Evolution of distributionmodels and sales strategies

It seems, that everything is OK

And every day…

The model was successful and

profitable

Manufacturers solve similar tasks

But in the new conditions the model

is not working. And the issue is

not the crisis

We need to grow both topline and

bottomline

1 2 3

But perhaps not all of us accept the real problems

The market has changed, but our mindset is the same

Distribution Model

Segmentation

TradeTerms

Something has happened with our sales –“crisis, it seems”

Retail chains are growing:

Revenue ’10: $11 bln

Q1 ‘11:+ 50 % revenue

+ 64 % EBITDA

X5

2000 2010

Retail chainsDistrbutorsManufacturers

The market has changed irreversibly

Retail chains are growing and competing for the best prices

The margin is going from production to retail

From distribution the margin has already gone

Those who do not feel it today – will confront it to-morrow

Manufacturers, overstepped $1mlrd, escaped from this problem

How the other producers must behave on the new market ?

Margin split

In sales — as on the boat

How not to crashin the first days…

And how to become the leaderin the next days…

Business Models are developingIf you don’t improve yours, you leak

What to do?

Start from theright model !

Which hasstrong musts *

* Distribution models

Flexibly adjustable Sails*

* Trade terms

Route *, which will bring you to the correct port

X

* Segmentation

What does our boat consist of ?

Distribution model

Trade terms Business processes

Training and development

Segmentation The captain

Communications

Distribution modelTransfer to another

1 big

The best 100

Trade terms

Segmentation

Route to the market —is the answer to the question : «HOW ?»

230 000 outletsManufacturers

The are three “route to market” models

Localdistributors

Transfer to another manufacturer

NationalDistributor

Transfer to another manufacturer

Another manufacturer distributes your product

Another manufacturer distributes your product

Distribution modelTransfer to another

1 big

The best 100

Trade terms

Segmentation

In 90s importers were called distributors

0 5 10

Megapolis

SNS

Kubanopt

Pivdom

CDK

2006

2007

2008

2009

In 2000s new type of Pan-Russia distributors appeared

…and caught up in turnover key manufacturers and retailers

Megapolis:190 branches140 000 outlets covered13 000 employees

$ mlrd / year

0 5 10

Megapolis

SNS

Unimilk

konditery

Russkoe more

2006

2007

2008

2009

National distributors showbetter growth than producers

Objedinennie

$ mlrd / year

0 5 10

Megapolis

SNS

Auchan

Magnit

Х5

2006

2007

2008

2009

And compete with key retailers

$ mlrd / year

2006 2010

Will FMCG catch up pharmaceuticalmarket in consolidation ?

Pharmaceutical

Others

TOP 5 distributors

FMCG

2006 2010

8% 70%

Consolidation of distribution –was one of the ways to save the margin

VerticalIntegration

Retail Chains

Own brandsproduction

Enter new product categories

Enter new territories

Warehousing

Logistic

Horizontal integration

Services

Horizontal integration of distributors is initiated by producers

Manufacturers, overstepped $1 mlrd, decrease number of their distributors

The best distributors get new cities on expense of the weak ones

Horizontal integration of distributors is initiated by producers

Manufacturers, overstepped $1 mlrd, decrease number of their distributors

The best distributors get new cities on expense of the weak ones

Then they organize “general price”, it can be used by other producers

Except sales, merchandising function has also changed

Retailers planogrammSales

Producer planogramm

Share of shelf

Additional space

And merchandisers also became national

Shared services (1 person merchandises several producers) was the reaction to reduction in the functional

There are national agencies with salary fund $10+ mln a year

Why are their services cheaper ?

Due to scale effect they organize processes better than manufacturers

Merchandiser spends more time in the outlets and less on the way

Distribution modelTransfer to another

1 big

The best 100

Trade terms

Segmentation

Strata Population N of cities

А over 1 mln 13

В 500’000 – 1 mln 22

С 100’000 – 500’000 132

D less 100’000

Why100 distributors?

