Dealer Selection

Dealer selection is the first task in the process of dealer management. It is obvious that a firm has to be very careful in selecting its dealers. It has to ensure that those selected for dealership possess certain essential qualifications. Some of these qualifications are common ones, irrespective of the product lines involved; others are product specific. Financial strength, business capacity, creditworthiness and salesmanship form part of the common qualifications.

Qualifications/Attributes to be Looked for A detailed checklist of the qualifications/attributes to be looked into while selecting dealers is furnished in above chart The criteria can be modified appropriately, depending on the product characteristics, the marketing environment and the objectives of the firm.

In practice, however, it is difficult for any firm to locate dealers possessing all the qualifications and attributes enumerated in the chart. Obviously, one has to compromise. Out of the available candidates, the firm has to select those who have the potential to be a good dealer. Then, it should build them into effective and strong dealers through a sustained process of development. If the product requires a specialized distributor, as in the case of industrial products, the choice must be made accordingly;

Firms which are well established in the market and those that which possess certain unique strengths in terms of product, brand, service, etc., will enjoy a wider choice when they set out to appoint dealers. Their reputation and brand equity will pull in a large number of applicants who are above average in the required attributes. In contrast, for firms yet to be established, the choice base will be small. Such firms may have to initially accept those who prepared to take up the dealership and build a good network over a period of time.

The Net must be Cast intelligently Effective dealer recruitment depends in the first place on the firm’s ability to attract applications from the right candidates. Advertisements will no doubt be of help in this regard. But they must be developed carefully. The companies and ad agencies must have the expertise needed for developing effective dealer recruitment ads.

‘Dealer Wanted’ Ads The first test of a good ‘dealer wanted’ ad is no doubt its ‘attention grabbing’ strength among the prospects. The second test is the ad’s ability to coax the stronger ones among them to respond to the proposition being made. In the present times, with more brands crowding the marketplace, the premium on dealers’ shelf space is increasing exponentially; It needs a well- thought out and well-written dealer ad to bring in the right response. The communication must put across the proposition forcefully; while many companies give ‘dealer wanted’ ads, only a few do a good job of it. Cited below are a few effective ‘dealer wanted’ ads.

Nanz ‘Dealer wanted’ Ad
An Invitation to be a NANZ franchisee
Open your own NANZ Lobill Store for the customers in your area, if you have…   Premises with an area of 1,000 sq. ft or more in a well-located commercial market near a residential complex of potential customers (ground floor preferred). Your business standards are high and you have the motivation and ambition to recognize the growing potential of retailing.	If you are financially strong and ready   for financial investments upwards of Rs. 25 lakh. Franchisees of leading petrol/service stations who are willing to add on convenience stores of an area of about 1000 sq.ft. are also invited to apply. Parking space for vehicles preferred.

The Nanz ad: The Nanz ad is another example. The Nanz Lobill chain stores were to be run by franchisees. The approach of Escorts-Nanz in this regard could be understood from the ads put out by them towards locating prospective franchisees.

Evaluating the Alternatives and Selecting the Best

With the completion of the foregoing steps, the number of alternatives would have narrowed down considerably; the firm must evaluate these alternative designs and choose the best among them. Actually, two distinct evaluations-an economic evaluation and a conceptual evaluation-may be necessary.

• Economic evaluation; balancing cost, efficiency and risk: Cost and efficiency are the two main parameters in economic evaluation. Often, though not necessarily, the two are directly proportional. The firm has to rate the risk associated with the different alternatives. The firm’s choice is a compromise among the three parameters. The first step here is the determination of the sales volume that can be obtained through each alternative design. Second, the costs of selling that volume through that alternative have to be assessed. In other words, the firm determines the unit cost of selling in each of the alternatives. The firm chooses the one, which is attractive from the cost vs. efficiency angle and is also relatively less risky.
• Conceptual evaluation; flexibility and controllability: Conceptual evaluation is also equally important. It has to be used for assessing the flexibility and controllability of the alternative. It is possible that economic evaluation points to one particular alternative as superior, while conceptual evaluation gives it a low rating. For example, a marketer-oriented channel design may show merit in terms of unit cost of selling, but may show severe limitations from the standpoints of controllability/flow of market feedback as well as requirements of long-term market development. With conceptual evaluation, the firm can also check out whether the alternative is compatible with its business objectives.

Some Vital Aspects in Finalising the Channel

The job is not over with the selection of the basic channel design. Within a given design, .different arrangements are possible. It means that further decisions are needed. The important aspects to be decided are:

• Channel intensity
• Number of tiers
• The appropriate variant within the design

Choosing the Channel Intensity: While two firms may go for the same channel design, they may need different intensities It depends on the position of the firm its objectives and strategies, its sales, profits, and market coverage, present and projected, and its resources. For example, Maruti and Mitsubishi India, being passenger car firms operating in the same market, may opt for similar channel design. But they may settle for different channel intensity; Maruti has a massive network consisting of 144 sales outlets, 175 dealer workshops and 750 authorized service stations across India. Mitsubishi has not gone in for similar intensity.

