Question 1: (13.5 marks)

As per the findings of Rais project team, the future disproportionate growth in the MCO market would come from NFWs.

Question 1A: Determine the characteristics of the three segments of NFWs (answered in the section on ungraded questions) based on the following parameters:

• Segment size (1.5 marks)
• Share in the oil change process (1.5 marks)
• Oil buying behaviour (1.5 marks)
• Financial condition (1.5 marks)

Now, the challenge was how to distribute the products to the NFWs. The team identified the following three major distribution models that can be incorporated to cater to these NFWs.

• Model 1: Ask the existing distributor network to supply directly to these NFWs.
  • Castrols distributors have been loyal to the company for years, but they originally needed to be convinced of the great potential that was available to them, albeit with its share of issues and challenges.
  • NFWs are scattered across the country, leading to complications in coverage, service and collections for the existing distributors.
• Model 2: Create a parallel set of exclusive distributors for the MCO product category. These distributors would solely cater to the MCO products and would supply directly to the NFWs.
  • Instead of creating new territory, distributors can be divided by product category.
  • Multiple channels have worked for some companies, by providing access to new markets that were unreachable or partially covered. A completely new channel could give Castrol the freedom to design new schemes and to experiment. However, the company will need to persuade the current distributors to give up MCO, a product category that has been growing.
• Model 3: Create a new channel partner of intermediaries between existing distributor networks and NFWs who will supply exclusively to these NFWs.
  • This option would create another first-mover advantage in the industry, by developing a rapport with the larger NFW base, and by using a business model that is scalable and sustainable.
  • It may be difficult to find these new intermediaries who are willing to work hard and invest their income for a starting salary that could also be earned by working in a comfortable environment, in big retail malls for fixed hours.

Question 1B: Evaluate these three models on the following parameters (Answer as High or Low.):

• Parameter 1: Willingness of these channel partners to supply to the NFWs (0.5 + 0.5 + 0.5 marks)
• Parameter 2: Channel partners preliminary knowledge of the local market that they are operating in (0.5 + 0.5 + 0.5 marks)
• Parameter 3: Potential of conflict(s) with other channel partners (0.5 + 0.5 + 0.5 marks)
• Parameter 4: Capital investment required to set up this model (0.5 + 0.5 + 0.5 marks)
• Parameter 5: Cost incurred by the channel partner to supply to the NFWs (delivery cost) (high, medium, low) (0.5 + 0.5 + 0.5 marks)

Use the following format to answer the question:

