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ALLIED MARKETING (PRIVATE) LIMITED, LAHORE

Since January 1992, Ahmad Hasnain, Director of Allied Marketing (Private) Limited (AML),
one of the Lahore distributors of Pakistan Tobacco Company Limited (PTC), was under
constant pressure from PTC to increase sales. AML sales of PTC brands over the last few years
were showing signs of stagnation. The PTC management wanted AML to increase its sales force
to boost sales, but Hasnain was not sure that this increase would improve the profitability of his
Company. He was also concerned about the effect this increase in sales force would have on the
average compensation of his salesmen. In June 1992, Hasnain decided that it was about time he
had a detailed assessment of the optimal size of the sales force for PTC distribution.

Another issue which currently occupied Hasnain’s attention was to reduce his Company’s
dependence on the wholesaler. After considerable effort, he had reached a level, in December
1991, where only 20% of the distribution of PTC brands was through the wholesaler; the
remaining being through the retailer. Hasnain deemed the wholesaler as a ‘necessary evil’ but
wanted to reduce dependence on him even further. He knew that in the issue of increasing the
sales force, there was a trade-off in this strategy. While less dependence on the wholesaler would
minimise the adverse effect of some of the practices of the wholesaler on AML’s trade,
significant costs were being incurred in increasing the penetration of the retail channel of
distribution. Hasnain wondered how far he should go in reducing his dependence on the
wholesaler.

EARLY DEVELOPMENTS

Hasnain’s family was in the trading business for nearly 100 years. It was the year 1898, when
Haji Sheikh Mohammad Din, Hasnain’s great grandfather, started a business of chinaware in
Dabbi Bazar, which at that time was the centre of commercial activity in the walled city of
Lahore. This business later developed into a firm known as S.M. Ilyas and Sons. Sheikh
Mohammad Din, actively assisted by his son, Sheikh Mohammad Ilyas, gradually expanded his
business into the manufacture of steel trunks. According to Hasnain, business flourished in both
fields, and yielded handsome dividends.

S.M. Ilyas and Sons was granted an agency business of Scissors brand cigarettes for the entire
Punjab Province by Bakhsh Elahi and Company, Dehli, in 1905. At that time, Bakhsh Elahi and
Company was the sole agent of the Imperial Tobacco Company Limited of India.
This case was written by Assistant Professor Irfan Amir under the supervision of Professor Waseem Azhar at
the Lahore University of Management Sciences to serve as a basis for class discussion ra ther than to
illustrate either effective or ineffective handling of an administrative situation. This material may not be
quoted, photocopied or reproduced in any form without the prior written consent of the Lahore University of
Management Sciences.

 1993 Lahore University of Management Sciences

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In 1914, Lever Brothers, a major multi-national company, gave the distributorship of their
famous Sunlight soap to S.M. Ilyas and Sons for the Lahore market. Subsequently, the
distribution of other products of Lever Brothers was also given to S.M. Ilyas and Sons. These
products included soap and toiletries, and vegetable oil. In 1927, S.M. Ilyas was given the
distribution rights of several brands of Imperial Tobacco Company Limited for the Lahore
market.

After independence in 19471, Imperial Tobacco Company and Lever Brothers established
separate companies for Pakistan. Imperial Tobacco Company started trading under the name of
Pakistan Tobacco Company Limited and Lever Brothers became Lever Brothers Pakistan
Limited. S.M. Ilyas and Sons continued to handle the distribution of these two companies.

Over the years, S.M. Ilyas and Sons also managed the distribution of several other popular
products for the Lahore market. These products included Lipton Tea, A. Wander’s Ovaltine,
Abbott Pharmaceuticals, ICI Pharmaceuticals, Pakistan Ind ustrial Development Corporation
(PIDC) cement and fertilizer, and Fauji Cereals. The distribution for these products was
discontinued due to policy changes of the manufacturers and S.M. Ilyas and Sons.

For a number of years, Sheikh Mohammad Ilyas managed the entire business himself. In 1938,
his eldest son S.M. Ikhlas joined the firm. Two years later S.M. Ilmas, the second son, also
joined, as working partner. The two younger sons, S.M. Riaz and S.M. Fayyaz joined the firm in
1950 and 1953 respectively. In 1959, this joint family business was converted into a private
limited company. The four brothers were appointed as working directors, with Sheikh
Mohammad Ilyas as the Chairman of the Company. The Company continued to receive guidance
and directions from the Chairman, till his death in May, 1969.

