Rohan GuptaIIT(BHU) Varanasi

GINO SA:

C A S E

Background

Information

BurnersBurners are electromechanically controlled appliances that provided “controlled flame” for combustion applications such as boilers and furnaces.

Burner Market

• Europe is the single largest burner market in the world.

• But the market has now become saturated.• In emerging markets such as Asia, the Middle East

and parts of Africa, however, the market is growing rapidly.

Burner Application

Burners are used-• In household for hot water in shower and dish wash.• As industrial boilers that generated steam or hot

water for heating buildings.• In chillers, industrial furnaces and ovens, ceramic

kilns, car painting booths and other incineration appliances.

Market In

CHINA

Burner MarketBefore 1990: China rich in coal-low efficiency and polluting-coal combustion boilers

and hence no burners 1990-1995: Emphasis on pollution control, replaced with oil combustion boilers Weishaupt (Germany), Baltur & Ridello (Italy), Elco (Germany),

Quenod (France), Corona (Japan)1995-1998: Price became an issue-Local manufacturers-only 5000 units-5 years

to become a threat-small burners Domestic-14% Commercial-8% Industrial-less than 3% Despite offering 10% to 20% less than Weishaupt low penetration in

industrial burners Post 1999: Domestic- price wars ; commercial – mainstream market Industrial burners – growth expected at 20% for next 5 years

Table 3: Estimated Sizes of Ranges in Numbers of Units Sold

Range Market Size Domestic 79,900 Commercial 20,080 Industrial 2,920 Total 102,900

Distribution Channel

GINO BURNER CO.

GINO Burner Co. Gino Burner Co., founded in 1931, manufacturer of burners,

headquartered in Paris, France. In-house production capability, a well-established channel

network and international exposure. Manufacture over 50 models of burners. Known for its domestic Burners. Largest burner manufacturers and exporters in the world.

Table 2: Gino Worldwide Production in 1999 (in thousands of units) Range Output Range (kcal/hour) Gino Production in 1999

Domestic 50,000-300,000 329 Commercial 300,000-2,000,000 49 Industrial >2,000,000 3 Total 381

SEGMENTOUTPUT

RANGE(kcal/hour)

GINO PRODUCTION -

1999 (thousand

units)

MARGINS

DOMESTIC 50,000-300,000 329 20%

COMMERCIAL 300,000-2,000,000 49 25%

INDUSTRIAL >2,000,000 3 30%

Total   381  

Gino Competitive Advantage

10-20% Lower Price than competitor

G I N Oin

China

Company Goals

Goals for next three years

• Achieve annual combined sales volume (for all type of burners) of 15,000 units

• Achieve annual sales of industrial burners of over 200 units

• Optimize the distribution channels.• Develop a minimum of two OEM accounts and two

end user key accounts within two years.• Improve service and spare supply• Build the brand image

Gino Distribution Network in China

Three Distributors Wayip Trading Co., based in the south China city

Guangzhou; 100% Gino burners Fung’s Co., based in the central coastal city Shanghai ,

90%revenue from textile industry Jinghua Mechanical Engineering Company, in the

northern city, Beijing; Largest distributor with 40% revenue of total.

Gino Distribution Network

Table 4: Distributors’ Performance Statistics In numbers of units sold — 1999

Jinghua FUNG’s Wayip TOTAL

Domestic 4,354 3,075 3,458 10,887 Commercial 876 433 568 1,877 Industrial 37 48 52 137 Total 5,267 3,556 4,078 12,901

Distributors’ Functions

Credit Function

Payment is made by the distributor’s bank as soon as

the goods are Shipped

Stock Function

Sales and Customer Service

• Transfer price • Base Price• Public Price• Contract Price

B.P=1.484*8.32 TPP.B=1.6*B.PC.P=0.8*P.B 1$=8.32RMB

Pricing

Transfer price Base Price Publiic Price Contract Price

100$ 1232RMB 1978RMB 1578RMB

Profits from Distributors

Type Transfer Price Base price Jinghua Fung Wayip

Domestic 2500 3710 16153340 11408250 12829180

Commercial 9000 13356 11699856 5783148 7586208

Industrial 65000 96460 3569020 4630080 5015920

Total 31422216(40%) 21821478 30061388

Revenue from Distributors

Type Margin Jinghua Fung Wayip

Domestic 20% 3230668 2281650 2565836

Commercial 25% 2924964 1445787 1896552

Industrial 30% 1070706 1389024 1504776

Values IN RMB

Protagonistsof

theCASE

David Zhou, Gino China Marketing ManagerJean Michel Pierre, Asia Pacific area ManagerFiema Boiler CompanyHenry Gond, Jinghua’s General Manager

Current Situation

Current Situation

Gino rely completely on distributors for sales.

Gino want to increase its industrial burner market.

Weishaupt own sales force and distribution network.

