Description
Document about United Spirit case wherein there was a boycott by the retailers in Maharashtra. It initially highlights the dominant position the company holds in the Indian liquor market and also the concerns the company holds vis-a-vis the other brands.
Retailers in Maharashtra to boycott UB Brands
Issue under the Scanner:
More than 1600 retailers decided to boycott two of the largest selling brands of the United Spirits stable viz. Bagpiper and Mc Dowell’s in Maharashtra after the distributors decided to slash the benefits passed on to the Retailers from 4% to 2%.
Affected Parties:
USL, Distributors, Retailers, and Consumers.
Potential Gainers:
Royal Stag, Seagram’s Imperial Blue, Allied Blenders & Distiller’s Officer’s Choice
Spirits Trade Flow in Maharashtra
Bone of Contention:
1. United Spirits Limited (USL) decided to cut down the margin of Distributors from 7% to 5.5%.This eventually resulted in Distributors slashing Retailers profit from 4% to 2%. 2
2. Distributors reduced the credit period from 25 days to a maximum of 7 days.
Sales Figure:
Annual Sales for these two brands in Maharashtra = 2.5 million cases. This boils down to more than 200,000 cases in sales for these two brands per month. On undertaking the Competitor Analysis on the basis of Market size, it becomes apparent that in gross annual sales of around 200 million cases, USL controls more than 50% market share (more than 100 million cases) followed by Pernod Ricard with annual sales close to 14 million cases. A few important points to be considered in this stand-off are: 1. After the acquisition of Shaw Wallace’s distillery division in 2004, USL enjoys a near monopoly position in the market with the trade facing immense pressure by undertaking this boycott. 2. Bagpiper and Mc Dowell’s in particular and USL in general enjoys a very high brand equity and strong brand recall in the Indian spirits space. Hence, it will be very difficult for the retailers to maintain this stern stand for a long time. 3. Distributors normally dump around 3 months stock on an average with retailers so in a way retailers will face a very high financial pressure by blocking the sales of these fast moving brands. 4. Even USL and the distributor network won’t be left unaffected by this deadlock as blocked sales and delayed payments will badly affect the return on capital employed(ROCE) both by the company and the distributors thereby impacting the top-line of the company. 5. Even from company’s perspective, a complete boycott of these two brands will strongly affect the bottom-line of USL as this line of business generates just a few hundred crores (roughly 200 crores) of profit against revenues of thousands of crores (more than 2000 crores). 6. Existence of a strong Bootleggers network in Maharashtra is acting against the Hotel and Wine shop owners.
Issues highlighted by Merchants Association):
MWMA(Maharashtra
Wine
3
1. On further investigating the issue, it was highlighted that Company demands deliver charges varying from Rs. 8-Rs.14 per case from the hotel and wine shop owners thus exploiting its monopoly position. 2. Also the company is not accountable for breakages of bottles during transit from Distillery to Distributor’s Warehouse and subsequently to retailers’ outlet. 3. USL is bearing the cost of breakage in Mumbai but not in smaller towns of Maharashtra. 4. Preferential treatment is given to big players owning multiple wine shops and hotels thereby sidelining the marginal players.
Distributor’s Claim:
As per the claims of a top distributor, there is 60% drop in sales since August 1, the date from which AHAR and MWMA members have refused to stock these brands. These two brands have also been boycotted throughout Maharashtra from August 17. This again validates the last two points quoted above regarding the impact on the company and the distributors.
USL’s Claim:
Only 3-4% of a total of 1600 retailers in the state have held up sales of these 2 brands. The company has already made available stocks to all the retailers for the month of August in Maharashtra and not a single customer has been denied a bottle of either of these two brands anywhere in the state. Retailers might have taken these two brands off the shelf but are still selling it to the consumers to get rid off the buffer stock and recover the capital employed.