Module	Parameter 1	Parameter 2	Parameter 3	Parameter 4	Parameter 5
1
2
3

Sales and Distribution - Castrol - An Innovative Distribution Channel a case study on Castrol India Limited, a leading automotive and industrial lubricant manufacturing company, known for its technological innovation and marketing expertise. Here's the case scenario. The top management at Castrol India is concerned that the market potential for motorcycle oils, which is one of their product categories, is much higher than the current sales level. While working on this project, you need to understand the gap in the current distribution strategy. You need to evaluate three new distribution strategy models and suggest a suitable model that caters to the changing market conditions and is cost-neutral to the company as well. "There has to be an explanation!" thought Mohit Rai, the general manager of sales for Castrol India Limited (Castrol). The market potential estimates for sales of Castrol motorcycle oil (MCO) for four-stroke engines (referred to as MCO 4T)' were just not making sense. It was January 2006, and Rai was just back from the annual sales conference where he had been lauded for substantial growth in the sales of Castrol MCO 4T. While presenting the sales plans, he had niggling doubts about his presentation. On his flight back home, he decided to re-examine the numbers. India was showing great demand for motorcycles (casually referred to as bikes), resulting in 5 million bikes being added on the road each year. After the 1824 months of the warranty period, almost all of the bikes came into the after-market for their maintenance service and consequent oil changes. At 3.5 litres per bike per year, the MCO 4T market was growing by 17 million to 18 million litres per year. Castrol was present in most of the important outlets in the after-market and had a strong over-the-counter market share. However, Castrol was adding an average of only 2.5 million litres of MCO 4T per year, which was far less than the demand that its market dominance suggested. Was there a parallel universe of outlets where Castrol was not present? Was the data wrong? One thing was certain: over a period of time, Castrol would not only lose market share but also market dominance. Rai became restless and decided to set up a meeting with members of his sales and marketing teams to get to the root of this issue. INDIA, A GROWING ECONOMY India was a fast-growing economy with a large and expanding middle class (see Exhibit 1). The growth indicators for India's future pointed toward a stable and market-oriented economy (see Exhibit 2). The total number of two-wheelers in India was expected to jump from 42 million units in 2004 to 80 million units by 2010 (see Exhibit 3) and was being driven by a combination of factors, including consumers' increasing disposable incomes, the aspiration to own a motorized vehicle, and the availability of easy financing. The Motorcycle oil was divided into two categories: two-stroke (2T) oil and four-stroke (4T) oil. 2 Once the warranty period expired, most motorcycles entered the after-warranty market, or bazaar, for service and oil changes. This channel consisted of spare parts shops, oil shops, and non-franchised workshops primary growth drivers were coming from the younger demographic market, which had an entrepreneurial energy. Competition was increasing, and the capital and financial markets were doing well in India. There was also considerable growth in demand from rural areas. Opportunities lay in creating employment and economic empowerment for the next generation. However, there were concerns regarding the poor infrastructure of roads, insufficient transport networks, and inadequate power supply. Newer engine technologies and a shift from two-stroke engines to four-stroke engines would impact consumer behaviour and choice of distribution channels. Before 2000, when a majority of the bikes had two-stroke engines, most oil requirements (i.e., 2T oil) were met by petrol pumps and gasoline stations run by the national oil companies (referred to as forecourts). In a two-stroke vehicle, the lubricating oil was mixed with the gasoline, and it burned along with the fuel. Most consumers would simply have the gasoline pump attendant mix the oil with the fuel in their two-stroke vehicle's tank. In a four-stroke vehicle, the lubrication system was separate, so the oil needed to be changed only once every 2,000 to 2,500 kilometres. Consumers would change the oil during a maintenance service, which almost always occurred at a workshop. This trend led to a complete shift of lubricant sales from forecourts to the open market, referred to as the bazaar, or high street. The overall lubricants market was growing by 3 per cent per year, while the MCO 4T market was growing by more than 20 per cent per year. CASTROL INDIA LIMITED Castrol was globally regarded as the leading lubricant specialist, providing premium lubricating oils, greases, and related services to automotive, industrial, and marine customers across the world. Founded by Charles Cheers Wakefield, the company was renowned for its technological innovation and marketing expertise. The company was headquartered in the United Kingdom and operated directly in more than 40 countries, employing approximately 7,000 staff worldwide. In nearly 100 other markets, Castrol was represented by third-party distributors who marketed and sold their products locally. The Castrol delivery network extended across 140 countries, covering 800 ports and partnering with more than 2,000 distributors and agents. Castrol had been in India for more than 85 years, selling lubricants that covered a wide range of automotive and industrial applications. The automotive portfolio covered engine oils, gear oils, transmission fluids, greases, coolants, and brake fluids. The industrial portfolio contained a wide range of metal working