24 City-satellite

44 Administrative center

63 Remote city

Strata Population N of cities

А over 1 mln 13

В 500’000 – 1 mln 22

С 100’000 – 500’000 132

D less 100’000

24 City-satellite

44 Administrative center

63 Remote city

100∑=

Why100 distributors?

These 100 cities «weigh» 75% of the market

There are 230.000 outlets in Russia

100.000 of them are in these 100 cities

100 cities are covered by distributors

The other cities are covered by wholesale40%

75%

Numeric Weighted

the other cities

TOP 100 cities

Outlets distribution

Usually one distributor is selected in the city

The strongest one !

Many manufacturers hired sales representatives

Then manufacturer has to be the “preferred supplier”

Service of distributor is:

Warehousing, delivery, cash collection

Additional credit

Legal flexibility

Fast decisions

Agent drives the truck with product, when he gets an order, he collects it and delivers to the outlet

Agent takes the order, passes to warehouse, and it is collected and delivered the next days

Delivery can be provided by two types:

Pre salesVan sales

In each city there can be three models

DSDDirect Sales and Delivery

DS3Direct Sales Third

party delivery

3PDThird Party sales

and Delivery

Warehousing and delivery

Manufacturer

Distributor

Distributor

Sales management

Manufacturer

What system is this ?

One national distributor over Russia

1000 merchandisers of manufacturer

Two persons come to the outlet:

To take the order

To merchandise

What system is this ?

Distributor opens entity, which sells only manufacturer product

Sales agents are in distributors headcount, but fully managed by manufacturer

Manufacturer approves of distributor’s P&Ls and ensures bottom line

Control over shelves

Cost to serve

What system to use ?

DSD

3PD

DS3

Fast development with minimum investments

Cheap non branded products

low sales, low marginal product

3PD

High sales, high marginal product

Short shelf life products

DSD

DSD

3PD

DS3

Control over shelves

Cost to serve

Cost to serve vs. control

Cost to serve vs. control — many havehigh cost low productive model

DSD

3PD

DS3

Control over shelves

Cost to serveHigh investment,

No result

Control over shelves

Cost to serve vs. control and onlyspecific get distribution for free

DSD

3PD

DS3

Cost to serve

«Creep -product»

Usually models are adequate to turnover and margin

Control over shelves

Cost to serve

DSD

3PD

DS3

3PD distributors are not manageable

In the past the targets were like this

We have to convert operations to DS3

Hired 500 sales representatives

50 000 outlets covered

1 2 3

Conversion to 3PD —is adherence to the route

The model should be“easy to sell” to distributors

The model should allow manufacturer to get ROI in a year

“General price”

“mixed” teams

“ballast” product

Exclusive teams

900 Euromanufacturer contribution

Sales per agent30.000 Euro

Distributor’s markup

3% = 900 EuroDistributor’s contribution

Sales increased twice up to 60.000 Euro

In a year

3% = 1.800 Euro

distributor contributionAgent wages

1.800 Euro

and stops investments of manufacturer in a year

DS3 model should be “easy to sell” to distributors …

Agent wages1800 Euro

Nowdays DS3 in Traditional Trade became less effective

Sales per outlets dropped – delivery cost increased

Quantity of shops decreased, traffic jams intensified – effectiveness of routes decreased

So agent’s salary eats the margin

Only those who overstepped $1 mlrd do not feel it yet

How to make DS3 cheaper ?

If your average order less than minimum delivery lot

If you already can not pay the salary to the agent

Then mixed teams — is your solution !

How to organize and manage mixed teams ?

The products should :

Not compete among themselves

To be within one category

To have similar sales per outlet

Belong to markets with equal volatility

Have similar consumer loyalty to brands

Your contribution to agents wages:

For the Euro of your sales agent gets commission more than for the other products

Ideally they pay fix part, and you pay bonus :-)

Hoe to organize and manage mixed teams ?

The products should :

Not compete among themselves

To be within one category

To have similar sales per outlet

Belong to markets with equal volatile

Have similar consumer loyalty to brands

Distribution model

Trade termsDiscount

Federal Trade Law

Should retail chains get back to distribution ?

