smeda distribution agency

Pre-Feasibility Study

SSMMAALLLL TTOO MMEEDDIIUUMM SSCCAALLEEDDIISSTTRRIIBBUUTTIIOONN AAGGEENNCCYY

Small and Medium Enterprise Development AuthorityGovernment of Pakistan

www.smeda.org.pk

HEAD OFFICE

Waheed Trade Complex, 1st Floor , 36-Commercial Zone, Phase III, Sector XX, Khayaban-e-Iqbal, DHA LahoreTel: (042) 111-111-456, Fax: (042) 5896619, 5899756

[email protected]

REGIONAL OFFICE PUNJAB

REGIONAL OFFICE SINDH

REGIONAL OFFICE NWFP

REGIONAL OFFICE BALOCHISTAN

Waheed Trade Complex,1st Floor, 36-Commercial Zone,

Phase III, Sector XX,Khayaban-e-Iqbal, DHA Lahore.

Tel: (042) 111-111-456Fax: (042) 5896619, 5899756

[email protected]

5TH Floor, BahriaComplex II, M.T. Khan Road,

Karachi.Tel: (021) 111-111-456

Fax: (021) [email protected]

Ground FloorState Life Building

The Mall, Peshawar.Tel: (091) 9213046-47


Bungalow No. 15-AChaman Housing Scheme

Airport Road, Quetta.Tel: (081) 831623, 831702


December, 2006

Pre-Feasibility Study Small to Medium Scale Distribution Agency

PREF-15/December, 2006/

DISCLAIMER

The purpose and scope of this information memorandum is to introduce the subject matter

and provide a general idea and information on the said area. All the material included in

this document is based on data/information gathered from various sources and is based on

certain assumptions. Although, due care and diligence has been taken to compile this

document, the contained information may vary due to any change in any of the concerned

factors, and the actual results may differ substantially from the presented information.

SMEDA does not assume any liability for any financial or other loss resulting from this

memorandum in consequence of undertaking this activity. Therefore, the content of this

memorandum should not be relied upon for making any decision, investment or otherwise.

The prospective user of this memorandum is encouraged to carry out his/her own due

diligence and gather any information he/she considers necessary for making an informed

decision.

The content of the information memorandum does not bind SMEDA in any legal or other

form.

DOCUMENT CONTROL

Document No. PREF-15

Revision 1

Prepared by SMEDA-Sindh

Approved by Provincial Chief - Sindh

Issue Date December, 2006

Issued by Library Officer



11 PPRROOJJEECCTT PPRROOFFIILLEE

11..11 PPuurrppoossee ooff tthhee DDooccuummeenntt

This document is developed to provide the entrepreneur with a potential investment opportunity in setting up and operating a Small or Medium Scale Distribution Agency. This pre-feasibility gives insights into various aspects of how to setup a distribution agencyand outlines the basic process involved in running an enterprise as a profitable business. The document is designed to provide relevant details to facilitate the entrepreneur inmaking the correct decision providing various technical as well as business details. The document also allows flexibility in change of various parameters to suit the customized needs of the entrepreneur.

11..22 PPrroojjeecctt BBrriieeff

Every small-scale entrepreneur requires a channel that can distribute his product to the right customers at the right time and at the right cost. It consists of all the middlemen which participate in the distribution of goods and which serve as a link between the manufacturer and the consumer.

Distribution is the process of moving product from business (manufacturer/producer) to the end user. This intermediary role is played by distributors who collect production from the manufacturer and ensure its availability to the end user. The term ‘Distribution’ is mostcommon for public utilities distribution i.e. electricity, gas, water etc, whereas, in the industries like Fast Moving Consumer Goods (FMCG) where mass production and its distribution is critical which accounts for 3% to 30% (of total operating costs) depending upon the industry and the product/brand’s position in the market.

For the purpose of this pre-feasibility, we have confined ourselves to the consumer goods distribution business which is rapidly increasing its market share and has enormous business potential. In Pakistan distributors work on different scale and levels, depending upon their operational capacity and the industry they are serving to. Most of the setups and businesses divide their markets into North and South regions and generally appoint more than two distribution companies for the distribution of their products. North region includes, NWFP and Punjab, whereas, South region covers Sindh and Balochistan. Different distributors are then appointed in different sales territories by the manufacturing company who evaluates the distributor for each territory using a pre-defined list of criteria.



Distribution setups generally work in the following ways:

Wholesale distributors

Using this method of distribution, manufacturers sell their product to a wholesaledistributor, who in turn sells it to a retailer or other agent for further distribution until it reaches the end user. However, the whole cycle depends on the nature of understanding between the manufacturing and the distributor. Where the brand name is so strong that manufacturer is in a position to dictate the distributor, margins are generally low and manufacturer ensures that sub distributor selected by the wholesale distributor is complying with their terms and criteria.

Retail distributor

A manufacturer may choose to sell directly to a retailer (such as a specialty store or organic food shop). The retailer then sells the product to the end user.

Brokers

Selling through a broker is similar to selling directly to a retailer but instead ofrepresenting yourself and your product, a broker is engaged to whom you pay acommission, for representing and selling the product to the retailers. This kind of distribution is common in industrial products or the products where heavy capital investment is expected. Textile sourcing agencies, industrial plants marketing companies etc. work using this type of distribution model.

