In January 2006, the general manager of sales at Castrol India Limited was worried due to the declining sales of Castrol motorcycle oil for four-stroke engines. It was lesser than it should be despite the increase in the number of motorcycles in India each year. People who have their motorcycle oil changed avail of the services in franchised workshops while still in the warranty period. Outside of the said period, they avail of this service in non-franchised workshops. The general manager plans to target both workshops in its strategy to increase the sales of Castrol oil. Thus, the general manager must come up with a better distribution strategy that distributors would grab and avail of to increase the sale of Castrol Oil.
Harvard Business Review (W16643-PDF-ENG)
September 22, 2016
Case questions answered:
- How do consumers buy MCOs? Discuss the existing consumer segments.
- What is the specific challenge for Rai and his team?
- What are Castrol India Limited’s options for expanding its distribution? Discuss the advantages and disadvantages of each option.
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Castrol India Limited: An Innovative Distribution Channel Case Answers
The case talks about Mohit Rai, who is the general manager of sales for Castrol India Limited, who while coming back from the annual sales conference in January 2006 realises that the market potential sales of Castrol MCO 4T were not making sense, even though every year 5 million bikes were added on road and also that at 3.5 ltr per bike per year, the market for MCO 4T was growing by 17 million to 18 million liters per year. The average being added was too less than the demand suggested i.e. only 2.5 million liters of MCO 4T per year.
The case also talks about the threat it gets from genuine oils, its competitors in the market and how technological innovations helped it maintain its leadership in the four-stroke category, and what the main consumer segments are i.e. minimalists, appreciators, and enthusiasts. Even though there was a price premium of 15-18 percent over the competition, the results were not matching so a project team was formed by Rai in order to conduct a gap analysis of MCO distribution. The analysis helped in the classification of Non-Franchised Workshops.
The main challenge was to come up with a distribution network where maximum areas are covered including spare parts and oil shops. This can be done through trade promotions, sales incentives plan,s and marketing support so as to reach 24 percent of the market share. The main issue is how to achieve the remaining 6 percent as the goal was to reach 30 percent in the next five years.
How do consumers buy MCOs? Discuss the existing consumer segments.
Answer: The trend for the consumption pattern was seen by the consumers who saw oil change as an important part of their bike maintenance. They use to take their bikes to Motorcycle dealers or franchised workshops (FW), for service frequently when in warranty, and for warranty benefits provided by the dealer. After the warranty is over they have to take their bikes to Non-franchised workshops (NFW), But in a study with the NFW, it was found that the consumers’ lubricant consumption pattern was erratic, at times there were very few requests and sometimes there was a sudden rush in the consumption by the consumers seeking service.
Based on the market research on needs and insights, Castrol has identified 3 distinct consumer segments:
- Minimalists:- The need for them was to do the thing right, with the insights of valuing money, with reassurance from a credible brand.
- Appreciators:- Need for them was to inspire freedom and confidence. With the insight, that bike was a means of transport for them, and they needed assurance that it remains reliable, and were also ready to pay a slight premium to avoid breakdowns.
- Enthusiasts:- Need for them was to get the most out of their bike’s engine. Insight for them was that they wanted to be associated with the best, as the bike was their vehicle for dreams through which they would uncover new opportunities.
What is the specific challenge for Rai and his team?
The challenge faced by Rai and his team was how to get Non-Franchise Workshops (NFWs) and spare parts shops to stock, display, and sell Castrol.
Out of the targeted 30% market share in the aftermarket, while 24% could be achieved through trade promotions, sales incentive plans, and marketing support, the remaining 6% potentially could be achieved through servicing NFWs and spare part shops.
But there were a few concerns for the distributors regarding the buying behavior of these outlets such as:
1. They were hesitant in supplying the mechanics of these outlets as the latter lacked a rudimentary understanding of cash flows and payment cycles.
2. The erratic consumption pattern of the consumers also was a concern as the demand for oil changes used to fluctuate violently. While stock and sell used to be supplied fairly regularly by distributors of either Castrol or its competitors, there was a chunk of NFWs which did not want to stock oil products as they were concerned that their customers would ask for credit for the cost of the Castrol motorcycle oil.
3. Also, distributors were cautious in investing in extra employees or delivery units to gain access to these workshops as each Distributor Sales Rep (DSR) would cost more than Rs.12000 a month. Moreover, the DSR would not be able to manage the activity from an area that is at a great distance from the base station as if credit was demanded by the respective workshop, the payment had to be completed by the end of the day. Furthermore, DSRs were hesitant to visit these workshops for social reasons as well as for the fear of exposing their lack of technical knowledge of bikes and parts.
4. Rai also had to make sure that any distribution route-to-market plan that he makes had to be a cost-neutral exercise as Castrol would not increase its distribution or trade margins to fund the proposed expansion. Delivery costs were bound to hit the roof as these outlets were highly scattered as well.
What are Castrol’s options for expanding its distribution? Discuss the advantages and disadvantages of each option?
There are two options that Castrol has for expanding its distribution and their advantages and disadvantages are in the following ways:
1. After Market Channel:
Spare parts outlets, non-franchised workshops, and oil shops come under the after-market channel. In total, there are about 77000 outlets out of which Castrol has grabbed 12578. They have a market share of about 16.4% in Spare part outlets, 30.4% in Oil shops, and 6.3% in Non-Franchised workshops. By coming up with a strategy like educating them about the technology and the benefits of the product through advertisements and campaigns and converting more outlets in this channel, Castrol can achieve a greater number of sales.
- After the warranty period, almost all vehicles are coming to non-franchised workshops for servicing. Through this, they can also convert the old vehicle users into their customers.
- With the long footprint and goodwill in the market, they can boost their sales and convert many more customers.
- They can effectively convert all the “enthusiasts” into customers of Castrol when it is easily available in the market.
- The conflicts between the distributors of spare parts outlets and oil shops as a part of their customers will be taken away from them.
- As most of the non-franchised workshops are located in remote locations, on-time supply and delivery might also be difficult.
- As many of the mechanics can’t afford for maintaining the stock, a credit system should be implemented and it will be difficult for the company as they have to employ a person for follow-up and they need to spend much more for the expansion.
2. Franchised Workshops
There are 4500 outlets and Castrol has captured 665 out of them. In terms of percentage, it holds 14.8% of the total market share. By increasing more number of outlets, Castrol can potentially increase its market share and this will result in a direct increase in its sales.
- In order not to void the warranty, the owners prefer giving their vehicles to an authorized service station during the warranty period and thus all the new vehicles will be exposed to Castrol.
- Since the authorized service station uses Castrol, the trust in customers to buy Castrol from the outside market will also increase.
- It will be difficult to convince the franchised workshop dealers as the OEM also supplies their own oil under their packaging.
- Castrol might be forced to reduce its profit margin to attract authorized dealers in buying and using their products.