Segmentation

Discounts classification

ConditionNo condition

RetrospectiveProspective

Pay for performancePay for compliance

TangibleIntangible

Methods of Regulation of rebates

On invoice discount

Cash bonus (no VAT)

Free product

Marketing services agreement (bank transfer or cross cancellation of debts)

Tax code

On invoice discount < 20%

Each channel has its price list

Discounts are accompanied with the documents

Discounts classificator – important sales instrument

Name of discount

Condition of charge

Retrospect / Prospect

Method of regulation

Budget owner

Maximum value

. . .

Prepayment

Transfer is on our account

Retrospective

On invoice discount

Sales director

3%

. . .

I recommend to evaluate discount annually

Sales volumes

Depth of discounts

АВ

I recommend to evaluate discount annually

Sales volumes

Depth of discounts

АВ

ВА

Regional pricing

Landed cost

influence:

transshipments

Retail Shelf Price

P&Ls of regions

Convenience for retail chains

Fight with competitionВладивостокСмоленск

Производитель

Дистрибьютор

Distribution model

Trade termsDiscount

Federal Trade Law

Rebates

RSP

Distribution

Should retail chains get back to distribution ?

Segmentation

Before the law

Price for distributor

Retail Shelf Price

Traditional Trade Local chains National Chains

Manufacturer

Price for retail

Unified national invoice price

Personal Rebate

Retail Shelf Price

Traditional Trade Local chains National chains

Price for distributor

Manufacturer

Price for retail

Unified price is destroyed, RB converted to discount

On-invoice discount

After the law

Retail Shelf Price

Traditional Trade Local chains National chains

Price for distributor

Manufacturer

Price for retail

Unified Price remains,RB converted into marketing

Marketing services

After the law

Transit of rebates into marketing

If rebates were not converted to discounts, they were transited into marketing

Transit of money into marketing services rose prices by 30%

In conttrast to cash bonus, marketing agreements are imposed by 38% tax

Saved Unified National Price

Converted extra RB into marketing

Huge manufacturers with strong competitors

How did it influence the market players ?

Huge manufacturers who dominated in the category unalternatively won

As they did not have RB over legal 10%

Even if they had — RB decreased down to 10%

Small manufacturers arewashed away from shelves

Because they can not develop brands during such a growth of prices on promotion instruments

Due to the Law we will decreasethe distance with West Europe

Set of brands on WE shelves is repetitive

The Law «thins out» number of small producers in Russia

Promo actions forecasting turned into casino

You produce promo product,

and retail chains do not

purchase it

If marketing will be prohibited …..

Chains increase “service

level”

By penalties chains can take

the leftover of RB, and it can

not be parted from supply

contract

Distribution model

Trade termsDiscount

Federal Trade Law

Rebates

RSP

Distribution

Should retail chains get back to distribution ?

Segmentation

Government price regulation was before the Law

Bunge 2007

Price was frozen for 6 months

The market price increased by 20%

The same happened with WimmBillDan

Formation of commodity market prices starts from the crop

Since buckwheat was the usual crop failure

Crop failure - the only way the farmer "recapture" loses in the years of overproduction

Only in the EU government during overproduction buys crops at a fixed price

0

50

100

Январь

Февраль

Март

Апрель

Май

Июнь

Июль

Август

Сентябрь

Октябрь

Ноябрь

Декабрь

Rur/kilo

Raw materials

2010

Q1 Q2 Q3 Q4

0

50

100

Январь

Февраль

Март

Апрель

Май

Июнь

Июль

Август

Сентябрь

Октябрь

Ноябрь

Декабрь

Rur/kilo

Raw materials

Retail shelf price

Retailers markup depends on:

1. other retailers RSP for KVIs

2. And average market mark up for niche products

When producers feel bankrupt they choose penalties for underdelivery, and the shelf increase exceeds “legal” 30%

But on the shelves of retailers market prices ends

2010

Q1 Q2 Q3 Q4

«The buckwheat criminal case» was raised

Federal Law #381

Implemented since august 2010

Distribution model

Trade termsDiscount

Federal Trade Law

Rebates

RSP

Distribution

Should retail chains get back to distribution ?