After the death of Sheikh Mohammad Ilyas, Sheikh Mohammad Ilmas (Hasnain’s father) took
over as Chairman. S.M. Ilyas and Sons continued to be the distributors for PTC and Lever
Brothers Pakistan Limited. Over the years, the area assigned for distribution had decreased.
According to Hasnain, this was the result of several factors, including increase in population,
changes in manufacturers’ policies with regard to coverage, and productivity.

ALLIED MARKETING (PRIVATE) LIMITED

In 1984, S.M. Ilyas and Sons was divided into two companies: Allied Marketing (Private)
Limited (AML) and United Marketing Limited. S.M. Ilmas became the Chairman of Allied
Marketing (Private) Limited. AML was given the distribution of Pakistan Tobacco Company
Limited (PTC) for part of the Lahore market. United Marketing Limited was assigned the
distribution of PTC brands for a part of the Lahore market not covered by AML. The
distribution of all products of Lever Brothers Pakistan Limited for part of the Lahore market was
also given to AML.

1
In August 1947, The Indian Sub-continent was divided into two sovereign states: Pakistan and India.

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Two separate sales departments, headed by sales managers, were set up to cater to the two
manufacturers: PTC and Lever Brothers Pakistan Limited (see Exhibit 1). The management of
Allied Marketing (Private) Limited concentrated on developing its allotted sales territory,
especially new areas like Defence, Faisal Town, and Green Town.

In 1992, AML handled the distribution for a part of Lahore market of all products and brands of
Pakistan Tobacco Company, Lever Brothers Pakistan Limited, and Mohsin Matches. The
distribution for Mohsin Matches was awarded in 1988. However, AML did not have a separate
sales set-up for Mohsin Matches. The salesmen for PTC brands carried the cartons of Mohsin
Matches with them on their field visits. According to Hasnain, the distribution of matches used up
only minimal warehousing space and other resources of the Company.

For the distribution of products of Lever Brothers Pakistan Limited, the total cost of supporting
the sales force (including salesmen salaries and commission, vehicles, and other direct selling
expenses) was shared equally by Allied Marketing (Private) Limited and Lever Brothers Pakistan
Limited. However, for PTC brands, all selling costs 2 were borne by AML.

PTC DISTRIBUTION

PTC sold all its brands including Gold Leaf, Capstan, Wills, Player’s No. 6, Gold Flake,
Embassy, and Scissors entirely through distributors. PTC had three distributors for the Lahore
market: Allied Marketing (Private) Limited, United Marketing Limited, and Fair Marketing
Limited. In 1991, market share by volume of these distributors was as follows:

AML 37%, United Marketing Limited 33%, and Fair Marketing Limited 30%.

AML worked on commission as a PTC distributor. AML’s main responsibilities were: proper
market coverage, achievement of sales targets, providing distribution logistics such as godown,
vehicles, and maintaining a trained and motivated sales force. PTC was responsible for product
quality, advertising and promotion, pricing, and safeguarding AML against malpractices in the
trade like cross-territory sales3, and cigarette smuggling.

PTC put a lot of pressure on its distributors to meet sales targets. According to Hasnain, though
the primary basis of distributor performance evaluation was sales volume, other criteria included
target market coverage, and maintenance of adequate stock levels.

The practice of cross-territory sales was a major problem. If a distributor whose territory had
been infiltrated obtained some proof, like cash memos, he could complain to the manufacturer.

There was no open price competition among distributors as prices were set by PTC. However,
according to Hasnain, the distributor who operated in the cigarette ‘mandi’ 4, near Aibak Road,
delivered products to the wholesalers at rates lower than the PTC’s scheduled rates for the
wholesale market. This was a cause of concern for the other two distributors of PTC. PTC knew

2
The selling costs did not include ad vertising and promotion costs. All such costs were borne by PTC.
3
One distributor selling products in the territory allocated to another.
4
A wholesale market.

