Reynolds Metals Company

Distribution Channel Strategy

Managing Incentives under Intensive
Distribution
March 2000
 The Incentive Problem
 Under intensive distribution, there is continuing
pressure by larger, powerful resellers to:
– Seek special discounts to bolster margins that are
otherwise competed away
– The discounts are not fully passed along to consumers
– To take advantage of these discounts to forward buy
– And to divert discounts received in one region to
another region
 This process serves to raise manufacturing and
logistics costs through out the channel
Tying Discounts to Promotion
 The MDF plans require that:
– Retailers provide promotional support for all
discounts in order to “earn” them
– Further, the plans limit the discounts to the
volume of product sold during the time the
discount is available. This eliminates the
economic benefits to be derived from forward
buying and diverting
 Impact of Plan to Retailers
 Retailers lose the significant increment to gross
margin that derives from a simple discount plan
 These discounts provide a major income stream
that is greater than savings from reduced stock
 Retailers run a full set of promotional programs at
all times, there is seldom any slack
 Support for Reynolds must therefore come at the
cost to another supplier and another promotion
 Impact of Plan on Supplier
 Suppliers benefit from:
– Reductions in manufacturing and inventory cost
– More effective use from promotional plans and
the extra sales gained
 Suppliers risk:
– Loss of retailer support for earned promotions
– Loss of some distribution breadth and depth
– Competitor opportunism
 The Role of Price Elasticity
 The role of price elasticity has a key impact
upon the impact upon the supplier
– Higher price elasticities will result in a greater
loss of sales if retail prices rise as a
consequence of the strategy
– The shift to the new strategy, as a consequence,
can only be led by suppliers with strong brands
– Resistance to choice compromise is critical
 Logistic Savings
 Logistic and manufacturing savings are a
free gain to the supplier of one to several
percent
 Logistic savings to retailers may be
ephemeral since they can may be competed
away
 Unrestricted trade discounts are less
vulnerable and a boon to retailers