Saturday, June 16, 2012

Rate Ka Chakkar

Many times, you will come across this line with your distributor/retailer/sales officer saying “Sir, aap ke maal mein rate ka lafda hai”. What this basically means is that your stock is available at a lower rate in the market – this could be another wholesaler, another distributor or anyone else.
A product that has a rate problem means that it is a top selling item in the market, which is good news for your brand team, but VERY bad news for you. When you start creating rate differences, you start playing a price war and there is no end to that - so our advice to you is stay away from it, even if it means a couple of extra gaalis :)

To explain better, let us look at the following scenarios:

Scenario 1:
You are selling Parle G biscuits. Your distributor is called ABC Traders, and there is a distributor in an adjoining area not too far away called XYZ Traders – however XYZ is not under your jurisdiction.
I will explain landing rates in another blog post, but to quickly explain:
MRP-Retailer Margin = Retailer Landing Price (RLP)
RLP - Distributor Margin = DLP
DLP –VAT = Company Landing Price (CLP)
For further information on rate calculation please read this

VAT cannot be escaped, hence there is only one way till now where your product can be sold at a lower rate – if the distributor decides to forego some of his margin, which is a rarity.
So effectively the lowest price you can sell at (legally) is the DLP, and illegally is the CLP or at a margin that is lowered so that your distributor gets volumes and you meet your numbers (not recommended, will explain this later); right?
Wrong.
Let me introduce you to this necessary evil called “Trade Schemes”. From time to time, every company will have a scheme which looks as such:
144 pcs – 6% discount
72 pcs – 4% discount
24 pcs – 2% discount
Then it is possible that Mr. Agarwal, a wholesaler may buy 144 pcs from ABC Traders for a 6% discount, and then sell it to the retailers at the same price again, even if they buy one piece. This is called rate undercutting. What effectively happens is that since wholesalers work on volume and not value, they don’t give a shit if they’re undercutting you, as long as they are getting the volumes and their regular margin.



I will explain this pictorially like a true MBA:








But then why bother, because irrespective of where the retailers buy from, your distributor is getting the business right?
 Wrong again.
The sales planning team in your company will be undoubtedly smart, but Mr. Agarwal in the market is smarter. Many a times, you will have schemes running in an adjoining state and/or you will have schemes running in the metros. And metros will have one big wholesaler, XYZ traders who will sell at a miniscule margin but with high volumes to these little wholesalers in your town. So what will effectively happen is that it is your company’s business that is growing, but will not show in your numbers and show in your metro/adjoining state counterparts numbers. Which would mean that your boss will call you the same night and abuse the hell out of you and will make you think that your MBA education was as useful as learning trigonometry in the 9th grade. Which would mean that your “Stock flow diagram” would look like this.










And hence you will be fucked and the ASM in the metro will have a life AND complete his numbers. So please kindly avoid as far as possible – whatever it takes, as long as there’s no undercutting happening. Once it starts, it doesn’t stop so beware.
Another way of rate undercutting is this: Your wholesalers will wait for your company to come out with a huge scheme (usually company year ending or slack period) and will stock up like there is no tomorrow. And then, he will fuck you over. Because he will hoard the same stock and sell it at the same discount later to your very own retailers – you can’t do anything about it, because company schemes are for a one month period only, but wholesalers can bill it at a discount anytime they like.

      Scenario 2: When the company’s own sales personnel undercut in order to achieve their targets:

However unviable this may seem, this is a practical phenomenon almost everywhere. Imagine Mr X is the Sales Officer of a company which sells Click Shampoo which is one of its major selling items in the market. The company has rolled out a slab-scheme in the market which looks something like this:
Slab 1 : On purchasing 0-25 Cases, a silver coin worth 1500/-
Slab 2: On purchasing 26-50 Cases, a gold coin worth 4000/-
Slab 3: On purchasing 51-100 Cases, a gold coin worth 10,000/-
A smart Sales officer will first break the slabs down to nett rates which basically means:
On Slab-1, there is an additional discount of Rs 60/- per case
On Slab -2, there is an additional discount of Rs 80/- per case
On Slab-3, there is an additional discount of Rs 100/- per case.
Now imagine 1 case of Click Shampoo’s nett rate (after deducting margins and primary schemes and excluding this additional QPS) is Rs 1100 per Case
Now Mr. X (being onto his last week of the Sales cycle and realizing that he is way behind his brand target for Click Shampoo) will slog his ass out in the market and find out that the rate prevailing in the market is to the tune of 1070-1080 per case.
He will convince a particular wholesaler  who has the capacity to buy 20 cases saying, ‘Aap 30 peti loge to rate laga doonga’. Similarly he will go to 2 more wholesalers and say the same thing for 30 and 40 cases respectively.
By the company’s rule book, these whole salers had to be sold at 1020 per case respectively (fitting into slab-2). Instead, what Mr.X has done is, he has shown 1 bill-cut from the distributor’s end (obviously to a fictitious wholesaler) of 100 Cases and given the rate of 1000/- per case to all the 3 wholesalers.
What this means is, the scheme which was intended to run in the market in a certain way, has been defeated in its purpose for the target achievement of its own sales guys. This is a never ending cycle because once you show the way to a wholesaler, you can never get out of it….Worse if in the future you attain the path of righteousness and deny twisting schemes and rates, he would buy it from a near-by (read another SO’s territory) and keep selling at a lower rate and you are doomed.

