Abstract
In March 2018, Rajan joined Wondersmoke India Ltd (WIL) as a sales executive for their cigarette business in Odisha, India. Although there was good demand for Wondersmoke as per the internal customer survey report of WIL on Kendrapara district of Odisha, a lot of the time, the demand was not fulfilled as the retailers did not have sufficient stock owing to inadequate working capital. Rajan needed to increase the cigarette sales from retail outlets in Kendrapara by ensuring that there was no loss of sales due to the lack of working capital of the retailers. Further, he needed to achieve the desired sales performance without making any exception to the company policy of no credit.
Keywords
Discussion Questions
What options does Rajan have to increase sales in Kendrapara?
Reflect on the merit of Wondersmoke’s policy of no credit to retailers, given the fact that many of them did not have adequate capital, for which they were losing sales.
Sales management of Wondersmoke in Kendrapara required delivery of sales numbers while implementing the sales policies of the company. The zero-credit policy of Wondersmoke seems to work against the objective of increasing sales in Kendrapara. How these challenges can be managed in the sales system of a large organization?
What is the root cause of the problem among Kendrapara retailers? How can Wondersmoke solve it? Suggest the best course of option.
Introduction
In March 2018, Rajan joined Wondersmoke India Ltd (WIL) as a sales executive for their cigarette business. He was posted in Bhubaneswar (capital state of Odisha, India) and was tasked with supervising five distributors located in the five nearby districts, namely Khurda, Puri, Cuttack, Kendrapara and Jajpur. Rajan, an MBA from a premier institute in Bhubaneswar, was a local resident.
Wondersmoke was a fast-moving consumer goods (FMCG) products company that marketed biscuits, instant noodles and cigarettes. The different product lines had different sales teams. The problem faced by Rajan in achieving the sales growth in Kendrapara was due to the economic backwardness of the area. Most of the cigarette retailers were poor. They did not have the working capital to invest in Wondersmoke. Hence, they stocked other products like paan, 1 paan masala 2 and some of the toiletry items. They depended on the distributor credit lines for their stocking. The challenge was that Wondersmoke had taken a policy decision that its distributors would not offer any credit to the retailers. The sales executive of Wondersmoke had to ensure that there was no deviation in the implementation of this policy.
Past efforts of offering limited credit lines by other FMCG companies had not been able to make any difference to the perpetual problem of the retailer’s working capital shortage in Kendrapara. Even wholesalers were not ready to offer the retailers any credit as they all had burnt their fingers in the past and learnt their lessons the hard way. Also, the model code of the distribution operation of Wondersmoke strictly prohibited the incorporation of wholesalers in the cigarette distribution system.
Although there was good demand for Wondersmoke as per WIL’s internal customer survey report from Kendrapara, a lot of the time, the demand was not fulfilled because the retailers did not have the stock when consumers demanded Wondersmoke. The number of retail outlets was expected to grow by 5 per cent in the financial year 2018–2019, and the sales target was also projected to grow by 8 per cent. To achieve the 2018–2019 targets, Rajan needed to increase the sales from retail outlets in Kendrapara. He needed to ensure that there was no loss of sales due to the lack of working capital of the retailers. Further, he needed to sustain the higher sales performance without making any exception to the company’s credit policy. It was already May 2018, Rajan needed to solve this problem quickly to deliver his annual sales targets.
Channel Sales Management Process in FMCG
The credit terms of a company to its channel members were determined by the relative bargaining power of the brand, stock turnover period, the volume of business, competitive scenario and the discount structure determined by the company. For strong marketing companies that enjoyed consumer pull, the credit terms were strict. A limited amount of credit was an accepted norm in businesses where the stock turnover was not very fast, and selective distribution was followed. However, for FMCG like cigarettes, the manufacturer did not offer any credit, and an intensive distribution system was followed.
