Marketing:

Channels of Distribution
 Channels of Distribution

“Systems” of interdependent organizations

that direct the flow of product
(title/possession) from producers to buyers.

Producers Intermediaries Customer

 Channels of Distribution
…create time, place, possession and
information utilities.

PLACE
TIME

POSSESSION

t y Information
U t ili
37 2157 1
Box 9 24
Creating utilities for customers.
 Channel Functions
Producer Intermediaries Customer
(Facilitate exchange)

Accumulating & Creating

breaking Assortments
bulk (sort to quantity

Materials handling

Reducing Transporting &

transactions Inventory storage
 Distribution Channels Facilitate
Specialization

Intermediaries provide Exchange efficiencies

Intermediaries

Producer Customer
Connectivity is King for product delivery
when and where
 Channel Functions: Promotion
Producer Collaborators Customer
(Facilitate exchange)

Promotion:
- Cooperative advertising
- In Store Sales promotion

Advertising
Sales
Agencies
Promotion
Personal Selling:
Merchant sales reps
sell only, no title transfer
 Promotional “Pull” Strategy
... Producers promote to the target audience to
stimulate demand and “Pull” the product through
the distribution channel to customers.
Promotes to

Producer Wholesaler Retailer Customer

Orders Orders Request

Promotional “Push” Strategy

Producers promote to marketing intermediaries

to “Push” the product through the distribution

channel to consumers.

Promotes To
Producer Wholesaler Retailer Customer
 Applied
Marketing Ice Cream Rivals
UNILEVER–17% MShare Nestle-16% (Mk Share)
Ben & jerrys Haagen Daz,Dreyers
Good Humor, Breyers Drum Stick Brands

Nestlé's GoaL: Improve (intensive) distribution

Introduce 100K branded vending machines &
freezers in big gas stations, convenience
stores & non grocer outlets
Create new products & specialty items:
Coffee Almond Crunch Bar at Starbuck’s
WSJ, June, 2003
 Ice Cream Distribution: The Scoop
70.00%
60.00%
50.00%
Ice-cream
40.00% distribution in
the U.S. in
30.00% 2001
20.00%
10.00%
0.00%
Standard Kiosks Discount Gas Traditional
Grocers Grocers Stations Grocers
Ball, Deborah. “Ice Cream Rivals Prepare to Wage A New Cold War.” WSJ, June 26, 2003
 Valued freezer space
Freezer costs are up to 6x higher in non
grocer venders due to electricity &
maintenance costs but offer 25% higher
profit margins than super market tubs
Growth Rates: Out of home 10%/year
in home 8%* (*
80% of ice cream is consumed in home)
80-20 principle
 Channel Functions: Pricing
Producer Intermediaries Customer
(Facilitate exchange)

Pricing: How much?

Pricing support:
- terms of sale (credit, cash, etc.)
- convenience of payment
- financial risk
Financial Institutions:
Transfer of Ownership
Provide Credit Services
 Applied
Marketing
What Levi’s is Doing
• Levi’s jeans were the same model and price for many years
although they were bought many different types of people.
•Diversifying their target markets by selling jeans in high
end stores such as Neiman Marcus, to middle class stores
such as Kohl’s and Macy’s, to large discount stores such as
Wal-Mart.

2004
Channel Functions: Product Support
Producer Intermediaries Customer
(Facilitate exchange)
Product:
- sales data feedback
- customer service/product repairs
- product selection & delivery
- packaging
- financial & social risk

Risk Taking
legal Services
 Distribution Channel Designs
Organizations through which a product passes to
reach the end user.