            Scenario 3: When the distributor cuts rates in order to garner his volumes:

Generally in many FMCG companies, there are 2 channels of distribution for Urban & Rural respectively which work as mentioned below:


Urban:












  Rural:














Typically the Urban Distributor’s margin would be 6% which while the Rural Super-Stockist’s margin would be 8% of which 3% is for him to keep and 5% to be passed on to the Rural Sub-Stockist.

Now imagine there is a Distributor sitting in Jalandhar who earns 6% margin and will therefore at best give a 2-3% margin to whole-sale (urban) and sell his stock.
However, a Super Stockist in Phagwara, who has no business in Jalandhar as far a Click Shampoo is concerned, but still supplies his Coal-gate stocks in Jalandhar, will typically have a couple of ‘Mota-Wholesalers’ whom he sells Click Shampoo at the rate he would sell to a sub-stockist i.e. by passing on 5% Margin and will very easily show in his books that he sold it to some god-foresaken sub-stockist in a god-foresaken village of Punjab.
This would generally happen without the knowledge of the company sales guy (if the sales guy is responsible for both the territories i.e. Jalandhar & Phagwara) and also if there are different people (Sales Officers) looking after the mentioned territories then this will generally be aided by them.

       Scenario 4: Cross-Geography Under-Cutting due to difference in VAT rates:
      Assume that there is a distributor of Click Shampoo in Ambala in Haryana (VAT Rate-12.5%)
      Similarly there is another distributor for the same product in Saharanpur in Uttarakhand (VAT Rate – 10% and just a 40 odd kilometers away from Ambala.
      Therefore the Distributor Landing Price in Saharanpur will be lesser owing to the 2.5% VAT difference as compared to the DLP in Ambala.
      Hence every opportunity for the distributor in Saharanpur to go and sell Click Shampoo in Ambala at a lower rate without foregoing his margin.
      This procedure, though is illegal and is done only through ‘setting and jugaad’, but is very common.

Similarly, these are just some of the common ways of under-cutting prevailing in the market. There are many more, and the wicked mind in the market keeps exploring even more ways to under-cut. Just the other day, on a table of drinks, I got to know about a Sales Officer, who during his early days claimed to have undercut in the following way:
(For that you need to know this, 1 Case of Click shampoo = 72 strips (also called ‘ladi’) and 1 strip = 20 sachets)
‘Sir, mera 1 tagda wholesaler tha. Woh 150-200 peti ek saath uthata tha. Maine company ki jo tape lagti hai peti mein, waisi tape jugaad ki. Peti ko neeche se khol ke 1 ladi nikal kar, wapis tape laga deta tha.Kaam dhyaan se karna padta tha. Lekin usko aaj tak pata nahi chala. Is tarah rate bhi 12-15 rs per peti kam ho jata tha’
Improbable as it may seem….but who knows.

Have you had any experiences in which your territory has been undercut in a different way? Please share in the comments!


18 comments:

  1. Institutions orders, home to home activities etc are other sources too

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  2. While it is best that undercutting is not practiced for the greater common good, seldom will most Sales ppl land in unadulterated, pristine deltas. So,what should you do to curb undercutting esp at the wholesale level which contributes to about 45% of your business and 90% of your undercutting.

    Got this down from a wise man: Your wholesaler bargains and threatens on undercutting as he wants to be the 'sava sher' if you are the 'sher' of that territory. It is vital that he is made to realise that you are his equal if not bigger than him. So how do we do that?

    Take a stand and stop supplying to him. Typically you will find about 40 to 50% of the wholesalers are up in the same area and they control about 80% of your company's wholesale business. Why is it like that, I mean doesn't it make more sense to just spread and have an individual monopoly in wholesale for a particular area within a city? So the secret is that every wholesaler has his unique set of retailer and consumers who buys from him alone and not the wholesale guy next to him. So more often than not, they don't need to be anywhere else.

    You got to start supplying to these retailers directly and try reaching those consumers through retail. This will cut the Wholesale lifeline (after not supplying to him) and you will win this 'higher pedestal' war! Of course, you need to know and learn your market well for that.

    Once you crack this, the wholesaler will fear you and fear breeds respect! I am sure he will still cry about rates but it will be more of a purr than a roar.

    Cheers,
    TiTo

    ReplyDelete
    Replies
    1. Agreed. The above solution is an ideal one. But the fact is many a times Cost of Servicing these small retailers of this Wholesalers exceeds the Business generated from them and this would be noticed immediately by your Distributor.
      I think this calculation needs to be done before taking any action against that wholesalers. End of the day, Numbers do matter.