MWMA’s Claim:
Distributors are not passing on the full benefits of promotional schemes to all the hotel and wine shop owners and forcing the shop and hotel owners to bear the full cost of breakage of bottles. Actual Retailer Profit worksheet: 1. According to the terms of trade existing between the Retailer and Distributor, the actual retailer margin stands at 12%. 2. Retailers use to get 3% discount for payment between 15-21 days of credit period. 3. The distributors have the liberty to pass on scheme benefits to retailers ranging from 2% to 4%, reimbursed in the form of free cases. 4
4. Over and above this, Retailers get Window/Signboard and Shelf display rentals. On working out the overall margin, it comes out to be between 17%-19% for the end Retailer stocking United Spirits brand. The current withdrawal of credit period benefit and profit margin squeezing will result in a direct loss of 5% margin, rendering the retail business unviable, keeping in mind the point that new Wine shop licenses are not issued in Maharashtra anymore and the annual lease of an average wine shop in cities like Mumbai and Pune is more than 50 Lacs. Thus a 5% direct impact in terms of margin will drive the marginal wine shop owners out of business.
Proposed Solution:
Employing more number of distributors to end distributor monopoly, as demanded by MWMA can be ruled out as this will impact distributor margins (The annual excise fees for distribution license is around 2-3 crores and the profit margin is just 7%). Since Liquor industry is highly seasonal in nature and is majorly driven by volumes, hence company should restore the distributor margin back to 7% and start focusing on secondary and tertiary sales. Rather than giving preferential treatment to an elite few based on their stature and stronghold in the association, the company should focus on a differential benefit scheme based on volume off-take by a retailer. USL should get rid of this ideology that since they enjoy a monopoly position in the market and the company deals with the Distributors and not directly with the Retailers and thus the profit margin issue between the distributors and retailers is their personal issue and USL has got nothing to do with it. Rather, USL should become extra vigilant by means of its sales executive network and ensure that the scheme benefits are genuinely passed on to all the retailers by the distributors. Since this is a seasonal industry, hence USL should provide enhanced trade support to the retailers during off-season and launch schemes to boost the tertiary sales. Moreover both USL and the Distributors should share the breakage cost along with the retailers outside Mumbai and try to ensure minimum breakage during logistic movement of the stock.
5
doc_582566933.doc
Document about United Spirit case wherein there was a boycott by the retailers in Maharashtra. It initially highlights the dominant position the company holds in the Indian liquor market and also the concerns the company holds vis-a-vis the other brands.
Retailers in Maharashtra to boycott UB Brands
Issue under the Scanner:
More than 1600 retailers decided to boycott two of the largest selling brands of the United Spirits stable viz. Bagpiper and Mc Dowell’s in Maharashtra after the distributors decided to slash the benefits passed on to the Retailers from 4% to 2%.
Affected Parties:
USL, Distributors, Retailers, and Consumers.
Potential Gainers:
Royal Stag, Seagram’s Imperial Blue, Allied Blenders & Distiller’s Officer’s Choice
Spirits Trade Flow in Maharashtra
Bone of Contention:
1. United Spirits Limited (USL) decided to cut down the margin of Distributors from 7% to 5.5%.This eventually resulted in Distributors slashing Retailers profit from 4% to 2%. 2
2. Distributors reduced the credit period from 25 days to a maximum of 7 days.
Sales Figure:
Annual Sales for these two brands in Maharashtra = 2.5 million cases. This boils down to more than 200,000 cases in sales for these two brands per month. On undertaking the Competitor Analysis on the basis of Market size, it becomes apparent that in gross annual sales of around 200 million cases, USL controls more than 50% market share (more than 100 million cases) followed by Pernod Ricard with annual sales close to 14 million cases. A few important points to be considered in this stand-off are: 1. After the acquisition of Shaw Wallace’s distillery division in 2004, USL enjoys a near monopoly position in the market with the trade facing immense pressure by undertaking this boycott. 2. Bagpiper and Mc Dowell’s in particular and USL in general enjoys a very high brand equity and strong brand recall in the Indian spirits space. Hence, it will be very difficult for the retailers to maintain this stern stand for a long time. 3. Distributors normally dump around 3 months stock on an average with retailers so in a way retailers will face a very high financial pressure by blocking the sales of these fast moving brands. 4. Even USL and the distributor network won’t be left unaffected by this deadlock as blocked sales and delayed payments will badly affect the return on capital employed(ROCE) both by the company and the distributors thereby impacting the top-line of the company. 5. Even from company’s perspective, a complete boycott of these two brands will strongly affect the bottom-line of USL as this line of business generates just a few hundred crores (roughly 200 crores) of profit against revenues of thousands of crores (more than 2000 crores). 6. Existence of a strong Bootleggers network in Maharashtra is acting against the Hotel and Wine shop owners.
