Channels of Distribution: Concept, Members, and Methods

1. Chapter 21 Channels of Distribution

2. Distribution 21.1 • After finishing this section you will know: • The concept of a channel of distribution • Who channel members are • The different non-store retailing methods • How channels of distribution differ for consumer and B2B products

3. Distribution-How it Works • Channel of distribution- the path a product takes from producer to final user • When the product is purchased for use in business, the final user is industrial • When the product is purchased for personal use, the final user is a consumer • A product can be both industrial and consumer: when a hair salon buys shampoo in bulk to wash their customers’ hair

4. Channel Members • Intermediaries- all businesses involved in sales transactions that move products from the manufacturer to the final user • Provide value to producers by being located in areas that the producer cannot reach • Reduce the number of contracts required to reach the final user of the product

5. Channel Members • Agent intermediaries- do not take title to the goods they are selling • Usually called agents • Paid commission to help buyers and sellers get together • Merchant intermediaries- take title to the goods they are selling

6. Wholesalers • Wholesalers- buy large quantities of goods from manufacturers, store goods, then resell them to other businesses • Rack jobbers- wholesalers that manage inventory and merchandising for retailers by counting stock, filling it when needed, and maintaining store displays • Retailers are billed for goods sold, not for all items on display • Common products include: CDs, hosiery, health products, and beauty aids

7. Retailers • Retailers- sell goods to the final consumer for personal use • Brick and mortar retailers- sell goods to the customer from their own physical stores • Final link between the manufacturer and consumer

8. Retailers • There are a number of non-store retailing operations that serve the customer: • Automatic retailing • Direct mail and catalog retailing • TV home shopping • Online retailing

9. Retailers • Vending service- buy manufacturers’ products and sell them through machines that dispense goods to consumers • Often placed in: stores, office buildings, restaurants, hospitals, and schools for free

10. Retailers • Direct mail and catalogs- also reach the final consumer • Television home shopping networks- TV stations that sell products to consumers • Buy the products in set quantities and sell them on television programs • Consumers phone in orders while watching the programs

11. Retailers • E-tailing- retailers selling products over the Internet to the customer • Customers with Internet access buy goods directly from the manufacturers’ web sites • Some companies are solely found on the Internet: Amazon.com • Some brick and mortar retailers have expanded to sell their products on the Internet: Toys R Us, and Barnes & Noble

12. Agents • Agents- act as intermediaries by bringing buyers and sellers together • Brokers- agents who are paid a commission for selling goods

13. Agents • Independent manufacturer’s representative- represent several related but not competing manufacturers in a specific industry • Not on any manufacturer’s payroll • Work independently, running their own business

14. Direct and Indirect Channels • Direct distribution- occurs when the goods or services are sold from the producer directly to the consumer • No intermediaries are involved

15. Direct and Indirect Channels • Indirect distribution- involves one or more intermediaries • Both are common in marketing goods • The channel of distribution is usually more direct when the services are performed by the business itself

16. Channels in the Consumer and Industrial Markets • Different channels of distribution are generally used to reach the customer in the consumer and industrial market. • Some manufacturers might sell the same product to two different markets using two distinct channels. • It is important for any manufacturer to weigh all of its options when selecting the best channel • A product can fail if the wrong channel is used

17. Assignment • Reviewing Key Terms • Page 381 • #1-6

18. Distribution Planning 21.2 • After finishing this section you will know: • The key considerations in distribution planning • When to use multiple channels of distribution • How to compare the costs and control involved in having a direct sales force versus using independent sales agents • The 3 levels of distribution intensity • The effect of the Internet on distribution planning • The challenges involved in distribution planning for international markets

19. Distribution Planning • Distribution decisions affect a firm’s marketing program, in the following ways: • Multiple channels • Control versus costs • Intensity of distribution desired • Involvement in e-commerce

20. Multiple Channels • Used when the product fits the needs of both industrial and consumer markets

21. Control vs. Costs • Manufacturers and producers must weigh the control they want to keep over the distribution of their products against costs and profitability

22. Control vs. Costs • To do this, the company must answer a few questions: • Who does the selling? • Use an in-house sales force • On company payroll • Receive employee benefits • Reimbursed for expenses • Manufacturers have complete control

23. Control vs. Costs • Hire agents to do the selling • Independent selling arm of producers • Can be lower in cost than hiring an in-house sales staff • There are 2 different types of agents: • Manufacturer’s agents- work for several producers and carry non-competitive merchandise in an exclusive territory • Selling agent- represent a single producer

24. Control vs. Costs • Who dictates the terms? • When dealing with retail giants, manufacturers must adhere to strict criteria • Some manufacturers cannot get involved with the giants due to costs

25. Distribution Intensity • Exclusive distribution- protected territories for distribution of a product in a given geographic area • Dealers are assured that they are the only ones within a certain radius to sell a manufacturer’s products • Retailers are tied by contract to the manufacturer

26. Distribution Intensity • Integrated distribution- variation of exclusive distribution where manufacturers own and run their own retail operations • Example: Sherwin-Williams sells its paints in company-owned retail stores

27. Distribution Intensity • Selective distribution- a limited number of outlets in a given geographic area used to sell the product • Select channel members that can: • Maintain the image of the product • Have no credit risks • Be aggressive marketers • Do good inventory planning

28. Distribution Intensity • Intensive distribution- involves the use of all suitable outlets to sell a product • Complete market coverage • Sell to as many customers as possible

29. E-Commerce • E-marketplace- online shopping location • E-marketplaces for B2B provide: • one-stop shopping • Substantial savings

30. Distribution Planning for Foreign Markets • Different environments in foreign markets require that businesses adjust their distribution systems • Chance to experiment with different distribution strategies • Cultural considerations should also be weighed • Study foreign culture before expanding

31. Distribution Planning for Foreign Markets • Keiretsu- alignment- Japanese distribution system • Groups of 20-45 companies connect to 1 bank • Bank groups businesses based on frequency of trade with each other • Wholesalers are very important in Japan because of lack of storage space for the manufacturer

32. Assignment • Reviewing Key Terms • Page 388 • #1-6