Catalog house

This method of distribution involves using a catalog house to sell products. Manufacturermay be asked to pay a fee to the catalog company (distributor) to carry the product. The catalog company ships product with other products ordered from the catalog or manufacturer may be asked to direct mail the product on behalf of the catalog company.Such distribution setups are more common in developed countries.

Beside, the various types of distribution setups, product categories and the industry, type of distribution to be followed by while going into a consumer products distribution businessdepends on many factors such as expected sales volume, product promotion by the manufacturer/trader, expected geographic dispersion of customers, etc. Due to increasing population and urbanization of the economy, distribution business has now become inevitable and traditional way of doing business by direct selling to the market or maintaining own distribution setup is a highly capital intensive option. In such circumstances, outsourcing the product distribution to the intermediaries is increasing



gradually. This cements the requirement of Small to Medium Scale Distribution setups to enter the market in order to enable manufacturers to deliver items to their customersefficiently and manage them effectively.

Distribution Process

Distribution functions performed by the distributors/ intermediaries

Types of function Activities related to function

Transactional function

Buying. Purchasing products for resale or as an agent for supply of a product.

Selling. Contacting potential customers, promoting products, and soliciting orders.

Risk taking. Assuming business risks in the ownership of inventory that can become obsolete or deteriorate.

Logistical function

Assorting. Creating product assortments from several sources to serve customers.

Storing. Assembling and protecting product at a convenient location to offer better customer service.

Sorting. Purchasing in large quantities and breaking into smaller amounts desired by customers.

Transporting. Physically moving a product to customers.

Facilitating function

Financing. Extending credit to customers

Grading. Inspecting, testing, or judging products, and assigning them quality grades

Marketing information and research. Providing information to customers and suppliers, including competitive conditions and trends

Producer

Producer

Producer

Consumer

Retailer

Wholesaler

Consumer

Retailer Consumer



11..33 OOppppoorrttuunniittyy RRaattiioonnaallee

Large and growing domestic market includes above 140 million consumers with growing incomes and a growing middle-class moving to sophisticated consumption habits, currentpopulation growth, increase in per capita income, urbanization and current economic development, etc. indicate that there is an attractive opportunity for entrepreneurs to invest in the Distribution business. The demand of distribution service providers is increasing which is directly proportionate to the increase in consumer goods manufacturing companies which is expanding substantially with the current economic growth and consumerism. Thus a lucrative opportunity exists for entrepreneurs to establish their business with the growing consumer goods manufacturer(s).

11..44 IInndduussttrryy && MMaarrkkeett OOvveerrvviieeww

The manufacturing sector has improved its output in recent years, growing at a compound rate of 10.9 percent per annum during 2001 – 05. Phenomenal growth in the consumer industry over the last few years has played a major role in the expansion of service sector particularly the third party outsourcing business setups i.e. manpower leasing companies, call centers, products distribution companies etc.

This growing trend of consumerism has increased opportunities for the consumer goods distribution business in Pakistan. Currently there are a few large scale distribution setups operating in Pakistan including: Universal Distributors Limited (UDL), International Brands Limited (IBL), Burque Corporation, Premier Distributor and Muller & Phipps (M & P) etc. The aforementioned distributors also represent the formal distribution sector which is mainly located in the Southern provinces of Pakistan (Sindh and Balochistan), whereas, in the Northern provinces (NWFP and Punjab) distribution setups are largely of small scale with limited territory coverage. The aforementioned major players hold about 90% market share of big / organized manufacturers of FMCG products.

As there are no specific statistics available on this sector, according to the information provided by the industry stakeholders and existing distribution setup operators: around 60% of the total distribution is carried out using third party country wide distribution facilities. Remaining, (40% of the distributions), manufacturers undertake using their own distribution facilities. Hiring of the designated distributor is more common in Sindh as against Punjab which is the largest consumer market of Pakistan where distribution through small distribution setups is more common and appointment of a single designated distributor is reported to be rare.



Following graph presents that 67% of the total distribution industry located in Sindh where urbanization is the main factor contributing towards the growth of this sector as compared to Punjab.

Formal Sector Distribution Industry Breakup

67%

33%

Sindh Rest of Pakistan

Mainly consumer products and services distribution setups are providing services to Pharmaceuticals, Fast Moving Consumer Goods and Food Services which altogether aggregate to the total distribution industry size of Rs. 14 to 15 billion. Around 50% to 70% of this market is being tapped by the formal sector and remaining is covered by the informal sector distributors operating on regional, area or district levels. Large scale distributors also act as an introducer of world’s famous brands in the local market.

Types and categories of distributors working in Pakistan:

Institutional distributors Food Service distributors Armed Forces distributor Hotels distributor Restaurants and food outlets distributors

Distributors and their levels of distribution:

Main distributor Retail distributor Sub-distributor Handling Agent

Manufacturing or trading companies dealing in consumer goods when interested in appointing a distributor for their products, advertise in the newspapers and call for



expression of interest from the local companies interested in the distribution. Companies evaluate following capabilities of the interested distributors:

Location of distributor’s business premises; Financial position and credit standing of the distributor; Knowledge and experience of the distributor; Storage and showroom facilities of the distributor; Ability of the distributor to secure adequate business and to cover the market; Capacity of the distributor to provide after sale service; General reputation of the distributor and his sales force; Willingness of the distributor to handle the entrepreneur’s products; Degree of co-operation and promotion service he is willing to provide; Nature of other products, if any handled by the distributor.