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about this practice, but was unable to eliminate or reduce this problem due to difficulty in finding
proof against cut-rate deliveries. The salesmen indulging in this practice issued cash memos at the
scheduled selling price but passed discounts under the counter.

Another level of competition was with the distributors of other tobacco companies. PTC
competed for the share of the cigarette market with Lakson Tobacco Company, Premier
Tobacco Industries5, Souvenir Tobacco Company, Saleem Cigarette Industries, Sarhad
Cigarette Industries, and United Tobacco Industries. All these cigarette manufacturers sold
through distributors. (See Exhibit 2 for a comparison of market performance of major tobacco
companies).

Smuggling of cigarettes was a major problem for cigarette manufacturers in Pakistan. Since over
70% of the retail price was due to taxes, sellers of smuggled cigarettes had a great price
advantage over the legitimate sellers. Some PTC brands, especially Gold Leaf and Capstan were
particularly affected by smuggled brands such as Dunhill, Rothmans, Marlboro, Benson and
Hedges, State Express 555, and some Japanese brands (especially Mild Seven). According to
Hasnain, the cigarette industry had lobbied the government to stop the flow of smuggled brands,
but to no avail. Although the government had once announced a fine of Rs 5,000 for trading in
foreign cigarettes, a lack of enforcement of this law allowed the cigarettes to be widely available
in the open market. According to an industry estimate, in 1990, the cigarette industry had lost
20% of the higher-priced brands market to smuggled cigarettes.

SALESMEN COMPENSATION

AML increased its PTC sales force from 14 salesmen (called carriers) in 1986, to 21 in 1990.
The total sales territory over this time period remained the same; the territory was reorganised to
assign additional salesmen. However, the increase in sales through addition in sales force was
small, resulting in a drop in average carrier’s compensation.

By late 1990, the carriers expressed serious concern about the decrease in their average monthly
take-home pay. The Company decided to review carriers compensation system. The claims
made by the carriers with regard to decline in their take-home pay were evaluated (see Exhibit
3).

The total take-home pay of a salesman had two components: ‘token money’ and commission.
Each carrier was paid a fixed sum of Rs 500 as token money per month plus commission. The
rate of commission varied across brands.

For salesmen who were regular employees, employers had extensive obligations according to the
Labour Laws6. AML had a legal agreement with the carriers which stipulated that they were not
Company employees. They would act as carriers with limited obligations on part of the
Company. In the agreement, it was stated that the carriers would be entitled to commission only.

5
Lakson Tobacco Company and Premier Tobacco Industries were under one management since 1986. The
new company was called the Lakson Premier Group.
6
As stipulated in the Industrial Relation Ordinance, 1969.

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There was no mention of any fixed, token money. Legally, token money could be treated as a
salary.
In early 1991, the Company decided to abolish token money and increase the carriers’ rate of
commission. Different rates of commission were set across carriers for the same brand on
account of factors like seniority of the carrier, and area potential for the brand. The AML
management deemed this change in the compensation system necessary as it would relieve the
Company from the obligation of paying a carrier a fixed amount of money. The management also
thought that the increase in the commission rates would result in an increase in both carriers
average commission and Company sales. From early 1991, the carriers were on commission
basis only. The monthly average compensation for a carrier increased from Rs 2,346 in 1990 to
Rs 2,688 in 1991.

Two incentive schemes were in operation at AML. An additional incentive was available to a
carrier in the form of a fixed sum of money, typically, Rs 0.50 for each productive sales call. This
incentive was used to increase brand availability, particularly for new brands. Another sales
incentive was available to carriers for performance above sales targets. Sales performance above
allocated sales targets for each of the 21 carriers was ranked and cash awards given to carriers
who achieved first three positions. These awards were given every month. The monthly sales
targets for carriers were set by adding a percentage to the average performance over the recent
three months. Some adjustments were made for seasonal and market trends in cigarette sales.

OPTIMAL SALES FORCE SIZE

Hasnain restructured his carriers compensation system, but was not sure if he had the optimal
number of salesmen. He was under constant pressure from PTC to increase the number of
carriers. Ideally, he wanted to find out the level of sales force which could achieve the three
objectives simultaneously: higher sales, higher profits, and higher average carrier’s compensation.