      Request opinion on this from all.

      Delete
  3. TiTo,

    One more way to curb cross-geography undercutting is to put a cap on the dealers you doubt on. I mean, this is not a long-term solution, and more or less is a litmus test to find out if by putting a cap (as in a restriction on the amount of business he can do), undercutting stops then he is the bugger.

    Cheers
    nishit

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  4. another way of undercutting, especially for biscuits and cold drinks, is through CSD.

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  5. Agreed. Can someone throw more light on Undercutting through CSD or other channels?

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  6. Thanks Amit and Niyant! If you know anyone who can write about CSD and Institutional, please let us know. Appreciate the feedback.

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  7. I think a big reason for undercutting is the sheer strength and demand of your brand - and when this happens i dont know as a brand manager i should feel happy or not. this is a phenomenon called "iska rate fix kar lo baaki mein ban jayega"

    So let's take a big wholesaler of Punjab (personal experience drawn here) - he is a feeder wholesaler who sells grains and FMCG products to hinterland smaller wholesalers. And uski dukaan pe rate "Brand X of Soap" se shuru hote hain - this means that the smaller wholesalers come and first ask the rate for that brand of soap and then if this rate suits them, buy their entire list from this wholesaler.

    So what will the wholesaler do - he will undercut from his own pocket on this brand and make up for it in other products that he is selling e.g. grains (non MRP products)

    The other realy interesting phenomenon is "Gatta Trading" - this happens b/w big whoelsalers sitting in different wholesal markets. for e.g. a wholesaler in Bada Bazaar talks to a wholesaler in Khari Bawli and they discuss rates for big bras. Whichever rates suit both of them, they trade for those brands while making only money on the cartons i.e. each outer case can be sold for Rs 2/3 - but in the bargain they get stocks of high demand products from the other markets at much lower prices and hence make up for profits.

    (and those of you who dont know what & where Bada Bazaar & Khari Bawli are shouldn't be reading this anyhow :P)

    ReplyDelete
  8. I think you guys are way too smart for me.
    For your next blog, make one fmcg for dummies edition.

    Jokes apart (yes it was a joke, I did get... some... of it) very lucid and I'm making little notes of this in my notebook.

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  9. This comment has been removed by the author.

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  10. I personally feel undercutting has a far more discerning effect in the long term. When your company gets its revenue from 3-4 SKU's it becomes even more challenging. It becomes an ugly fight for achieveing your numbers with each ASM focussing solely on creating budgets. I have come across three ways of creating budgets
    1) not passing on the schemes
    2) Not passing on the gift articles to retailers for acieving QPS or value purchase schemes
    3) creating fictious retailers and saving on the whole sale margins
    These budgets are used to reduce the price of single SKU and dump the one or two sku's in the wholesale at ridicoulosly low price. In the short term this would mean a good business. But over a period of time the company becomes wholly dependent on wholesale and as a result all the new product launches fail to take off. I have personally come to a conclusion that In a wholesale driven company it is wholesale which decides the product and Landing rate which ideally have to be in the control of the sales team

    ReplyDelete
    Replies
    1. Another way of creating budgets i have come across is
      1. By making fictitious damage claims. Typically this happens in liquid products packed in pouches where it is difficult to sent back to the company depot for verification and the Sales Officer is given the authority to pass claims in such matters on company's behalf.
      2. Creating fictitious Activity claims and getting them passed.

      Delete
  11. agree with zo_acm. haha.. btw, as business owner (just a small one), how do we find people like u? i mean..qualifications..experiences..? wish i have ppl like u in my team. (^_^)

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  12. I have worked as area manager in GSK Pharma... similar things also happen in pharma.. however as area manager, we used to maintain control over them... i had tried few methods to control them..

    1: threatening to stop supply products for some time
    2: holding stock held (for a scheme product) certificate
    3: updating loyal stockists with scheme product at the start of the month than nonsupporting stockists.. who get information typically on 4-5 of the month.. thus enabling loyal ones to increase their offtake at the start of the month

    I have never tried to take any stockist head-on.. but one of my colleague did tat.. he tore down a stockist monthly order in-front of him and made sure that the closing stocks was not sent to him...

    dont knw if such a thing happens in fmcg...

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  13. mrf is another channel to under cut rate in trade . from many companies they receive extra budgets in terms of merchandising consumer offers and sell the same stocks to the traders ....

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  14. I worked in Karnataka and worked in hubli, the most infamous market in Karnataka for its undercutting, fresh out of MBA i was not ready to do wrong things and ruined my training SO stint, degrowing by 30%, while during my stint all the neighboring SO showing growth for the first time since last year....And deep down I knew from where this growth came from..
    well what I also observed was that sales is for risk taking people, if you are in good company your product will under-cut for sure and you cant escape it. To be successful in sales i think one should be ready to do these things once in a while or someone else will do and have success in career at expense of you...

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  15. Hello Sir
    I want to know about 10+2 offer in fmcg if it affects to distributors margin

    ReplyDelete