Trade Margin

Trade margin is the No.1 element in trade relations mix. Channel member invariably look for whole-some, juicy margin. The principals invariably try to peg it as modest as possible. The point to be noted here is that the margin must be sufficient to enable the dealer to gain a reasonable return on his investment.

Present-day dealers as a rule, expect larger margin: In the earlier days, dealers managed to operate their outlets with modest trade margins. First, their investment in infrastructure was relatively low and they were able to make a profit even with a modest margin. Second, their expectation of profit was also relatively low. In recent years, the position has been changing rapidly; First, the new generation dealers adopt a more contemporary approach to retailing. Accordingly, their investment in the business infrastructure is much larger. They go in for attractive shops/showrooms; they periodically renovate and redecorate the premises; they also employ skilled and better trained salesmen. All this naturally pushes up their investment in infrastructure and their overheads. Running costs too have been going up. Added to this, the expectation of the new generation dealers in the matter of profit is also considerably higher compared to the earlier day dealers.

Paradigm shift from ‘gross margin’ to ‘retained earning’: Thus, in the contemporary scene, in most cases, the manufacturers have to willy-nilly settle for a higher outflow towards dealer margin. It also becomes necessary for them to accept a paradigm shift in this matter-from ‘gross margin’ to ‘retained earning’. They are required to hike the dealer margin to a level that would fetch the dealer a reasonable ‘retained earning’ after meeting all his normal expenses. They are also required to collaborate with their dealers and help them achieve a larger turnover and greater retailing productivity, so that at a given level of trade margin, their retained earnings is higher.

In the matter of margins, the way it is structured and allocated among the different tiers/levels in the channel is as important as the total quantum. There are several instances where firms have suffered in their marketing Endeavour on account of defective structuring and improper allocation of the margin among the different levels of the channel.

Hawkins Gains by Recasting Dealer Margins

Till the 1970s, Prestige pressure cooker, manufactured by the TTK group, was the leader in the Indian pressure cookers market, outselling Hawkins. Prestige had a strong distribution network.     Hawkins had in its favour a good product design. In spite of its superior product design, Hawkins’ sales were much lower than that of Prestige, largely as a result of its distribution weakness.   The actual problem was that the retailers were getting only a small share of the total trade margin, while the sole distributor and the regional distributors were allowed to keep a large portion of the margin for themselves.   In the 1970s, Hawkins overtook Prestige and became the market leader. It attained a market share of 30 per cent as against Prestige’s 21 per cent and United’s 10.5 per cent. It was by streamlining the distribution and recasting the margin structure that Hawkins achieved the feat.   Till the 1970s, Hawkins was using Kellick-Nixon as the sole distributor for the product.   It was paying Kellick-Nixon, 50 per cent of the list price as distribution margin. But, the latter was passing on just 17 per cent to the distributors, retaining 33 per cent for itself. The distributors in turn were passing on a mere 7 per cent to the retailers.

The actual costs to the sole distributor, Killick-Nixon, and the distributors amounted to just 2 to3 per cent. Yet, they were keeping a very high share of the margin for themselves, 33 per cent and 10 per cent, respectively. Against this, the retailers, who had to incur all major expenses on the distribution of the product— storage cost, cost of inventories, and cost of shop/personal— received only 7 per cent.     In the revamping exercise, as a first step, Hawkins dispensed with the sole-selling arrangement with Killick Nixon and took the distribution responsibility into its own hands.   Then, it recast the margin structure thoroughly.   It set up four regional distributors (subsequently, the number went up to 15) and increased their margins to 20 per cent. They were made to pass on 14 per cent to the retailers.   The doubling of the margin to the retailers played a substantial role in the increased sales and market share of Hawkins. The company also introduced several trade promotion schemes to enlist the enthusiastic participation of the retailers in promoting the brand.

Functions which channel has to Perform They have to perform the following essential functions normally expected by their principals.

Functions are

• Help establish the brand in the market
• Help achieve the sales targets
• Provide adequate shelf space
• Provide merchandising support
• Provide service to consumers
• Make prompt payments
• Maintain fair trade practices
• Provide winning store image