Issues highlighted by Merchants Association):
MWMA(Maharashtra
Wine
3
1. On further investigating the issue, it was highlighted that Company demands deliver charges varying from Rs. 8-Rs.14 per case from the hotel and wine shop owners thus exploiting its monopoly position. 2. Also the company is not accountable for breakages of bottles during transit from Distillery to Distributor’s Warehouse and subsequently to retailers’ outlet. 3. USL is bearing the cost of breakage in Mumbai but not in smaller towns of Maharashtra. 4. Preferential treatment is given to big players owning multiple wine shops and hotels thereby sidelining the marginal players.
Distributor’s Claim:
As per the claims of a top distributor, there is 60% drop in sales since August 1, the date from which AHAR and MWMA members have refused to stock these brands. These two brands have also been boycotted throughout Maharashtra from August 17. This again validates the last two points quoted above regarding the impact on the company and the distributors.
USL’s Claim:
Only 3-4% of a total of 1600 retailers in the state have held up sales of these 2 brands. The company has already made available stocks to all the retailers for the month of August in Maharashtra and not a single customer has been denied a bottle of either of these two brands anywhere in the state. Retailers might have taken these two brands off the shelf but are still selling it to the consumers to get rid off the buffer stock and recover the capital employed.
MWMA’s Claim:
Distributors are not passing on the full benefits of promotional schemes to all the hotel and wine shop owners and forcing the shop and hotel owners to bear the full cost of breakage of bottles. Actual Retailer Profit worksheet: 1. According to the terms of trade existing between the Retailer and Distributor, the actual retailer margin stands at 12%. 2. Retailers use to get 3% discount for payment between 15-21 days of credit period. 3. The distributors have the liberty to pass on scheme benefits to retailers ranging from 2% to 4%, reimbursed in the form of free cases. 4
4. Over and above this, Retailers get Window/Signboard and Shelf display rentals. On working out the overall margin, it comes out to be between 17%-19% for the end Retailer stocking United Spirits brand. The current withdrawal of credit period benefit and profit margin squeezing will result in a direct loss of 5% margin, rendering the retail business unviable, keeping in mind the point that new Wine shop licenses are not issued in Maharashtra anymore and the annual lease of an average wine shop in cities like Mumbai and Pune is more than 50 Lacs. Thus a 5% direct impact in terms of margin will drive the marginal wine shop owners out of business.
Proposed Solution:
Employing more number of distributors to end distributor monopoly, as demanded by MWMA can be ruled out as this will impact distributor margins (The annual excise fees for distribution license is around 2-3 crores and the profit margin is just 7%). Since Liquor industry is highly seasonal in nature and is majorly driven by volumes, hence company should restore the distributor margin back to 7% and start focusing on secondary and tertiary sales. Rather than giving preferential treatment to an elite few based on their stature and stronghold in the association, the company should focus on a differential benefit scheme based on volume off-take by a retailer. USL should get rid of this ideology that since they enjoy a monopoly position in the market and the company deals with the Distributors and not directly with the Retailers and thus the profit margin issue between the distributors and retailers is their personal issue and USL has got nothing to do with it. Rather, USL should become extra vigilant by means of its sales executive network and ensure that the scheme benefits are genuinely passed on to all the retailers by the distributors. Since this is a seasonal industry, hence USL should provide enhanced trade support to the retailers during off-season and launch schemes to boost the tertiary sales. Moreover both USL and the Distributors should share the breakage cost along with the retailers outside Mumbai and try to ensure minimum breakage during logistic movement of the stock.
5
doc_582566933.doc