575.00
11810
2003
165
36
29,525,000.00 18,027,000.00 10,725,000.00
4,340,700.00 58,277,000.00
7,381,250.00 4,506,750.00 2,681,250.00
1,085,175.00 14,569,250.00
36,906,250.00 22,533,750.00 13,406,250.00
5,425,875.00 78,272,125.00
$ 4,446,536.14 $ 2,714,909.64 $ 1,615,210.84 $
653,719.88 $ 9,430,376.51
$ 889,307.23 $ 678,727.41 $ 484,563.25 $
196,115.96 $ 2,248,713.86
$
43,373.49
$
94,920.13
$
14,096.39
$ 889,307.23 $ 678,727.41 $ 484,563.25 $
43,725.96 $ 2,096,323.85

Price Per unit for Gino Burners

Forecasted units (from appendix)
Revenue from Burners
Revenue from Spares(80/20 split)
Net Revenue in RMB
Net Revenue in USD
Total Contribution Margin(10%;15%;20%) in USD

Alternative 3
Domestic
Comercial
Industrial
Industrial direct sell

2,500.00
9,000.00
65,000.00
11810
2003
198
29,525,000.00 18,027,000.00 12,870,000.00
7,381,250.00 4,506,750.00 3,217,500.00
36,906,250.00 22,533,750.00 16,087,500.00
$ 4,446,536.14 $ 2,714,909.64 $ 1,938,253.01
$ 444,653.61 $ 407,236.45 $ 387,650.60

Total

53,015,500.00
13,253,875.00
66,269,375.00
$ 7,984,262.05
$1,596,852.41

Total

60,422,000.00
15,105,500.00
75,527,500.00
$ 9,099,698.80
$ 1,239,540.66

Jinghua's financial Analysis for each alternative

Jinghua's Cost to Acquire (Qx2500x1.484/8.3)
Jinghua Revenue(5% public,95% Contracts)
jinghua's profits
Segmentation share of profit

Alternative 1
Domestic(2500RMB/8.3*1.484) Comercial(9000RMB/8.3*1.484) Industrial(65000 RMB/8.3*1.484)
Total
$1,946,185.54
$1,409,621.20
$430,002.41
$3,785,809.16
$2,522,256.46
$1,826,869.08
$557,283.12
$4,906,408.67
$576,070.92
$417,247.88
$127,280.71
$1,120,599.51
51%
37%
11%

Jinghua's Cost to Acquire (Qx2500x1.484/8.3)

Jinghua Revenue(5% public,95% Contracts)
Discounts to Feima(10% x 1055, 81)
jinghua's profits
Segmentation share of profit

Alternative 2
Domestic(2500RMB/8.3*1.484) Comercial(9000RMB/8.3*1.484) Industrial(65000 RMB/8.3*1.484)
Total
$2,261,312.05
$1,461,114.22
$395,137.35
$4,117,563.61
$2,930,660.41
$1,893,604.03
$512,098.00
$5,336,362.44
$47,157.23
$8,783.13
$622,191.14
$423,706.68
$116,960.66
$1,162,858.47
54%
36%
10%

Jinghua's Cost to Acquire (Qx2500x1.484/8.3)

Jinghua Revenue(5% public,95% Contracts)
jinghua's profits
Segmentation share of profit

Alternative 3
Domestic(2500RMB/8.3*1.484) Comercial(9000RMB/8.3*1.484) Industrial(65000 RMB/8.3*1.484)
Total
$1,946,185.54
$1,409,621.20
$430,002.41
$3,785,809.16
$2,226,436.26
$1,612,606.66
$491,922.76
$4,330,965.68
$280,250.72
$202,985.45
$61,920.35
$545,156.52
51%
37%
11%

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Gino SA: Distribution Channel Strategy Sanket Sao

Appendix 5
Alternative Evaluation
Alternative 1
Pros
Cons
- Strengthen distributor-manufacturing
- Forgone revenue from potential sales in
relationship
domestic and commercial from Feima.
- Maintain its leadership position in
- Opportunity cost in lucrative Industrial
domestic segment.
segment
- Conflict with strategy of adding more
OEM accounts.
- Increase in distributor power
Alternative 2
Pros
Cons
- Alternative completely inline with
- Convincing distributor can be challenge
management strategy goals.
despite high profits for year1
- Will acquire OEM accounts
- Will penetrate into high growing
Industrial segment
- Increase in overall sales & profitability
- Warehouse will resolve in Inventory
Cycle time problems for other
distributors
- Increase in distributors profit
- Meeting companys target of selling
200 Industrial burners.
Alternative 3
Pros
Cons
- Will satisfy both the parties
- Can open a Pandora s Box where other
distributors OEM accounts will also
- Can work further on distributerask for same margin
Manufacture relationship
- Alternative not aligned to Ginos
strategy
- Distributors will be difficult to
convince for reduction in margin
- Distributors power will further increase
- Marketing and other expenses needs to
be streamlined
- Can impact the entire profit margin of
industry

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Gino SA: Distribution Channel Strategy Sanket Sao

Appendix 6
GINO SA
Income Statement
At the end of December 2000
Revenue
Price Per unit for Gino Burners
Revenue from Burners
Revenue from Spares(80/20 split)
Net Revenue
Total Contribution Margin(20%;25%;30%;30%) in USD

Domestic

2,500.00
29,525,000.00
7,381,250.00
36,906,250.00
$
889,307.23

Cost of Goods Sold

Fixed Manufacturing Cost per unit (15%,17.5%,21%,21%)
Fixed Bonded Warehouse Cost Per unit(20000/33)
Total Fixed Cost Per unit

375.00

375.00

1,575.00

1,575.00

13,650.00

13,650.00

2,000.00

6,750.00

Variable manufacturing Cost per unit (20%,25%,30%,30%)

Variable Bonded Warehouse Cost Per unit (30000*12/33)
Other Variable costs (48.4% for shipping, insurance etc)
Variable Sales and Service Cost
Total Variable Cost Per Unit
Total Cost Per unit
Total Cost
Gross Income
Gross Income (1USD=8.3)

Comercial

9,000.00
18,027,000.00
4,506,750.00
22,533,750.00
$
678,727.41

Industrial

2,000.00
6,750.00

2,375.00
8,325.00
28,048,750.00 16,674,975.00
8,857,500.00 5,858,775.00
$1,067,168.67

$705,876.51

65000
10,725,000.00
2,681,250.00
13,406,250.00
484,563.25

Industrial direct sell

120,575.00

3,978,975.00

994,743.75

4,973,718.75
$
179,772.97

Total

58,277,000.00
14,569,250.00
77,819,968.75
2,232,370.86

45,500.00

45,500.00
59,150.00
9,759,750.00
3,646,500.00

45,500.00
10,909.09
31,460.00
12,057.50
99,926.59
119,637.20
3,948,027.50
1,025,691.25

58,431,502.50
19,388,466.25

$439,337.35

$123,577.26

$2,335,959.79

13,650.00
6,060.61
19,710.61

Assumptions:
1. The Profit Margin is assumed as 25% of Contribution Margin to compute Variable &
fixed cost.
2. The initial investment or Sunk cost of RMB200,000 has been considered as fixed cost
to evaluate this years performance.
3. The Sales and Service contract has been assigned to existing distributer and paid
approximately 5% of product cost.

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Gino SA: Distribution Channel Strategy Sanket Sao

13