OEM are trying to bypass distributors. Issues with disributor.

Distribution Related Issues

• Distributor Behaviour Demand for Better Terms: Bargaining

For more margin. Stolen Sales: Poaching other Gino

Distributor. Reluctance to Stock Industrial

Burners: Loss of sales due to shortage of stock.

• No candidates for new or replacing distributors.• No warehouse.

Main Problem

Feima Boiler Co. Ltd is a leading boiler factory in northern China, made over 1,200 sets of boilers.

Last year Feima bought from Jinghua 350 domestic burners, 50 commercial burners and 3 industrial burners.

Jinghua gave an average 25 % discount off the public list price.

Now Feima is approaching Gino for OEM, expectinga 10 per cent greater discount and promising to buy50 % of its commercial and industrial burners and all its domestic burners from Gino.

What Decision David Zhou Should Take

He Should Consider:

1. The possible response from Gino’s other two distributors.2.The message that his decision would send to competitors.3. The attitude of Gino’s corporate management once the issue was put forward in April with Picher, the director of the Commercial Department.4. Feima’s response.5. Were there any other solutions that could save face for both sides?

PROBLEM

lll

• Lower Price• Good

Reputation• Reputable

Employee Base

• Over reliance on distributors

• No Warehouse• No workforce for

Sales & Service

• New OEM Buisness• Control over

Distributor Power• Increased Profits

• Loss of Jinghua(40% Revenue)

• Loss of Distributor trust

• Can’t meet Assigned Goals

Three Choices

1. Develop Feima as OEM

Devlop Fiema as OEM and give 1-2 % extra discount to Jinghau on its dealing so that jhingua do not suffer loss.

• Pros • Cons

• Profit of about 359% more than the earlier dealing with Feima.

• Increased unit sales through Feima.

• Brand image and potential end-user channels built.

• New OEM channel developed.

• Decreasing distributor power

• Disappointed Jinghua. • Fear in distributor channel

may lead to poaching and exits.

• Industrial stocking remains a challenge.

• High marketing investment.

• If Jinghua leave 40% loss of revenue

• No new distributor available

If Fiema is OEMTYPE UNITS

BASE PRICE

LIST PRICE

OEM PRICE

COST OF 1 UNIT

PROFIT ON 1 UNIT Total

DOMESTIC 1055 3710 5936 3858.4 2938 920.4 971022COMMERCIAL 81 13356 21369.6 13890.24 10017 3873.24 313732.4INDUSTRIAL 35 96460 154336 100318.4 68190 32128.4 1124494Total 2409248

TYPE UNITSBASE PRICE LIST PRICE OEM PRICE

MARGIN ON 1 UNIT Profit

DOMESTIC 350 3710 5936 4452 772 270200COMMERCIAL 50 13356 21369.6 16027.2 3339 166950

INDUSTRIAL 3 96460 154336 115752 28290 84870

Total 525020

Earlier

Profit increased= 359%

Values IN RMB

2. Accept Fiema as Jinghua’s Customer

• Negoitate with Fiema, that it can buy Industrial burner directly from Gino at 10% greater discount and Commercial, domestic burners from jinghua’s at 5% greater discount, if Fiema keeps its promise.

• Give 2% discount to Jinghua on its dealing with Fiema. So that there is no loss to Jinghua.

• Jinghua will be happy as its sales are increasing and total revenue too.

• Fiema will also be pleased as it is getting a greater discount.

Gino Enjoys good profit even on giving 3% discount to Jinghua

TYPE UNITSBASE PRICE LIST PRICE

OEM PRICE

MARGIN ON 1 UNIT Profit

DOMESTIC 1055 3710 5936 3858.4 630.7 665388.5

COMMERCIAL 81 13356 21369.6

13890.24 2938.32 238003.92

INDUSTRIAL 35 96460 154336

100318.4 32128.4 1124494

• Pros • Cons

• Increase in unit sales.

• Relationship with distributors strengthened.

• Industrial burners demand increased.

• New OEM.• Decreasing power

of distributors• Win Win situation

for both.• Sales goal are met.

• A little loss in profit• High Investment

3. Reject Feima’s Offer

• Pros • Cons

• Relationships with distributors remain undeterred.

• Increase Trust in Distributor

• OEM account lost.• Guaranteed unit

sales lost.• Distributor power

remains.• No profit increased• No sales goal met.

Reccomendations

• By weighing the Pro’s & Con’s the second choice is best.

• If negotiation fails then choice third should be chosen, since Gino cannot afford to loose its distribution network

• A warehouse should be built so that stocking problem is solved.

• For services, Charge 5% extra from customers, so that distributors are motivated for giving better service.

• Improve the brand image by advertising, organizing various events etc.

Created by ROHAN GUPTA, IIT (BHU) Varanasi,

during an internship by

Prof. SAMEER MATHUR, IIM Lucknow

www.iiminternship.com