In a country like Pakistan one needs an effective distribution system that provides market coverage and is economical. The choice of a channel by traders or manufacturers depends upon the nature of the product e.g. for low priced consumer products like soap, a vast network is needed and manufacturers prefer to higher the services of a independent distributor rather than having their own distribution setup which is a high cost option. For industrial goods, a direct channel or a very short channel is considered to be appropriate. The nature of the product- whether it is bulky or perishable for instance as well as the cost and efficiency of the distributors are some other factors that manufacturers and tradersconsider while selecting a distributor.

It is therefore suggested that availability of good brands and clients (on the list of clients of the distributor) would increase the chances for the company to qualify the bidding process; procedure followed to bid for a distribution contract advertised through Newspaper is asfollows:

Distributors are invited through newspaper advertisement to submit their application

Distributor fills the tender and submits with the application The company evaluates bidders according to prescribed criteria and makes

selection Selected distributor deposits caution money/security deposit to finalize the process.

In most of the cases where manufacturers are in a position of dictating terms and conditions with the distributor, may select separate distributor for each product category or for a group of product categories i.e. liquid product, food service, health care etc or may appoint one distributor for the distribution of all product categories.



Distributors are also not allowed by the manufacturers to deal with any of their competitor’s product of the same category. Manufacturing companies while selecting a product distributor for their products are even more conservative and intolerant to allow the distributor to deal in competitor’s products.

Incentive schemes and sales benefits generally offered by the manufacturing companies to their distributors include the following:

Product promotion, marketing and advertising

Incentive Schemes

Consumer plans Sales promotions – e.g. on sale of two carton one carton free, on sale of 100 carton

20 carton free

Credit limit for most of the distribution set-ups is from 3 to 7 days. However, this credit term is the practice of consumer goods industry. In case of top brands, i.e. Nestle Water, Lipton and Tapal Dane Dar etc., 100% advance payment is required before lifting stocks.

11..55 KKeeyy SSuucccceessss FFaaccttoorrss//PPrraaccttiiccaall TTiippss ffoorr SSuucccceessss

The four critical success factors that affect the decision to invest in the proposed business setup are:

i) Products and brand

Above all factors, brand(s) and product(s) to be distributed would act as a key success factor for the proposed distribution business. Greater the brand awareness in the market, higher would be the chances of business success. It is suggested for a prospective entrepreneur to ensure that he obtain distribution agreement for at least one successful market brand.

ii) Background Experience

Background experience plays an important role in operating a Small to Medium Scale Distribution Agency specially when dealing with customers and deciding on the business development activities to be carried out and negotiating on commercial terms and conditions, etc.



iii) Marketing Skill

Critical to the business’ success is that the entrepreneur must have effective PR & marketing skills. These marketing skills should enable the entrepreneur to carryout business development activities to target his potential customers and also to maintain his existing client base. It is advisable that the entrepreneur should have contacts in companies. Such referral network is an important asset for the entrepreneur.

iv) Strong Sub-distributor

A strong sub-distributor network also plays an important role in generating additional business. Such a network is imperative in developing a strong customer base which might remain restricted if operated singly. An entrepreneur having a background experience in market is able to quickly develop a dealer network while it takes time for an entrepreneur who is comparatively new to the business.

During the discussion with the industry experts, it was also noted that eighty twentyrule is applied to this industry. Eighty percent of the business is generated through twenty percent of the clients. It could further be elaborated as: of the total volume to be distributed in the territory, 80% of that volume would be distributed to the consumer through 20% of the outlets within the territory.

Besides above factors, following factors need a continuous focus for making the proposed setup a successful business venture:

Small Customers (Retailers)

Customer Support Service is the main interface through which the agency should be able to generate considerable revenue. Most of the distribution agencies in order to retain and attract customers offer bill collection services and delivery of goods at doorstep on weekly basis.

Skilled & Experienced Manpower

The knowledge and experience of the entrepreneur is not sufficient to run the business smoothly. A major proportion of the business development activities and accounts receivables are managed by sales personnel employed by the agency.Therefore it is crucial for the distribution agency to hire experienced and skilled



sales staff that can bring in new business with them and retain the existing customer base.

11..66 PPrrooppoosseedd BBuussiinneessss LLeeggaall SSttaattuuss

Although the legal status of business tends to play an important role in any setup, the proposed Small to Medium Scale Distribution Agency is assumed to operate on a sole proprietorship basis which may extend to partnership in case of addition of significant business to the existing setup.

11..77 PPrroojjeecctt IInnvveessttmmeenntt

Investment in a small or medium scale distribution business would largely depend on the following factors:

Distribution territory or region to be covered Population of the area Number of houses; and Family size

For the purpose of this pre-feasibility, it has been assumed that a total of Rs. 6.8 millionwould be required for establishing the business to operate on the following parameters:

Area or distribution territory distribution company will coverPopulationNo. of Houses within the areaFamily size

: About 25 KM radius: 2,000,000: 400,000: 5 persons

Item Cost (Rs.)

Premises Rent 240,000

Security Deposit/Distribution Auction Money 2,500,000

Delivery Van (3) 1200,000

Furniture 210,000

Renovation 600,000

Working Capital 2,002,500

Pre-Operating Cost 60,000

Total Cost 6,812,500



11..88 PPrrooppoosseedd PPrroodduucctt MMiixx

It has been suggested that for the proposed distribution business, the company would act as a main institutional distributor for Fast Moving Consumer Goods (FMCG) products. The business would distribute: one established tea brand, any one of packaged Milk as new brands are growing in the market and any two of confectionery products i.e. biscuits & toffee etc. These products would contribute to the total business operations with percentages of 20-25%, 15-20% and 60% respectively.

