Session: 7

Managing and designing

Distribution Channels

INDIAN INSTITUTE OF MANAGEMENT ROHTAK

Marketing Strategy Planning Process2-2

Distribution Channel System: Conceptual Framework

Distribution Channel System: Conceptual Framework

• Functions of Distribution System

–Marketing Exchange process Prospecting Promotion Physical Financing Market

Distribution & Collection Feedback

Transfer of Promotion Physical Money & Risk Feedback

Ownership Flow Flow Flow Flow

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 ChannelsValue-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 Consumer Products

Alternative Channel Systems for Industrial Products

Alternative Channel Systems for Industrial Products

Channel DynamicsChannel 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• Mumbai’s 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 Insurance’s total premium collection was Rs 51 crore. • Corporate agents — such as the SBI-GE credit cards venture — contributed Rs 11

crore. • For banks, it’s a win-win deal — it boosts their income, and helps them gain

some free publicity and advertising space.

Distribution Channel FunctionsDistribution Channel Functions

OrderingOrdering

PaymentsPayments

CommunicationCommunicationTransferTransfer

NegotiationNegotiation

FinancingFinancingRisk TakingRisk Taking

PhysicalDistribution

PhysicalDistribution

InformationInformation

Factors Affecting the Channel System

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 competition’s 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.

2-13

HomogeneousHomogeneousHeterogeneousHeterogeneous

Shopping ProductsShopping Products

Specialty ProductsSpecialty Products

Convenience ProductsConvenience ProductsImpulseImpulseEmergencyEmergency

New UnsoughtNew Unsought

Regularly UnsoughtRegularly UnsoughtUnsought ProductsUnsought Products

StaplesStaples

Marketing Strategy Planning Process

Place & Development of Channel Systems

Distribution of Customer Service & LogisticsRetailers, Wholesalers & their strategic planning

1. Place Objectives

Product Class

PLC

2. Direct v/s Indirect

3. Channel Specialists

4. Channel relationships

5. Market Exposure

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 high-

mark 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 SystemsAdvantages:• 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 franchisor’s 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 franchisor’s 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-of-

purchase, (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.

SessionSession

Managing Retailing, &

Wholesaling

Managing Retailing, &

Wholesaling

What is Retailing?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

Classification By Product Line

Specialty StoresSpecialty Stores

Department StoresDepartment Stores

SupermarketsSupermarkets

Convenience StoresConvenience Stores

SuperstoresSuperstores

Category KillersCategory Killers

Narrow Product Line, Deep Assortment

Narrow Product Line, Deep Assortment

Wide Variety of Product Lines i.e. Clothing, Home Furnishings, &

Household Items

Wide Variety of Product Lines i.e. Clothing, Home Furnishings, &

Household ItemsWide Variety of Food, Laundry, &

Household ProductsWide Variety of Food, Laundry, &

Household Products

Limited Line of High-Turnover Convenience Goods

Limited Line of High-Turnover Convenience Goods

Large Assortment of Routinely Purchased Food & Nonfood Products,

Plus Services

Large Assortment of Routinely Purchased Food & Nonfood Products,

Plus ServicesGiant Specialty Store that Carries a

Very Deep Assortment of a Particular Line

Giant Specialty Store that Carries a Very Deep Assortment of a Particular

Line

HypermarketsHypermarkets Huge SuperstoresHuge Superstores

Store Type Length and Breadth of Product Assortment

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.

• Category Killers: Giant specialty stores, deep assortments of particular product line. E.g. Reliance Retail’s consumer electronics

venture Reliance Digital and Tata Group’s Croma.

• Hypermarkets: Huge superstore like Adani Hypermarkets, RPG’s

Giant (Ram Prasad Goenka group), Reliance Mart in Ahmedabad.

PARKnSHOP Superstore in Hong Kong

Retail Levels of Service

Retailers position w.r.t. four levels of

services:

• Self service: discount stores follow this

locate-compare-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, Tele- shopping 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?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 WholesalersTypes of Wholesalers

Merchant Wholesaler

Independently Owned Business that Takes

Title to the Merchandise

it Handles.

Merchant Wholesaler

Independently Owned Business that Takes

Title to the Merchandise

it Handles.

Manufacturers’Sales Branches

and OfficesWholesaling operations

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

Manufacturers’Sales Branches

and OfficesWholesaling operations

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

Brokers/ AgentsThey Don’t Take Title to

the Goods, and TheyPerform Only a Few

Functions.

Brokers/ AgentsThey Don’t Take Title to

the Goods, and TheyPerform Only a Few

Functions.

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.