oils, high-performance lubricants, corrosion preventives, industrial cleaning chemicals, hydraulic oils, gear oils, turbine oils, and general lubricating oils. Castrol had redefined the lubricant marketing channels in India. In the 1970s, more than 90 per cent of all lubricant sales occurred at retail forecourts. Following the nationalization of the industry, when government-owned national oil companies took over these forecourts, Castrol cultivated and developed the bazaar channel, which eventually contributed more than 65 per cent of the industry's lubricant sales. Being technology leaders, Castrol had many achievements in the Indian lubricants market, including being first to introduce several new products: . Multi-grade oils in India in 1982 (CRB) A dedicated passenger car oil in 1983 (GTX) A dedicated two-stroke oil in 1984 (Super TT) A dedicated four-stroke oil in India in 1993 (Grand Prix, later migrated to Activ 4T) New pack formats, including the 40-millilitre pouch (Scootek 2T) and the 50-litre garage pack Castrol also set up the first distributor model across the country as route-to-market (see Exhibit 4). The company was known for its technology innovations and marketing expertise, and was a respected brand that commanded a good premium. Its tagline was, It's more than just oil, it's liquid engineering." COMPETITION The Indian automotive lubricants market was largely price-sensitive. Changes in engine design and newer technology meant that the oil sump sizes were getting smaller, and the periods between oil changes were longer. These changes led to stagnation in volume growth. The market had more than 22 large and small manufacturers, represented by a mix of public sector undertakings' (PSUs), multinational lubricant companies (e.g., Shell, Gulf, Valvoline, Veedol, and Elf), and local manufacturers. Castrol faced competition from three large PSUs: Indian Oil Corporation Limited, Bharat Petroleum Corporation Limited, and Hindustan Petroleum Corporation Limited (see Exhibit 5). These PSUs had the advantage of owning forecourts, where they could retail the lubricants directly to the consumers at the time of refuelling. At these forecourts, consumers were either given recommendations to change oil or asked about their need for an oil change. That opportunity was not available to Castrol because the forecourts were not allowed to market products from other companies. PSUs were the market leaders in the two-stroke oil category, but the four-stroke oil category was a level playing field (in other words, a market where all players had equal opportunities), which was available largely in the after-market bazaar trade. Brand awareness, channel advocacy, and distribution determined the sales and power of the brand. PSUs were investing heavily in setting up a distribution network and trying to gain market share by giving large trade deals, such as discounts and better credit terms. Apart from the lubricant companies, Castrol also faced a growing threat from "genuine oils." For example, some motorcycle manufacturers, such as Hero Honda Motors, packaged engine oils under their brand name (e.g., Hero Honda 4T), which they sold through both their own dealerships and the bazaar trade. Technological innovations enabled Castrol to maintain its leadership in the four-stroke category; strong sales and marketing initiatives ensured its success in the after-market. BEHAVIOUR OF A MOTORCYCLE CONSUMER Most consumers saw oil changes as a necessary part of their bike maintenance. During the vehicle's warranty period (i.e., 18 to 24 months), consumers visited motorcycle dealerships, or franchised workshops (FW), for warranty benefits provided by the manufacturers. Once the warranty period was over, these bikes entered the after-warranty market, or after-market. Consumers had previously chosen to buy the oil of their choice and take it to their preferred mechanic for service, but they were now more likely to take the bike directly to the mechanic's shop and trust the mechanic to use the right oil. Rai called this change in behaviour a move from shop to workshop. The factors driving this behavioural change were trust, convenience, and personal attention from the mechanic, who was seen as a credible source of information for recommending the right oil for the bike. These mechanics were called non-franchised workshops (NFW). Rai reviewed the market research studies on motorcycle owners, their reasons for ownership, and their attitude toward maintenance of their motorcycles. For most Indian consumers, a motorcycle was a first step on the journey to personal mobility, and an effective and economical mode of transport. Consumers were generally very closely tuned to their motorcycles; some claimed that they could feel their bike's engine. Most consumers were aware that changing the oil was important to get a better performance from their bikes and were also aware of the consequences of not maintaining their motorcycle. It was evident to Rai that consumers did not seem to differentiate the products and the brand offerings distinctly. Based on extensive consumer market research on needs and insights, Castrol had identified three distinct consumer segments minimalists, appreciators, and enthusiasts (see Exhibit 6). CHANNELS OF DISTRIBUTION IN THE INDUSTRY Apart from the bazaar trade, FWs were a critical distribution channel in the Indian automotive lubricants market. Due to growing competition, an association with original equipment manufacturers (OEMs) was becoming important. It reinforced approval and usage of a particular brand. Not only would a motorcycle manufacturer's FW insist on using the OEM-approved product, consumers would also associate with that brand in the after-market, after their vehicle warranty period was over. In recent years, all the major motorcycle manufacturers were expanding their service network into Tier 2 and Tier 3 towns through authorized service centres, where the dealer would set up a sales and service branch to cater to the bikes sold in rural areas. The sales of lubricants through the bazaar or high street channel had transformed the Indian automotive lubricants market into a fast-moving consumer goods sector. The other marketing channels were rural and agricultural dealers, supermarkets, and wholesalers (see Exhibit 7). PSU companies also sold products through their own widespread network of forecourts. Therefore, lubricants were sold broadly through three different channels: FWs, forecourts, and bazaars. The bazaar trade was the most profitable distribution channel. It consisted of spare parts shops, dedicated oil shops, and mechanic workshops (or NFWs).