STUDY OF DISTRIBUTION CHANNEL FOR HONDA’S UPCOMING LOW COST BIKE IN INDIA

1. 2/26/2012
STUDY OF DISTRIBUTION CHANNEL FOR
PROJECT HONDA‟S UPCOMING LOW COST BIKE IN
INDIA
BY | BENU SINGHAL

2. ABSTRACT:
Successful value creation needs successful value delivery. Honda Motorcycle & Scooter India
(HMSI) has planned to open 200 outlets a year for at least next 10 year. These plans are not
ambitious; in fact, it‟s a need of the hour to support India‟s burgeoning demand for 2-Wheelers
(2-W). Some highlights of market leaders of various industries:
1. 2 Wheeler Industry: Hero MotoCorp has more 5000+ touch points, covering sales,
services and spares.
2. Passenger Car Industry: Maruti Suzuki India Ltd. is leading the market with its 1000+
sales outlets and 2946 service stations.
3. Banking Industry: One of the oldest banks of India, SBI is serving millions of Indians
with its 13000 outlets.
4. Insurance Industry: With the network of its 1337064 agents, LIC is having near
monopoly status in India.
5. Retail in Groceries: Your nearest Kiryana Store, serving you since ages. Its arm‟s stretch
distance from you, makes it indispensable for you.
Superior distribution channels can take the company to the market leadership position. Failure to
coordinates the value network properly can have dire consequences.
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3. INDEX
S.no. Content Page no
1. Introduction 4
1A. Distribution channels 5
1B. The most anticipated product from HMSI 7
2 Factors determining the Distribution Channel 8
2A Indian 2-wheeler industry 10
2B Why the Hero MotoCorp is consistent market leader 12
2C Rural market 13
2D Objective of HMSI 16
2E Different segment of motorcycle 17
3 Current & Future expansion of Channels by 18
HMSI
3A Current distribution channel 19
3B Proposed channel expansion by company 19
4. Team Inputs 20
4A Proposed channel for low cost bike by the team 21
4B State wise analysis of outlet per person 22
5 Bibliography 23
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4. 1. INTRODUCTION
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5. 1A. DISTRIBUTION CHANNELS:
Most producers do not sell their goods directly to the final users; between them stands a set of
intermediaries performing variety of functions. These intermediaries constitute a distribution
channel (also called marketing channels).
The channel chosen affect all other marketing decisions. The company‟s pricing depends on
whether it uses mass merchandisers or high-quality boutiques. The firm‟s sales force and
advertising decisions depend on how much training and motivation dealers need. In addition,
channel decisions involve relatively long-term commitments to other firm as well as set of
policies and procedures. When an automaker signs up independent dealers to sell it automobiles,
the automaker cannot buy them out the next day and replace them with company-owned outlets.
1. In managing its intermediaries, the firm must decide how much effort to devote to push
versus pull marketing.
Push Strategy: involves the manufacturer using its sales force and trade promotion
money to induce intermediaries to carry, promote, and sell the product to end users. Push
strategy is appropriate where there is low brand loyalty in a category, brand choice is
made in the store, the product is an impulse item, and product benefits are well
understood.
Pull Strategy: involves the manufacturer using advertising and promotion to persuade
consumers to ask intermediaries for the product, thus inducing the intermediaries to order
it. Pull strategy is appropriate when there is high brand loyalty and high involvement in
the category, when people perceive differences between brands, and when people choose
the brand before they go to the store.
Top marketing companies such as Nike, Intel and Coca-cola skillfully employ both push
and pull strategies.
2. Channel Levels:
The producer and the final customer are part of every channel. There are broadly three
types of channel.
0-level: Manufacturer-Consumer
1-level: Manufacturer-Retailer-Consumer
2-level: Manufacturer-Wholesaler-Retailer-Consumer
3. Number of Intermediaries:
Exclusive Distribution: means severely limiting the number of intermediaries. It
is used when the producer wants to maintain control over the service level and
output offered by the resellers. By granting exclusive distribution, the producer
hopes to maintain more dedicated and knowledgeable selling. Used in distribution
of new automobiles, some major appliances, some women‟s apparel brands, etc.