The manufacturer (also called company/principal) of FMCG products typically used carrying and forwarding agents (C&FA) as the main distribution point in a state. The C&FA supplied materials to a few distributors against their order and advance payment. Distributors supplied products only to the identified retailers located in their assigned territories. Retailers sold to the end users, mostly a regular clientele that bought from the outlet. Distributors employed their own sales team for the smooth operation of the distribution work. The sales team included frontline salespersons who took orders and collected payment from retailers, and a few sales supervisors who supervised the salespersons as per the guidelines/policies of the principals. FMCG companies had sales managers on their payrolls who supervised the distributors’ business performance, including sales policy implementation in the territory, regularly.
Since there were a lot of small shopkeepers among the retail universe of distributors, and their collective contribution to sales was important in some categories of FMCG products, a limited credit was offered from the distributors to the retailers, totally at their own risk. This credit was extended as a mechanism of providing much-needed working capital for adequate stocking of the principal’s product. However, there were instances when the working capital was sometimes used by the retailer as an investment fund, which they diverted to higher rolling businesses and made more money. The other problem of a distributor extending credit (especially to less prosperous and less developed retailers located in rural markets) was that a large number of the retail outlets were mobile and temporary in nature, as they were put up in temporary huts and even mobile carts. Thus, the retailer could move away or just close the shop suddenly (and this could not be predicted), leading to bad debts for the distributors.
The salesforce management processes were standardized in the FMCG businesses across India. Distributors were required to appoint and supervise the salesmen. Salesmen were required to visit the retail outlets as per pre-determined schedules of the principal, and take orders and collect payments (in some cases like cigarettes, they were expected to carry stocks and deliver stocks to the retailers at the time of their visit). The number of retail outlets to be serviced by the salesman every day was decided based on the time and motion studies and was termed as ‘daily call norm’. The salesforce was monitored based on their performance against the pre-set call norms as well as the productivity of their calls. The salesman’s productivity was calculated as the percentage of the outlets visited from which actual sales were generated against pre-set sales targets. For example, in a day, if a salesperson visited only 40 outlets, collected the desired orders from 36 outlets out of the total call norm of 50 outlets. The call norm achieved was 80 per cent, and productivity was 90 per cent. The setting of call and productivity norms for the salesperson and the monitoring was done by the sales executive of the FMCG principal.
Distribution Model of Wondersmoke
Wondersmoke was a dominant cigarette company in India. It had many brands, and together they accounted for 80 per cent of the Indian cigarette market. The company had strong market presence across the country with a very good distribution network, supply chain and loyal customer base. Hence, Wondersmoke depended primarily on a high level of retail penetration to increase business and growth.
The competition of Wondersmoke was from two quarters. One was the other cigarette brands and the other was (possibly even more significant) from a related category like paan, paan masala, and so on. The cigarette competition was quite weak, who worked with a smaller number of distributors and primarily used wholesalers to distribute. Their demand was so low and geographically spread out that intensive distribution directly to retailers was not commercially viable. However, using wholesalers was cost-effective, but it did not ensure the availability of the product across the retail network at all times. Paan masala and paan were much more lucrative for the retailers as they provided much higher margins than Wondersmoke could ever provide. Hence, Wondersmoke did not provide the retail outlets with high margin, but they had a stable and loyal consumer base, which drove regular footfall to the retail shops. Also, Wondersmoke added an image to the outlets, which helped the outlets attract more affluent consumers, thereby increasing their overall business and profitability.
Cigarettes being injurious to health, there were anti-smoking drives by the government as well as non-government organizations, which led to a peculiar behaviour among cigarette consumers. The majority of cigarette consumers, even the habitual and regular smokers of a specific brand, did not purchase the packets (typically containing 10 or 20 units), they bought it in single units as and when they felt the urge. Thus, the sales and consumption of the product was impulse led and also transient in nature. For example, a person may feel the urge to have a cigarette based on the display/point of purchase materials or even watching others smoke, and so on. Since most consumers did not carry cigarettes with them, in case the stock was not available in their vicinity, the demand was not fulfilled.