Tea, Packaged Milk and Confectionary Industries are the expanding industries with phenomenal share in the FMCG products. Among confectionery items, there are reportedly 23 units in the organized sector which together have a capacity of 30,300 metric tons of sweets, 12,000 metric tons of toffees, 7,800 metric tons of bubble gum, and 4,200 metric tons of chocolates, a combined capacity of 54,300 metric tons which definitely would need to be supported by the distributors to run the business cycle.Situation for the milk is no different. Total milk production in the country is around 32 million tons and only 0.63 million tons of milk is processed and distributed through intermediaries. Remaining milk quantities are waiting to be catered by the manufacturing industry for processing which ultimately would need distributors to get the product to the consumer.

Products for the distribution have been selected for the proposed business by foreseeing their high potential and anticipated expansion in the manufacturing of these products. However, as these products are perishable, efficient distribution operations would be necessary. In order to leverage the opportunity for further business expansion, intensive distribution practice would be followed which means that the business would place its products and services in as many outlets as possible employing the FIFO method.

It is proposed that Milk would not stay in the warehouse more than 03 days, whereas, tea and confectionery would take 07 days at most. However, it is suggested that time for a product to leave the warehouse and be distributed should be as minimum as possible.



11..99 RReeccoommmmeennddeedd PPrroojjeecctt PPaarraammeetteerrss

Gross Commission

Human Resource Equipment Location

7.4 million 20 NilMedium – High Income Locality

Financial Summary

Project Cost IRR NPV Payback PeriodCost of Capital

(WACC)Rs. 6.8 million 42% Rs.6.55 million 2 Year and 10 months 17.5%

11..1100 PPrrooppoosseedd LLooccaattiioonn

The location of the distribution agency has strategic importance for the business. The location of the agency is usually determined by the entrepreneur based on various factors. Following points must be considered when choosing a location:

The entrepreneurs choose locations like bungalows in the vicinity of the industrial areas or godowns within the industrial arras. Proximity of distribution house to the target market plays major role to cut down transportation cost and increase revenue. Besides, loading and unloading of goods would be convenient.

Many distribution agencies make use of their dealer network to obtain further contacts and keep abreast of the demand and supply situation in the market to identify opportunities for further business. A dealer network is created when theyenter into an agreement with small outlets in various / nearby locations. While such an association benefits the agency by enabling it to have a greater outreach, it also helps the agency in generating more business through the dealer network and lastly the dealers also benefits from additional business support from them.

A well populated location which fulfills all these requirements of the business suggest that location like North Karachi, Federal B. Area, Nazimabad, Gulistan-e-Jauhar would be preferable in Karachi. These areas are well populated with a good market from distribution point of view as number of All three category Shops(Category A, B and C) are located in these areas. [A category shops are those withhighest turnover, B second to A and C is the shop category with lowest among three categories. However, the definition varies and different manufacturing and distribution organizations use their own definition in broad terms.



1.11 Capital & Operational Expenditure

The distribution agency is required to establish, maintain and run the agency along with its appropriate staff at its own cost including all taxes and deal with all government departments, labor institutions and law courts independently. The manufacturing company does not bear any liability on this account.

3.7 Time Period

The agency agreement is usually enforced / effective for one year from the date of its execution, unless terminated and can be extended at the sole discretion of the manufacturing company for the next one year.

3.8 Commission

The manufacturing company will pay commission to distribution agency as per the commission structure in place, which could be revised according to the manufacturing company’s discretion and market practices.

3.9 Field Force and Vehicles Management - Technology

Integrating logistics data can help improve delivery operations of the distribution house which in turn, reduce costs and increase revenue. Acquiring private fleet management solutions include applications i.e. wireless frequency, hand held devices to record sales and distribution data while working with retailer. It would help enhances driver and dispatcher productivity and improve customer service. Tactful management of the delivery staff and vehicles using technology products may result the following:

Raise Productivity:

Improve productivity for drivers and fleet management

Integrate data with enterprise systems to help automate billing and payroll

Reduce out-of-route miles

Increase Asset Utilization:

Improve route and operational planning

Provide asset visibility and quick communication enabling more immediate, informed decision-making

Increase backhaul opportunities



Improve Customer Service:

Provide accurate ETAs (Expected Time of Arrival) and up-to-date load location and status to internal or external customers

Manage shipments to respond to problems or meet changing customer demands

Improved on-time delivery

22 MMAANNPPOOWWEERR RREEQQUUIIRREEMMEENNTT

The manpower requirement depends on the anticipated business opportunities and can be adjusted accordingly after the commencement of the operations. The following table presents the manpower requirement for the proposed distribution agency setup:

Staff Number Monthly Salary (Rs)

Owner / Manager 1 -

Sales Staff/Order Booker 4 40,000 + 8k (Commission)

Store Keeper 1 10,000

Billing Staff 1 10,000

Cashier 1 10,000

Delivery Man 2 14,000

Driver 3 15,000

Loaders 3 12,000

24 Hour Security Guard Service 4 16,000

Total 20 135,000

Owner / Manager: It is recommended that the owner should act as a Principal Manager for some time to establish staff credibility and to ensure smooth workflow.