To determine the optimal number of carriers, Hasnain asked his sales manager to gather some
data about sales territories, carriers’ performance, and selling costs (see Exhibits 4 to 8).

THE WHOLESALE-RETAIL SPLIT

AML distributed PTC cigarettes through two main types of distribution channels: retailers and
wholesalers. The retail channel included direct delivery (DD) outlets, army canteens, and outlets
in villages. Through considerable effort, Hasnain had managed to achieve about 80% distribution
through the retail channel and 20% through the wholesale channel by December 1991 (see
Exhibit 9). The retail market coverage was increased by increasing the direct delivery sales force.
For the wholesale trade, there was only one salesman. Hasnain wondered whether or not he
could eliminate the wholesaler from his distribution network.

Hasnain also felt strongly about some of the malpractices by the wholesalers. He mentioned the
following specific activities on part of the wholesaler:

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• The PTC scheduled rates did not remain stable because wholesalers indulged in cut rates
by selling to the retailer at rates lower than PTC’s scheduled price for sale to the retailer.

• ‘Cross-territory’ sales took place through the wholesale trade.

While Hasnain was critical of these activities, he acknowledged that increasing emphasis on the
retail channel was not easy. He noted that the retailers were inclined to contact the wholesaler
because of the lower rates, availability of different brands, credit facilities, and longer working
hours of wholesalers. Hasnain remarked:

To cater to retail trade is tough in that you need more resources: carriers, vehicles,
etc. The overheads are high. However, the retail margins are better than the
wholesale margins and perhaps worth the extra effort required to manage the retail
trade.” Exhibit 10 shows margins for different channel members.

Implied in Hasnain’s remark, was a touch of ambivalence about the rationale of his strategy of
cutting dependence on the wholesale trade and the degree to which he should pursue this
strategy. Hasnain wondered up to what extent he could bypass the wholesaler.

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Exhibit 2
ALLIED MARKETING (PRIVATE) LIMITED

Market Share by Sales Volume*

(in %)

NATIONAL MARKET

1989 1990 1991

PTC 50% 46% 43%

LAKSON + PREMIER 19% 13% 15%
SOUVENIR 14% 15% 17%
OTHERS 7% 26% 25%
100% 100% 100%

LAHORE MARKET

PTC** 44% 44% 54%***

LAKSON + PREMIER 14% 12% 13%

SOUVENIR 11% 12% 12%
OTHERS 31% 32% 21%

100% 100% 100%

* Accurate market share of cigarette companies by rupee sales was difficult to determine
because of the existence of two types of companies in the cigarette industry. The first
type was the ‘organised sector’, where companies registered accurate sales figures. The
second type was the ‘tax evaders’. These companies colluded with excise duty
inspectors posted at the factory to record sales lower than their actual value.

** In 1991, percentage share of the volume sales of the three distributors was as follows:
AML 37%; United Marketing Limited 33%; and Fair Marketing Limited 30%.

*** The market share soared because of high growth in the GOLD FLAKE brand. This
growth was due to a comparatively low price and promotional efforts.

Source: Information Collected from Leading Tobacco Companies in Lahore

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Exhibit 3
ALLIED MARKETING (PRIVATE) LIMITED

Monthly Average Compensation Per Carrier

Year Number of DD* Monthly Average

Carriers Compensation Per Carrier
(Rs)

1986 14 2,786

1987 15 2,472

1988 18 2,292

1989 21 2,003

1990 21 2,346

* Direct delivery.

Source: Company Records

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Exhibit 4
ALLIED MARKETING (PRIVATE) LIMITED

Market Coverage, Sales Staff, Vehicles

(December 1991)

LAHORE – B (MAIN AREAS)

Gulberg, Defence, Cantt, Ferozepur Road, Walton Road, Officers’ Colony, Cavalry Ground,
Model Town, Township, Green Town, Faisal Town, Garden Town, Samanabad, Multan Road,
Sanatnagar, Krishan Nagar, District Courts, Sanda, Gulshan Ravi.

COVERAGE

(NUMBER OF OUTLETS) FREQUENCY OF COVERAGE

DAILY THRICE PER TWICE PER
WEEK WEEK

RETAILERS 4,089 240 160 3,689

WHOLESALERS 58 - 38 20

Source: Company Records

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