Interestingly, most unfulfilled cigarette demand was either converted to other competing products such as chewing tobacco/pan masala, and so on, or the demand was simply lost. Hence, one of the critical requirements for ensuring good cigarette sales was the availability of the product at the point of desire. Also, experience suggested that successful cigarette retailers also stocked substitute products such as paan, paan masala, and so on, which were also demanded by the cigarette customer. Typically, making paan required specific focus of the outlet as the product was perishable and required specific skills to custom prepare it to suit the taste requirement and preferences of each customer. Hence, these shops were quite finite in any market, and they enjoyed a loyal customer base.
High availability of cigarettes was typically achieved by ensuring a very high level of retailer penetration for Wondersmoke. The sales of a cigarette could practically be considered to be essentially distribution led. The cigarette retailers were typically paan shop owners. Stocking Wondersmoke helped these small shops to attract the premium customers, but their real margins came from the sales of paan and paan masala type of products. Some of these shops were very small. They only had the small signboard of Wondersmoke as their only identifying mechanism. Many of them did not even have a permanent structure of a shop and were located in mobile carts. Such carts could be physically moved to their home at the end of the day or, in extreme cases, converted to bed for sleeping.
The distribution pattern of Wondersmoke was simple. Every district in a state had a few distributors, who were supplied materials by the company from its factory or C&FA. The distributors then supplied materials to the retailers in their territory, who, in turn, supplied to the end consumers. Some retailers had bigger business volume; they at times supplied some of their stocks to other smaller retailers, but that was a normally insignificant part of the overall sales of Wondersmoke. Hence, it was important to optimize the sales processes for the specific territory.
Wondersmoke managed all the advertising and sales promotion activities using its marketing department, which operated independently from the sales team. The marketing team had independent agencies that implemented their advertising in the television, radio and digital media, and consumer sales promotion initiatives were implemented at retail outlets in terms of signage, posters and other displays.
Trade promotions were under the sales team, and it included special initiatives for boosting sales in some territories. Trade promotion initiatives were restricted to the distributors and their salesforce. Most of the trade promotions were given special targets, and they were monitored very closely so that there was no undercutting in the market.
Distribution of Wondersmoke in Kendrapara
In the Kendrapara district (see Figure 1 for the map), Wondersmoke had three distributors, who were more or less similar in their size and operations. They were Suman Traders, Bijoli Brothers, and Satya Parida Distribution House (SPDH). On average, a retail paan/cigarette shop in Kendrapara sold ₹500 worth of cigarettes on a day, and the corresponding profit earned by them was ₹40 a day. The sales and profit figures could be 4–5 times in a metro city like Delhi or Mumbai. Owing to the nature of the market, typically, the highest daily cigarette sale of a retailer in Kendrapara was in the range of ₹800, while the lowest could be ₹250. WIL distributor’s gross margin was around 2 per cent of the value of sales, which was standard for Wondersmoke across the country. The company prescribed the number of salesmen and supervisors (field force) and infrastructure that was to be maintained by the distributor. Typically, the entire distribution operations cost (variable expenses) of the distributor was approximately 1.9 per cent of the gross sales in most cases (see Table 1 for detailed financials of SPDH). The stock holding required by a distributor was only 1.5–2 days of average sales, as they were supplied daily by the Wondersmoke C&FA. Although the gross margin for the distributor was 0.1 per cent of sales value, the net return on investment was a healthy figure of around 24 per cent for a distributor (if the business followed a daily supply and collection model, with zero credit across the retail distribution chain). This situation also made it very difficult for the distributor to add investment in the business, although they were quite satisfied with the returns.
Select Financials @ SPDH, Kendrapara, for 2017–2018
In the Kendrapara district, the normal distribution pattern of Wondersmoke distributor salesman was that each of them had to visit 50 pre-determined shops per day. The salesman went to a shop daily at the same time, gave the retailers the day’s stock and collected the payment against the same. In rural areas, one of the major problems was that some paan shops initially did not have the money to even invest ₹500 for a day’s sales, and hence they purchased as much stocks as they could with their available cash. Thus, these retailers exhausted their cigarette stocks before the next visit of the distributor salesman, and the customer would not get Wondersmoke for the intervening period. The customer could gratify his senses by other means (e.g., paan masala, paan or even some chewing gum) at the specific retail outlet, and the Wondersmoke salesman lost sale. The company executives, like Rajan, ended up losing sleep over it as it was a high-pressure trade, and there was steep sales targets and daily monitoring of sales achievements.