Sales Staff/Order Booker: Will visit customers at their designated area as per schedule provided and book their orders.

Store Keeper: will be responsible for handling incoming goods from manufacturing company and issuing goods as per delivery order issued by sales department.



Cashier: will be responsible for managing funds and maintaining books of accounts. The cashier will be required to record all transactions manually and verify the same with the billing status as shown on the computer. The cashier also receives payment from outdoor sales staff and matches it with the daily sales figure reported by sales staff. Before commencing work, previous day’s position is crosschecked with the cash position to ascertain and verify the cash balances.

Billing Staff: The person is responsible for handling cash and close the position at the end of the day once all sales transactions have been entered. The cashier would subsequently crosscheck the figures before commencement of day’s operations.

Delivery Man: would be required to collect goods from Godown as per delivery orders issued by sales function and timely deliver the same to the customer.

33 LLAANNDD && BBUUIILLDDIINNGG RREEQQUUIIRREEMMEENNTT

33..11 LLaanndd RReeqquuiirreemmeenntt

The minimum requirements for a small to medium scale distribution agency premises i.e. Office, Godown and Parking which are necessary for smooth operations of this kind of set-up, would be divided as follows:

Godown 70 % 5,000 Sq. Ft.

Office Kitchen and Toilets 1-5 % 250 Sq. Ft.

Parking 25-35 % 2,000 Sq. Ft.

33..22 RReeccoommmmeennddeedd MMooddee ffoorr AAggeennccyy AAccqquuiissiittiioonn

The rent of the Agency premises would depend on the location chosen for setting up the distribution agency setup. For the purpose of this study, it is assumed that the localityshould be of medium level area having good communication infrastructure and close to the market. The office and godown for the proposed project will be acquired on a rental basisof Rs.40,000 per month with 3 month deposit and 3 month advance rent, after which rent will be payable on a monthly basis. The premises can then be acquired over a period after ensuring business sustainability.



44 FFIINNAANNCCIIAALL AANNAALLYYSSIISS && KKEEYY AASSSSUUMMPPTTIIOONNSS

The project cost estimates for setting up a distribution agency has been formulated on the basis of discussions with relevant industry experts and stakeholders. The cost projections cover the cost of premises, office equipment, manpower costs etc. The specific assumptions relating to individual cost components are given as under:

44..11 RReevveennuuee && CCoosstt PPrroojjeeccttiioonnss

Revenue projections for the proposed distribution set-up include sales streams from the following sources:

Income from Commission on Distribution Income from Manufacturer’s incentive schemes

Income from Commission on Distribution

Following four products would be distributed with the given ratio (Sales/Distribution):

i. Distribution of Tea – branded 20-25%

ii. Distribution of Packaged Milk – Branded 15-20%

iii. Distribution of Biscuit/Cookie 50-60%

iv. Distribution of Candy/Toffee/Chocolate

The sales are expected to grow at a real rate of 10% per annum for the first two years and would subsequently taper off to 7.5% for subsequent remaining years which reflect on the current and anticipated growth in the consumerism in the near future and then the saturation of the market thereof. However at the same time due to increased competition margins are also expected to go down hence the sales growth in the later years will be a reflection of this phenomenon. Similarly the cost of sales are assumed to increase by 10%for the first 2 years which would eventually go down to 5% for the remaining years signifying the incentive schemes introduced by manufacturing companies to gain market share.

Income from Manufacturer’s incentive schemes

It has been assumed that most common incentive schemes offered to the distributors would also be available to the proposed business setup with the following breakups:



SchemeUnits Available under Incentive Scheme (in ton)

i. Distribution of Tea – Branded on sale of 1000 kg 20 kg free 0.20ii. Distribution of Packaged Milk – Branded on sale of 1000 kg 30 kg free 1.50iii. Distribution of Biscuit/Cookie on sale of 1000 kg 30 kg free 1.50iv. Distribution of Candy/Toffee/Chocolate on sale of 1000 kg 25 kg free 0.25

44..11..11 GGrroossss MMaarrggiinnss//CCoommmmiissssiioonn SSttrruuccttuurree

The following table gives the Gross Margins for the proposed distribution services1:

Service Gross Margin

1. Distribution of Tea – Branded

2. Distribution of Packaged Milk – Branded3 %

3. Distribution of Biscuit/Cookie

4. Distribution of Candy/Toffee/Chocolate5 %

The margin on the sales of product differs with the denomination of different brands of products; therefore an average margin has been used to depict the income of the distribution.

44..22 OOffffiiccee FFuurrnniittuurree && EEqquuiippmmeenntt

A total of Rs 210,000 is required for purchase of office furniture and related equipment.The following table gives an assumed breakup:

1 Based on the estimates of the industry experts keeping in view the future demand



44..33 RReenntt CCoosstt

The rent for the required premises will be Rs.40,000/- per month. It is assumed that Rs. 240,000 will be given in advance before possession of premises. This will include 3 months deposit and 3 month advance rent. The rent would be payable on a monthly a basis and is expected to increase at the rate of 10% per annum for the projected period.

44..44 OOffffiiccee RReennoovvaattiioonn

It is expected that a total of Rs. 100,000 would be incurred to renovate the office before commencement of operations. For office renovation, it would include wall paint, tile-flooring, false ceiling, glass partitions, board partition, air conditioner, fancy lights, carpet,etc.