* CASTROL'S CURRENT CHANNELS OF DISTRIBUTION Castrol marketed its products mainly through the bazaar channel using distributors and retailers. It dominated the retail lubricant market with access to more than 70,000 retail outlets. Rai took two months to keenly study the distribution of MCO 4T products through sales reports, market visits, meetings with sales force members, and consultations with distributors. All factors indicated that Castrol four-stroke oil (of which Activ 4T was the predominant contributor) was the fastest-moving brand and the preferred choice of consumers, despite its price premium of 15-18 per cent over the competition. This positioning was also corroborated by market research data, which indicated that for every 10 bottles of MCO 4T oil sold, two bottles were Castrol products. Competition was highly fragmented, with many different brands competing in various different markets. Rai also had a chance to visit smaller towns in Tier 2 and Tier 3 cities, where it seemed that the results were not significantly different. So where was the problem? After a brainstorming session with his marketing colleagues and sales managers, Rai decided to form a project team to conduct a gap analysis of MCO distribution and suggest any remedial actions that might be necessary. PROJECT TEAM'S FINDINGS To initiate the problem investigation, the team divided the country geographically into four sections based on population statistics: Greater than 5 million people (the top eight metropolitan areas) 5 million to 1 million 1 million to 500,000 Less than 500,000 In each category, they looked at some sample towns and conducted a distribution analysis for the following services: Motorcycle spare part and accessory shops Oil shops Motorcycle NFWs The team drew three key inferences: There was low coverage across key after-market channels. The gap was larger in the towns with lower population. The last category (less than 500,000 people) afforded great potential. NON-FRANCHISED WORKSHOP CLASSIFICATION A study of NFWs also helped the project team broadly classify them into three segments: . The first segment consisted of mechanics workshops that stocked and sold lubricants (referred to a stock-and-sell mechanics). This segment was very small (approximately 10 per cent of the market) but contributed 30 per cent of the oil changes. Almost all these mechanics were ustaad mechanics. They were highly respected and were considered to be the best in the trade. They had developed a high level of skill through years of experience and were trusted by consumers to conduct major jobs on their bikes (such as overhauling engines). These mechanics commanded a premium price for their services, and customers never questioned their abilities. The second segment constituted mechanics who had worked at the franchised workshops and were ready to set up their own business. They were young (usually between 25 and 40 years old) and had developed their clientele while working with the franchised workshop. They were highly skilled but short on finances, and were looking for financial support. Unfortunately, distributors refused to service their shops because there was no guarantee about their existence and payments. These mechanics normally received their supply of MCOs from nearby spare parts shops. Based on their business relationships, they could usually manage to get some credit on MCOs and spare parts, but such sales were normally settled on a daily basis. This category accounted for 40 per cent of mechanics and 50 per cent of oil changes. The third segment included mechanics who were approached for small jobs. Consumers would trust them with minor issues such as clutch wire changes and brake adjustments. They comprised 50 per cent of the mechanic base. If consumers needed an oil change, they would buy their own bottle of MCO and take it to the shop. These mechanics had likely apprenticed under an ustaad, but were struggling to build their clientele and reputation. Customers who approached the first two categories of NFWs would often explain the bike problem, after which the mechanic would conduct a test drive and provide a cost estimate. They would leave the bike with the mechanic, whom they would trust to use the proper choice of oil (see Exhibit 8). The mechanics would buy the product at a small discount for the market operating price and charge the customer up to the maximum retail price (see Exhibit 9). There was no doubt that the stock-and-sell mechanic provided a great opportunity for lubricant companies to enhance their brand visibility and advocacy. NEW Buying Behaviour A deeper study into the buying habits of NFWs showed that the consumers' lubricant consumption pattern was erratic. There were times with very few requests for oil changes and other times with a rush of consumers seeking immediate service. Stock-and-sell mechanic shops were routinely serviced by a distributor (either Castrol or a competitor). Mechanic shops in the second category, however, were hesitant to stock oil products for a couple of reasons. They worried that their customers would ask for credit for the cost of the MCO, and they were reluctant