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6. Selective Distribution: involves the use of more than a few but less than all the
intermediaries who are willing to carry a particular product. It is used by
established companies and by new companies seeking distributors.
Intensive Distribution: consists of the manufacturer placing the goods or
services in as many outlets as possible. This strategy is generally used for tobacco
products, soap, snack foods, etc.
Manufacturers are constantly tempted to move from exclusive or selective
distribution to more intensive distribution to increase coverage and sales. This
strategy may help in the short term, but often hurts long term performance.
Intensive distribution increases product and service availability but may also
result in retailers competing aggressively. If price war ensues, retailer profitability
may also decline, potentially dampening retailer‟s interest in supporting the
product. It may also harm brand equity.
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7. 1B. THE MOST ANTICIPATED PRODUCT FROM HMSI:
Hero MotoCorp, the new avatar of Hero Honda, which accounts for 46% of all bikes sold in
India, dominates the market with models like the 100cc CD Dawn, Splendor, Passion and the
125cc Super Splendor. Honda Motorcycle & Scooter India Pvt. Ltd. (HMSI) was restricted to
enter this segment, as per their agreement with the previous partners- Hero Honda India Ltd.
Now, after their part, HMSI is free to enter this segment. According to the „The Economic
Times’, the company hopes to introduce a low-cost bike, possibly the cheapest, in India —
currently being manufactured in China. Tatsuhiro Oyama, senior managing officer & director
motorcycle operations at the Japanese giant, told ET: "We are working out plans to gain
leadership in the Indian two-wheeler market." The Japanese giant‟s Indian subsidiary hopes to
sell these 125 cc made-in-China bikes — currently sold in some African markets — at around Rs
30,000 (ex-showroom Delhi), almost Rs 4,000 lower than market leader Hero‟s CD Dawn and
about Rs 18,000 cheaper than the Super Splendor, The Economic Times said. "Going forward we
are conducting a feasibility study for our low-cost bike that is currently made in China and could
be manufactured in India," added Oyama.
To add to its armor, on 5th January‟12, HMSI unveiled the „Dream Yuga‟, its first bike aimed at
the highly lucrative mass market at the Auto Expo in Delhi. HMSI will be launching “Dream
Yuga”, the mass segment bike, in mid 2012.
Honda Dream Yuga is a mass production commuter bike which will hit the market by 2012 May.
This bike has a 110cc engine which produces 9 BHP @ 7500 RPM. 72 KMPL mileage is
something which is worth noticing. Expected price of the bike is between Rs. 40000 & Rs.
45000/-.
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8. 2. FACTORS DETERMINING THE
DISTRIBUTION CHANNEL
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9. FACTORS DETERMINING THE DISTRIBUTION CHANNEL
OF HMSI’s
LOW COST MOTORCYCLE:
1. Indian 2 Wheeler Industry
2. Learning from Market Leader
3. Rural Market
4. HMSI Objective
5. Segment of the Motorcycle
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10. 2A. INDIAN TWO-WHEELER (2W) INDUSTRY
The 2W consists of:
1. Motorcycle
2. Scooters
3. Mopeds
Segmental Market Share
100%
90%
80%
70%
60%
50% Mopeds
40% Scooter
30% Motorcycle
20%
10%
0%
The distribution of the chart shows how the preference of an Indian customer has
changed over the period of time. There was a time when 70% of the 2W sales come from
mopeds and scooter. Today, motorcycle segment alone has 82% market share in 2W
segment. One cannot guess what is there in future; the market dynamics keep on
changing. Once exited from scooter market, Rahul Bajaj, chairman of Bajaj Auto, has
expressed intentions to re-enter in it. In 2008, Kinetic Motor, which was pre-dominantly
present in scooter market, was sold out to Mahindra 2wheelers. In December 2010, Hero
Honda filed for divorced, ending its 27 year long relationship with Honda. In November
2011, HMSI overtook TVS on monthly sales basis, and brought more fire in the
playground for Bajaj Auto. This is the state of Indian 2W industry, ever changing, ever
challenging.