44..55 WWaarreehhoouussee RReennoovvaattiioonn

It is expected that a total of Rs. 500,000 would be incurred to repair and customize the warehouse premises before commencement of operations. It would include wall paint, Fumigation, construction and fabrication for storage and installation of cooling systems etc.

It is expected that at least two renovations will be carried out, during the projected period of 10 years. The costs would be approximately 50% of the initial value i.e. Rs 300,000 and would be incurred in Year 5 and Year 10 subsequently.

The initial cost of premises renovation is assumed to be under the following heads:

Item Number Assumed Cost (Rs.)

Waiting Chairs 10 10,000

Lounge Table 1 10,000

Sofa Set (Elegant) 2 40,000

Computer (P4) & Printer 2 100,000

Office Tables 5 15,000

Office Chairs 5 10,000

Water Cooler/Kitchen items 15,000

Cupboard / Shelves 10,000

Total 210,000



44..66 UUttiilliittiieess RReeqquuiirreemmeenntt

The following table presents the assumed breakup of utilities on a monthly basis:

Utility Monthly Charges (Rs.)

Electricity 15,000

Water 2,500

Telephone 15,000

Total 32,500

It is assumed that utilities expenses will increase by 10% every year.

44..77 DDeepprreecciiaattiioonn oonn FFuurrnniittuurree && RReennoovvaattiioonn

The treatment of depreciation on premises renovation and furniture would be on a diminishing balance method at the rate of 10%. This method is also expected to provide accurate tax treatment.

44..88 WWoorrkkiinngg CCaappiittaall && PPrree OOppeerraattiinngg CCoossttss

It is estimated that an approximate amount Rs. 6,812,500/- will be required as working capital to meet the cash requirements for initial stages. The requirement is based on the

Item Assumed Cost (Rs.)

OFFICE

False Ceiling for office 20,000

Lights & Fittings for office 10,000

Carpet for office 15,000

Air Conditioner for office and warehouse 30,000

Board Partition 10,000

Bracket Fans (6) 10,000

Others 5,000

PREMISES AND WAREHOUSE

Premises Whitewash & Paint 100,000

Construction and fabrication of storage areas 400,000

Total 600,000



security deposit for the acquisition of distribution of a good market brand (Rs. 2.5 million)for one year, after which, it will be renewed every year or some other brand may be acquired. 1.5 million will be required as cash in hand to start product distribution cycle, whereas, utilities & salaries expenses for at least three months have also been included. The following table gives the break up.

Item (Rs.)Security Deposit/Auction Money –one time expense

2,500,000

Cash in Hand 1,500,000

Utilities – 3 months costs 97,500

Salaries – 3 months costs 405,000

Total 4,502,500

The provision for pre-operating costs and other expenses are assumed to be Rs. 60,000/-which will be amortized equally over a 5 year period.

44..99 AAccccoouunntt RReecceeiivvaabblleess

Although most of the distributors work on cash in the formal sector, being new entrant in the market it has been assumed that collection period would be of 7 days to remove any entry barrier. The distributor usually settles the amount relating to billing sales to the retailer after a period of one week where brand is a cash cow.

44..1100 CCrreeddiitt PPeerriioodd ffrroomm MMaannuuffaaccttuurreerr ((AAccccoouunntt PPaayyaabbllee))

It has been assumed that the manufacturer will give a seven days credit period. For the purpose of this pre-feasibility we have assumed that Account receivable will setoff against credit.

44..1111 VVeehhiicclleess

Distribution business is a logistics business which draws a considerable investment in the goods transportation vehicles. Success of the business largely depends on the efficient transportation and delivery of products. Considering the size of territory, its geographicalspread, location and distance among the retail shops and daily volume to be delivered, two small trucks and one Suzuki pickup are assumed to be sufficient to cater the need of



business operations during the initial stages; however, in the coming years entrepreneur may add new vehicles depending on the expansion in business. For this purpose Rs. 1.2million would be required to buy vehicles in the initial stages. Depreciation on vehicles will be charged @ 10% annually.

44..1122 FFuueell aanndd MMaaiinntteennaannccee EExxppeennssee

Fuel and vehicle maintenance expense is the major operating expense while running a distribution business. For this purpose a monthly expense of Rs. 100,000/- has been assumed which will increase by 10% annually.

44..1133 FFiieelldd FFoorrccee LLiiffee aanndd AAcccciiddeennttaall IInnssuurraannccee EExxppeennssee

Due to high risk factor and life threat in any logistics business where road driving and goods transportation is a basic business need, life and accidental insurance for the field staff is a must and hence embedded in the business itself. For this purpose it has been assumed that each field worker would be provided with comprehensive group life and accidental insurance which will cost around Rs. 300,000/- annually in account of life insurance policy.

44..1144 MMiisscceellllaanneeoouuss OOffffiiccee EExxppeennsseess

A monthly figure of Rs. 15,000 is assumed to be incurred for traveling and stationery printing expenses and other office purchases which are expected to increase at the rate of 10% per annum for the projected period.

44..1155 FFiinnaanncciiaall CChhaarrggeess

It is assumed that long-term financing for 5 years will be obtained in order to finance the proposed distribution setup which would mainly include purchase of office furniture, warehouse renovation, etc. This facility would be required at a rate of 15% (including 1% insurance premium) per annum with 60 monthly installments over a period of five years. The installments are assumed to be paid at the end of every month.



