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Lessons from Philip Fisher - VI - Views on News from Equitymaster
 
 
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  • Apr 16, 2012

    Lessons from Philip Fisher - VI

    In today's competitive world, spectacular production, sales, and research are the main foundations on which great companies are built. All of these are essential for success. If any of these factors are taken for granted, shareholder returns will subsequently suffer. In our earlier articles we focused on the research and development aspect of things. But, in this article we will focus on the ‘most basic single activity of any business' - i.e. sales.

    According to Phillip Fisher - without sales, survival is impossible. And companies cannot succeed without the ability to generate repeat sales from satisfied customers. Without sales there would be no profits, and eventually no business. Let's look back at the dotcom bust. During the tech bubble, dot-coms would show phenomenal growth in sales. But, was this sustainable? One dot-com would exchange advertising space on its website in exchange for advertising space on another and record it as a sale on the P&L account. So in reality no one paid any money to the company and hence there was no receipt of any money either. For a savvy investor - this would be extremely fishy.

    So, how does an investor measure the sales and distribution efficiency of his or her potential investment? Well, it is relatively easy to create ratios and analyse financial structures, production costs and R&D expenses. But, to judge the efficiency of sales and distribution channels is tougher. Thus, this important aspect of a firm's operations is often ignored by investors

    Well, the answer lies in the scuttlebutt. One can easily learn about the efficacy of a company's sales organization from sources outside the company. Competition and customers have all the answers. The effort an investor spends on researching this will be well worth his or her time.

    What kind of effort does the company put in training its sales staff? How does it select its sales personnel? How does the sales staff engage a potential customer? What happens after a sale? The answers to these questions can provide valuable insights to any investor.

    Let's now look at a few examples to help drive the point home:

    • Hindustan Unilever's (HUL) distribution network is enviable and reaches even the remotest Indian villages. It has a strong and efficient distribution network with a direct coverage of over 2 m retail outlets. These comprise of 12.5 lakh outlets are present in urban region and 7.5 lakh outlets in villages and are serviced through manufacturing plants in 70 locations, 43 depots and 2,400 distributors. The company has doubled its direct outreach during the past two years by tripling reach in rural India to 7.5 lakh stores in 2010. This is something that cannot be easily replicated, and helps drive sales. HUL's presence across all distribution channels from family grocer to rural to modern trade makes it a strong player as increased penetration and reach plays a very important role for FMCG companies. It is little wonder then that HUL commands premium valuations on the bourses.

    • Coca-Cola, one of Warren Buffet's famous investments is another company with an impressive sales and distribution track record. But, it is always on the lookout for improvement. The integration of the North American bottling and distribution operations of Coca-Cola Enterprises in 2010, helped eliminate redundancies and increase efficiencies. The company is now able to work more efficiently with retailers in coordinating sales of multiple brands and package sizes. Earlier some accounts would have one touch point for juice, another for water, and another for cola. Now in the revamped operations, a single person handles each account. Both sides can now come up with a supply arrangement that is mutually beneficial. Coca-Cola is one of the most globally active companies. It derives 80% of its sales from outside the US. Thus it is highly attuned to local realities in a number of countries and has capitalised on the same.

    • An average salesman at IBM spends a third of his time training in company sponsored schools. This according to Fisher helps keep the sales force abreast of rapid technology changes.
    According to Phillip Fisher, a company that steadily invests in its sales function will be successful. A development on the manufacturing or the research front may help boost profits for some time. However, for sustainable growth over the longer term, a strong sales arm and a distribution network is needed.

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