Chapter 12

Place and Development

of Channel Systems
 Learning Objectives
 To explore the role and significance of marketing
channels and supply chains
 To identify types of marketing channels
 To understand factors that influence marketing channel
selection
 To identify the intensity of market coverage
 To understand the purpose and function of retailers in the
marketing channel
 To identify the major types of retailers
 To explore strategic issues in retailing
 To examine franchising and its benefits and weaknesses
 To understand the nature and functions of wholesaling

© 2012 South-Western, a part of Cengage Learning 14-2

 Supply-Chain Management

A set of approaches used to integrate the functions

of operations management, logistics management,
supply management and marketing channel
management so products are produced and
distributed in the right quantities, the right
locations and at the right time.
 The goal is to achieve optimal levels of efficiency
and service
 The supply chain includes all entities that facilitate
product distribution and benefit from cooperative
efforts

© 2012 South-Western, a part of Cengage Learning 14-3

 Supply Chain Management Issues
 Technology
• Information technology has created almost
seamless distribution processes
• Information sharing has reduced costs
• Increased speed, flexibility, and cooperation
 Technology has improved service
• Increasing number of innovative goods
• Increased involvement of firms in management
supply chain
 Effective supply-chain management is
closely linked to a market orientation
© 2012 South-Western, a part of Cengage Learning 14-4
 The Role of Marketing Channels
in Supply Chains
Marketing Channel (Channel of Distribution,
Distribution Channel)
 A group of individuals and organizations that
direct the flow of products from producers to
customers within the supply chain
Marketing Intermediaries
 Middlemen that link producers to other
intermediaries or ultimate consumers
through contractual arrangement or through
the purchase and reselling of products
© 2012 South-Western, a part of Cengage Learning 14-5
 Marketing Channel Activities
Performed by Intermediaries

© 2012 South-Western, a part of Cengage Learning 14-6

 The Significance of
Marketing Channels
 Marketing channel decisions influence the
rest of the marketing mix
 Channel decisions determine:
 A product’s market presence
 Buyer’s accessibility to the product
 Effective marketing channels required for
organizational success
 Entail long-term commitments among a
variety of firms
• Difficult to change/undo marketing channel
decisions
© 2012 South-Western, a part of Cengage Learning 14-7
 Marketing Channels Create Utility

 Time Utility
• Having products available when the customer
wants them
 Place Utility
• Making products available in locations where
customers wish to purchase them
 Possession Utility
• Customers have access to the product to use now
or store for future use
 Form Utility
• Formed by assembling, preparing, or otherwise
refining the product to suit customer needs
© 2012 South-Western, a part of Cengage Learning 14-8
 Marketing Channels Facilitate
Exchange Efficiencies

© 2012 South-Western, a part of Cengage Learning 14-9

 Typical Marketing Channels for
Consumer Products

© 2012 South-Western, a part of Cengage Learning 14-10

 Think About It: Banana Republic

 Banana Republic has retail stores across the

country, as well as offers sales through its
website
 Banana Republic and The Gap recently
began offering sales in Europe through their
websites
 What distribution channels do you think
Banana Republic utilizes to sell its goods?

© 2012 South-Western, a part of Cengage Learning 14-11

 Think About It

 The Internet and smartphones have created

new distribution channels
 Magazines and newspapers sell content via
smartphone and iPad apps
 How does this change the distribution
system for print media?
 From a marketers perspective, what are
potential problems with selling books,
magazines, and newspaper via apps?

© 2012 South-Western, a part of Cengage Learning 14-12

 Multiple Marketing Channels and
Channel Alliances

Dual Distribution
 The use of two or more marketing channels
to distribute the same product to the same
target market
Strategic Channel Alliance
 The products of one organization are
distributed through the marketing channels
of another

© 2012 South-Western, a part of Cengage Learning 14-13

 Selecting Marketing Channels

© 2012 South-Western, a part of Cengage Learning 14-14

 Selecting Marketing Channels continued

Customer Characteristics
 Consumer market or business market?
• Business customers often prefer to deal directly
with producers; are more likely to buy complex
products and in large quantities
Product Attributes
 Complex/Expensive or standardized?
 Durable or Fragile?

