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6: Distribution Policies and Strategies

A distribution system (also called a "channel" or a "chain") describes the structure of organizations through which goods are handled between their point of original and the point of use or consumption. This typically includes a number of intermediaries.

Distribution Systems

The distribution system can be divided into its components, which are classified into four kinds:

1. Customer Components - The consumer of the product and those who handle the tasks of obtaining it for their use (particularly in organizational markets)
2. Selling Components - Intermediaries who purchase the product and resell it (such as retailers and wholesalers) or are involved in financial transactions (such as brokers or agents)
3. Facilitating Components - Those who provide services that assist in the process, and may have physical possession of the goods, but do not own them (shipping companies, storage facilities, etc.)
4. Supervising Components - Third parties, generally government agencies, who may intervene directly or indirectly in the distribution process (such as customs, department of transportation, federal trade commission, etc.)

Aside of merely moving physical products around, the distribution system provides a number of additional benefits:

• To provide customer satisfaction, generally through the convenience and timeliness of product delivery
• Economic benefits to the supply chain (by taking ownership and financial responsibility for inventory, bulk-breaking, cost savings to the manufacturer)
• Demand stimulation: wholesalers and retailers often help to "push" product through the distribution chain

Another consideration of benefits classifies them as "utilities":

• Time Utility - Pertains to ensuring the goods are available when the consumers want them, both in terms of business hours and stocking seasonal merchandise
• Place Utility - Pertains to making the goods available in locations that are convenient to the consumer (a local store or a food cart at an event)
• Possession Utility - Pertains to transferring the physical good, but also to the benefits of possession without ownership (a rack-jobber has possession, but not ownership, of shelf space in retail outlets)

Intermediaries

Each organization between the manufacturer and the consumer is an "intermediary."

There is a quick aside about the impact of the Internet on distribution systems, especially in shortening the distribution chain by enabling a manufacturer to sell directly to the consumer, with the only intermediary being a shipping service (and even that can be removed for goods that can be digitally delivered).

Another quick aside: as a rule, the fewer intermediaries, the greater power the manufacturer of a good has to control its marketing process - each intermediary is a potential filter or blockage in the channel of communication to the consumer, and in some instances, the agenda of a middleman can be detrimental to the manufacturer (a salesman who pushes another company's product because he earns a better commission).

The author illustrates a distribution Web for a given kind of product, in which there are multiple manufacturers of a good, each of which has its own distribution chain, and in which a given intermediary may be shared among multiple manufacturers (a store carries the merchandise of many manufacturers) and a manufacturer may use multiple intermediaries (a given product is stocked in a number of stores).

(EN: my first reaction was that this is making a simple matter complex, in that a given manufacturer needs only concern itself with its own supply chains rather than the entire Web, but it then occurred to me that, in a competitive market, a marketer would do well to take a consumer-centric view of channels through which they may be able to procure products).

For simplicity's sake, the author divides intermediaries into wholesalers (who obtain the product with an intention to resell to someone other than the consumer) and retailers (who sell to the consumer).

(EN: the author overlooks intermediaries on the customer's side, such as the departments that manage logistics within an organization. They are neither a wholesaler nor retailer, but are still an intermediary that can have an impact on consumer demand.)

Wholesalers include merchant wholesalers (independent businesses that maintain their own inventory of goods for sale to retail outlets), sales branches (parts of the manufacturer's organization that may maintain inventory), and agents/brokers (independent individuals who do not take possession of goods, but interface with the customer in the buying process).

Retailers are considered the last link in the supply chain, which handles the financial transaction and transfer of physical goods to the ultimate consumer. (EN: More accurately, the person who buys and will presumably deliver to the ultimate consumer.) The primary value of the retailer is to aggregate products from multiple producers to provide a convenient buying process for the consumer, though retailers may also provide an array of value-added services.

Traditional formats of retailers include department stores, supermarkets, discounters, specialty stores, and convenience stores - but the retail landscape has changed significantly in the past few decades. Increasingly, discounters (particularly Wal-Mart) are drawing increasing market share away from other retail formats and the Internet has had a significant impact on the nature and percentage of business consumers do with brick-and-mortar retailers.

(EN: The author provides an aside on the "impact of technology," but I'm skipping that because the book was written in 2002 and some of the remarks are misguided.)

Distribution Strategy

A distribution strategy involves the decisions made by the producer regarding the use of intermediaries in marketing and providing their product to the final buyer. Direct distribution would seem to be the most attractive choice, as eliminating middlemen increases profit margin and control, but there are instances that make other delivery methods more appealing.

• The qualities of the product may make it unfeasible to sell direct to consumers (particularly, if the product is perishable or fragile)
• The unit value of a product may make it unprofitable to sell directly (generally, the smaller the profit, the longer the channel)
• Products that are costly, require a lot of "personal selling" or have high follow-on needs (maintenance) are more likely to e sold direcrtly
• The geographic dispersion of a target market may make it more efficient and effective to distribute goods though a system of intermediaries
• The producer can spread economic risks by having intermediaries take possession of inventory or provide ancillary services (such as financing) to customers
• The breadth of a product link impacts a company's ability to sell directly (particularly, if a product has complementary goods that the firm does not produce, it must sell through retailers who can provide a bundle of goods to the consumer)
• The company's existing resources (or the resources it is capable of obtaining and maintaining) may impact distribution options
• The company's level of concern about reputation and branding will impact its willingness to trust intermediaries.
• The existence (or absence) of a distribution channel for similar goods may impact distribution strategy

A company may use multiple channels of distribution. This may be a consequence of resource limitations (a company may have its own retail outlets in some areas but wish to expand into other areas without opening more stores) or it may be a strategic choice (to suit the buying preferences of different market segments).

