The Distributor Who Became a Competitor
Padma Ceramics Ltd sells through 40 independent distributors. Its largest, accounting for 28% of revenue, has begun private-labeling a competing ceramic line sourced from a lower-cost manufacturer and is now selling it alongside Padma's products to the same retailers. Padma's gross margin is 22%; the distributor's private label likely carries 35%+. Padma's sales director proposes terminating the distributor immediately. The finance director notes that losing 28% of revenue would cut contribution by an estimated Tk 45,000,000 against fixed costs of Tk 60,000,000, and that no replacement distributor is identified. Padma has excess capacity and a strong brand with end consumers.
1. Analyse the strategic situation using the relevant strategy frameworks and recommend a course of action.
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Diagnosis. Padma is facing channel conflict and disintermediation risk: its distributor has backward-integrated into private label and is now a competitor inside Padma's own route to market. The distributor's incentive is structural - a 35%+ margin on private label versus 22% on Padma - so appeals to loyalty will not work.
Porter's Five Forces lens: the distributor has gained bargaining power by acquiring an alternative supply source; Padma's dependence (28% of revenue) is a vulnerability, not a strength.
The sales director's proposal is wrong on the numbers. Terminating now removes 28% of revenue and Tk 45,000,000 of contribution against Tk 60,000,000 fixed costs - a swing to a loss of roughly Tk 15,000,000 before any replacement. The distributor knows this; the threat of termination is weak unless Padma has an alternative channel ready.
Recommended sequence:
- Do not terminate yet. Build the alternative first: recruit and onboard replacement distributors in the affected territories, or develop direct-to-retailer or e-commerce channels. Termination is the last step, not the first.
- Segment the relationship. Continue supplying where the distributor still adds value; reduce exposure in territories where private label is displacing Padma.
- Strengthen the brand with end consumers - the distributor's private label competes on price; Padma competes on brand. Consumer pull reduces the distributor's power.
- Renegotiate terms with volume tiers and a clear policy on competing lines, enforced consistently across all 40 distributors.
- Reduce concentration. Set a policy cap (e.g. no distributor above 15% of revenue) and build toward it.
Judgement tested: the candidate must resist the emotionally satisfying 'terminate the traitor' answer and recognise that channel power is about alternatives, not intent.
2. The distributor offers a deal: it will drop the private label if Padma grants an extra 5% margin. Quantify and evaluate.
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Quantification. Revenue base attributable to the distributor: if total revenue is R, the distributor is 0.28R. An extra 5% margin on that revenue costs 0.05 × 0.28R = 0.014R, i.e. 1.4% of total revenue - and it comes straight off contribution.
Against the alternative: losing the distributor costs Tk 45,000,000 of contribution (given). The concession costs 1.4% of total revenue. If total revenue is, say, Tk 300,000,000, the concession is Tk 4,200,000 - roughly one-eleventh of the loss from termination. On pure numbers, the deal looks attractive.
But evaluate the strategic terms, not just the price:
- Precedent. Granting 5% to the largest distributor invites the other 39 to demand the same. If applied across the base, the cost is 5% of total revenue - potentially larger than the loss from one distributor.
- Credibility. The distributor has already demonstrated willingness to compete with Padma. A margin concession rewards that behaviour and may be repeated.
- Enforceability. The 'drop the private label' promise needs a contractual term with a defined remedy, not a handshake.
Recommendation: counter with a time-bound, non-precedent arrangement - a 2–3% margin improvement tied to volume growth and a contractual exclusivity clause, explicitly ring-fenced to this distributor, with a review date. Use the period to build alternative channels. Do not grant 5% unconditionally, and do not terminate today.