Abstract
Scenario
The healthcare sector has gradually embraced the health and wellness paradigm, as people incorporate more of the wellness values into their lifestyle. Earlier such products were viewed as luxury, but now with growing awareness, they have transcended to being products of the masses. Health products are generally growing in terms of acceptance as a very integral part of people’s consumption basket. India is no exception to this global trend. Health drinks are becoming popular among all the sections of the society. CARL’s foray into the health drink sector must be seen in this context.
In the down economy, a condition which pervades the Indian economy as we usher in the second decade of the twenty-first century, innovation and marketing are still the most relevant functions, the most basic, as Peter Drucker had postulated. These functions bring revenue and sustain a company to further grow and generate more revenue. However, a company needs to find relevant and optimum channels of distribution to sell existing or new products or services.
Perspectives
The case titled ‘Setting Up Distribution Channel for Elixir Health Drink’ is a typical situation of the complexity of the channel decision that a new company launching its maiden product in a competitive market.
The case is an excellent tool to highlight the following business imperatives:
Interrelationships of a sales and distribution manager’s decision with the other functions of a company. Factors a manager must consider while deciding on a particular channel of distribution or a combination thereof (such as efficiency, economies, effectiveness and scalability) Strategies to mitigate channel conflicts which are bound to arise whenever a new product launch or a new channel of distribution comes into being necessitating rejigging the existing modes of distribution and shares of sale thereof. Planning to identify, select and secure channel members to form a channel structure or distribution model to support the company’s market strategy and motivating the channel members to act in the company’s best interests. Given a company’s channel strategy how to develop recommendations for managing the channels in terms of product, pricing and promotion issues.
The above five strands of analysis, though not exhaustive, give a fair amount of discussion points which would help a class of students to arrive at an optimum distribution model for Elixir Health Drink (referred to as EHD henceforth).
The optimum distribution model is required in line with a growing interest in making more integrated business decisions across larger segments of logistics and distribution networks.
Analysis of Nature of Channel Decision
Let’s first analyse the nature of Mr Lodha’s decision for coming up with a distribution model to be adopted in the city of Sukhsagar for EHD.
Decision is with long-term implication:
Since the same distribution model involving the channel arrangement will be used for the future launches of CARL, the decision has long-term implications. Just about four months’ time for planning and implementing the distribution strategy is a bit of a rush job and might end up in suboptimal choices or partnerships covenants. Negotiations with channel members take long time, and the lack of time should not force Mr Lodha to go for an arrangement that is not in the best interest of the company.
Decision is with boundary conditions:
Certain guidelines, norms, practices, etc., might hamper the overall effectiveness of the decision of Mr Lodha given that CARL is a government-supported venture. For example, a government-owned third party surface courier company was given the charge of delivering from the factory to the city of sales. Also, the MRP of the product had to be fixed to ensure cost of production to be around 60 per cent of the MRP, while sales and administration overhead costs accounted for 10 per cent of the MRP. So, the decisions for Mr Lodha were not without boundary conditions.
Decision has cross-functional implications:
Decisions on channel models have implications on the business functions, and are themselves, in turn, affected by decisions concerning other business functions. This is perhaps the most important covenant of the case and a perspective that needs further analysis.
Detailed Analysis of Cross-functional Linkages
The following are few obvious interlinkages with other functions, which can be taken up for analysis and discussion in a specialization class of Sales and Distribution course.
Product
The nature of the product, particularly perishability, affects the choice of SKUs and material and nature of packaging. These in turn affect the decision on the design and structure of the distribution channels. The low shelf life of EHD coupled with the fact that being a new company CARL would carry on business on a cash only basis, the channel must support no-return policy. The product configuration was new to the market (500 ml and 1,000 ml bottles), and hence the novelty of the product demanded that the channel must also portray the same novelty.
Pricing
Since the mandate for CARL was to bring to market cost effective products with a social purpose, that is, helping the economically weaker sections of people to lead healthier life, appropriate pricing was very crucial. Though the availability of raw material at a lower price compared to its competitors was assured by the government, the affordability of the product for the end consumers could only be ensured with an effective and responsive supply chain which would minimize pilferage, damage and maximize the available shelf life for steady sale, rather than either going for hard sale before the expiry date or rendering the consumption ineffective, if not harmful, after the expiry date.
