Session: 7

Managing and designing Distribution Channels

INDIAN INSTITUTE OF MANAGEMENT ROHTAK

Marketing Strategy Planning Process

2-2

Distribution Channel System: Conceptual Framework

Functions of Distribution System

Marketing Exchange process

Prospecting Promotion Physical Distribution Financing & Collection Market Feedback

Transfer of Ownership Flow

Promotion Physical Flow Flow

Money & Risk Flow

Feedback Flow

Types of Flows

Distribution Channel System: Conceptual Framework cont

Functionaries in the Distribution System 1. Intermediaries who take physical possession and transfer to others within an industry Merchants
(Wholesalers, and Retailers)

2. Intermediaries who facilitate the tasks of Merchants Agents, Middlemen

(Selling Agents, Purchasing Agents, Commission Agents etc)

3. Intermediaries who serve different industries Supplemental Agents

(Transporters, Insurance Companies & Agents etc)

Value-Added Chain of Distribution Channels

Basic activities in channel management:

Push activities: getting channel members to carry and sell the product. Pull activities: motivating customers to ask for your brand by name.

Alternative Channel Systems for Consumer Products

Alternative Channel Systems for Industrial Products

Channel Dynamics
Channel structures must adapt to changes in the environment.

Innovation in distribution can create new marketing opportunities. (discussed later) The Internet has evolved into a standard channel option. Differential advantage can be obtained by means of unique channel structure decisions.

Innovation in Distribution
Mumbais Apna Bazar Co-operative stores chain recently tied up with MetLife India for the customer base of over 1.5 million in the metropolis and beyond. Earlier, the Department of Post tied up with the Oriental Insurance Company for the same end. Till the opening up of the sector, Indian insurers sold risk products using the agents majorly. The reliance on a single channel limited reach and penetration. Future Scenario: The postman will not only deliver the mail from now on, he will also sell insurance products. You can buy a toothpaste and win a dental insurance or buy a home loan product and get life insurance cover free. Banks have themselves gained from such linkages. In the first quarter of fiscal year 2004-05, SBI Life Insurances total premium collection was Rs 51 crore. Corporate agents such as the SBI-GE credit cards venture contributed Rs 11 crore. For banks, its a win-win deal it boosts their income, and helps them gain some free publicity and advertising space.

Distribution Channel Functions

Information
Transfer

Communication

Payments Physical Distribution

Negotiation

Ordering Risk Taking

Financing

Factors Affecting the Channel System

Customer Behaviour Consumer needs should be analyzed when designing the channel structure. Sometimes channel systems can be designed to reach a new customer segment. Competitors A key decision is whether or not to follow the competitions channel structure. Marketing Strategy Marketing strategy should be linked to the channel system through the value proposition. Resources

Note on Strategic Issues on Distribution (HBS, Takeuchi 1987)

Shoe Manufacturer running 6 different distribution channels to penetrate market: Direct Selling: authorized full time/part time salespersons and are paid commission/ salary. Send the order to the company and the order shipped directly to customer. Direct Mail: mail fliers to direct-mail customers. Orders received were recorded in systems, to maintain past order records i.e. purchase pattern. Shoemobiles: For large industrial accounts 20 shoemobiles. Visiting factory locations; provide on-site fitting services; limited inventory; large proportion of orders were written and shipped; prepaid/ COD. Retail Stores: more than 100 company owned free standing stores in major cities. Carry large inventory of various styles and sizes. Shipment from Co. warehouse weekly. Franchised Stores: 50 franchised stores in small market areas. Independently owned mostly by former Direct salespersons & retail store managers.
Terms: One time initial franchise fee + monthly fee/ royalty (% of total gross sales) Set their own prices and store hours.

Sears (US one of the biggest department stores started in late 19th century): private label program. Specifies quantities and inventory levels for each SKUs. Contractual agreement . Term: full production cost + negotiated amount to cover overheads and profits.

Marketing Strategy Planning Process

2-13

1. Place Objectives

Place & Development of Channel Systems Distribution of Customer Service & Logistics Retailers, Wholesalers & their strategic planning

Convenience Products

Product Class PLC

2. Direct v/s Indirect
3. Channel Specialists 4. Channel relationships 5. Market Exposure

Staples Impulse Emergency Homogeneous Heterogeneous New Unsought Regularly Unsought

Shopping Products Specialty Products Unsought Products

Channel Selection
The selection of distribution channels is one of the most critical strategic marketing decisions due to two reasons: 1. It affects all other marketing mix elements:
Pricing strategy depends on whether distribution is through highmark up dealers or mass distribution. Promotional strategy depends on whether selling directly / or through sales persons/ or retailers. Product and packaging strategy depends on whether selling through department stores or discount stores.

2. Channel choice commits the Company to long term and complex relationships with intermediaries.

Channel Selection Process

Three major decisions: Length of distribution channel: number channel intermediaries participate in moving the product. Breadth of distribution channel: relative intensity of distribution coverage i.e. number of retail outlets and number of wholesalers which will distribute to these outlets. Retail penetration intensive, selective and/or exclusive. Whether and how to modify the current distribution channel structure to meet new market opportunities.

