evolution of distribution systems
DESCRIPTION
TRANSCRIPT
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Evolution of distributionmodels and sales strategies
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It seems, that everything is OK
And every day…
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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
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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”
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Retail chains are growing:
Revenue ’10: $11 bln
Q1 ‘11:+ 50 % revenue
+ 64 % EBITDA
X5
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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
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In sales — as on the boat
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How not to crashin the first days…
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And how to become the leaderin the next days…
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Business Models are developingIf you don’t improve yours, you leak
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What to do?
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Start from theright model !
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Which hasstrong musts *
* Distribution models
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Flexibly adjustable Sails*
* Trade terms
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Route *, which will bring you to the correct port
X
* Segmentation
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What does our boat consist of ?
Distribution model
Trade terms Business processes
Training and development
Segmentation The captain
Communications
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Distribution modelTransfer to another
1 big
The best 100
Trade terms
Segmentation
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Route to the market —is the answer to the question : «HOW ?»
230 000 outletsManufacturers
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The are three “route to market” models
Localdistributors
Transfer to another manufacturer
NationalDistributor
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Transfer to another manufacturer
Another manufacturer distributes your product
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Another manufacturer distributes your product
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Distribution modelTransfer to another
1 big
The best 100
Trade terms
Segmentation
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In 90s importers were called distributors
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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
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0 5 10
Megapolis
SNS
Unimilk
konditery
Russkoe more
2006
2007
2008
2009
National distributors showbetter growth than producers
Objedinennie
$ mlrd / year
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0 5 10
Megapolis
SNS
Auchan
Magnit
Х5
2006
2007
2008
2009
And compete with key retailers
$ mlrd / year
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2006 2010
Will FMCG catch up pharmaceuticalmarket in consolidation ?
Pharmaceutical
Others
TOP 5 distributors
FMCG
2006 2010
8% 70%
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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
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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
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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
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Except sales, merchandising function has also changed
Retailers planogrammSales
Producer planogramm
Share of shelf
Additional space
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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
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Distribution modelTransfer to another
1 big
The best 100
Trade terms
Segmentation
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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
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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?
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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
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Usually one distributor is selected in the city
The strongest one !
Many manufacturers hired sales representatives
Then manufacturer has to be the “preferred supplier”
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Service of distributor is:
Warehousing, delivery, cash collection
Additional credit
Legal flexibility
Fast decisions
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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
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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
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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
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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
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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
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DSD
3PD
DS3
Control over shelves
Cost to serve
Cost to serve vs. control
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Cost to serve vs. control — many havehigh cost low productive model
DSD
3PD
DS3
Control over shelves
Cost to serveHigh investment,
No result
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Control over shelves
Cost to serve vs. control and onlyspecific get distribution for free
DSD
3PD
DS3
Cost to serve
«Creep -product»
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Usually models are adequate to turnover and margin
Control over shelves
Cost to serve
DSD
3PD
DS3
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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
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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
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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
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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
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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 !
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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
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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
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Distribution model
Trade termsDiscount
Federal Trade Law
Should retail chains get back to distribution ?
Segmentation
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Discounts classification
ConditionNo condition
RetrospectiveProspective
Pay for performancePay for compliance
TangibleIntangible
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Methods of Regulation of rebates
On invoice discount
Cash bonus (no VAT)
Free product
Marketing services agreement (bank transfer or cross cancellation of debts)
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Tax code
On invoice discount < 20%
Each channel has its price list
Discounts are accompanied with the documents
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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%
. . .
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I recommend to evaluate discount annually
Sales volumes
Depth of discounts
АВ
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I recommend to evaluate discount annually
Sales volumes
Depth of discounts
АВ
ВА
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Regional pricing
Landed cost
influence:
transshipments
Retail Shelf Price
P&Ls of regions
Convenience for retail chains
Fight with competitionВладивостокСмоленск
Производитель
Дистрибьютор
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Distribution model
Trade termsDiscount
Federal Trade Law
Rebates
RSP
Distribution
Should retail chains get back to distribution ?
Segmentation
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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
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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
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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
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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
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Saved Unified National Price
Converted extra RB into marketing
Huge manufacturers with strong competitors
How did it influence the market players ?
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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%
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Small manufacturers arewashed away from shelves
Because they can not develop brands during such a growth of prices on promotion instruments
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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
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Promo actions forecasting turned into casino
You produce promo product,
and retail chains do not
purchase it
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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
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Distribution model
Trade termsDiscount
Federal Trade Law
Rebates
RSP
Distribution
Should retail chains get back to distribution ?
