Description
This Documentation is about the boycott case between the united spirits and retailers.
United Spirits (USL) Case study Analysis
Retailers in Maharashtra to boycott UB brands
Case Summary and Salient Points
1. USL has decided to cut down the distributors’ profit margin from 7% to 5.5% along with the slashing the margins for retailers from 4% to 2%. 2. In addition to this, the distributors also announced their decision to reduce the credit period of retailers from the current 25 days to a maximum of 7 days. 3. This has led to over 1600 retailers deciding to boycott the flagship whisky brands of USL - Bagpiper and McDowell's. USL’s position in the market USL accounts for more than 100 million cases in the Indian spirit market of 200 million cases with the closest rival accounting only for 14 million cases. Maharashtra accounts for 8% of USL’s all-India business. USL also accounts for 80% of the 10 million cases of spirit sale in the state. USL has almost gained monopoly in the market after the acquisition of Shaw Wallace. Concerns for USL 1. Consumers may switch over to other brands when retailers are boycotting the two brands which may favour other players such as a. Royal Stag b. Seagram’s Imperial Blue 2. This decision has adversely affected every sort of sale – primary, secondary as well as tertiary and a solution is needed fast. 3. USL and the distribution network will be adversely affected as the blocked sales and delayed payments will negatively affect the return on capital employed. 4. Since the ongoing meetings between USL and Indian Hotel and Restaurants Association (Ahar) and Maharashtra Wine Merchants Association (MWMA) have not been successful, the associations have threatened that they would not mind extending the strike and would also force the restaurants which are still serving these two brands to stop. 5. It has been reported that the two brands have witnessed an over 60 per cent drop in sales since August 1, the date from which Ahar and MWMA members have refused to stock these. 6. Retailers also feel that the full benefits of the incentives from the company are not passed on to them. Also, the cost of breakage of bottles is still born by the retailers outside Mumbai whereas in Mumbai it is born by the company which has also lead to certain amount of unrest. 7. The bootleggers’ network is strong in this industry which will even more adversely affect the retailers aggravating their frustration.
USL’s stand However, USL has also said that only 3-4% of the retailers have held up sales and that stocks have already been made available to all retailers for entire August. Retailers’ profit margins Also, it has emphasised that the entire issue is between the distributors and retailers and that the company does not deal directly with the retailers. According to USL’s knowledge 1. The retailer’s margin is 12 % 2. Additionally they get 3% cash discount on payment within 25 days 3. And schemes of anywhere between 2-4% which makes their effective gross margin between 17-19%. Moreover, retailers also get window/ signboard rentals over and above this. All this makes quite a healthy return on capital employed (ROCE) for the retailers. Liquor Industry in India: Constraints The liquor industry in India is constrained by a multitude of factors: ? Capacity Restrictions ? High Duty Structure ? Prohibition ? Ban on Advertising ? The Black Market ? Fragmented Structure ? Distribution and Trading Restrictions ? Open Market: Maharashtra, West Bengal, J & K, Goa, Assam, Meghalaya, Tripura, Arunachal Pradesh ? Auction Market: UP, Rajasthan, MP, Bihar, Punjab, Chandigarh, Haryana ? Government-controlled: Tamil Nadu, Delhi, Kerala, Andhra Pradesh ? Prohibition States: Gujarat, Manipur, Mizoram, Nagaland ? Retailers' Grip Possible Solutions Listed below are some steps that the company can take in order to take control of the situation: • USL can increase the prices of Bagpiper and McDowell's and instead of deducting the margins from the retailers or the distributors, the extra margin can be taken from the end customers.
•
USL should definitely try and bridge the gap between itself and retailers because it seems like 1. Distributors take on a lot of benefits for themselves and pass on relatively less to the retailers. 2. Among retailers also, Mumbai and owners with more than two outlets are given more privileges than rest of the state. USL should ensure that the distributors pass on the benefits to the retailers as well, and also increase their contact with the retailers instead of dealing totally indirectly. Also, it can try and assure retailers of future benefits and ask them to cooperate in the time being because all the parties in the chain will suffer due to the strike. USL should also work towards solving the problem of the cost of breakage of bottles. Instead of dumping the entire cost on the retailers, a way can be worked out to share the burden and take more onuses to reduce costs due to breakage. Currently, the retailers entirely service the breakage cost which runs to anywhere between Rs 8-14 per case. As of now, this is being done only in Mumbai and not the rest of the state. This improvement in distribution policies should be a continuous focus point for the company and not only in the face of such a situation. Secondly, USL can also look at reducing the number of distributors in the state so as to send a strong message and end their upper hand in the trade which has caused so many problems instead of slashing their profit margins by a whopping 1.5%. Third, USL can look at offering margins via schemes related to the volume of sales, some sort of differential margins which could satisfy both the distributors as well as retailers while it cuts down the direct margins. This, to some extent, may not only control the situation but also push and motivate the entire chain to sell more.
