Distribution Strategies - Marketing Intermediaries

Distribution Strategies

Marketing Intermediaries

Retailers

Wholesalers

Think of all the products you buy: food, toiletries, clothing, sports equipment, train tickets, haircuts, gasoline, stationery, appliances, CDs, videotapes, books, and all the rest. How many of these products do you buy directly from the producer? For most people, the answer is not many. Most companies do not sell their goods directly to the final users, even though the Internet is making that easier to do these days. Instead, producers in many industries work with marketing intermediaries (also called middlemen) to bring their products to market.

Two main types of marketing intermediaries are wholesalers and retailers.

Customers of Wholesalers

Retailers

Wholesalers

Organizations

Wholesalers sell primarily to retailers, to other wholesalers, and to organizational users such as government agencies, institutions, and commercial operations. In turn, the customers of wholesalers either resell the products or use them to make products of their own.

Types of Retail Outlets

Physical Facilities

Vending Machines

Virtual Stores

Unlike wholesalers, retailers sell products to the final consumer for personal use. Retailers can operate out of a physical facility (department store, gas station, kiosk), through vending equipment (soft drink machine, newspaper box, or automated teller), or from a virtual store (via telephone, catalog, or website). Most retailers today reach shoppers through a carefully balanced blend of store and nonstore retail outlets.

Distribution Functions of Wholesalers and Retailers

Match buyers and sellers

Provide market information

Offer promotional and sales support

Gather an assortment of goods

Transport and store products

Assume risks

Provide financing

Wholesalers and retailers perform a number of specific distribution functions that make life easier for both producers and customers:

Match buyers and sellers.

Provide market information.

Provide promotional and sales support.

Gather an assortment of goods.

Transport and store the product.

Assume risks.

Provide financing.

Wholesalers and retailers are instrumental in creating three of the four forms of utility: place, time, and possession utility. They provide items in a convenient location (place utility); they save you the time of having to contact each manufacturer to purchase a good (time utility); and they provide an efficient process for transferring products from the producer to the consumer (possession utility).

How Intermediaries Simplify Commerce

As the slide above shows, without marketing intermediaries, the buying and selling process would be expensive and time-consuming. Intermediaries actually reduce the price customers pay for many goods and services, because they reduce the number of contacts between producers and consumers that would otherwise be necessary. They also create place, time, and possession utility.

Types of Wholesalers

The majority of wholesalers are merchant wholesalers, independently owned businesses that buy from producers, take legal title to the goods, then resell them to retailers or to organizational buyers. Full-service merchant wholesalers provide a wide variety of services, such as storage, selling, order processing, delivery, and promotional support. Rack jobbers, for example, are full-service merchant wholesalers that set up displays in retail outlets, stock inventory, and mark prices on merchandise displayed in a particular section of a store. Limited-service merchant wholesalers, on the other hand, provide fewer services. Natural resources such as lumber, grain, and coal are usually marketed through a class of limited-service wholesalers called drop shippers, which take ownership but not physical possession of the goods they handle.

In contrast to merchant wholesalers, agents and brokers never take title to the products they handle, and they perform fewer services. Their primary role is to bring buyers and sellers together; they are generally paid a commission (a percentage of the money received) for arranging sales. Real estate agents, insurance brokers, and securities brokers, for example, match up buyers and sellers for a fee or a commission, but they don't own the items that are sold. Producers of commercial parts often sell to business customers through brokers. Manufacturers' representatives, another type of agent, sell various noncompeting products to customers in a specific region and arrange for product delivery. By representing several manufacturers' products, these reps achieve enough volume to justify the cost of a direct sales call.

Changing Role of Wholesalers

The Internets efficient and effective global reach is revolutionizing the way goods and services are sold and distributed. An increasing number of businesses are using the Internet to improve the efficiency of their distribution systems and to expand their market reach. But for some wholesalers the Internet is as much a threat as it is a promise for others.

Types of Retail Stores

When you shop in a pet store, a shoe store, or a stationery store, you are in a specialty storea store that carries only particular types of goods. The basic merchandising strategy of a specialty shop is to offer a limited number of product lines but an extensive selection of brands, styles, sizes, models, colors, materials, and prices within each line.

At the other end of the retail spectrum are the category killerssuperstores that dominate a particular product category by stocking every conceivable variety of merchandise in that category. Home Depot, Toys R Us, Office Depot, and Barnes and Noble are category killers.

