Swosti Foods: Case Analysis

Abstract

Situation Analysis

Swosti foods, headquartered in Ahmedabad, started as a manufacturer of bakery products in 1985 and added edible oil to its portfolio in 2002. It followed a three-tier distribution system, comprising Carry and Forwarding Agents (C&F), distributors and wholesalers/retailers, commonly used for Fast Moving Consumer Goods (FMCG) distribution, for its bakery products which it decided to use for its oil business also. The company’s products have a good brand image and customer pull and enjoy regular demand. It, therefore, enjoys loyalty of the distribution channel as well.

Swosti’s two product lines, namely, the bakery products and edible oil, have similarities as well as differences. Housewives are strong influencer buyers for both, though shelf lives and inventory turnaround times are different. The market for both is transitioning from undifferentiated, price-focussed commodities to branded, differentiated products, and thus both face competition from unbranded low-priced competitors. Both also have large end users like restaurants, cafes and other large kitchens like in the army, hospitals and other institutions. With increasing health awareness, customers of both products are willing to pay a premium for quality, consistency and brand promise. At the same time, there is proliferation of big brands with deep pockets and wide market reach (ITC and Britannia in bakery; Cargill, ITC and HLL in oils). There is also the growth of e-commerce, linking the manufacturers directly with consumers bypassing the distribution channel completely. Both distribution channel and Swosti can benefit from future market growth, but only if they collaborate together to gain a larger share of the market.

Presently, Swosti seems unable to capture this growth. While sales (INR million) grew from 1,205 (2010) to 2,502 (2014), the annual sales growth tapered from 25 per cent in 2011 to 16.4 per cent in 2014. Profit Before Tax (PBT) as a share of sales has been static at about 6.4 per cent. There is also the hint of beginning of a channel conflict between the retailers, who look for consistency in supply at regular prices, Swosti, which aims for sales growth and compliance of company norms and the distributors looking to maximize Return on Investment (ROI) by reducing investments in inventory and receivables. Analysis of Swosti standards for distributor performance for Haribabu Sales Corporation (HSC) and Kantibhai Shantibhai and Sons (KSS) reveals undertrading and overtrading. Both result from large variations from norms and cause price variations, stock-outs and harm channel health, which, if not checked, will result in erosion in the long-term market share.

Analysis of HSC shows average stocks and receivables (SAR) at 10 days, nearly half of the Swosti norm of 19 days. This resulted in higher return on own capital of 65 per cent against the norm of 30 per cent. Thus, HSC, while earning the same share of gross profit from sales, was able to double ROI by reducing its investment in SAR. Another distributor, KSS, retained the SAR levels at prescribed norms, but reduced own capital to 20 to 25 per cent of total against the norm of 30 per cent again improving ROI. While such reduction in distributor investment may improve their ROI in short term, it greatly reduces their ability to effectively service the retailers, thereby eroding Swosti market presence. This normally needs to be controlled by the Swosti sales team. Swosti staff costs as a percentage of sales reduced from 13.2 per cent in 2010 to 8.6 per cent in 2014. The sales manpower, thus, has not matched the robust growth in sales volumes and impacted channel control exercised by Swosti. Finally, a bid to grow sales has meant overlooking the distributor digressions from the norm.

Problem Definition and Proposed Solution

Swosti relationship with the distribution channel is pure transactional, with Swosti in lead coupled with lack of goal alignment and control. Lack of goal alignment and control has led to members of the distribution chain acting to maximizing their own returns without focussing on the needs of their downstream partners or finally to the consumer. The solution lies in Swosti deepening their bond with the channel for better goal congruence and control. The selected course of action also needs to satisfy the following conditions:

Linking Swosti and distribution channel members seamlessly to meet customer needs of price, variety, consistency and so on.

Norms for Carrying and Forwarding Agent (CFA), distributors and retailers/wholesalers should be documented, understood and followed without deviation.

Improving overall channel efficiency for the flow of products, reducing turnaround times and cost of distribution.

Using the distribution channel as a tool for competitiveness in the marketplace.

Criteria for Evaluation of Alternatives

What will be the cost of implementation (overall and to be borne by Swosti).

Stakeholder reaction; should be acceptable to the channel, Swosti and customers.

Ability to scale up or replicate in newer markets Swosti plans to enter.

Time taken for implementation.

Alternative Courses of Action

Option 1. Improve more direct control within the existing system by increasing sales team numbers and focussing more on channel compliance of Swosti norms. Staff expenses may be hiked to 2010 levels of about 13.5 per cent of turnover. Sales team and channel performance evaluation may be based on compliance of norms. Appropriate rewards and punishment systems may be implemented (Table 1).

Option 2. Improve Management Information System (MIS), efficiency and control by replacing the present manual reporting system and implementing a central information technology (IT)-based inventory control, payments and order management system. Interface with sales team for control and MIS to know real-time inventory, receivables, stock-outs and other control mechanisms. Dashboards for management to display real-time system load, performance and danger areas. Walmart did this worldwide in the 1990s and used it as competitive tool (Table 1).

Option 3. Deepen bond with distributors by selectively (some distributors/products) adding CFA functions to them. Take a share of SAR cost in the market place, thereby improving SAR levels in the marketplace, improving retailer servicing and satisfaction and avoiding stock-outs and price variations (Table 1).

Option 4. Engage with channel partners and evaluate appropriateness of channel norms. Owing to regional and product differences, different sets of norms may need to be applied for different states, for oil and bakery products and so on, with the understanding that developer deviations are also sometimes a response to market forces and unyielding company norms (Table 1).

Table 1.

Evaluation of Alternatives

Option/Criterion	Cost to Company	Stakeholder Acceptability	Time Taken for Implementation	Replicability and Scalability
Option 1: Control through Sales team	Low initial cost, though high in long term	Very high, existing practice	Low; only training and focus needed	High but at high long-term cost
Option 2: IT-based distribution model	High initial cost, moderate recurring cost	Moderate for the channel and Swosti management	High, needs design implementation and testing time	Very high, allows national roll-out at limited additional costs
Option 3: Extending CFA functions to some distributors	High initial cost, distributors may demand similar concessions in future	High for channel, low acceptability to management	Low, minor modifications to the existing system	High
Option 4: Modification of norms based on location and product	Higher costs of designing and implementing new norms	Moderate, good idea but inertia against it	Very high, needs consultation with channel and management	Moderate to high, new norms needed for all new locations

Source: Author’s analysis of alternatives

Based on the above evaluation, it is recommended to start with control through sales team (option 1) immediately while also starting preparations for implementation for developing an IT based distribution model (option 2) in six months’ time.

Other Supporting Strategies and Options for Channel Rewards

Develop innovative experience centres for bakery products in tie-ups with cafes, office complexes, residential clubs and so on for involving channel and customers in experiencing Swosti products.

Develop a strong direct sales team for institutional sales. The clients once developed thus may be handed over to the loyal distributors for managing the client.

Hold, with distributor support, neighbourhood cooking and baking events for improving direct connect with customers.

Develop an e-commerce strategy to augment and indeed support the existing channel.

Unprecedented changes in the market require companies to move from the earlier control mentality to collaboration in their channel management. Swosti needs to over time aim for partnerships and finally strategic alliance with its channel. Swosti and channel together undertaking activities to connect Swosti brands to its customers will supplement its advertising and grow market share and brand connect. In the immediate term, channel management focus (involving selection, training, evaluation and conflict resolution) can ensure better goal congruence.