44..1166 TTaaxxaattiioonn

The tax rate applicable to sole proprietorship is the same as that of the non-salaried individual. Therefore, we are assuming that the tax rate would be the same for the proposed agency setup.

44..1177 CCoosstt ooff CCaappiittaall

The cost of capital is explained in the following table:

Particulars Rate

Required return on equity 20.0 %

Cost of finance 15.0 %

Weighted average cost of capital 17.5 %

The weighted average cost of capital is based on the debt/equity ratio of 50:50.

44..1188 OOwwnneerr’’ss WWiitthhddrraawwaall

It is assumed that the owner with withdraw from the business once the desired profitability is reached from the start of operations. The amount would depend on business sustainability and availability of funds for future growth.



44..1199 KKeeyy AAssssuummppttiioonnss

ITEM ASSUMPTION(S)Sales Increase 10 % (Year 1-2), 7.5% (Year 3-10)

Increase in Cost of Sales 10 % (Year 1-2), 5% (Year 3-10)

Increase in Staff Salaries 10 % per year

Increase in Utilities 10 % per year

Increase in Rent 10 % per year

Increase in Office Expenses 10 % per year

Debt / Equity Ratio 50 : 50

Depreciation: Premises Renovation 10 % per annum (Diminishing Balance)

Furniture 10 % per annum (Diminishing Balance)

Lease Period 5 Years

Lease Installments Monthly

Financial Charges (Lease Rate) 15 % per annum

Tax Rate Applied Non-salaried Individuals



Monthly Revenue from Sales`

Unit Price (Rs) Total Sales (Rs.)

i. Distribution of Tea – branded 10 ton 200,000 2,000,000

ii. Distribution of Packaged Milk – Branded 50 ton 28,000 1,400,000

iii. Distribution of Biscuit/Cookie 50 ton 90,000 4,500,000

iv. Distribution of Candy/Toffee/Chocolate 10 ton 100,000 1,000,000

Total Monthly Revenue 8,900,000

Monthly Income from Commission on Distribution

Margin Gross Income

i. Distribution of Tea – branded 3.0% 60,000

ii. Distribution of Packaged Milk – Branded 3.0% 42,000

iii. Distribution of Biscuit/Cookie 5.0% 225,000

iv. Distribution of Candy/Toffee/Chocolate 5.0% 50,000

Income from Incentives 377,000

Monthly Income from Distributor's Incentive Schemes

Units Available under Incentive Scheme (in

ton)

Income from Incentive Scheme

(Rs.)

i. Distribution of Tea – branded on sale of 1000 kg 20 kg free 0.20 40,000

ii. Distribution of Packaged Milk – Branded on sale of 1000 kg 30 kg free 1.50 42,000

iii. Distribution of Biscuit/Cookie on sale of 1000 kg 30 kg free 1.50 135,000

iv. Distribution of Candy/Toffee/Chocolate on sale of 1000 kg 25 kg free 0.25 25,000

Income from Incentives 242,000

Total Monthly Income 619,000

Monthly Cost

Fuel Cost for Delivery Vehicles

No. of VehiclesAvg. Daily

Running

Fuel Consumption in

liter

Estimated Monthly Running in km

Total Fuel Cost

*Small truck 2200 cc (Diesel) 2 150 1,620 8,100 63,180 **Suzuki Pickup 800 cc (CNG) 1 150 405 4,050 13,365

Total Monthly Cost 76,537

* CNG rate 33 Rs./liter** Diesel rate 39 Rs./literTruck gives 5km/literSuzuki gives 10km/kg

REVENUE & COST SHEET - SMALL TO MEDIUM SCALE DISTRIBUTION AGENCY

No. of Units

Scheme



Projected Income Statement (Rs.) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Revenue 7,428,000 8,170,800 8,783,610 9,442,381 10,150,559 10,911,851 11,730,240 12,610,008 13,555,759 14,572,441 Cost of Sales 1,200,444 1,320,488 1,386,513 1,455,838 1,528,630 1,605,062 1,685,315 1,769,581 1,858,060 1,950,963

Gross Profit 6,227,556 6,850,312 7,397,097 7,986,542 8,621,929 9,306,789 10,044,925 10,840,427 11,697,699 12,621,478

General Administrative & Selling ExpensesSalaries 1,620,000 1,782,000 1,960,200 2,156,220 2,371,842 2,609,026 2,869,929 3,156,922 3,472,614 3,819,875 Utilities Expense 390,000 429,000 471,900 519,090 570,999 628,099 690,909 760,000 836,000 919,600 Rent Expense 480,000 528,000 580,800 638,880 702,768 773,045 850,349 935,384 1,028,923 1,131,815 Accidental and Life Insurance Expense 300,000 330,000 363,000 399,300 439,230 483,153 531,468 584,615 643,077 707,384 Office & Miscellaneous Expenses 180,000 198,000 217,800 239,580 263,538 289,892 318,881 350,769 385,846 424,431

Amortization 12,000 12,000 12,000 12,000 12,000 - - - - - Depreciation Expense 201,000 180,900 162,810 146,529 131,876 148,688 133,820 120,438 108,394 97,555 Subtotal 3,183,000 3,459,900 3,768,510 4,111,599 4,492,253 4,931,903 5,395,356 5,908,127 6,474,853 7,100,659 Operating Income 3,044,556 3,390,412 3,628,587 3,874,943 4,129,676 4,374,886 4,649,569 4,932,300 5,222,846 5,520,819

