Analysis of Red Bull Distribution Channel

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Comparative analysis of the distribution channels between Red Bull energy drink and major carbonated beverages Issues, recommendations and their implications

SDM Section A
Anshul Sehgal – 10P010 Kayarat Ajit Krishnan – 10P023 Esha Sharma – 10P075 Jayant Bahel – 10P081 Mohit Ahuja – 10P090

Issue: Price volatility in Red Bull products being sold to retailers and wholesellers

Till 2009 Red Bull refrained from selling to wholesellers and used to sell the product to retailers at a single price. They relied heavily on store executions to get the necessary retail push. Since 2009, Red Bull has begun selling to wholesellers and began the practice of price cutting. The reasons for these changes in strategy was that the competition in the energy drink segment was increasing through the improved presence of XXX and Cloud9. As a result of these changes there is a high volatility in the prices of Red Bull in the retail channels. There are two consequences to high price volatility/price cutting: 1. Lower margins to the company: Selling at multiple price points and focusing heavily on retail push will lose the company a lot of money which it would have been entitled to had it sold on a single price. 2. Retailers remain confused regarding their costs for stocking Red Bull. Also, retailers complain about missing out on short-lived lucrative prices as they were already well stocked and couldn’t afford to buy more from the distributor when the low price was on. The cost per can of Red Bull varies from Rs 65 – Rs 75. The MRP of the product is Rs 85. Hence the retail margins vary from 11.7% to 23.5%.

Recommendations:
Red Bull should stop the practice of volatile pricing and should go back to implementing a single

landing price for retailers. Price volatility and the consequent high retail push makes sense for products that have a high amount of competition and low pull. This is also an effective strategy when the company is unable to execute the retail stores effectively. But, Red Bull is the leader of the category and currently there is no visible competition for it. (Neither Cloud 9 nor XXX nor Burn have managed to make a dent in the market and none have a pan-India presence). Also Red Bull as a product has a high amount of retail pull. Both these facts negate the need for price cutting, which was a strategy by Red Bull India to eliminate the emerging competition in 2009. Also, while implementing the single pricing strategy, Red Bull should concentrate on store executions heavily to offset the higher cost of the product to the retailer.

Implications:
On raising the prices to a single price level, the sales would be expected to take a hit. Retailers would not be happy with the rise in prices and would stock lower quantities. Also, strong protests from retailers should be expected. But due to the high pull for Red Bull, the hit in sales would be short lived and the company should be able to realize the benefits for a single price level in a short time.

Issue: Dependence on one partner
Traditional distribution outsourcing involves hiring a third party to store and distribute your products through its national or international distribution network; this party provides the staff, warehouses, distribution center and transportation fleet. This model may be right for the company currently as the costs of setting up its own infrastructure would not be justified for the current market size. But this may not be the best bet in the long run. Currently, the distribution of Red Bull in India is handled by The Narang Group. They are distributors of premium waters, including Qua, Evian and Perrier; functional and juice drinks, such as Qua+, Red Bull, Orangina and Rani; and coffee and chocolates including La Marzocco, Franke, Ronnefeldt and Lindt. The energy drinks category is expected to be worth Rs 1000 Cr by the end of 2012, and futher consistent growth is expected. It would then be viable for Red Bull to take over the...
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