Conditions of either stock out or unsold inventory on the shelves led to suboptimal utilization of the distribution channel, thereby affecting the price of the product, in the medium and long run. On top of that, with CARL’s decision to go with only cash business, and with no return policy, pricing decision needs to be taken very carefully.
Consumer Behaviour
EHD had its target market of both users and non-users. The various alternative consumer reactions, faced with minor health issues, challenged CARL’s media campaign plan to reach out to the respective segments effectively and ultimately either turn non-users to users of EHD or users of other competing Ayurveda-based OTC or prescriptive medicines for good health to EHD consumers.
The media habit of the economically weaker sections of the market needed to be carefully analysed and the product had to be positioned appropriately to encourage trial and usage.
Positioning
The positioning of CARL’s products would be straddling the established allopathic and Ayurvedic products with established network of doctors and pharmacists already in place and having deep pockets for mass marketing, on the one hand, and the large number of small-scale producers, supported by the government as a policy and having very niche markets with dedicated clientele in their respective geographies or zones of influence, on the other hand.
The buying behaviour of the target market affects the choice of the distribution channel and in turn gets affected by the latter. The ambitious target of achieving 100 per cent reach in the 3rd year after launch of EHD necessitated that the distribution channel chosen must be the preferred channel of the majority of the target population. It is from this perspective that any arrangement with Mild Dairy may prove to be a hindrance since customers visit the Mild Dairy booths only at certain times of the day, which may not augur well with the purchase timing of EHD by a consumer.
Channel Relationship
The biggest concern for any new product company is the loyalty of the channel partners, while the appointment of the right set of distributors is crucial for the launch of any new product; sustaining the loyalty of the distribution channel partners by ensuring early break-even achieved by them is more important.
Although a number of new products were in the pipeline from the CARL stable, garnering the trust and loyalty of the distributors such that they would stay with the company even if the break-even point reached a little later. So, financial aspects from the distributors’ point of view is crucial in the decision of distribution channel choice. The margins offered to the retailers along with the additional bonuses affect the profit margin for a company. So, the arrangement of margins and bonuses as negotiated with the distribution channel partners go a long way in ensuring the financial health of the company.
Human Resources
The number of retailers who were the last link in the distribution chain, the number of distributors or wholesalers, augmented by e-commerce and large format retailers—all these factors affect the number of sales professionals the company had to recruit—and keep them on board—either to have effective monitoring of the channel members or just to have adequate feet in the market. The recruitment, training, incentive schemes, retention strategies—all depend on the choice of distribution structure.
Possible Case Solution
Blended Channel Development
In the light of the above discussion and analysis, it seems logical for Mr Lodha to go ahead and implement a blended network, consisting of distributors and retailers for reaching out the older consumers, and e-commerce for reaching out the younger, with clear planning and thorough preparation for any backlash from the established competitors.
First and foremost, given the fact that CARL is a government-supported venture, he must utilize its power to forge alliances with other private and public companies. The company must build a strong brand and assert its brand power.
Despite special importance of distributors, there are reasons why low volume channel members like retailers, and sundry mom-and-pop stores, small kirana shops must be supported:
They would add scope and completeness to its market coverage, making it harder for competitors to gain momentum by serving parts of the market neglected by all. Low volume channels could have a powerful effect on the reputation of the brand, thereby creating a brand pull quickly. Often, low volume channels encompassed the best future opportunities for a company with the best growth opportunities.
Marketing: Understanding the Customers
The health drink market is a new sector and did not have consistent brand power. The competitors grew simply because they were pulled by the growth of their major retailers and other upstream channel partners. CARL has a potential strength in terms of it being government supported which ensures cheaper raw material and easy tie-ups with other such companies (like Milk Dairy), if they wanted.
The fragmented brand presence is a boon for any new company with a concerted effort to build a brand pan-India. It must be kept in mind that due to the proximity with the customers, it is the channel partners rather than the manufacturer that can really build the brand. Connecting directly with the customers is the long-term solution, though with short-terms losses for a new company like CARL.