Foreal’ Shampoo: Cleaning a self-inflicted mess

Foreal’ is a hair care brand with Shampoo as its flagship product with an annual revenue of Rs.15000
crores.

Market Context

Foreal products were distributed through distributors to the retailers.

Foreal offered 7% distributor margin and an additional 2% discount for volume sold through
wholesalers.

Distributors extended 7 days credit to retailers and incurred redistribution cost of 3% approx.

In wholesale market, the distributors had to offer 2% cash discount and a regular wholesale discount
of 2%. Redistribution cost for wholesale was about 1%. There was no credit offered.

Trade Scheme

Foreal also frequently operated trade schemes that was volume based and this ranged from 5% at
the lowest slab to 20% at the highest slab

The company is facing an unanticipated regressive trend recently.

Many distributors started concentrated on selling to wholesalers and retail distribution was
slackening.

If this was not enough the product was being undercut and frequently it sold between 10% and 15%
lower than MRP.

Distribution disruption and sales loss

A large number of retailers who were selling small volume found that they had to sacrifice their
regular retail margin to match this price. In disgust some of them stopped buying from distributor
and instead bought from wholesaler. Many retailers were not interested in going to the wholesaler
who did not offer credit and instead stopped selling Foreal and preferred to stock and sell competing
brands

Prabhu, National sales head was alarmed to find that despite operating a trade scheme, sales had
dropped, and the number of outlets stocking had dropped

He called the Regional Manager Nandakumar and fumed “What is happening in your region Nandu.
We are creating our own internal competition and shooting ourselves in our foot. I am stopping all
trade schemes.”

Nandu responded “If we drop trade scheme this month, wholesalers who account for 35% of sales
will cut back their purchase by 30% and sales will drop more”

Prabhu “So what do you want to do. Increase the trade scheme further so that you can make a
bigger mess”

Nandu “Prabhu, you can cut the trade scheme but if the sales drops next month, don’t blame me”
Question
1. What underlying factors explain this mess?
2. Should the trade scheme offers be dropped? What are the implications of doing that?
3. If we want to redesign the trade scheme how should we go about it
4. Can you create a fundamental distribution margin policy framework to correct this
situation?
5. What issues are likely to crop up at the ground level during implementation of the policy and
how do we address and mitigate the operational/implementation challenges?
6. Should Foreal shampoo explore direct servicing of retailers and remove the distributor as
intermediary? What are the pros and cons of direct retail service?