1. Determining Vertical Length of Channel System

Whether to sell directly or through intermediaries.

Selling Directly (Advantages): More cost effective in case of high volume business with an account. Can exert more control over distribution functions. Better satisfy the customer needs like technical services. Direct relationship can provide prompt market information.

Through intermediaries (3 options) Corporate system: manufacturer owns and operates vertical integrated system. E.g. ITC buy wheat from farmers to produce Aashirwad atta and Sunfeast biscuits . Contractual system: sign contract b/w Co. and intermediaries. Conventional system: utilizes the resources of intermediaries to move its products.

Vertical Length of Channels: Corporate Systems

Advantages: Company can exercise control over its marketing activities e.g. set and maintain consistent list price. Control quality standards. Better coordination in executing its promotional campaigns. Achieving operating economies by standardization, automation and better channel operations like inventory and stock management. Better in-store services e.g. brand store can do alterations of suits within the store; Singer provide in-store demonstrations and sewing lessons. Disadvantages: Large investments in financial and human resources, otherwise performed by independent intermediaries. Difficult to adapt to new market opportunities. Legal risks due to vertical mergers or acquisitions e.g. competitive issues.

Vertical Length of Channels: Contractual Systems

Contractual systems are a form of Franchising arrangement. Category: Product trade name franchising and Business format franchising. Product trade name franchising: arrangement where franchisee acquires the marketing rights within a designated area, using franchisors trade name. e.g. automobile and truck dealers and soft drink bottlers. Business format franchising: franchisee acquires rights for Utilizing business know-how (i.e. operating manuals, standards, quality control, information systems and marketing plans) Offering franchisors product or services in a designated market area. E.g. fast food chains, hotel etc.

Disadvantages of Franchising:
Fly-by-night operators. Termination of contract. Disagreement over strategic issues.

Vertical Length of Channels : Conventional System (to achieve coordination and economies of scale)
Administered programs administer inventory plan, advertising plan, or sales training plan. E.g. GE is using programmed

merchandising plan with its appliance retailers. Through this method

Co. try to satisfy its intermediaries i.e. carrot approach / reward. Sales agreements bind the dealers to: Meet technical requirements To have qualified sales staff Allow Co. representatives to inspect the store Protect name and reputation of Co.

i.e. stick approach/ punishment

Determining the Breadth of Channel System

Intensive: when share of distribution translates into share of market. For commodities with low unit value, consumer prefer conveniently located outlets. Issue of loss leaders in mass merchandisers i.e. product sold below cost to stimulate store sales like milk, egg, rice etc. alongwith other purchases of store. A kind of sales promotion using

pricing. E.g. soft drinks, impulse products etc.

Selective: maintain image, full assortments, consistency in prices at retail level etc. e.g. apparel companies, Exclusive: provide sales assistance, good local reputation and specialists.

Choice b/w Intensive or Selective Distribution Product characteristics:

Convenience goods: sold frequently, minimum effort intensive Shopping/ specialty goods: deep involvement in purchase, rational/ emotional selective/ exclusive.

Buying behaviour:
Selective distribution when: perceived risk is high, post-purchase services requirements, frequency of purchase is low, high brand loyalty, high personal selling effort required. Intensive distribution: .

Choice b/w Intensive or Selective Distribution cont

Degree of Control: Selective distribution is appropriate: (a) to control retail prices, (b) selling assistance required at point-ofpurchase, (c) display standards, (d) maintaining product

image.
Intensive distribution is appropriate: (a) penetration,

(b) minimum risk and low exit barrier.

Competitive strategies: Products frequently move from Selective to intensive distribution over stages of PLC.

Modifying the Channel System

A company may develop new channel systems majorly due to: Forced to adopt changes due to competitive reasons. E.g. competitors are opting for VMS. To serve a new customer segment. E.g. automobile Co. start selling through their own sales force to Car Rental companies. To cover new geographical region. E.g. selling in host country v/s in foreign markets.

Channel Conflicts
Role Conflict: Certain members of the channel deviate from the agreed/ expected role. Horizontal and Vertical (Bait and Switch tactics) E.g. A car sales showroom puts a basic
car outside with a very low price-tag. Once the customer is interested, the sales person trades them up to a more expensive model.

Goal Conflict: goal(s) of one channel member differs from the other. E.g. manufacturer want volume growth whereas small retailers may be satisfied with stability or higher margins of limited products. Lack of Communication: relevant strategic or tactical information not disseminated in advance. E.g. manufacture
often make changes in product design, prices and promotional strategies.

Ways of dealing Channel Conflict

Motivating Channel Members: financially through better credit terms, higher gross margins, promotional allowances, trade discounts etc. Non financially like pep rallies, sales contests and awards etc. Communicating the Channel members: proper flow of information i.e. changes in product design, prices and promotional strategies with mutual consent. Establishing Controls: Control can be build into the system after mutual understanding, through measures of performance standards. Explicit agreements regarding: territorial coverage, exclusive agreement, participation in promotional programs and treatment of damaged goods etc.

