Marketing: Channels of Distribution

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

Producers

Intermediaries

Customer

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

POSSESSION Information
37 2 57 9 241 1 Creating utilities for customers.

Channel Functions
Producer Intermediaries
(Facilitate exchange) Accumulating & breaking bulk Creating Assortments (sort to quantity Materials handling Reducing transactions Transporting & Inventory storage

Customer

Distribution Channels Facilitate Specialization

Intermediaries provide Exchange efficiencies

Intermediaries Producer Customer Connectivity is King for product delivery when and where

Channel Functions: Promotion

Producer Collaborators
(Facilitate exchange) Promotion: - Cooperative advertising - In Store Sales promotion Sales Promotion Advertising Agencies
Personal Selling: Merchant sales reps sell only, no title transfer

Customer

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
Orders

Wholesaler
Orders

Retailer

Customer
Request

Promotional Push Strategy

Producers promote to marketing intermediaries

to Push the product through the distribution Push channel to consumers.

Promotes To Producer Wholesaler Retailer Customer

Applied Marketing

Ice Cream Rivals

NestleNestle-16% (Mk Share)
Haagen Daz,Dreyers Drum Stick Brands

UNILEVER UNILEVER17% MShare

Ben & jerrys Good Humor, Breyers

Nestl'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 Starbucks
WSJ, June, 2003

Ice Cream Distribution: The Scoop

70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00%
Standard Grocers Kiosks Discount Grocers Gas Traditional Stations Grocers
Ball, Deborah. Ice Cream Rivals Prepare to Wage A New Cold War. WSJ, June 26, 2003

Ice-cream distribution in the U.S. in 2001

Valued freezer space

Freezer costs are up to 6x higher in non grocer venders due to electricity & maintenance costs but offer 25% higher profit margins than super market tubs Growth Rates: Out of home 10%/year in home 8%* (* 80% of ice cream is consumed in home)
80-20 principle

Channel Functions: Pricing

Producer Intermediaries
(Facilitate exchange)

Customer

Pricing: How much? Pricing support: support: - terms of sale (credit, cash, etc.) - convenience of payment - financial risk
Financial Institutions: Transfer of Ownership Provide Credit Services

Applied Marketing

What Levis is Doing

Levis 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 such as Neiman Marcus, to middle class stores such as Kohls and Macys, to large discount stores such as Wal-Mart.

2004

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: (Direct)
Manufacturer

Intermediaries: (Traditional) Producer

Manufacturer Wholesaler Intermediaries

Consumer

Retailer Consumer

Retailer 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)

All Laptops 78.8% of 26.4 worldDell 2000 world-wide million shipments world-wide worldshipments 65.5% of 65.3 worldDell 2005 world-wide million shipments world-wide worldPC companies are refocusing on the consumer market (15% of shipments Year
consumers like to hold & test models in a store. Consumers prefer 30Aug06 WSJ, Consumer Demand and Growth in Laptops Leave Dell Behind, laptops due

Desktops

Dells sales of 56 bil/yr vs the business market) where

Changes in PC Buying Behavior affect Dell (Direct sales)

Year Dell Desktop 78.8% of worldworld-wide shipments 65.5% of worldworld-wide shipments Laptop Mkt (all) 26.4 million worldworld-wide shipments 65.3 million worldworld-wide shipments

2000

2005

PC companies are focusing on the consumer market (15% of Dells 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 &WSJ, Consumer Demand and Growth in Laptops Leave Dell Behind, 30Aug06 on the go convenience.

Channel

esi n Criteria Collaborators

elect

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 distribution

Selective distribution

Exclusive 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

Applied Marketing

Direct Sales of Alcohol

Liquor Wholesaler: A Mandated Middleman

Issue: Florida wine aficionados desire vintages direct from California. Ecommerce simplifies the P to C relationship by passing wholesalers & their 1818-25% price cut Current Legislation: direct shipment to consumers is a misdemeanor (1st time ), a felony (2nd time violation ) Rationale: (a) to prevent underage drinking and (b) to collect state taxes
Update:July06,.5 -3mil (teens) buy on line
WSJ 4 OCT 1999 pg A1

Channel Integration
Forward integration: member acquires a downstream member
Manufacturer

Wholesaler

Backward integration: member acquires an upstream member Franchise: member licenses property to independent business

Retailer

Consumer

Vertical Channel Integration

seeks to control 2 or more levels
Oil field, Oil rig, Pipeline transport, Refinery, transport, Station storage,

Producer Wholesaler Retailer

U.S. Court

Consumer

Consumer

Consumer

Oulet Own by t e To Six Co n t s ed h p mpa ies

2001 Rank Company 1 Royal Dutch/Shell 2 BP 3 Conoco Phillips 4 Exxon Mobil 5 Citgo 6 Chevron Texaco Combined Market Share Outlets 2 ,0 0 20 1 ,5 0 70 1 ,4 0 70 1 ,0 0 68 1 ,6 6 36 85 ,0 5 5% 5 1993 Rank Company 1 Texaco 2 Citgo 3 Exxon 4 Amoco 5 Royal Dutch/Shell 6 Chevron Combined Market Share Outlets 111 45 151 23 95 40 97 30 83 53 82 55 3% 0

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: (Ace Hardware)

Retailer Sponsored: (IGA)

Franchise Systems: (McDonaldss)

Channel Systems (Examples)

Corporate: Corporate: . 1 channel member owns other channel members

Contractual: Contractual: channel members operate under contractual agreements (franchises) Administered: Administered: channel members operate based on agreed upon plans (Channel Captains)

Applied Marketing

Peoples Bank

Founded in 1842,it is the largest statestatechartered bank in Connecticut. Is part of multiple horizontal & vertical distribution systems with Travelers, Hartford, Kemper, and Chubb to offer auto, home & hhh business insurance. uses a zero-level or direct marketing zerochannel 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 retailers Fullmember to carry a suppliers entire product line to obtain any of the suppliers 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 refusal-tocertain channel members.

Exclusive Dealing-Forbidding an intermediary to Dealingcarry 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 members 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 Longmembers 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