Segmentation

Everybody can buy distribution contract now

ст 9 п 10, ст 13

It is impossible to prohibit or charge change of owners of the contract

In conjunction with the illegal restriction of the territory, theoretically “Pan Russia distribution” can be purchased

And you can not oblige distributor to sell :

ст 9 п 12

promote all SKUs

place POSM

motivate sales agents

set responsibility for distribution

translate retail promos

serve clients )

…and now it’s a soother

Earlier you could read distribution agreement

Who wins, if relationships move to the shadow ?

КeyАccountsМanager

Who wins, if relationships move to the shadow ?

Distribution model

Trade termsDiscount

Federal Trade Law

Rebates

RSP

Distribution

Should retail chains get back to distribution ?

Segmentation

Trade termschange the market

WIll retail chains return to distribution ?

Vertical integration into retail chains – was one of the ways for distributors to save the margin

VerticalIntegration

Retail Chains

Own brandsproduction

Enter new product categories

Enter new territories

Warehousing

Logistic

Horizontal integration

Services

And distributors soon …

Tander

Uniland

Sweet Life

R-Modul

Pallada Torg

Turned into a beautyfull retailers

Magnit

Dixi

Spar NN

Monetka

Sberegaika

Tander

Uniland

Sweet Life

R-Modul

Pallada Torg

Fragmentation of supply will continue further more the price distance with TOP retailers

1 x

One city – one distributor

Fragmentation of supply will continue further more the price distance with TOP retailers

1 x 5 x

+ direct deliveries to DCs of local and national retailers

1+ 2 + 2

One city – one distributor

So, will chains return to distribution ?

Distribution centers work perfectly

Prices are lower than distributors’

Price is “washed” from rebates

Direct supply contracts with producers

Distribution can be “bought”

Distributors ChainsChains -

distributors

Resources are restricted —where to invest ?

OPEX and CAPEX of national start up even for 2.000 SKUs can be compared with hundred discounters

Should distribution be in perspective as profitable as retail ?

There is space for retail brand developing – who is ready to invest in non profile business ?

There are also mental barriers

Will the shops allow to depend on one supplier ?

Will the shops buy from competitor ?

How long will it take to convert Buying organization into Selling ?

Sanctum is under the risks –the business processes efficiency

Stock level will grow — forecasting deteriorates when you do not manage the shop

Transshipments, commodity … pricing solutions are to be taken quickly and locally

Orders return to warehouse, assembling and delivering apiece, cash collection …

Distribution model

Trade terms

SegmentationIntroRetailDistributionPeople

Segmentation:

— Subject

— Process

— Parameters

Subject of segmentation

Employees

Distributors

Wholesellers

Retailers

….

Segmentation process

identify

analyze

prioritize

develop plan

realize plan

analyze again

Segmentation parameters

Sales

parameters

Sales volumes

Market share

Price segment

Growth rate

Sales channel parameters

margin

speed to market

risks

Retail outletparameters

Format

Marketing value

Segmentation matrix changes rapidly

Before: 50 meters, 60 km/hour

Segmentation matrix changes rapidly

Before: 50 meters, 60 km/hour

Today: 10 meters, 100 km/hour

Coefficient of investment

performance= Investment index

Revenue Index Market share indexх

You need to evaluate investments annually

Coefficient of investment performance

Parameter Sample 1

Revenue Index 80

Investment index 100

Market share index 90

Coefficient of investment performance 72

Coefficient of investment performance

Revenue and market share dropped with the

same level of investments

Parameter Sample 1

Revenue Index 80

Investment index 100

Market share index 90

Coefficient of investment performance 72

Parameter Sample 2

Revenue Index 115

Investment index 105

Market share index 110

Coefficient of investment performance 120

Coefficient of investment performance

Parameter Sample 2

Revenue Index 115

Investment index 105

Market share index 110

Coefficient of investment performance 120

Coefficient of investment performance

Revenue and market share growth overruns growth of investments

Distribution model

Trade terms

SegmentationIntroRetailDistributionPeople

Segmentation by retail formats

Hypermarket

Supermarket

Discounter

Grocery

Kiosk

Segmentation by sales volumes

# of retail outlets

100%25 50 75

Sal

es V

olu

mes

А

В

СD

Segment А

Segmentation by sales volumes

# of retail outlets

100%25 50 75

Sal

es V

olu

mes

А

В

СD

Segment А

Segmentation by sales volumes —volumes of your product or your category?