The Indian two-wheeler industry has shown a robust volume growth over the last two-years,
having grown by 25% in 2009-10 and 27% in 2010-111 to reach 1,33,29,895 units. The 2W
industry growth over the last two years has been supported strongly by various underlying
factors including India‟s rising per capita GDP, increasing rural demand, growing urbanization,
swelling replacement demand, increasing proportion of cash sales and the less measurable metric
of improved consumer sentiment.
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11. Company wise breakup of sales (1,33,29,895 units) for the wear 2010-11:
REST
7%
HMSI
12% Hero
Moto
TVS Corp
Motor 41%
Company
15%
Bajaj
Auto
25%
These 4 companies held 93% combine market share of 2-wheeler industry in India.
ICRA expects the 2W industry to report a volume CAGR of 10-12% over the next five years to
reach a size of 21-23 million units by 2015-16 as it views the fundamental growth drivers -
comprising of expected steady GDP growth, moderate 2W penetration levels, favorable
demographic profile, under developed public transport system and utility quotient of a 2W - to be
intact. Additionally, the entry of new players in the industry, multitude of new model/ variant
launches, growing distribution reach, cheaper ownership costs on a relative basis are expected to
be some of the other prime movers for industry growth over the medium term. In ICRA‟s view,
while the trend in rising commodity prices, hardening interest rates and increasing fuel costs may
lead to some moderation in industry growth over the short term, the growth over the medium to
long term is expected to remain in double digits. Hence all 2W majors are busy in ramping up
their capacity.
After so many Joint-Ventures, Mergers & Acquisitions and then Divorces, one thing is clear-
making motorcycle is not a rocket science. Ashok Taneja, Managing Director, Shriram Rings
and Pistons, a long-time vendor to Hero, says "Technology is not that much of a factor in
motorcycle sales any longer”. Hero, after their divorce with Honda, is not taking chances and is
in advanced stages of talks for technology with a "group of Japanese companies”. If you have
the money, you can buy it off the shelf in Japan, South Korea, and elsewhere. Kinetic, after
splitting with Honda, tied up with Hyosung of South Korea and rolled out motorcycles, including
a high-end cruiser, the Aquila, priced at Rs 1.5 lakh. The same experts would also tell you that
success in 2W is not about technology alone, sales and distribution are vital.
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12. 2B. WHY THE HERO MOTOCORP IS CONSISTENT
MARKET LEADER:
Hero sold over 5 million units in fiscal 2010-11. This was the first time when they crossed 5
million mark in single year. It was its superior customer reach which contributed the most in
achieving this mammoth sales. Currently it has more than 800 dealers and 5000 touch points,
which includes sales, service & spares. 50% of the total sale had come from Rural Market. In
Rural Markets, Hero is far more stronger than its any of its competitor.
Hero’s strategy: Every village, every household
"Small towns, villages… we are everywhere," says Anil Dua, Senior Vice President, Marketing
and Sales, Hero Moto Corp.In villages where Hero does not have direct presence, it has
authorised representatives of dealers - Dua calls them opinion makers - who travel from place to
place extolling the virtues of its motorcycles. "Our aim is Har Gaon, Har Aangan (every village,
every household)," he says.
Hero dealers even send mechanics every month to repair and service motorcycles in far-flung
villages. Vivek Goyal, owner of Autoneeds, a Hero dealer for 22 years with outlets in Delhi's
middle-class borough of Patparganj and in Gurgaon, says word of mouth is always positive for
Hero. "If we can sell a bike to one major household in a village, we can crack the village," he
says.
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13. 2C. RURAL MARKET:
The future of growth in 2W lies in rural market. Currently half of the total sales of Hero are rural.