Session Managing Retailing, &

Wholesaling

What is Retailing?
All the activities involved in selling goods or services directly to final consumers.

Retailers - businesses whose sales come primarily from retailing.

Retailers can be classified as:
Store retailers such as Sears, Walmart. Nonstore retailers such as the mail, telephone & Internet.

Classification By Product Line

Store Type
Specialty Stores Department Stores Supermarkets Convenience Stores Superstores Category Killers Hypermarkets

Length and Breadth of Product Assortment

Narrow Product Line, Deep Assortment Wide Variety of Product Lines i.e. Clothing, Home Furnishings, & Household Items

Wide Variety of Food, Laundry, & Household Products

Limited Line of High-Turnover Convenience Goods Large Assortment of Routinely Purchased Food & Nonfood Products, Plus Services Giant Specialty Store that Carries a Very Deep Assortment of a Particular Line Huge Superstores

Retail Channel Terminology

Hyper markets:
Selling areas exceeding 200,000 sq.ft.

Discount stores:
Selling areas averaging 70,000 sq.ft.

Super markets:
Selling areas averaging 30,000 to 50,000 sq. ft.

Superettes:
(a compact food market which often services persons in low-density suburbs mostly in
New Zealand; similar to convenience stores of US; a small form of Super market)

Selling areas averaging 1,000 to 4,000 sq. ft.

Major Retail Types

Specialty Stores: Narrow product line with depth. E.g., Music world, Nokia world, Sony world, Khadims, Adidas, Bata, Raymonds, Apollo pharmacy. Department Store: Several product lines, each line operated as a separate department managed by specialist merchandisers. E.g. Sears, Fabmall in Kerala, Spencer. Supermarkets: Relatively large, low-cost, low-margin, high-volume, self service operation designed to serve diversity of needs. E.g. FoodWorld, Apna Bazar. Convenience Stores: Relatively small stores located near residential areas, open long hours, 7 days a week, carrying limited line of high-turnover convenience products at slightly higher prices. E.g. grocery stores. Discount Stores: Standard merchandise sold at lower prices, lower margins, higher volumes. Discount retailing has moved into specialty merchandise stores like discount sporting-goods stores, electronic stores, and bookstores. E.g. Walmart, Kmart, Future Group's Brand Factory, Arvind Brands' Megamart, Provogue's Promart and The Loot. Off-price retailers: leftover products like Factory outlets.

Major Retail Types

cont

Superstores: Huge selling space, routine purchase food and HH items, plus services. e.g.
In U.S: IKEA (Furniture, Housewares), Kmart (owned by Sears Holdings Corporation) (Groceries, General Merchandise), Toys "R" Us (Toys) In Australia: Kmart, Megamart. In Canada: Future Shop. In India: Star India Bazaar (owned by the Tata Group), Big Bazaar (owned by the Pantaloon Group), Reliance Retail, Vishal Megamart.
PARKnSHOP Superstore in Hong Kong

Category Killers: Giant specialty stores, deep assortments of particular product line. E.g. Reliance Retails consumer electronics venture Reliance Digital and Tata Groups Croma.
Hypermarkets: Huge superstore like Adani Hypermarkets, RPGs Giant (Ram Prasad Goenka
group), Reliance Mart in Ahmedabad.

Retail Levels of Service

Retailers position w.r.t. four levels of services: Self service: discount stores follow this locatecompare-select process.

Self selection: customer locate good but can ask for

assistance.

Limited service: credit, returns, customer assistance.

Full service: all possible assistance and delivery.

Retailing
Non-store retailing Categories of nonstore retailing:
Direct selling: Amway, Eureka Forbes. Direct marketing: Indiatimes.com, Amazon.com, Teleshopping networks.

Automatic vending: Beverages etc.

Retailing
Services and Store Atmosphere
Prepurchase services include accepting telephone and mail orders, etc. Postpurchase services include shipping and delivery, etc.

Ancillary services include general information, check cashing, parking, etc.

Price Decision
High-markup, lower volume Low-markup, high volume

What is Wholesaling?
All the activities involved in selling goods and services to those buying for resale or business use.

Wholesaler - those firms engaged primarily in wholesaling activity.

Types of Wholesalers
Merchant Wholesaler
Independently Owned Business that Takes Title to the Merchandise it Handles.

Brokers/ Agents
They Dont Take Title to the Goods, and They Perform Only a Few Functions.

Wholesaling operations conducted by Sellers by putting purchase offices in diff. market centers.

Manufacturers Sales Branches and Offices

Franchising
Franchising is not a separate industry but a method of distribution
Outcome of the contract b/w franchiser (decides what pdt/service to be provided) and the franchisee (undertakes to execute the contract; may be distribution etc) Terms of the contract includes: minimum monetary investment, specified operating procedures, quality control, and payment terms. Franchising at the international market is a fast emerging medium of entering new country(ies)/ region(s). E.g. McDonalds, Benetton, Kentucky Fried Chicken (KFC) etc.