© 2012 South-Western, a part of Cengage Learning 14-15

 Selecting Marketing Channels continued

Type of Organization
 Large or small?
• Large firms are often in a better position to have
more distribution centers, which reduce delivery
times
• Smaller firms may be in a better position to serve
smaller-scale regional needs
Degree of Competition
 High or low?
• Highly competitive markets require companies to
keep costs and prices low
© 2012 South-Western, a part of Cengage Learning 14-16
 Selecting Marketing Channels continued

Environmental Forces
 Economic considerations will force
organizations to make compromises
 Technology may help a firm modify/improve
its channel strategy
 Government regulations and trade
agreements can affect channel strategy
Characteristics of Intermediaries
 If an intermediary is not adequately
promoting an organization’s products, it may
reconsider channel choices
© 2012 South-Western, a part of Cengage Learning 14-17
 Intensity of Market Coverage
Intensive
 Uses all available outlets to distribute a product
 For most convenience products
 Multiple channels may be used
Selective
 Uses only some available outlets to distribute a product
 For shopping products
 Desirable when a special effort is important to customers
Exclusive
 Uses a single outlet in a fairly large geographic area
 For products purchased infrequently, consumed over a
long period of time, or requiring service and information
 Only authorized dealers are used
© 2012 South-Western, a part of Cengage Learning 14-18
 Discussion Question

 Wrigley’s Doublemint
gum is a classic
choice for gum lovers
 What intensity of
coverage is most
common for the
distribution of a
convenience product
like chewing gum?

© 2012 South-Western, a part of Cengage Learning 14-19

 Intensity of Market Coverage continued

© 2012 South-Western, a part of Cengage Learning 14-20

 Discussion Question

 What level of intensity of market coverage

would you select for products sold by the
following brands?
• Montblanc
• Carhartt
• Reebok
• Chanel

© 2012 South-Western, a part of Cengage Learning 14-21

 Strategic Issues in
Marketing Channels

Competitive
Priorities

Strategic Issues

Channel
Channel Leadership,
Integration Coordination, and
Conflict

© 2012 South-Western, a part of Cengage Learning 14-22

 Competitive Priorities in
Marketing Channels
 Supply chains can provide a competitive
advantage for many marketers
 Supply chain decisions cut across all
functional areas of a business
 An effective and efficient supply chain can
sustain a business in a variety of competitive
environments
• Inefficient supply chains can lead to increased
costs
• Integrated supply chains lead to a holistic view
of the supply chain
© 2012 South-Western, a part of Cengage Learning 14-23
 Channel Leadership

Channel Captain (Channel Leader)

 The dominant leader of a marketing channel
or a supply chain
 May be a producer, wholesaler, or retailer
Channel Power
 The ability of one channel member to
influence other channel members’ goal
achievements

© 2012 South-Western, a part of Cengage Learning 14-24

 Channel Cooperation
 Cooperation is vital if each channel member is
to gain something from the others
 Enables retailers, wholesalers, suppliers and
logistics providers to:
 Speed up inventory replenishment
 Improve customer service
 Cut the costs of bringing products to customers
 A marketing channel should be viewed as a
unified supply chain
 Members should work toward common
objectives
 Channel member tasks must be clearly defined
© 2012 South-Western, a part of Cengage Learning 14-25
 Channel Conflicts

 Channel conflict occurs when:

 Self-interest creates misunderstanding about role
expectations of channel members
 Communication is poor between channel
members
 There is increased use of multiple channels has
increased the chance for miscommunication and
conflict

© 2012 South-Western, a part of Cengage Learning 14-26

 Physical Distribution in Supply-
Chain Management
Physical Distribution (Logistics)
 Activities used to move products from
producers to consumers and other end users
Outsourcing
 The contracting of physical distribution tasks
to third parties
• Most distribution activities can be outsourced to
firms with expertise in specific areas
Cycle Time
 The time needed to complete a process
© 2012 South-Western, a part of Cengage Learning 14-27
 Goals of Physical Distribution

Right
Goods

Cycle Right
Time Place

Goals of
Physical
Right Distribution
Right
Support
Price
System

Right Right
Quantity Time

© 2012 South-Western, a part of Cengage Learning 14-28

 Proportional Cost of Each Physical Distribution
Function as a % of Total Distribution Cost

© 2012 South-Western, a part of Cengage Learning 14-29

 Characteristics and Ratings of Transportation
Modes by Selection Criteria

© 2012 South-Western, a part of Cengage Learning 14-30

 Retailing
Retailing
 All transactions in which the buyer intends to
consume the product through personal, family,
or household use
 Can occur in stores, through direct selling,
vending machines, and online
Retailer
 An organization that purchases products for the
purpose of reselling them to ultimate consumers
 Creates utility (time, place, possession and
form) for consumers
© 2012 South-Western, a part of Cengage Learning 15-31
 How Retailers Enhance Value