Motorcycle sales in the world‟s second-most populous nation will grow about three times to about 30
million in 2020 according to Ernst & Young LLP. Rural sales will increase to 45 percent of the total in
that period from the current 40 percent, as distribution expands and incomes rise in those areas.“As per
capita incomes rise in villages, the first aspiration is to buy a personal mobility solution,” said Rakesh
Batra, who leads the automobile practice at Ernst & Young in New Delhi. “In villages, there is no public
transportation and the alternative is to walk, ride on the back of a tractor or a bicycle.”
Literature Review of the E&Y report on “Competing for Market Share in Rural India”:
A key contributor to India‟s strength has been the significant growth in consumption from its
rural market. Estimates put the Indian rural market close to 45% of the total Indian GDP.
1. In demographic terms, rural India is more advantageously placed, with the number of
working population there outnumbering the total urban population.
Age group Population (rural) mn
Greater than 70 22
61 to 70 33
51 to 60 56
41 to 50 77
31 to 40 107
21 to 30 127
Less than 20 311
2. A clear demonstration of the importance of rural India is shown by looking at the number
of organizations which derive a significant proportion of their overall sales from outside
of the country‟s largest towns and cities :
Company Category % sales from rural markets
Hindustan Unilever Household Products 45%
Hero Honda Two wheelers 50%
Dabur Personal Products 40%
Dish TV Media 33%
TVS Two wheelers 50%
3. 72% of the total population lives in 6,00,000 villages. Yet more than half of the
population and approximately 60% of the total rural wealth is concentrated in just 17% of
these same villages. Given these characteristics, deploying an optimal distribution
structure for such a market becomes a challenge for any company, especially those which
have been geared toward managing a distribution chain predominantly in urban markets.
For instance, decisions on distribution networks have to take into account both the size of
the potential market as well as the cost required to service the dispersed demand that rural
India represents.
4. How companies can improve their performance in Rural Markets:
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14. i. Network Strategy:
In order to improve strategic deployment, a detailed review is required of the
existing network. So that high performing dealers could be allocated attractive
markets.
ii. Channel management, working on the answers of the following:
What indicators of the channel partner‟s funding system should the
organization team be actively tracking?
How should dealer‟s fund in market/stock be tracked?
Should the network be self-funded, funded by distributor/stockist or
provided channel funding/CC?
What should be liability borne by company in each case? What rate of
interest should channel partner be charged?
How should dealer‟s funds be distributed among sales/service/spares?
iii. Sales force effectiveness :
Analysis of customer buying behavior revealed that customer conversion
dramatically drops when the salesman has not met the customer during the sales
process. For example, conversion ratio was 36% when a company salesman met
the customer, irrespective of whether the customer visited the dealership or not.
Conversion ratios went up to 48% when the customer visited the dealership and
was visited by the salesman. However, when the salesman did not contact the
customer during the sales process, the conversion was only 5%, irrespective of
the customer having visited the dealership.
Conclusion:
While organizations spend significant amounts of time and effort in developing their brand
equity, in rural India, given the nature of the market, it is critical for organizations to focus
equally, if not more so, on their distribution equity. We believe this will yield greater returns to
organizations planning to succeed in rural markets in India.
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15. 2D. HONDA MOTORCYCLE & SCOOTER INDIA PVT LTD. :
The Company which was founded in
1999, today is the 4th largest manufacture
of 2W in India. In November 2011,
HMSI overtook TVS motor company in
2-wheeler segment on monthly basis,
while former sold 1,99,154 units later
could sold only 1,72,829 units. Still on
10 months cumulative basis, TVS is
ahead of HMSI, where former had sold
18,09,105 units and later had sold only
16,80,405.
HMSI owns 10 brands of Motorcycle
and 3 brands of Scooters. It has 45%
market share in Scooters segment.
18 Growth Trajectory 16.56 16.8
16
14 12.713
12 11
9.9
10
8 7.153
5.512 6.006
6
3.414
4
1.6
2 0.55
0
Sales (in lac units)
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16. OBJECTIVE OF HMSI:
In 10 years down the line HMSI wants to become market leader in 2W segment. Honda
aims sell 10 million 2 wheeler by 2020 and have 30% market share, which will make it No.1
in India.