to burden their current spare parts suppliers with more requests. Supplying to NFW mechanics directly was a major challenge for distributors because, unlike typical shopkeepers, they lacked a basic understanding of cash flows and payment cycles. If credit was extended to these mechanic shops, the available cash would likely be spent on daily necessities. In order to service this segment of mechanic shops sustainably, the Castrol project team identified several action items related to focus, area and business size, and local servicing (see Exhibit 10). Rai reflected on the project report. Because MCO was still a small part of the distributor's portfolio, ranging from 10 to 20 per cent of Castrol's overall business, distributors were wary of investing in extra employees or delivery units to gain access to these workshops. Each distributor sales representative (DSR) hired to service these outlets would cost the distributor more than 12,000 per month, and the return on that investment needed to be seen over a longer-term perspective. Each workshop required only two or three bottles of Activ 4T per day. If credit was requested, the collection of payment needed to be completed by the end of the day. If Castrol were to hire an extra DSR in the headquarters location, how would this person manage activity in a remote location, away from the base station? Most DSRs were also reluctant to visit ? The market operating price was the cost to the consumer, which was usually less than the maximum retail price. India mandated by law that the maximum price that the retailer could charge for the product be printed on the product packaging. 8A DSR was the distributor's employee, who was responsible for daily ordering and payment collections. 9 * = INR = Indian rupee; all currency amounts are in unless otherwise specified; US$1 = 346 on January 1, 2006. mechanics shops for social reasons and for fear of exposing their poor technical knowledge of bikes and parts. The spare parts shop network seemed better positioned to manage this segment more efficiently. It was clear to Rai that Castrol needed to find a solution to service this segment. Rai recalled the conversation he had with his managing director during his discussions on this report. He was plainly told that any distribution route-to-market plan needed to be a cost-neutral exercise for the company. Castrol would not increase its distribution or trade margins to fund this expansion. There was no way for Castrol to fund the expansion by increasing distribution costs. THE CHALLENGE In 2005, the total market for MCO 4T was 76 million litres, and was slated to grow at a compound annual growth rate of 23 per cent. This growth would be spearheaded by the after-market channel, which was growing at a rate of 27 per cent, considerably higher than the market's rate (see Exhibit 11). Castrol had approximately 16 per cent coverage in the after-market with maximum penetration in the oil outlets (see Exhibit 12). It was evident that Castrol's opportunity to tap the potential to sell MCOs could come from spare parts shops and NFWs (see Exhibit 13). Rai contemplated that to generate interest from distributors and the sales team, it was important to develop a critical mass for the MCO business. One way was to grow organically, which would lead to an increase in the two-wheeler market share to approximately 24 per cent. However, disproportionate growth would also be a consideration, with a goal for a 30 per cent market share in the MCO market in the next five years. This would mean benchmarking with its champion brand, CRB, which commanded a 30 per cent market share and had virtually ruled the diesel engine oil market for more than 20 years. In comparison, Activ 4T was barely six years old. Rai's keen understanding of the market gave him the confidence to push his team to expand the coverage of the spare parts and oil shops because distributors were comfortable dealing with Castrol. Further, by focusing trade promotions, sales incentives plans, and marketing support, he could potentially reach a 24 per cent market share. How could the remaining 6 per cent of the market share be achieved? Could the NFWs help Castrol achieve this gap, or was this disproportionate growth even possible? It was clear that there was a great opportunity to get NFWs to stock, display, and sell Castrol. Consumer behaviour was said to be moving "from shop to workshop. If this was true, the potential benefits of a first-mover advantage were immense. He recalled his conversation with a Castrol distributor who had doubts. The distributor was aghast at the suggestion that the company was expecting him to distribute to these outlets: You want me to supply to these small, unreliable mechanics on my current 4.3 per cent margin? They were already buying Castrol from the nearby dealer, so my sale would drop from those counters. Most of these mechanics are unauthorized and can close shop any day. Since they buy on credit, it would mean a big risk to us. Also they are highly scattered and in remote locations, so the delivery costs would rise phenomenally. And imagine delivering such small quantities every day. Do not expect me to deliver less than my minimum order of one carton [18 litres, costing about 32,500). What about my [labour] cost? It would hit the roof! The distributor couldn't imagine parting with his margins, simply on the premise of some potential in servicing these small mechanic shops. "What about the negative implications of annoying my loyal dealers if I supply their customers directly?" asked the distributor. "And what about the credit risk? Who will bear that?" EXHIBIT 1: SHARE OF INDIAN POPULATION IN EACH INCOME BRACKET (%) Share of Population in each income bracket Per cent, millions of people COIN Globals (>1000k) Strivers (500-1000k) 18 19 41 31 Seekers (200-500k) Middle class 44 93 80 36 Aspirers (90-200k) 54 35 22 Deprived(