 Provide services
 Assist in product selection
 Make shopping experience more convenient
 Location facilitates comparison shopping
 Demonstrate products
 Create utility for ultimate consumers

© 2012 South-Western, a part of Cengage Learning 15-32

 Strategic Issues in Retailing:
Store Image

Projecting a functional and psychological

picture that appeals to the target market
 Atmospherics: The physical elements in a store’s
design that appeal to consumers’ emotions and
encourage buying
• Exterior atmospherics (storefront, displays,
entrances)
• Interior atmospherics (lighting, wall and floor
coverings, store fixtures)

© 2012 South-Western, a part of Cengage Learning 15-33

 Firms to Know: Zara

 A Spanish company
 Popular for its low-cost and trendy clothing
 Famous for its quick production and
distribution times
• Allows it to stay ahead of the competition in the
fast-moving fashion industry
 Retail presence in 73 countries

© 2012 South-Western, a part of Cengage Learning 15-34

 Category Management

Category Management
 A retail strategy of managing groups of
similar, often substitutable, products
produced by different manufacturers
• Represents a move towards a collaborative
supply-chain initiative that enhances customer
value

© 2012 South-Western, a part of Cengage Learning 15-35

 Direct Marketing

The use of telephone, Internet and nonpersonal

media to communicate product and
organizational information to customers
 Nonstore Retailing: The selling of products
outside the confines of a retail facility

© 2012 South-Western, a part of Cengage Learning 15-36

 Catalog Marketing
Occurs when an organization provides a catalog
from which customers make selections and place
orders via mail, telephone, or the Internet
 Advantages
• Customers benefit from efficiency and convenience
• The retailer benefits by being able to locate in
remote, low-cost areas, save on expensive store
fixtures and reduce both personal selling and store
operating expenses
 Disadvantages
• Inflexible
• Limited Service
• Only effective for some products
© 2012 South-Western, a part of Cengage Learning 15-37
 Direct Response Marketing

Occurs when a retailer advertises a product and

makes it available through mail or telephone
orders
 Often conducted on television, but mailing,
samples, brochures and booklets are also
common

© 2012 South-Western, a part of Cengage Learning 15-38

 Telemarketing

The performance of marketing-related activities

by telephone
 Can help generate sales leads, improve customer
service, accelerate payments on past-due accounts,
raise funds for nonprofit organizations and gather
marketing data
 The laws and regulations regarding telemarketing
have become more restrictive

© 2012 South-Western, a part of Cengage Learning 15-39

 Television Home Shopping

Presents products to television viewers who can

purchase products through toll-free numbers
and paying with credit cards
 Easy demonstration of products
 Consumers have the convenience of
shopping from home

© 2012 South-Western, a part of Cengage Learning 15-40

 Online Retailing

 Makes products available through computer

connections
• New retail opportunities
• Easy comparison shopping and ordering
 Easier than ever to find upscale and hard-to-
find items
 Online security remains a serious problem

© 2012 South-Western, a part of Cengage Learning 15-41

 Direct Selling
“Door-to-door selling;” it is the marketing of
products to ultimate consumers through face-to-face
sales presentations at home or in the workplace
 Benefits
 Gives marketers an opportunity to demonstrate the
product where it would most likely be used
 Customers get personal attention
 Products are presented at convenient times and
locations for customers
 Limitations
 Is the most expensive form of retailing
 Some customers do not trust direct sellers
 Some communities prohibit direct selling
© 2012 South-Western, a part of Cengage Learning 15-42
 Automatic Vending

The use of machines to dispense products

selected by customers
 It is one of the most impersonal forms of
retailing
 Machines need only a small amount of space
and no sales personnel
 Equipment is expensive and requires
servicing and repair

© 2012 South-Western, a part of Cengage Learning 15-43

 Think About It
 Many products are sold via vending
machines
 The U.S. mostly sells drinks and snacks,
but other countries get more creative
• Aldi supermarkets in Germany sell freshly
baked bread out of vending machines
• Japan has vending machines that grow
vegetables
• China have vending machines that dispense
live crabs
 What is the strangest thing you have seen
sold in a vending machine?
© 2012 South-Western, a part of Cengage Learning 15-44
 Franchising

An arrangement in which a supplier, or

franchiser, grants a dealer, or franchisee, the
right to sell products in exchange for some type
of consideration

© 2012 South-Western, a part of Cengage Learning 15-45

 Franchising Advantages

 Franchising enables a franchisee to start a

business with limited capital and to benefit
from the business experience of others
 Are generally more successful than
independently owned outlets
 The franchiser gains fast product distribution
through franchise arrangements
 The franchiser can dictate many aspects of
the business

© 2012 South-Western, a part of Cengage Learning 15-46

 Franchising Disadvantages

 The franchisee must pay to use the

franchiser’s name, products and assistance
 The franchisee gives up control when
entering into a franchise agreement

© 2012 South-Western, a part of Cengage Learning 15-47

 Top U.S. Franchisers and Their
Startup Costs

Source: “2009 Franchise 500 Rankings,” Entrepreneur (accessed April 8, 2010).