Meeting the Objective:
Along with cost-competitive models, Honda is also busy ramping up capacity to match that of
the Munjals-owned Hero MotoCorp. Oyama told ET the company plans to set up a fourth plant
in India with an initial capacity of 1.2 million units, entailing an investment of Rs 1,000 crore.
The fourth plant will take its cumulative capacity to 5.2 million, not far behind the Munjals,
whose current capacity stands at 6.15 million per year.
"We are aiming to sell 10 million two-wheelers in India by 2020 and target a 30% market share
to achieve leadership in India. We are market leader in scooters and now the focus is to replicate
the same in bikes," said Oyama.
Total
First plant Second plant Third plant capacity
IMT* Manesar, Tapukara Industrial Narsapuram Area,
Location
Haryana Area, Rajasthan Karnataka
As of May 2011 1.6M units - - 1.6M units
Jul-11 1.6M units 0.6M units - 2.2M units
Mar-12 1.6M units 1.2M units - 2.8M units
1st half of 2013 1.6M units 1.2M units 1.2M units 4.0M units
Starting from 2013, HMSI wants to build 1 plant a year till 2017, meaning 5 plants in next 5
years.
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17. 2E. DIFFERENT SEGMENT OF MOTORCYCLE
HMSI wants to replicate the same story of scooters in motorcycle segment.
The motorcycle segment can be further divided into 3 categories:
1. Entry level; with a price (ex-showroom) tag less than Rs.40000/-
2. Executive; with a price (ex-showroom) range Rs.40000/- to Rs.50000/-
3. Premium; with a price (ex-showroom) over Rs.50000/-
The Executive segment‟s share in the domestic motorcycles segment has risen from 48% in
2005-06 to 65% in 2010-11. Being the largest volume generator, the Executive segment has
also seen the largest number of new model launches and portfolio refurbishments by all
players and involves the highest product and brand clutter. Although the Executive segment
has high competitive intensity reflected in the presence of a large number of brands, Hero
Honda remains the clear market leader on the strength of its Splendor and Passion series of
bikes that have maintained a dominant position over the years.
Sales of 100-cc motorcycles account for about 50 percent of total motorbike sales of 10.9 million
in India, according to Mr. Rattan, VP at HMSI. About 91 percent of the 5.5 million motorcycles
that Hero, the maker of over half the motorcycles in India, sold last year were below 125-cc
models, according to data from the Society of Indian Automobile Manufacturers.
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18. 3. CURRENT & FUTURE EXPANSION OF
CHANNELS BY HMSI
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19. 3A. CURRENT DISTRIBUTION CHANNEL:
Currently HMSI is managing 1577 touch points across India. It has an army of 452 dealers, where urban-
rural breakup is 254 & 198 respectively.
No. of Sales Outlets are = 761
No. of Service Outlets are = 816
Competition Mapping:
Company Capacity Touch Points Dealers
1. Hero Moto Corp 6.1 million 5000+ 800+
2. Bajaj Auto 5 million 3600+ 589
3. HMSI 2.8 million 1577 450
3B. PROPOSED CHANNEL EXPANSION BY COMPANY:
HMSI aims to have at least one sales outlet for every Hero Moto Corp sales outlet. To live the dream of
market leader, it will be adding 200 outlets every year for next 10 year.
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20. 4. TEAM INPUTS
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21. 4A. PROPOSED CHANNEL FOR LOW COST BIKE BY
THE TEAM:
1. HMSI should use its own distribution channels to make available this low-cost bike.
2. Due to high weightage of Rural Market in total sales, special emphasis need to be given
for rural channels. SBI has 13000 outlets and PNB has 6249 outlets (CBS branches)
across the India. The company should tie-up with these banks to make these outlets the
point of sale for low-cost bike.
Eg: UP has 1288 CBS branches of PNB. These touch points can be used to sale low-cost
bikes.
