Executive Summary

Racer is one of the leading players in Indian market for lube oil. Racer sells its products using two channels dealer channel and Bazaar or distributor channel. Dealers are either company owned stores or franchise stores, which sell directly to customer. A distributor buys products from Racer and then sells these products to retailers after adding its mark ups, retailer in turns adds its margin and sells racer products to customers or small garages. Racer has 6750 dealers and 2500 distributors. Over a period of time, Racer has been losing its market share to competitors. This decline in market share has been caused by leakage across channels, low brand recall for the racer products and lack of incentive for retailers to sell racer products. Retailer earns lower margin on racer product compared to similar product from competitor. Another problem is that Racer products have price variations across different retailers even in small neighbourhood. Based on our analysis, we propose that Racer should implement uniform credit terms of 30 days across channels and price Racer product to dealer at `170 and to distributor at
`160.This will help in plugging leakage across channel. Racer should also move to

volume based tier pricing to provide incentive to distributor to increase sales volume. Simultaneously Racer should invest more on advertising which will help Racer to improve brand recall to the customer. A detailed problem analysis and recommendations have been provided in the following sections.

Analysis
For the analysis of this situation we are assuming that presently no credit is being given to the distributor. A 60 day credit is given to only the dealers.

Make Credit Terms Consistent

Currently distributor is able to purchase from Racer Lube at the price of `160 for 500ml but the channel of purchasing from dealer at `150-155 is also open for the distributor. This is causing the leakage to bazaar channel. Dealers are able to do this because of the 60 day credit that company is proving to them. The leakage between the channels can be stopped by providing the similar credit to distributors. This reduces the incentive for distributor to purchase from dealer.

Price Difference in Different Channels

Moreover the hierarchy of supply chain has more levels in distributor chain than in dealer chain. That s why dealer is able to sell the lube to retailer at a price, which is lower than what distributors offer. This can be stopped by discouraging the retailer to purchase from dealers. To discourage the dealers, Racer Lube should increase the price at which lube is sold to its dealers. Since the price at which lube is sold to dealer is higher, it will not be able to sell to retailer at a price which is lower than the price at

which distributor is selling to retailer. This will narrow the range at which retailer is selling to the customer. The range will be narrowed from `160-190 to `170-190.

Building Brand Recall

Currently Racer Lube is facing a problem of brand recall. Competitors like Fortune have 92% brand recall as against 41% brand recall of Racer Lube. The company should spend more in advertising and customer-connect to improve the brand recall. The brand recall will create a pull from the customers and it will force retailers and distributors to stock more of Racer Lube products. This strategy will take time to build the recall but it is effective strategy so 6-12 months may not be sufficient for this but this can definitely be adopted considering 2-3 year vision in mind.

Tier Pricing System

Racer Lube currently offers a flat pricing system to distributor. This structure does not provide enough incentive to distributor to increase sell of race lube products. Instead of this flat pricing structure racer lube should move to volume based tier pricing for distributor. In tier pricing at lower volumes Distributor will have lower margin but as the volume increases and distributor moves to next tiers its margin will increase. But to increase his own volume distributor will also pass some part of this incentive to retailers, so he will start tier pricing for retailer. Racer lube can have 2 tiers to start with y y Tier 1- sales volume up to 26 KL , price to distributor - `170 Tier -2 - sales volume above 26 KL , price to distributor - `165

Different packaging
Racer lube can change the packaging for different distribution channels. The packaging of the product that is sold through dealers can contain warnings like Not to be sold through retailers . This will reduce the motivation for the retailer to purchase from dealers and only official channel left for them to purchase material is through

Deal

distributors. Different packing will greatly reduce the leakage between the channels in any direction.

Percentage based commission for dealer

Another aspect of the relationship of Racer lube with its dealers. As per the current arrangement with dealers, they don t have any risk but are getting the maximum premium. Currently dealers have the premium of `40 if they sell the lube oil at MRP. However, in case of any unsold material, it is taken back by the company. Company is also providing 60 day credit to dealers on payments. Company should start selling to dealers on commission basis. This will motivate dealers to sell it very close to MRP to get maximum margin. However, this approach can be double edged sword, where dealer will get more margin than before by selling it at a price, lower than MRP. This can be countered by setting a price floor above which commission will be given. If dealer sells the lube oil below that price floor, no commission will be paid.

Recommendations
Our recommendation is to have combination of above mentioned approaches.

To stop leakage between distribution channels

 Racer Lube should reduce the credit for dealers to 30 days and introduce the credit of 30 days for distributors.  Increase the price at which lube oil is supplied to dealer to `170 and retain `160 price at which lube oil is sold to distributor. This will reduce/ remove the arbitrage opportunity for dealer to sell to offload their inventory to bazaar channel.

To motivate the dealer to push the sales

 Racer Lube should implement the tier based pricing for distributors. It will motivate the distributor to sell more to retailer. To push the retailer sales, distributors will also start tier based pricing model for the retailers. With the higher profits in sight in case of more volume sales, retailer will be motivated to sell more of Racer products.  Racer Lube should also work on advertising to build brand recall. This will create a pull factor from customers, which will increase sales.