(EN: also worth noting: distribution strategy applies only to the decisions a company makes about factors under its control. There are also instances in which consumers receive goods through a distribution channel that the producer did not intend. This can be as nefarious as ticket scalping and the black market, or it can be as straightforward as independent resellers, after-market sales, or person-to-person sales. The Internet has greatly increased the number and activity of "unauthorized" distributors.)

The author discusses some of the special concerns of international distribution

• Placing goods in overseas markets often requires the assistance of intermediaries with local expertise and access to decision-makers in the distribution chain.
• Social norms may restrict a company's ability to choose or avoid certain intermediaries
• Underdeveloped countries may lack a distribution infrastructure at all
• Legal regulations can complicated international distribution
• Cost of international distribution, particularly in getting goods from their point of origin to an overseas market, can be a significant factor.

Intensity of Distribution

The "intensity" of distribution pertains to the effort undertaken by the producer to make the product available to consumers, which generally follows the producer's estimation of the level of effort a customer is willing to undertake to obtain the product.

Intensive Distribution is a strategy that seeks to make a product available to the customer in as many places as possible. A good example of this strategy is soft drinks, which are sold in convenience stores, supermarkets, discount retailers, vending machines, restaurants, event concessions, etc. In these instances, the manufacturer often uses advertising to create customer demand to "pull" the product through the distribution chain, such that distributors have an active interest in obtaining it to satisfy customer demand.

Selective Distribution involves choosing a given type of outlet through which goods are to be made available. An example of this strategy is designer fragrances, which are only available through certain department stores and boutiques. It is assumed that the products rely on consumer preference (they will seek out the brand) and advertising is used to give the product a sense of exclusivity, such that a retailer will be incented to carry the product to attract a certain kind of consumer, or to reinforce its status as a retailer.

Exclusive distribution is the most restrictive policy, in which the manufacturer refuses to allow retailers to stock its goods, or provides a license that give the retailer an "exclusive" on the product in a given market (geographic area). This is often used when control over brand and customer experience is of high importance, though it applies to a wider range of goods (the author gives the example of Rolex watches, but it's also true of a Big Mac).

(EN: Returning to a topic mentioned earlier, the more restrictive a distribution policy, the greater the appeal of "unauthorized" distribution - there is no black market or independent Web site reseller for goods that can be purchased in any supermarket).

Channel Management

Channel management pertains to the strategies used by a company to control the flow of goods through the distribution channel. In instances when a product is established and has a high level of demand, the producer has considerable level lo control - but in most instances, "management" is a matter of negotiation, in that the producer is not always in a position of greatest power to require intermediaries to obey its desires.

Where a company has a strong brand, a high level of demand, and few competitors, it is easier for a producer to control the channel. In other instances, the producer lacks power and must cajole or even beg to get its products moved through the distribution channel. And in still others, retailers have significant channel power too bully their suppliers (Wal-Mart is a noted example).

Depending on the desired intensity of distribution, a producer may seek out (or accept) a limited number of qualified intermediaries. The choice is usually based on whether the intermediary serves the desired product market, offers the necessary services, has promotional expertise, and is willing to give a product the required attention and positioning.

Producers may also seek to manage the marketing of their product through different channels. This is often referred to as "multichannel marketing" and the distribution chain may be termed a "hybrid distribution system." It is increasingly common to use MCM to suit product sales by various retailers and channels (store, catalog, internet), though it brings the potential for channel conflict and cannibalization.

Another common concept is the "Vertical Channel Integration," in which companies attempt to take exclusive control of certain parts fo the distribution channel. This is most evident in the restaurant business, in which some manufacturers sell product to any wholesaler for use in any restaurant, others manage their wholesale operations but have independent retail franchises, whereas others insist on owning the entire distribution system. The primary advantages of vertical integration are higher profit margin and tighter control over the brand experience, but it comes at significant expense and increased business risk.

"Direct Marketing" is slightly different from vertical marketing, in that it seeks to eliminate (rather than merely control) as much of the distribution system as possible. The manufacturer seeks to establish contact and maintain a "relationship" directly with the consumer, typically via mail-order, telephone, or Internet channels. This approach ahs a significant cost advantage compared to traditional distribution and marketing approaches and often results in higher customer loyalty (which translates into better share-of-wallet).

A key distinction for marketing strategy is the company's approach to moving product through the distribution channels. A company can use a "push" strategy in which it users salesman and aggressive promotional tactics to convince intermediaries to buy inventory (and then apply effort to incent their own buyers to move it forward) or a "pull" strategy that is aimed at the final buyers to create demand for the product that will cause intermediaries to seek to obtain inventory. (EN: This is not either/or. A company may employ both push and pull tactics, either in different channels or to work both ends of a single channel.)

Some manufacturers engage in co-marketing efforts with retailers to promote its brand to customers. The most typical example are merchant tabloid advertising, in which manufacturers offer advertising dollars (or invoice credits) for using product logos, copy points, and other collateral from the manufacturer (EN: which is also a method of brand control), btu also applies to product placement (shelving) and any instance in which the retailer handles or presents the manufacturer's brand.

The author uses a different term, "horizontal marketing systems," to refer to instances in which companies work together to co-market complementary products, in the way that cell phone manufacturers partner with cellular service providers to offer a device-and-service package to customers, or the way that H&R Block and Hyatt Legal share office space (and even support staff) to provide services to customers who often need both.