Channels of Distribution

Channels of Distribution

• Channels of Distribution are “Systems” of

interdependent organizations that direct the flow of
product (title/possession) from producers to buyers

Producers Intermediaries Customers

 Channels of Distribution
• Channels of Distribution create time, place,
possession and information utilities.
PLACE
TIME

POSSESSION

t ili t y 18 Information
U 37 2157
Box 24
Creating utilities for customers
 Channel Functions
Producer Intermediaries Customer
(Facilitate exchange)

Creating
Accumulating &
Assortments
breaking (sort to quantity
bulk
Materials handling

Reducing Transporting &

Inventory storage
transactions
 Distribution Channels Facilitate
Specialization
• Intermediaries provide Exchange efficiencies

M! R1 M1 R!

M2 R2 M2 I R2

Intermediaries
M3 R3 M3 R3

Producer Customer

Connectivity is King for product delivery when and where

 Channel Functions: Promotion
Producer Collaborators Customer
(Facilitate exchange)

• Promotion:
- Cooperative advertising
- In Store Sales promotion

Advertising
Sales
Agencies
Promotion
Personal Selling:
Merchant sales reps
sell only, no title transfer
 Promotional “Pull” Strategy

... Producers promote to the target audience to

stimulate demand and “Pull” the product through
the distribution channel to customers.
Promotes to

Producer Wholesaler Retailer Customer

Orders Orders Request

Promotional “Push” Strategy

Producers promote to marketing intermediaries

to “Push” the product through the distribution

channel to consumers.

Promotes To
Producer Wholesaler Retailer Customer
 Ice Cream Rivals
• UNILEVER–17% MShare • Nestle-16% (Mk Share)
• Ben & jerrys • Haagen Daz,Dreyers
• Good Humor, Breyers • Drum Stick Brands

Nestlé's GoaL: Improve (intensive) distribution

• Introduce 100K branded vending machines &
freezers in big gas stations, convenience stores &
non grocer outlets
• Create new products & specialty items: Coffee
Almond Crunch Bar at Starbuck’s
 Ice Cream Distribution: The Scoop
70.00%
60.00%
50.00%
Ice-cream
40.00% distribution in
the U.S. in
30.00% 2001
20.00%
10.00%
0.00%
Standard Kiosks Discount Gas Traditional
Grocers Grocers Stations Grocers
 Channel Functions: Pricing
Producer Intermediaries Customer
(Facilitate exchange)

Pricing: How much?

• Pricing support:
- terms of sale (credit, cash, etc.)
- convenience of payment
- financial risk
Financial Institutions:
Transfer of Ownership
Provide Credit Services
 What Levi’s is Doing
• Levi’s jeans were the same model and price for many years
although they were bought many different types of people.
•Diversifying their target markets by selling jeans in high
end stores to middle class stores, to large discount stores
such as Wal-Mart.
Channel Functions: Product Support
Producer Intermediaries Customer
(Facilitate exchange)
• Product:
- sales data feedback
- customer service/product repairs
- product selection & delivery
- packaging
- financial & social risk

Risk Taking
legal Services
 Distribution Channel Designs
• Organizations through which a product passes to reach
the end user.

Zero-level: Intermediaries:
(Direct) (Traditional)

Manufacturer Producer Manufacturer

Manufacturer
Manufacturer

Wholesaler
Wholesaler
Intermediaries

Consumer Retailer Retailer

Retailer
Consumer
Consumer
Consumer
Consumer
 Channel Design
Criteria To Select Collaborators:
• #1 - Target market coverage & consumer
purchase behavior
• Company Resources & Objectives
- adaptability/control
- performance quality level
• Ease of Doing Business
• Packaging Requirements
• Order Processing Quality
 Changes in PC Buying Behavior affect
Dell (Direct sales)
Year Desktops All Laptops
78.8% of 26.4 million
Dell 2000 world-wide world-wide
shipments shipments
                65.5% of 65.3 million
Dell 2005 world-wide world-wide
shipments shipments

PC companies are refocusing on the consumer market (15% of

Dell’s sales of 56 bil/yr vs the business market ) where consumers like
to hold & test models in a store. Consumers prefer laptops due
to new wireless technology & on the go convenience.
 Channel Design Criteria To Select
Collaborators
• Competition
• Technical service support
• On time delivery/reliability
• Economic value/efficiency
• Total costs, a “systems view”,
Examples of compensation: Trade,
quantity, promotion & cash discounts.
 Channel Design:
#1 Target Market Coverage

Intensive Selective Exclusive

distribution distribution distribution
 Market Coverage: Legal Issues
Strategic Alliances..the products
of one organization are distributed
through the marketing channels of
another
Dual Distribution
A producer can use two different channels to
reach the same target market if it is not
trying to engage in unfair competition & put
its independent distributors out of business

Restricted Sales Territories - Granting exclusive sales

territory rights to distributors is permissible if the
rights do not restrain trade
 Direct Marketing Channels