© 2012 South-Western, a part of Cengage Learning 15-48
 Wholesaling

Wholesaling
 All transactions in which products are
bought for resale, for making other products,
or for general business operations
Wholesaler
 An individual or organization that sells
products which are bought for resale, for
making other products, or for general
business operations

© 2012 South-Western, a part of Cengage Learning 15-49

 Major Wholesaling Functions

© 2012 South-Western, a part of Cengage Learning 15-50

 Services Provided by Wholesalers:
To Producers
 Wholesalers serve as an extension of the
producer’s sales force
 Often pay for transporting goods
 Reduce a producer’s warehousing expenses
and inventory investment by holding goods
in inventory
 Extend credit and assume losses from buyers
who turn out to be poor credit risks
 Can be a source of working capital
 Serve as conduits for information within the
marketing channel
© 2012 South-Western, a part of Cengage Learning 15-51
 Services Provided by Wholesalers:
To Retailers

 Assist with marketing strategy, especially

distribution
 Help retailers select inventory
 Are often specialists on market conditions
and experts at negotiating final purchases
 Can reduce a retailer’s burden of looking for
and coordinating supply sources

© 2012 South-Western, a part of Cengage Learning 15-52

 Merchant Wholesalers

Independently owned businesses that take title

to goods, assume risks associated with
ownership and generally buy and resell products
to other wholesalers, business customers, or
retailers

© 2012 South-Western, a part of Cengage Learning 15-53

 Full-Service Wholesalers
Perform the widest possible range of wholesaling
functions
 Types of Full-Service Wholesalers
• General-Merchandise Wholesalers: Carry a wide
product mix but offer limited depth within product
lines
• Limited-Line Wholesalers: Carry few product lines
but offer an extensive assortment of products within
those lines
• Specialty-Line Wholesalers: Offer the narrowest
range of products
• Rack Jobbers: Full-service, specialty-line
wholesalers that own and maintain display racks in
supermarkets, drugstores and discount and variety
stores
© 2012 South-Western, a part of Cengage Learning 15-54
 Think About It

 Grainger is a full-
service, limited-
line wholesaler of
electrical
equipment and
supplies
 Can you describe
what this means?

© 2012 South-Western, a part of Cengage Learning 15-55

 Limited-Service Wholesalers
Provide fewer marketing services than full-service
wholesalers and specialize in just a few functions,
passing on the rest of the functions to customers or other
intermediaries
 Cash-and-Carry Wholesalers: Intermediaries
whose customers pay cash and furnish
transportation
 Truck Wholesalers: Transport a limited line of
products directly to customers for on-the-spot
inspection and selection
 Drop Shippers: Take title to goods and negotiate
sales but never take actual possession of products
 Mail-Order Wholesalers: Use catalogs instead of
sales forces to sell products to retail and business
customers
© 2012 South-Western, a part of Cengage Learning 15-56
 Services That Limited-Service
Wholesalers Provide

© 2012 South-Western, a part of Cengage Learning 15-57

 Brokers and Agents
Brokers
 Intermediaries temporarily employed by buyers or
sellers in order to unite buyers and sellers
Agents
 Represent either buyers or sellers on a permanent
basis
 Types of Agents
• Manufacturers’ Agents: Independent intermediaries
who represent sellers and usually offer customers
complete product lines
• Selling Agents: Market either all of a specified
product line or a manufacturer’s entire output
• Commission Merchants: Receive goods on
consignment from local sellers and negotiate sales in
large, central markets
© 2012 South-Western, a part of Cengage Learning 15-58
 Services That Agents and Brokers
Provide

© 2012 South-Western, a part of Cengage Learning 15-59

 Manufacturer’s Sales
Branches and Offices

Sales Branches
 Manufacturer-owned intermediaries that sell
products and provide support to the
manufacturer’s sales force
Sales Offices
 Manufacturer-owned operations that provide
services normally associated with agents

© 2012 South-Western, a part of Cengage Learning 15-60