Segmentation
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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
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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
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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
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«The buckwheat criminal case» was raised
Federal Law #381
Implemented since august 2010
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Distribution model
Trade termsDiscount
Federal Trade Law
Rebates
RSP
Distribution
Should retail chains get back to distribution ?
Segmentation
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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
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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 )
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…and now it’s a soother
Earlier you could read distribution agreement
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Who wins, if relationships move to the shadow ?
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КeyАccountsМanager
Who wins, if relationships move to the shadow ?
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Distribution model
Trade termsDiscount
Federal Trade Law
Rebates
RSP
Distribution
Should retail chains get back to distribution ?
Segmentation
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Trade termschange the market
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WIll retail chains return to distribution ?
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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
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And distributors soon …
Tander
Uniland
Sweet Life
R-Modul
Pallada Torg
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Turned into a beautyfull retailers
Magnit
Dixi
Spar NN
Monetka
Sberegaika
Tander
Uniland
Sweet Life
R-Modul
Pallada Torg
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Fragmentation of supply will continue further more the price distance with TOP retailers
1 x
One city – one distributor
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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
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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
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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 ?
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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 ?
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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 …
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Distribution model
Trade terms
SegmentationIntroRetailDistributionPeople
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Segmentation:
— Subject
— Process
— Parameters
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Subject of segmentation
Employees
Distributors
Wholesellers
Retailers
….
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Segmentation process
identify
analyze
prioritize
develop plan
realize plan
analyze again
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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
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Segmentation matrix changes rapidly
Before: 50 meters, 60 km/hour
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Segmentation matrix changes rapidly
Before: 50 meters, 60 km/hour
Today: 10 meters, 100 km/hour
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Coefficient of investment
performance= Investment index
Revenue Index Market share indexх
You need to evaluate investments annually
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Coefficient of investment performance
Parameter Sample 1
Revenue Index 80
Investment index 100
Market share index 90
Coefficient of investment performance 72
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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
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Parameter Sample 2
Revenue Index 115
Investment index 105
Market share index 110
Coefficient of investment performance 120
Coefficient of investment performance
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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
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Distribution model
Trade terms
SegmentationIntroRetailDistributionPeople
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Segmentation by retail formats
Hypermarket
Supermarket
Discounter
Grocery
Kiosk
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Segmentation by sales volumes
# of retail outlets
100%25 50 75
Sal
es V
olu
mes
А
В
СD
Segment А
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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?
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2-D segmentation with price segments
Pricesegment
Объем
D
C
B
A
Low Medium Premium
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2-D for premium products
Pricesegment
Volume
D
C
B
A
Low Medium Premium
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2-D for premium products
Pricesegment
Volume
D
C
B
A
Low Medium Premium
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2-D for value products
Price segment
Volume
D
C
B
A
Low Medium Premium
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2-D for value products
Price segment
Volume
D
C
B
A
Low Medium Premium
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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
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-
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
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Distribution model
Trade terms
SegmentationIntroRetailDistributionPeople
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All distributors are different —how to compare an apple with an orange ?
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All distributors are different —how to compare an apple with an orange ?
3 key parameters
Power of distributor
Efficiency of manager
Size of distributor
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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
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Distributors power and managers’ efficiency
0%
50%
100%Distributor’s power
Managers’ efficiency
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Distributors power and managers’ efficiency
0%
50%
100%Distributor’s power
Managers’ efficiency
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Distributors power and managers’ efficiency
0%
50%
100%
Distributor’s power
Managers’ efficiency
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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%
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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
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Distribution model
Trade terms
SegmentationIntroRetailDistributionPeople
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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%
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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
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Or sales organigram does not correspond to the business model ?
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The organigramm can be as this:
Boss
Assistant
Sales Force
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Or based on the objectives
Objectives – V, MC, MS
Route to market model
# of people in the field
Organigramm to support field force management
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Distribution model
Trade terms
Segmentation
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So we have three key parts of our boat …
Distribution Model
Trade terms
Segmentation
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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
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In sales — as on the boat
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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
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Administrative resourse * ?
* 0% taxes
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Unique construction * ?
* 100 km / hrs
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Muscles ?
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Special sail– spinnaker ?
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I wish you find your spinnaker!
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Thank you !