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22. 4B. STATE WISE ANALYSIS OF OUTLET PER PERSON
%age of Sales Ratio Index Deficiency
Rank State/UT Population Total Outlets (Avg=858) (Base =TN)
1 Uttar Pradesh 199,581,477 16.49170% 73 443 55 60
2 Maharashtra 112,372,972 9.28554% 80 862 107
3 Bihar 103,804,637 8.57752% 17 198 25 52
4 West Bengal 91,347,736 7.54819% 22 291 36 39
5 Andhra Pradesh 84,665,533 6.99603% 62 886 110
6 Madhya Pradesh 72,597,565 5.99884% 43 717 89 5
7 Tamil Nadu 72,138,958 5.96094% 48 805 100
8 Rajasthan 68,621,012 5.67025% 40 705 88 6
9 Karnataka 61,130,704 5.05132% 47 930 116
10 Gujarat 60,383,628 4.98958% 80 1603 199
11 Orissa 41,947,358 3.46617% 23 664 82 5
12 Kerala 33,387,677 2.75887% 49 1776 221
13 Jharkhand 32,966,238 2.72405% 11 404 50 11
14 Assam 31,169,272 2.57556% 11 427 53 10
15 Punjab 27,704,236 2.28924% 49 2140 266
16 Haryana 25,753,081 2.12801% 30 1410 175
17 Chhattisgarh 25,540,196 2.11042% 17 806 100
18 Jammu and Kashmir 12,548,926 1.03694% 4 386 48 4
19 Uttarakhand 10,116,752 0.83596% 11 1316 163
20 Himachal Pradesh 6,856,509 0.56656% 2 353 44 3
21 Tripura 3,671,032 0.30334% 1 330 41 1
22 Meghalaya 2,964,007 0.24492% 0 0 2
23 Manipur 2,721,756 0.22490% 0 0 2
24 Nagaland 1,980,602 0.16366% 0 0 1
25 Goa 1,457,723 0.12045% 7 5811 722
26 Arunachal Pradesh 1,382,611 0.11425% 1 875 109
27 Mizoram 1,091,014 0.09015% 1 1109 138
28 Sikkim 607,688 0.05021% 0 0 1
NCT Delhi 16,753,235 1.38434% 21 1517 188
UT1 Pondicherry 1,244,464 0.10283% 1 972 121
UT2 Chandigarh 1,054,686 0.08715% 2 2295 285
Andaman and Nicobar
UT3 Islands 379,944 0.03140% 0 0 1
UT4 Dadra and Nagar Haveli 342,853 0.02833% 0 0 1
UT5 Daman and Diu 242,911 0.02007% 0 0 1
UT6 Lakshadweep 64,429 0.00532% 0 0 1
Total India 1,210,193,422 100%
Taking Tamil Nadu as a base, red colored states are the states which should be given preference
for consideration for channel enhancement and development.
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23. BIBLIOGRAPHY
1. „Part 6: Delivering Value‟, Marketing Management by Philip Kotler & Kevin Lane
Keller.
2. Size, Growth Rate & Distribution of Population by Census India.
Link:http://censusindia.gov.in/2011-prov-
results/data_files/india/Final%20PPT%202011_chapter3.pdf
3. Two-Wheeler Industry: Growth Drivers Intact by ICRA Rating Services, June 2011.
Link: http://www.icra.in/Files/ticker/Two-
Wheeler%20Industry%20Note,%20June%202011.pdf
4. Doing Business in India, E&Y Report 2011
Link:http://www.ey.com/Publication/vwLUAssets/Doing_business_in_India_2011/$FIL
E/Doing_business_in_India_2011.pdf
5. Case Study on Competing for Market Share in Rural India by E&Y.
Link:http://performance.ey.com/wp-content/uploads/2011/05/Competing-for-market-
share-in-rural-India.pdf
6. HMSI website: http://www.honda2wheelersindia.com/
7. Hero MotoCorp‟s Annual Reports
Link: http://heromotocorp.com/investors/financials
8. Bajaj Auto‟s Annual Reports
Link: http://www.bajajauto.com/bajaj_investor_annual_report.asp
9. The Economic Times
Link: http://economictimes.indiatimes.com/
10. The Financial Express
Link: http://www.financialexpress.com/
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