In contrast to category killers, discount stores offer a wider variety of merchandise, lower prices, and fewer services. One of the newest categories of discounters is supercenters, large discount stores that offer broad selection of groceries, toys, household items, and other products at discount prices. Since the early 1990s, Wal-Mart has opened over 1,140 U.S. supercenters with an average size of 190,000 square feet and is now one of the nations largest food retailers.

Nonstore Retailers

Among the most popular types of nonstore retailers are mail-order firms. These companies provide customers and businesses with a wide variety of goods ordered from catalogs and shipped by mail or private carrier.

For certain types of products, vending machines are an important nonstore retail outlet. In Japan, soft drinks, coffee, candy, sandwiches, and cigarettes are all commonly sold this way.

You have probably experienced telephone retailing, or telemarketing, in the form of calls from insurance agents, long-distance telephone companies, and assorted nonprofit organizations, all trying to interest you in their products and causes.

Gone are the days when a large sales force called directly on customers in their homes or offices to demonstrate merchandise, take orders, and make deliveries, simply because in many households both parents work outside the home.  However, two famous names in door-to-door selling(and its variant, the party plan)Avon and Tupperwareare trying to stay in business by changing their approach. Both have recently launched initiatives to sell directly to the customers over the Internet and in retail stores.

Catalogs on computer disk or published over the Internet have many advantages: They offer an easy way for customers to search for products; they allow businesses to reach an enormous number of potential customers at a relatively low cost; and they present timely information about a products price and availability.

These web-based retail complexes house dozens of virtual storefronts, or Internet-based stores. Consumers can buy everything from computer software to gourmet chocolates in cybermalls.

Interactive kiosks are small free-standing electronic structures vend products and services in convenient locations and introduce new products in dynamic ways.

Today, a growing number of businesses sell a huge selection of goods and services online. For some, such as Amazon, the Internet is their only marketing channel. But for others, such as Costco and REI, the Internet offers an additional way to sell to customers.

Retail Industry Challenges

Oversupply of Store Space

Weakened Economy

Consumer Demographics

Nonstore Retailing and E-Commerce

Like wholesalers, retailers are facing a number of pressing challenges in todays competitive marketplace. Chief among them is an oversupply of physical retail store space. The United States now has about 1,800 malls, which industry watchers say is about one third too many. In addition to an oversupply of stores, retailers are grappling with a weakened economy, and changing consumer demographics, lifestyles, and shopping patterns. Finally, the growth of nonstore retailing and e-commerce is forcing many retailers to revise their sales and marketing strategies to accommodate new technologies.

Internet Retail Strategies

In the midst of the Internet boom, conventional wisdom held that shoppers, lured by the convenience of online buying, would disappear from physical retail stores. So traditional retailers rushed to establish websites and engage in e-tail (conducting retail business over the Internet). Their thinking was that an independent web operation could make faster decisions, be more flexible, and be more entrepreneurial and thus could compete more effectively with pure-play e-businesses. Some retailers, such as REI, ignored this advice and adopted a clicks-and-bricks strategy from inception.

The disadvantages of running a companys retail and Internet operation independently became apparent during the dot-com meltdown at the end of the 20th century. Difficulty in acquiring brand recognition, high customer-acquisition costs, logistical snags, and competition among siblings were just a few of the problems encountered by retailers who chose to run their e-tail operations independently.

Using multiple channelsInternet, telemarketing, mail order, and physical storeshas many advantages. A clicks-and-bricks strategy allows customers to purchase what they want, where they want, and when they want. It also facilitates the product exchange and return process. Customers can gather production information from a companys website before heading to the store, where they can use salespeople to answer specific product questions and to demonstrate products. Customers can also order merchandise online and pick up or return their purchases at a nearby physical outlet.

Setting Distribution Strategies

A companys decision about the number and type of intermediaries to useits distribution mixdepends on the kind of product being sold and the marketing practices of the industry.

Length of Distribution Channels

A companys decision about the number and type of intermediaries to useits distribution mixdepends on the kind of product being sold and the marketing practices of the industry.

Most businesses purchase goods they use in their operations directly from producers, so the distribution channel is short. In contrast, the channels for consumer goods are usually longer and more complex. The four primary channels for consumer goods are as follows:

Producer to consumer. Producers who sell directly to consumers through catalogs, telemarketing, infomercials, and the Internet are using the shortest, simplest distribution channel.