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doc_578511240.doc
This Documentation is about the boycott case between the united spirits and retailers.
United Spirits (USL) Case study Analysis
Retailers in Maharashtra to boycott UB brands
Case Summary and Salient Points
1. USL has decided to cut down the distributors’ profit margin from 7% to 5.5% along with the slashing the margins for retailers from 4% to 2%. 2. In addition to this, the distributors also announced their decision to reduce the credit period of retailers from the current 25 days to a maximum of 7 days. 3. This has led to over 1600 retailers deciding to boycott the flagship whisky brands of USL - Bagpiper and McDowell's. USL’s position in the market USL accounts for more than 100 million cases in the Indian spirit market of 200 million cases with the closest rival accounting only for 14 million cases. Maharashtra accounts for 8% of USL’s all-India business. USL also accounts for 80% of the 10 million cases of spirit sale in the state. USL has almost gained monopoly in the market after the acquisition of Shaw Wallace. Concerns for USL 1. Consumers may switch over to other brands when retailers are boycotting the two brands which may favour other players such as a. Royal Stag b. Seagram’s Imperial Blue 2. This decision has adversely affected every sort of sale – primary, secondary as well as tertiary and a solution is needed fast. 3. USL and the distribution network will be adversely affected as the blocked sales and delayed payments will negatively affect the return on capital employed. 4. Since the ongoing meetings between USL and Indian Hotel and Restaurants Association (Ahar) and Maharashtra Wine Merchants Association (MWMA) have not been successful, the associations have threatened that they would not mind extending the strike and would also force the restaurants which are still serving these two brands to stop. 5. It has been reported that the two brands have witnessed an over 60 per cent drop in sales since August 1, the date from which Ahar and MWMA members have refused to stock these. 6. Retailers also feel that the full benefits of the incentives from the company are not passed on to them. Also, the cost of breakage of bottles is still born by the retailers outside Mumbai whereas in Mumbai it is born by the company which has also lead to certain amount of unrest. 7. The bootleggers’ network is strong in this industry which will even more adversely affect the retailers aggravating their frustration.
USL’s stand However, USL has also said that only 3-4% of the retailers have held up sales and that stocks have already been made available to all retailers for entire August. Retailers’ profit margins Also, it has emphasised that the entire issue is between the distributors and retailers and that the company does not deal directly with the retailers. According to USL’s knowledge 1. The retailer’s margin is 12 % 2. Additionally they get 3% cash discount on payment within 25 days 3. And schemes of anywhere between 2-4% which makes their effective gross margin between 17-19%. Moreover, retailers also get window/ signboard rentals over and above this. All this makes quite a healthy return on capital employed (ROCE) for the retailers. Liquor Industry in India: Constraints The liquor industry in India is constrained by a multitude of factors: ? Capacity Restrictions ? High Duty Structure ? Prohibition ? Ban on Advertising ? The Black Market ? Fragmented Structure ? Distribution and Trading Restrictions ? Open Market: Maharashtra, West Bengal, J & K, Goa, Assam, Meghalaya, Tripura, Arunachal Pradesh ? Auction Market: UP, Rajasthan, MP, Bihar, Punjab, Chandigarh, Haryana ? Government-controlled: Tamil Nadu, Delhi, Kerala, Andhra Pradesh ? Prohibition States: Gujarat, Manipur, Mizoram, Nagaland ? Retailers' Grip Possible Solutions Listed below are some steps that the company can take in order to take control of the situation: • USL can increase the prices of Bagpiper and McDowell's and instead of deducting the margins from the retailers or the distributors, the extra margin can be taken from the end customers.
•
USL should definitely try and bridge the gap between itself and retailers because it seems like 1. Distributors take on a lot of benefits for themselves and pass on relatively less to the retailers. 2. Among retailers also, Mumbai and owners with more than two outlets are given more privileges than rest of the state. USL should ensure that the distributors pass on the benefits to the retailers as well, and also increase their contact with the retailers instead of dealing totally indirectly. Also, it can try and assure retailers of future benefits and ask them to cooperate in the time being because all the parties in the chain will suffer due to the strike. USL should also work towards solving the problem of the cost of breakage of bottles. Instead of dumping the entire cost on the retailers, a way can be worked out to share the burden and take more onuses to reduce costs due to breakage. Currently, the retailers entirely service the breakage cost which runs to anywhere between Rs 8-14 per case. As of now, this is being done only in Mumbai and not the rest of the state. This improvement in distribution policies should be a continuous focus point for the company and not only in the face of such a situation. Secondly, USL can also look at reducing the number of distributors in the state so as to send a strong message and end their upper hand in the trade which has caused so many problems instead of slashing their profit margins by a whopping 1.5%. Third, USL can look at offering margins via schemes related to the volume of sales, some sort of differential margins which could satisfy both the distributors as well as retailers while it cuts down the direct margins. This, to some extent, may not only control the situation but also push and motivate the entire chain to sell more.
•
•
•
doc_578511240.doc