Producer Buyer
Personal Selling
Telemarketing
Toll free phone #
Catalog order
Fax order
Mail order
E Commerce
 Direct Marketing can eliminate the
middleman but not the functions

Infomediaries & Vertical Exchange

 Channel Integration
Manufacturer
Manufacturer
Forward Backward
integration: integration:
member member
acquires a Wholesaler
Wholesaler acquires an
downstream upstream
member member
Retailer
Retailer
Franchise:
member licenses
Consumer property to
Consumer
independent
business
 Vertical Channel Integration…
seeks to control 2 or more levels

Oil field,
Producer
Oil rig,
Wholesaler
Pipeline
Retailer
transport,
U.S. Court
Refinery,
transport,
Station
storage,
Consumer Consumer Consumer
 Outlets Owned by the Top Six Companies
2001 1993
Rank Company Outlets Rank Company Outlets
1 Royal Dutch/Shell 22,000 1 Texaco 14151
2 BP 17,500 2 Citgo 12531
3 Conoco Phillips 17,400 3 Exxon 9450
4 Exxon Mobil 16,080 4 Amoco 9370
5 Citgo 13,666 5 Royal Dutch/Shell 8533
6 Chevron Texaco 8,055 6 Chevron 8525
Combined Market Share 55% Combined Market Share 30%

Gas stations (thousands)

220
210
200
190
180
170
91 92 93 94 95 96 97 98 99 00 01
Horizontal Channel Integration …
seeks economies of scale via advertising,
purchasing,etc
(Contractual Systems)

• Wholesaler Sponsored

• Retailer Sponsored

• Franchise Systems: (McDonalds’s)

 Channel Systems
(Examples)
• Corporate: 1 channel member owns
.
other channel members

• Contractual: channel members operate

under contractual
agreements (franchises)

• Administered: channel members operate

based on agreed upon
plans (Channel Captains)
 Applied
Marketing People’s Bank

• Founded in 1842,it is the largest state-chartered

bank in Connecticut.
• Is part of multiple horizontal & vertical distribution
systems with Travelers, Hartford, Kemper, and
Chubbhhhto offer auto, home & business insurance.
• uses a zero-level or direct marketing channel to
distribute its financial services
• or vertical system for collaborators (Brokerage
services).
 Other Distribution Issues
• Reverse distribution

• Ethical, Political, &

Legal
 Applied
Marketing
MAJOR RECALL
• Mitsubishi Motors Corp. presents a public image of
economic value & purity but in reality …
• it was “forced” to recall vehicles to fix a potentially
defective ball joint in the front suspension
• Affects models made between 1992 and 2001
– 960,000 vehicles recalled in U.S.
– 400,000 vehicles recalled in
Japan
– 156,000 vehicles in other
countries

Source: The Wall Street Journal

February 16, 2001,Page A3
 Distribution Channel: Legal Issues
One Coca Cola
Distributor

U.S. Court

OK
Difficult
 Tying Contracts - Requiring a channel
member to buy additional products from
the supplier in order to purchase a
particular product from the supplier
One thousand
 Full-Line Forcing - Requiring a channel
member to carry a supplier’s entire retailers
product line to obtain any of the
supplier’s products
 Channel Legal Issues
 Product Liability,
 Resale Price maintenance ,
 Refusal to Deal - Suppliers can choose their distributors
and refuse to deal with others if their decisions are not
based on anticompetitive motives or are not part of an
organized refusal-to-deal with certain channel members.

• Exclusive Dealing-Forbidding an intermediary to carry products

of a competing manufacturer
– Is anticompetitive if
• it blocks competitors from 10% of the market
• sales revenues are sizable
• the manufacturer is larger than the dealer
 Channel Relationships
Supply Chain Management

Channel Captain: The dominant member (producer,

wholesaler, or retailer) establishes channel policies &
coordinates the marketing mix

• Leadership …by example

• Cooperation..common objectives
• Conflict resolution
• Power to enforce
 Types of Channel Power
(The ability of one channel member to
influence another member’s goal achievement)
 Reward Power

 Legal Power

 Expert Power

 Coercive Power

Power Control Performance

 Supply Chain Management:
Channel Conflict
• Sources of Channel Conflict
– Disagreements on responsibilities
– Communication difficulties reduce coordination
– Increased use of multiple distribution channels by
manufacturers creating conflicts with distributors and
retailers
– Intermediaries diversifying into and offering competing
products
– Producers try to circumvent intermediaries and deal
directly with retailers
CHANNEL CONFLICT

Large retailer threatens to stop buying a

product unless the suppler grants “
unreasonably low” prices and/or high
supports services

Coercive power?
Ethical Decision?
Survival Decision?
 Marketing Channels Form a
Supply Chain
• Supply Chain Management
– Long-term partnerships among channel members that
reduce inefficiencies, costs, and redundancies and
develop innovative approaches to satisfy customers
– Optimizes costs throughout the whole channel for
efficiency and service
– Includes all entities that facilitate product distribution
and benefit from cooperative efforts
– Arises from the need to achieve a more competitive
position