Producer to retailer to consumer. Some producers create longer channels by selling their products to retailers such as Ace Hardware, who then resell them to consumers.

Producer to wholesaler to retailer to consumer. Most manufacturers of supermarket and drugstore items rely on even longer channels. They sell their products to wholesalers, who in turn sell to the retailers.

Producer to agent/broker to wholesaler to retailer to consumer. Additional channel levels are common in certain industries, such as agriculture, where specialists are required to negotiate transactions or to perform interim functions such as sorting, grading, or subdividing the goods.

Market Coverage

The appropriate market coveragethe number of wholesalers or retailers that will carry a productvaries by type of product. Inexpensive convenience goods or organizational supplies such as computer paper and pens sell best if they are available in as many outlets as possible. Such intensive distribution requires wholesalers and retailers of many types. In contrast, shopping goods (goods that require some thought before being purchased) such as Sub Zero refrigerators require different market coverage, because customers shop for such products by comparing features and prices. For these items, the best strategy is usually selective distribution, selling through a limited number of outlets that can give the product adequate sales and service support.

If producers of expensive specialty or technical products do not sell directly to customers, they may choose exclusive distribution, offering products in only one outlet in each market area.

Cost Factors

Selling

Storage

Distribution

Costs play a major role in determining a firms channel selection. It takes money to perform all the functions that are handled by intermediaries. Small or new companies often cannot afford to hire a sales force large enough to sell directly to end users or to call on a host of retail outlets. Neither can they afford to build large warehouses and distribution centers to store large shipments of goods. These firms need the help of intermediaries who can spread the cost of such activities across a number of noncompeting products. With time and a larger sales base, a producer may build enough strength to take over some of these functions and reduce the length of the distribution channel.

Control Issues

A third issue to consider when selecting distribution channels is control of how, where, when, and for how much your product is sold. Longer distribution channels mean less control for producers, who become increasingly distant from sellers and buyers as the number of intermediaries multiplies. Shorter distribution channels, on the other hand, gives producers more control over how the goods are sold in the market, but there is a tradeoff. Concentrating too many distribution functions in the hands of too few intermediaries can increase the negotiating power of distributors.

Channel Conflict

Inadequate Product Support

Too Many Intermediaries

Multiple Sales Channels

Because the success of individual channel members depends on the overall channel success, ideally all channel members should work together smoothly. However, individual channel members must also run their own businesses profitably, which means that they often disagree on the roles each member should play. Such disagreements create channel conflict. Channel conflict may arise when suppliers provide inadequate product support, when markets are oversaturated with intermediaries, or when companies sell products via multiple channels, each of which is competing for the same customers.

Distribution Strategies: Additional Factors

In addition to channel length, market coverage, cost, control, and possible channel conflict, managers should consider several other factors when selecting distribution channels. These factors include the nature and price of the product, the market's growth rate, the geographical concentration of the customer base, customers' need for service, the importance of rapid delivery, the strengths and weaknesses of the various types of intermediaries within the channel, and international laws and customs when selling in other countries.

Managing Physical Distribution

In-House Operations

Outbound Transportation

Developing a distribution strategy involves more than selecting the most effective channels for selling a product. Companies must also decide on the best way to move their products and services through the channels so that they are available to the customers at the right place, at the right time, and in the right amount. Physical distribution encompasses all the activities required to move finished products from the producer to the consumer, including the in-house operations of forecasting, order processing, inventory control, warehousing, materials handling; and outbound transportation.

In-House Operations

Forecasting

Order processing

Inventory control

Warehousing

Materials handling

The components of the distribution process can be divided into in-house operations and outbound transportation. The in-house steps include forecasting, order processing, inventory control, warehousing, and materials handling.

To control the flow of products through the distribution system, a firm must have an accurate estimate of demand. To some degree, historical data can be used to project future sales; however, the firm must also consider the impact of unusual events (such as special promotions) that might temporarily boost demand.

Order processing involves preparing orders for shipment and receiving orders when shipments arrive. It includes a number of activities, such as checking the customers credit, recording the sale, making the appropriate accounting entries, arranging for the item to be shipped, adjusting the inventory records, and billing the customer.

If your inventory is too large, you incur extra expenses for storage space, handling, insurance, and taxes; you also run the risk of product obsolescence. On the other hand, if your inventory is too low, you may lose sales when the product is not in stock. The objective of inventory control is to resolve these issues.

