Fako Soap: Choosing Between Wholesalers, a Supermarket and Direct Retailers
Fako Soap Ltd in Limbe produces 20,000 cartons of laundry soap a month. Its ex-factory price is FCFA 4,500 per carton; average production cost is FCFA 3,800. At present it sells through 12 wholesalers who buy at FCFA 5,000 and resell to retailers at FCFA 5,800. Retailers sell at FCFA 6,500. A national supermarket chain has offered to buy 4,000 cartons monthly at FCFA 5,100 but demands 60 days' credit and delivery to its Douala warehouse. Separately, 40 retailers in Bamenda have formed a buying group and ask to buy directly at FCFA 5,400, collecting from Limbe with their own transport. Fako Soap has FCFA 6,000,000 cash and currently gives wholesalers 30 days' credit. Its production capacity is 25,000 cartons a month. The manager fears losing wholesalers and tying up cash.
1. Calculate Fako Soap's monthly contribution from its current wholesale channel and from the supermarket offer, ignoring transport and credit costs. Advise whether the supermarket offer is financially attractive.
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Current wholesale channel: contribution per carton = FCFA 5,000 − FCFA 3,800 = FCFA 1,200. For 20,000 cartons: 20,000 × 1,200 = FCFA 24,000,000 per month.
Supermarket offer: contribution per carton = FCFA 5,100 − FCFA 3,800 = FCFA 1,300. For 4,000 cartons: 4,000 × 1,300 = FCFA 5,200,000 per month.
At first sight the supermarket gives FCFA 100 more per carton. The judgement depends on whether the 4,000 cartons are additional sales or replace wholesale sales:
- If they are additional, using idle capacity (capacity is 25,000, current output 20,000), the extra contribution is FCFA 5.2m before credit and delivery costs.
- If they replace 4,000 wholesale cartons, the gain is only 4,000 × FCFA 100 = FCFA 400,000. The 60-day credit ties up 4,000 × FCFA 5,100 = FCFA 20.4m. At an assumed 12% annual cost, 60 days costs about FCFA 20.4m × 12% × 60/360 = FCFA 408,000. The gain is almost wiped out.
Advice: accept only if the volume is genuinely incremental, or negotiate 30-day credit, a higher price or a smaller trial order. Do not divert existing wholesale sales to a lower-margin credit channel.
2. Evaluate the Bamenda retailers' direct-purchase proposal, considering channel conflict, transport, credit and administrative cost.
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The direct price of FCFA 5,400 gives a contribution of FCFA 1,600 per carton, FCFA 400 more than the wholesaler price. The retailers collect from Limbe, so Fako Soap avoids outward transport, and cash collection reduces credit risk. The buying group could also give useful market feedback and loyalty in Bamenda.
However, the volume is unknown and may be small and irregular. Serving 40 retailers directly means 40 accounts, invoices, follow-up and possible returns; this administrative cost can absorb the extra FCFA 400. More seriously, it bypasses the 12 wholesalers who currently provide bulk orders and take credit risk. If they feel undermined, they may switch to competing soap brands, and Fako Soap could lose more volume than the buying group can replace.
A better judgement is to avoid a full bypass. Options include: (a) supply the Bamenda group through one of the existing wholesalers, giving that wholesaler a small redistribution margin; (b) set a minimum order and cash payment for direct buyers; or (c) run a limited pilot with 5–10 retailers while assuring wholesalers that their terms remain protected. The direct channel should be judged on incremental contribution after administration and on whether it damages the wholesale network.
3. Recommend a distribution strategy that balances growth and channel relationships.
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Fako Soap should adopt a segmented multi-channel strategy rather than replacing one channel with another.
- Protect the core: keep the 12 wholesalers for the mass market, with clear territories and a written 30-day credit limit. Give them first refusal on large orders.
- Treat the supermarket as a separate account: negotiate 30 days or a 2% early-payment discount, set a credit limit, and require delivery schedules that fit Fako's transport. Use the supermarket for brand visibility, not for volume at any price.
- Manage Bamenda through a redistributor: appoint one wholesaler or a buying-group leader to serve the 40 retailers. This keeps one account, reduces administration and preserves the wholesale network.
- Use pack differentiation: sell a smaller, lower-priced pack to retailers and a bulk pack to wholesalers so the channels do not undercut each other.
- Monitor contribution after credit: calculate margin after credit cost, transport and bad debts for each channel monthly.
The aim is to use idle capacity (5,000 cartons) for incremental sales without destroying the wholesalers who provide stable volume and credit coverage.