In the past, there were some efforts by the WIL distributors to supply one day’s sales on credit and collect the payments the next day. However, there were frequent losses as the retailer used up the cash for paying some other creditors, or some personal medical emergency or even personal indulgences like liquor. Then they had no way of paying back. This led to a loss of sale as well as money for the distributor. Thus, whenever they had attempted the extension of credit, howsoever nominal, the distributor had lost money. Therefore, the collective wisdom of the Wondersmoke sales organization had been to prevent the distributor from selling materials on even a one-day credit.
The Kendrapara retailers were typically very poor and did not have access to any organized source of credit, even for working capital. Most of them did not have a permanent place of business, although many of them looked like a permanent place. Many of them operated from structures that could be moved from one place to another by using even a hand-drawn van. The organized money lending mechanisms available in the vicinity could not extend credit as retailers did not fulfil the minimum criteria for offering credit, and they were too small for commercially viable lending models to work. The daily earnings of the retailers were such that they could not think long term and had to run their homes from the margin earned by them on a day-to-day basis. Typically, they did not even have the financial strength to sustain even the additional expenses of minor health problems that their family might face. Personal loans were also rare for them as their credibility and ability to pay back was very low.
For a company like Wondersmoke, the call norms were decided very scientifically and were a reliable indicator of the workload and market potential. Rajan realized that the retail outlet coverage of the Kendrapara distributor sales force was 100 per cent of the retail counters targeted by Wondersmoke distributors. However, the total calls were still only 92 per cent of the standard call norms of 50 set by the company for the field force. Rajan estimated that in the next two years, the number of retailers was likely to increase by 10 per cent as small shops regularly sprung up. He knew that this slack available in the manpower utilization at the distributor’s end would be used up in the future as the retail universe of Wondersmoke grew in Kendrapara. Rajan realized that a distributor-specific solution had to be tried out with one of the distributors, which could then be replicated elsewhere. He chose SPDH Kendrapara to analyse in detail.
SPDH had ten salespersons covering the entire territory assigned to them. Each salesperson was given a fixed territory to cover, and they all were assigned daily call norm of 50 outlets. There were slight geographical variations in the territory in terms of the amount of business and the geographic concentration of the outlets (See Table 2 for a specific territory and route plan of a salesperson in Kendrapara). The operation was carried out 365 days a year. Every day, the distributor salespersons came to the distributor warehouse at 8:00
A Typical SPDH Salesman’s Territory Details
Most of the salesmen territories under SPDH had about 44–46 retailers. So, all the salesmen had some float, which Rajan estimated, would be absorbed in the next one year due to the growth in the retail universe and, as a consequence, increase in the retailer base of Wondersmoke in Kendrapara. Hence, each salesman had some float in their daily work. Some of them used this to visit the particularly high potential but low working capital retailers even twice a day, once in the morning while they supplied the materials and then in the late afternoon when they made the collections. This allowed some additional sales with the same working capital for these retailers, which helped the retailer as well as the distributor salesman. However, it marginally increased the work of the salesman and the cost of serving the market for the distributor. The distributor had to bear the cost of this extra visit as Wondersmoke’s compensation for market coverage was fixed. Still, it was reasonably taken care of by the additional margin from the additional sales.
However, without the sales growth, Rajan’s 2018–2019 targets would not be met, nor any of the Kendrapara distributors’ financials would be viable to tap into the growth opportunities for the future. Without an immediate increase in sales, the sustainability of the distributors’ businesses in the next few years was also going to be at stake as the cost of the sales force and distribution operations were likely to increase by 10 per cent every year. Rajan had to solve the problem, without infringing on the strict credit policies of Wondersmoke. That was a big task, but if resolved, it could open doors for career enhancement for Rajan.
Footnotes
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.
Funding
The author received no financial support for the research, authorship and/or publication of this article.