In fact, a firm would be ill-advised to adopt without question the channel intensity of another firm, even if the latter were the industry leader. What suits one may not suit the other. Blindly following another firm’s channel pattern and intensity will land the firm in trouble. Recent experience of some well-known MNC FMCG firms in India will clearly amplify this point. Below table shows how choosing channel intensity wrongly landed P & G and Nestle in trouble.

Wrong Choice of Channel Intensity : P & G and Nestle

P & G, Nestle and HLL are FMCG companies   Operating in India. P & G and Nestle thought that it would be appropriate for them to follow the HLL channel model. It was only after losing some precious money and time that they realized that they neither needed or could afford channel intensity on the HLL pattern.   HLL maintains a channel consisting of over a million retail points and 7,500 distributors, the largest in the country. The arrangement has suited HLL very well. HLL has a large basket of products and brands covering every possible price/ demographic/geographic segment. At the last count, it had over 110 actively selling brands. HLL’s marketing channel has to naturally cover every income group and every geographical segment in the country. And HLL has an annual sales turnover of over Rs. 10,000 crore.   P & G and Nestle were different from HLL in all these respects.   Moreover, the HLL model comes with its Associated costs. Setting up marketing networks in rural areas and small towns takes both time and money. HLL had incurred the associated investment and had absorbed a dent on its bottom-line on this account over the past several years, and it is not affected currently by this Strategy.   After learning the lessons the hard way, P & G decided to forget the HLL model and drastically downsized its distribution.

It now confined itself to Class I and Class II towns, and exited practically all rural areas.   Only for some select products like Vicks Action-500, it continued its distribution in rural areas.     It also reduced the number of pack sizes in which it offered its products as another measure towards reducing distribution costs.   Nestle too decided to move away from the HLL model.   Earlier, embracing the HLL model, it had gone in for high channel-intensity. For example, between 1993and 1996, Nestle had added on 350,00 retail points to its distribution network in India, the bulk of them in smaller towns and rural areas.   As its sales were nowhere near the HLL level, it could not sustain the channel intensity. It reduced it considerably. It also compressed its product mix and product line.   It now concentrated on products in which it was traditionally strong—milk products and beverages—and weeded out the low-profit products from the portfolio.   It also went in for tighter market targeting and limited its attention to urban population.   In fact, it limited its focus to roughly half of the urban population.   With these moves, it could reduce the cost of servicing the channel. Its new policy was to be on perpetual guard in the matter of channel intensity, limiting it to the level warranted by its sales and profits—present and planned.

Choosing the Number of Tiers Correctly The second decision concerns the number of tiers. How many tiers should the channel have? This issue is related in a way to channel intensity; In a majority of cases, the choice will be between single tier and two tiers, while in a few cases, firms may find it necessary to go in for a three-tier channel. When a firm opts for a sole-selling agency or marketer, the latter will be have their own channel arrangement and the tiers that operate under them automatically become a part of the firm’s channel.

The decision depends on a number of factors. In a given business, a particular channel pattern might have taken roots and there may be some advantage in going along with the established trade pattern. The product characteristics are perhaps the most important consideration. For example, for selling passenger cars, a firm need have only a single-tier distribution channel. Here, the intermediaries at one level can effectively link the maker buyer. In a product like toothpastes, or cosmetics, or cigarettes it may be necessary to have a two or three-tier channel pattern in view of the mass nature of the product. It may be difficult to achieve adequacy of market coverage in such products, with just a single tier of marketing intermediaries.

Comparative merits of single-tier and two-tier channel: The single-tier and two tier channel patterns have their associated advantages and disadvantages. The single-tier pattern provides better motivation to each member in the channel, as in such a pattern, the trade discount is available in full measure to the retailer. The pattern also brings in savings to the firm by the avoidance of multiple transport and handling. The firm can also service all the outlets directly in this pattern. But, the pattern involves greater administrative burden for the firm. It will have to perform many functions that could otherwise be passed on to the channel. It will have to increase the number of field storage points and the size of sales force to make up for the absence of the wholesale middlemen. The pattern may also sometimes result in inadequate market coverage. The two-tier pattern helps quicker outflow of stocks and more intensive coverage of the market. But, it results in lower profits to retailers as the available trade margin has to be shared between two tiers. It also weakens the principal’s control over the outfit compared with a single-tier pattern.