2-D segmentation with price segments

Pricesegment

Объем

D

C

B

A

Low Medium Premium

2-D for premium products

Pricesegment

Volume

D

C

B

A

Low Medium Premium

2-D for premium products

Pricesegment

Volume

D

C

B

A

Low Medium Premium

2-D for value products

Price segment

Volume

D

C

B

A

Low Medium Premium

2-D for value products

Price segment

Volume

D

C

B

A

Low Medium Premium

Retail investments need to be optimized too

There are 22 500 modern

trade retail outlets in Russia

They form 50% of the market

-

10 000

South North

Non active

Active clients with investments

Active clients with investments AND profitable

Active clients with investments AND NOT profitable

# of outlets

-

10 000

South North

Non active

Active clients with investments

Active clients with investments AND profitable

Active clients with investments AND NOT profitable

Retail investments need to be optimized too

There are 22 500 modern

trade retail outlets in Russia

They form 50% of the market

# of outlets

Transfer of investments improves bottom line and topline

Distribution model

Trade terms

SegmentationIntroRetailDistributionPeople

All distributors are different —how to compare an apple with an orange ?

All distributors are different —how to compare an apple with an orange ?

3 key parameters

Power of distributor

Efficiency of manager

Size of distributor

3PD distributor’s Profile

Territory coverage

Modern Trade

Traditional Trade

Wholesale

Opportunity to promote product

Sales reps motivation is effective

Promo for retail is effective

All your SKUs are in matrix

General

Growth vs LY

Price architecture

Finance discipline

Distributors power and managers’ efficiency

0%

50%

100%Distributor’s power

Managers’ efficiency

Distributors power and managers’ efficiency

0%

50%

100%Distributor’s power

Managers’ efficiency

Distributors power and managers’ efficiency

0%

50%

100%

Distributor’s power

Managers’ efficiency

0%

50%

100%

To cover Russia effectively you need 100

distributors. You have more ?

# of distributors

Sales Volumes

Last 15% clients weigh 3% sales

100%

You can segment the problem and solutions :

To grow

To consolidate

To convert to sub-distributor

The only client at regional center

Second clientat regional center

Remote city

Distribution model

Trade terms

SegmentationIntroRetailDistributionPeople

If your DS3 are more expensive every year …

Chicago

To develop

New York

Philadelphia

# active clients per sales agent

Salary / Sales per agent

Florida

Oklahoma

Washington

San-Hose To convert to 3PD

100

50

10%

Perhaps, DS3 is not so effective, as you did not

allocate territories properly …

Producer

Distributor

“General price” DS3 sales agent KAM DS3

Traditional trade, city

Modern trade, cityTraditional Trade, suburbs

Wholesale

Or sales organigram does not correspond to the business model ?

The organigramm can be as this:

Boss

Assistant

Sales Force

Or based on the objectives

Objectives – V, MC, MS

Route to market model

# of people in the field

Organigramm to support field force management

Distribution model

Trade terms

Segmentation

So we have three key parts of our boat …

Distribution Model

Trade terms

Segmentation

So we have three key parts of our boat …

Distribution Model

Trade terms Business

processes

Learning and

development

SegmentationThe Captain

Internal

communications

But the synergy comes when you get the others

In sales — as on the boat

But there are no similar yachts, as well as similar companies. Your strategy should be based on your competitive advantages

In sales — as on the boat

Administrative resourse * ?

* 0% taxes

Unique construction * ?

* 100 km / hrs

Muscles ?

Special sail– spinnaker ?

I wish you find your spinnaker!

Thank you !