Zero-level: Intermediaries:
(Direct) (Traditional)
Manufacturer Producer Manufacturer
Manufacturer
Manufacturer

Wholesaler
Wholesaler
Intermediaries

Consumer Retailer Retailer

Retailer
Consumer
Consumer
Consumer
Consumer
 Channel Design
Criteria To Select Collaborators:
#1 - Target market coverage &
consumer purchase behavior
Company Resources & Objectives
- adaptability/control
- performance quality level
Ease of Doing Business
Packaging Requirements
Order Processing Quality
 Changes in PC Buying Behavior affect
Dell (Direct sales)
Year Desktops All
Laptops
78.8% of 26.4
Dell 2000 world-wide million
                 shipments world-wide
shipments
65.5% of 65.3
Dell 2005 world-wide million
PC companies are refocusing on shipments
the consumer world-wide
market (15% of
Dell’s sales of 56 bil/yr vs the business market ) where consumers like
shipments
to hold & test models in a store. Consumers prefer laptops due
to new wireless technology & on the go convenience.
WSJ, “Consumer Demand and Growth in Laptops Leave Dell Behind”, 30Aug06
 Changes in PC Buying Behavior affect Dell
(Direct sales)
Year Dell Laptop Mkt
Desktop (all)
78.8% of 26.4 million
2000 world-wide world-wide
shipments shipments
                65.5% of 65.3 million
2005 world-wide world-wide
shipments shipments
PC companies are focusing on the consumer market
(15% of Dell’s sales of 56 bil/yr vs the business market) where
consumers like to hold & test models in a store.
Consumers prefer laptops due to new wireless
technology & on the go convenience.

WSJ, “Consumer Demand and Growth in Laptops Leave Dell Behind”, 30Aug06
Channel Design Criteria To Select
Collaborators
Competition
Technical service support
On time delivery/reliability
Economic value/efficiency
Total costs, a “systems view”,
Examples of compensation:
Trade, quantity, promotion & cash
discounts.
 Channel Design:
#1 Target Market Coverage

Intensive Selective Exclusive

distribution distribution distribution
 Market Coverage: Legal Issues
Strategic Alliances..the products
of one organization are distributed
through the marketing channels of
another
Dual Distribution
A producer can use two different channels to
reach the same target market if it is not
trying to engage in unfair competition & put
its independent distributors out of business

Restricted Sales Territories - Granting exclusive

sales territory rights to distributors is permissible if the
rights do not restrain trade
 Direct Marketing Channels

Producer Buyer
Personal Selling
Telemarketing
Toll free phone #
Catalog order
Fax order
Mail order
E Commerce
 Direct Marketing can eliminate the
middleman but not the functions

Infomediaries & Vertical Exchange

 Applied
Marketing Direct Sales of Alcohol
Liquor Wholesaler: A Mandated Middleman
Issue: Florida wine aficionado’s desire
vintages direct from California.
E–commerce simplifies the P to C relationship
by passing wholesalers & their 18-25% price
cut
Current Legislation: direct shipment to
consumers is a misdemeanor (1st time ), a
felony (2nd time violation )
Rationale: (a) to prevent underage
drinking and (b) to collect state taxes
Update:July06,.5 -3mil WSJ 4 OCT 1999 pg A1

(teens) buy on line

 Channel Integration
Manufacturer
Manufacturer
Forward Backward
integration: integration:
member member
acquires a Wholesaler
Wholesaler acquires an
downstream upstream
member member
Retailer
Retailer
Franchise:
member licenses
Consumer property to
Consumer
independent
business
 Vertical Channel Integration…
seeks to control 2 or more levels

Oil field,
Producer
Oil rig,
Wholesaler
Pipeline
Retailer
transport,
U.S. Court
Refinery,
transport,
Station
storage,
Consumer Consumer Consumer
 Outlets Owned by the Top Six Companies
2001 1993
Rank Company Outlets Rank Company Outlets
1 Royal Dutch/Shell 22,000 1 Texaco 14151
2 BP 17,500 2 Citgo 12531
3 Conoco Phillips 17,400 3 Exxon 9450
4 Exxon Mobil 16,080 4 Amoco 9370
5 Citgo 13,666 5 Royal Dutch/Shell 8533
6 Chevron Texaco 8,055 6 Chevron 8525
Combined Market Share 55% Combined Market Share 30%