Financial Charges (15% Per Annum) 477,851 398,348 306,064 198,946 74,607 - - - - -

Earnings Before Taxes 2,566,705 2,992,064 3,322,523 3,675,997 4,055,068 4,374,886 4,649,569 4,932,300 5,222,846 5,520,819 Tax 641,676 748,016 830,631 918,999 1,013,767 1,093,722 1,162,392 1,233,075 1,305,712 1,380,205 Net Profit 1,925,029 2,244,048 2,491,892 2,756,998 3,041,301 3,281,165 3,487,177 3,699,225 3,917,135 4,140,614

Monthly Profit After Tax 160,419 187,004 207,658 229,750 253,442 273,430 290,598 308,269 326,428 345,051

SMALL TO MEDIUM SCALE DISTRIBUTION AGENCY



Projected Balance Sheet (Rs.) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

AssetsCurrent Assets

Cash & Bank Balance 2,002,500 3,645,966 5,088,849 6,549,202 7,911,261 8,698,633 10,128,486 11,249,483 11,569,145 11,094,674 9,532,842Security Deposit/Auction Money 2,500,000 2,500,000 2,500,000 2,500,000 2,500,000 2,500,000 2,500,000 2,500,000 2,500,000 2,500,000 2,500,000Prepaid Rent 240,000 240,000 240,000 240,000 240,000 240,000 240,000 240,000 240,000 240,000 240,000Pre Operating Costs 60,000 48,000 36,000 24,000 12,000 0 0 0 0 0 0

Total Current Assets 4,802,500 6,433,966 7,864,849 9,313,202 10,663,261 11,438,633 12,868,486 13,989,483 14,309,145 13,834,674 12,272,842

Fixed AssetsDelivery Vehicles 1,200,000 1,080,000 972,000 874,800 787,320 708,588 637,729 573,956 516,561 464,905 418,414Furniture & Fixtures 210,000 189,000 170,100 153,090 137,781 124,003 111,603 100,442 90,398 81,358 73,222Premises Renovation 600,000 540,000 486,000 437,400 393,660 654,294 588,865 529,978 476,980 429,282 686,354

Total Fixed Assets 2,010,000 1,809,000 1,628,100 1,465,290 1,318,761 1,486,885 1,338,196 1,204,377 1,083,939 975,545 1,177,991

Total Assets 6,812,500 8,242,966 9,492,949 10,778,492 11,982,022 12,925,518 14,206,682 15,193,859 15,393,084 14,810,219 13,450,833

Owner's Equity 3,406,250 5,331,279 7,155,326 9,107,218 11,084,216 12,925,518 14,206,682 15,193,859 15,393,084 14,810,219 13,450,833

Long Term Liability 3,406,250 2,911,688 2,337,622 1,671,273 897,806 0 0 0 0 0 0

Total Equity & Liabilities 6,812,500 8,242,966 9,492,949 10,778,492 11,982,022 12,925,518 14,206,682 15,193,859 15,393,084 14,810,219 13,450,833




Projected Statement of Cash Flows (Rs.) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Cash Flow From Operating Activities

Net Profit 0 1,925,029 2,244,048 2,491,892 2,756,998 3,041,301 3,281,165 3,487,177 3,699,225 3,917,135 4,140,614Add: Depreciation Expense 0 201,000 180,900 162,810 146,529 131,876 148,688 133,820 120,438 108,394 97,555

Amortization Expense 0 12,000 12,000 12,000 12,000 12,000 0 0 0 0 0

Net Cash Flow From Operations 0 2,138,029 2,436,948 2,666,702 2,915,527 3,185,177 3,429,853 3,620,997 3,819,663 4,025,529 4,238,169

Cash Flow From Financing Activities

Receipt of Long Term Debt 3,406,250Repayment of Long Term Debt (494,562) (574,065) (666,349) (773,468) (897,806)Owner's Equity 3,406,250 (420,000) (540,000) (780,000) (1,200,000) (2,000,000) (2,500,000) (3,500,000) (4,500,000) (5,500,000)

Net Cash Flow From Financing Activities 6,812,500 (494,562) (994,065) (1,206,349) (1,553,468) (2,097,806) (2,000,000) (2,500,000) (3,500,000) (4,500,000) (5,500,000)

Cash Flow From Investing Activities

Security Deposit - Acquisition of Distribution (2,500,000)Security Deposit - Warehouse and Office (240,000)Renovation (600,000) (300,000) (300,000)Preoperating Costs (50,000)Delivery Vehicles (1,200,000)Furniture (210,000)Preliminary Expenses (10,000)

(4,810,000) 0 0 0 0 (300,000) 0 0 0 0 (300,000)

NET CASH FLOW 2,002,500 1,643,466 1,442,882 1,460,353 1,362,060 787,371 1,429,853 1,120,997 319,663 (474,471) (1,561,831)

Cash at the Beginning of the Period 0 2,002,500 3,645,966 5,088,849 6,549,202 7,911,261 8,698,633 10,128,486 11,249,483 11,569,145 11,094,674Cash at the End of the Period 2,002,500 3,645,966 5,088,849 6,549,202 7,911,261 8,698,633 10,128,486 11,249,483 11,569,145 11,094,674 9,532,842


smeda distribution agency

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