Exiting an Established Channel Structure is Difficult: P&G Example

As mentioned earlier, P&G had embraced a highly intensive, two-tier channel structure in India. It was more or less akin to the channel structure of HLL.     Over the year, it become clear to P & G that it did not need such a structure, as in business growth and pattern of sale, it differed from HLL. P & G then went in for a reorganization of the channel set-up. It has to face several problems.   P & G had earlier gone in for nearly 200 stockiest and 4,000 dealers all over the country.   But sales had remained limited.   A large number of the stockiest and dealers were not notching up enough sales. In other words, P & G’s channel productivity had become low. The company was incurring a disproportionately large cost on channel. Moreover, the company’s sales were coming primarily from the urban market, as this market alone was willing to pay the premium price, which P & G normally charged for its Products.   P & G then downsized and revamped its channel structure, drastically pruning the number of stockiest. In the revised scheme, it appointed state-wise sole distributors and derecognized more than 150 ongoing stockiest in the bargain. At the retail level too, thousands of dealers became a casualty.

P & G also went in for the ECP (efficient consumer response) approach. ECP focuses on containing costs and improving bottom lines. In the ECP approach, stocks are replenished at the retail shop at more frequent intervals. This enables the retailers to operate with smaller inventories. And consequently, a cut in retailer’s margin would be in order.     P & G drastically cut the trade margins on its best selling products. It cut stockiest margin from 10 to 3 per cent and retailer margin from 12 to 8 per cent.   P & G did inform the stockiest beforehand about the new scheme. But, many stockiest had set up a lot of infrastructure over the past two decades, much of its specifically for marketing P & G products, and with the loss of P & G stockist role, they faced financial hardship.   They went on a warpath. In a collective bargaining move, most of them banned P & G products. The retailers too, especially those in mofussil areas, went on a war-path and banned P & G products.

So, the choice depends on the context. The governing principle is that the chosen channel must have the capability to sell the product and to provide the required market coverage. It should also ensure that the user gets the products with the minimum of effort or strain on his part. And it must be cost-effective. The channel must also be amenable to the control of the company to the extent required for operating the marketing system.

In recent years, as a general trend, the number of tiers in the distribution channels is getting shorter. Businesses that used to have a three-tier structure earlier now have a two-tier structure and those with a two-tier structure earlier are now trying to manage with a single- tier channel. And often, the axe falls on the stockiest. Asian Paints, again, is an example. It chose, as a matter of conscious policy, a single-tier channel-going directly to the retail trade.

Selecting Appropriate Variant within a Given Design: Usually, within a given channel design different variants can be thought of. For example, firm I: A and firm B may opt for the same channel design consisting of conventional wholesalers and retailers. Still, their approaches within the model can vary from one another. Firm A may opt for a wholesaler-weighted system, while firm B for a retailer-weighted system. For example, Nirma Chemicals distributes Nirma soap with a wholesaler-weighted system. In contrast, HLL distributes its Lifebuoy in the same market through a retailer-weighted system. Nirma off-loads the product on the wholesalers at a larger discount; the retailers buy the product from the wholesalers. HLL reaches out directly to a large number of retailers, using wholesalers! C&F agents to the extent necessary:

The two variants have their associated advantages and disadvantages. For instance the wholesaler-oriented system obviates the need for a large sales force, thereby resulting in considerable savings in related costs. But, brand building may suffer somewhat in that system. The firms have to study in detail the trade-off between the two approaches and have to see which one would best suit the firm.

An Eye on the Future is Essential Once a channel structure is created and channel members are put in place and channel compensations are streamlined, it will be difficult for the firm to exit from that structure and put an alternative in its place. Therefore, as a general rule, an eye on the future is essential while adopting a channel system and structure. Exhibit illustrates this point with the ‘example of P&G. The example clearly illustrates the difficulties involved in altering an ongoing channel structure.

One Unified System We saw in the preceding chapter that for the optimization of the physical distribution task, all elements of physical distribution/marketing logistics, such as transportation, warehousing and inventory management, must be handled as a single, unified system. In the same way, the firm has to handle wholesaling, retailing and other forms of selling as one unified system and not as separate entities. The linkage among them in terms of functions, costs and efficiency being quite strong, looking at them as independent entities will lead to sub- optimization of the channel management task as a whole. Compensation provided to the different tiers has also to be properly intertwined, since the functions performed by the different tiers are inter. twined.

Building Channel System by Bottom-up Method The purpose of having marketing channels is to serve customer needs effectively. This means that the prime task in channel design is to determine the type of retailers who are best suited to serve customer needs in the specific context and develop the distribution system by the bottom-up method. Once the type of retailers suited for the context is determined, the wholesaling arrangement that would best suit the chosen retail arrangement can be chosen and put in place.