Gas stations (thousands)

220
210
200
190
180
170
91 92 93 94 95 96 97 98 99 00 01
Horizontal Channel Integration …
seeks economies of scale via advertising,
purchasing,etc
(Contractual Systems)

Wholesaler Sponsored: (Ace Hardware)

Retailer Sponsored: (IGA)

Franchise Systems: (McDonalds’s)

 Channel Systems
(Examples)
 Corporate: 1 channel member owns

. other channel members

 Contractual: channel members operate

under contractual
agreements
(franchises)

 Administered: channel members operate

based on agreed upon
 Applied
Marketing People’s Bank

Founded in 1842,it is the largest state-

chartered bank in Connecticut.
Is part of multiple horizontal & vertical
distribution systems with Travelers, Hartford,
Kemper,
hhh and Chubb to offer auto, home &
business insurance.
uses a zero-level or direct marketing
channel to distribute its financial services
or vertical system for collaborators
(Brokerage services).
 Other Distribution Issues
Reverse
distribution

Ethical, Political, &

Legal
 Applied
Marketing
MAJOR RECALL
Mitsubishi Motors Corp. presents a public image
of economic value & purity but in reality …
it was “forced” to recall vehicles to fix a
potentially defective ball joint in the front
suspension
Affects models made between 1992 and 2001
– 960,000 vehicles recalled in U.S.
– 400,000 vehicles recalled in
Japan
– 156,000 vehicles in other
countries

Source: The Wall Street Journal

February 16, 2001,Page A3
 Distribution Channel: Legal Issues
One Coca Cola
Distributor

U.S. Court

OK
Difficult
 Tying Contracts - Requiring a channel
member to buy additional products from
the supplier in order to purchase a
particular product from the supplier
One thousand
 Full-Line Forcing - Requiring a channel retailers
member to carry a supplier’s entire
product line to obtain any of the supplier’s
products
 Channel Legal Issues
 Product Liability,
 Resale Price maintenance ,
 Refusal to Deal - Suppliers can choose their
distributors and refuse to deal with others if their
decisions are not based on anticompetitive motives
or are not part of an organized refusal-to-deal with
certain channel members.
Exclusive Dealing-Forbidding an intermediary to carry
products of a competing manufacturer
– Is anticompetitive if
it blocks competitors from 10% of the market
sales revenues are sizable
the manufacturer is larger than the dealer
 Channel Relationships
Supply Chain Management

Channel Captain: The dominant member (producer,

wholesaler, or retailer) establishes channel policies &
coordinates the marketing mix

Leadership …by example

Cooperation..common objectives
Conflict resolution
Power to enforce
 Types of Channel Power
(The ability of one channel member to
influence another member’s goal achievement)
 Reward Power

 Legal Power

 Expert Power

 Coercive Power

Power Control Performance

 Supply Chain Management:
Channel Conflict
Sources of Channel Conflict
– Disagreements on responsibilities
– Communication difficulties reduce coordination
– Increased use of multiple distribution channels by
manufacturers creating conflicts with distributors
and retailers
– Intermediaries diversifying into and offering
competing products
– Producers try to circumvent intermediaries and
deal directly with retailers
CHANNEL CONFLICT

Large retailer threatens to stop buying a

product unless the suppler grants “
unreasonably low” prices and/or high
supports services

Coercive power?
Ethical Decision?
Survival Decision?
 Marketing Channels Form a
Supply Chain
Supply Chain Management
– Long-term partnerships among channel
members that reduce inefficiencies, costs, and
redundancies and develop innovative
approaches to satisfy customers
– Optimizes costs throughout the whole channel
for efficiency and service
– Includes all entities that facilitate product
distribution and benefit from cooperative efforts
– Arises from the need to achieve a more
competitive position