Products held in inventory are physically stored in a warehouse, which may be owned by the manufacturer, by an intermediary, or by a private company that leases space to others. Some warehouses are almost purely holding facilities in which goods are stored for relatively long periods. Other warehouses, known as distribution centers, serve as command posts for moving products to customers.

An important part of warehousing activities is materials handling, the movement of goods within and between physical distribution facilities. One main area of concern is storage method--whether to keep supplies and finished goods in individual packages, in large boxes, or in sealed shipping containers.

Outbound Transportation

Each of the five major modes of transportation has distinct advantages and disadvantages:

Railroads can carry heavier and more diverse cargo and a larger volume of goods than any other mode of transportation. However, trains are constrained to tracks, so they can rarely deliver goods directly to customers.

Trucks are a preferred form of transportation for two reasons: (1) the convenience of door-to-door delivery, and (2) the ease and efficiency of travel on public highways, which do not require the use of expensive terminals or the execution of right-of-way agreements (customary of air and rail transportation). Trucks cannot, however, carry all types of cargo cost effectively; for example, commodities such as steel and coal are too large and heavy.

The cheapest method of transportation is via water, and is the preferred method for such low-cost bulk items as oil, coal, ore, cotton, and lumber. However, ships are slow, and service to any given location is infrequent. Furthermore, another form of transportation is usually needed to complete delivery to the final destination, like it is for rail.

Air transportation offers the advantage of speedbut at a price. Airports are not always convenient to the customers. Moreover, air transport imposes limitations on the size, shape, and weight of shipments and is the least dependable and most expensive form of transportation. Weather may cause flight cancellations, and even minor repairs may lead to serious delays. But when speed is a priority, air is usually the only way to go.

For products such as gasoline, natural gas, and coal or wood chips (suspended in liquid), pipelines are an effective mode of transportation. Although they are expensive to build, they are extremely economical to operate and maintain. The downside is transportation via pipeline is slow (3 to 4 miles per hour), and routes are inflexible.

Shippers can combine the benefits of each mode by using intermodal transportation (a combination of multiple modes). For instance, a company may ship goods in over-the-road trailers that ride part of the way on flat bed railroad freight cars and part of the way on highways.

KEY TERMS

distribution strategy - Firm's overall plan for moving products to intermediaries and final cu stomers

marketing intermediaries - Businesspeople and organizations that channel goods and services from producers to consumers

wholesalers -   Firms that sell products to other firms for resale or for organizational use

retailers -   Firms that sell goods and services to individuals for their own use rather than for resale

merchant wholesalers - Independent wholesalers that take legal title to goods they distribute

full-service merchant wholesalers - Merchant wholesalers that provide a wide variety of services to their customers, such as storage, delivery, and marketing support

rack jobbers - Merchant wholesalers that are responsible for setting up and maintaining displays in a particular section of a retail store

limited-service merchant wholesalers - Merchant wholesalers that offer fewer services than full service merchant wholesalers; they often specialize in particular markets, such as agriculture

drop shippers - limited-service merchant wholesalers that assume ownership of goods but don't take physical possession; commonly used to market agricultural and mineral products

agents and brokers - Independent wholesalers that do not take title to the goods they distribute but mayor may not take possession of those goods

scrambled merchandising - Policy of carrying merchandise that is ordinarily sold in a different type of outlet

wheel of retailing - Evolutionary process by which stores that feature low prices gradually upgrade until they no longer appeal to price sensitive shoppers and are replaced by new low-price competitors

specialty store -   Store that carries only a particular type of goods

category killers - Discount chains that sell only one category of products

discount stores - Retailers that sell a variety of goods below the market price by keeping their overhead low

mail-order firms - Companies that sell products through catalogs and ship them directly to customers

distribution mix - Combination of intermediaries and channels a producer uses to get a product to end users

intensive distribution - Market coverage strategy that tries to place a product in as many outlets as possible

selective distribution - Market coverage strategy that uses a limited number of outlets to distribute products

exclusive distribution - Market coverage strategy that gives intermediaries exclusive rights to sell a product in a specific geographical area

physical distribution - All the activities required to move Finished products From the producer to the consumer

logistics - The planning, movement, and flow of goods and related information throughout the supply chain

order processing - Functions involved in preparing and receiving an order

warehouse - Facility for storing inventory

distribution centers - Warehouse facilities that specialize in collecting and shipping merchandise

materials handling - Movement of goods within a firm's warehouse terminal, factory, or store.