Distribution Channels and Pricing

1. Distribution Channelsand Pricing MK-814 Gerald Smith

2. PULL DISTRIBUTION STRATEGIES

3. PUSH DISTRIBUTION STRATEGIES

4. Channel Margins • 2-Step ChannelAverage Margins • Warehouse Clubs 6.0% • Medical Supplies Wholesalers 8.8% • Computer Resellers 8.9% • Vending Product Wholesalers 11.0% • Lumber Wholesalers 11.5% • Grocery Wholesalers 11.5% • Candy and Tobacco Wholesalers 13.1% • Floor Covering Distributors 22.0% • Lawn Mower Parts Distributors 28.0%

5. Prices Market Contract Meet comp List price Net pricing Brand Resale Pricing Min/max/exact MAP programs Discounts Volume Functional Activity-based Time-based Markdowns Close-outs Promotions Fees Finders fees Drop shipment fees Broken carton fees Restocking fees Slotting fees Fees for service Commissions Margin-based Volume-based Accrual Programs Co-op advertising Market development Account-specific Other Invoice deductions Spiffs Channel Pricing • Allowances • New stores • Opening order • Display allowances • Swell allowances • Policy funds • Rebates • Growth • Volume • Product mix • Exclusivity • Loyalty • End User • Terms and Conditions • Extended dating • Prepaid freight • Prompt payment • Warranty reimbursement

6. ADVERTISING & PROMOTIONS TOOLS Informational Economic Rebates Bonus Packs Price Packs Coupons Sweepstakes Premiums Sampling Trade-in Allowances Financing Incentives National Advertising Spot Advertising Coop Advertising Event Sponsorship Pull (End-User) Off-invoice Allowances Quantity Discounts Dating, Floor Plans Sales Force Incentives Trade Advertising Trade Shows Point of Purchase Push (Trade)

7. TRENDS AMONG THREE MAINCATEGORIES OF PROMOTIONAL SPENDING

8. Direct Corporate Sales Economic Value and Channel Pricing Strategy Corporate Direct Website Sales Direct Mail, Tele-Marketing Online Marketplaces Economic Value To the Vendor Manufacturer, Vendor Value-Added Resellers Specialty Direct Marketing, Catalog Partners End-Buyer Segments Control and Influence Retailers Wholesale Retail Wholesalers, Distributors Retailers Retailers Agents, Mfr Reps, Brokers Retailers Economic Value To the Reseller Direct-Buy Retailers Direct Retail Logistics Partners Distressed Merchandisers

9. Info Accuracy-Lost Sales $20,000 Extra Installers $36,000 Delivery Errors-Lost Cust $16,000 Experienced Installers $38,000 Delivery Errors-Opp Cost $16,000 Negative Differentiation Value $114,000 Delivery Errors-Rep Bus $10,000 Product Failure- Reinstall $42,000 Positive Differentiation Value $234,000 Out of Stock-Lost Bus $23,000 Brand Tie-In Purchase $36,000 Out of Stock-Rep Bus $12,000 Management Time Lost $10,000 Brand Likelihood of Purchase $41,000 Carpet Products Probs $7,000 Brand Awareness $41,000 Net Economic Value $520,000 A Standard Package of Distributor Services from a Competitor would cost $400,000 Economic Value of a Distributor

10. VENDOR DRIVERS OF VALUE TO THE RESELLER • Drive traffic for this reseller • Brand image drivers (awareness, favorability, loyalty) • Brand market volume drivers (e.g., advertising -- gross impressions, GRPs, reach, frequency) • Brand availability drivers (coop advertising, market development funds) • Special promotion drivers (sweepstakes, special packages, special displays, etc.) • Repeat purchase drivers (vendor loyalty programs, etc.) • Increase likelihood of purchase at this reseller • Brand trust drivers (brand predictability, warranty, reputation for problem resolution, etc.) • Supply chain knowledge drivers (accuracy and predictability of product availability -- timing, models) • Product knowledge drivers (product training, knowledge of the brand, its differentiation value versus competitive brands) • Increase average basket value for this reseller • Tie-in purchases of complementary goods (e.g., loss leader products) • Cross category promotions (cross-ruff coupons, promotion bundles of vendor products) • Reduce operational costs (inventory, etc.) for this reseller (United Stationers -- multiple catalogs, drop ships to custs for non-inventoried products) • Obsolete inventory drivers (closeout, mark-down programs) • Supply chain knowledge drivers (accuracy, predictability of product delivery, transparent logistics) • Increase margins for this reseller • Vendor pricing drivers (discount programs -- trade, volume, functional, activity-based, time-based discounts) • Vendor Competitive Pricing Assistance (e.g., special “Meeting Comp” prices) • Reduce intra-brand competitive rivalry for reseller • Exclusive drivers (e.g., exclusive, selective, longer term reseller contracts)

11. RESELLER DRIVERS OF VALUE TO THE VENDOR • Access to a base of customers and market segments (volume and/or margin) • Inventory and stock availability • Merchandising skills • Customer relationships and loyalty • Scale economies • Basic Services to End-Users • Education, clinics, demonstrations • Repair, maintenance • Rentals • Financing • Basic Services to Resellers (e.g., rack jobbers) • Inventory risk • Inventory management • Technical service • Delivery • Ordering • Value-Added Services • E.g., (TCO, auto inventory replenishment, EDI) • New product launch services for vendors • Customer service and support drivers • Warranty service drivers • Customer maintenance and repair drivers • Service location drivers, hubs for customer interaction • Supply chain efficiencies for vendors • Reduced order cycle drivers • Warehouse efficiency drivers • Transportation efficiency drivers • Inventory prediction and reduction drivers • Dedicated sales forces and selling professionals • Problem resolution drivers for the vendor

12. Exhibit 12-2Ingram Micro Partner Service Model

13. Leveraged Profit Growthfor a Wholesale Distributor Increase Average Purchase • Acquire new Product Lines • Create New Client Services • Build Revenue-Generating Strategic Initiatives • Partnering with Complementary Channel Members • Acquisition of Complementary Product Firm • Acquire Service Firm that diversifies the Service Mix New Product Lines or Services • Increase Share of Account with Specialty Retailers • Enhance Price Recovery and Margin Management • Selectively Increase Some Product Prices • New Fees on Existing Services • Increase Penetration in Strategic Market Channels • Target Small New Accounts with High Margin Potential • Target Disaffected Large Specialty Accounts • Horizontal Acquisition Existing Product Lines New Customer Acquisition Existing Customers New Customers/Markets

14. By 2008, Distributors Plan to Offer Some Fee-For Service

15. Fee-Based Services and Pricing • Product price pressure • Wholesale product prices up 1%/yr since 1990s • Compensation up 4.1%/yr since 1998 • Low inflation causes gross margin squeeze • But customers will resist fees for existing “free” services

16. Logistics and Fulfillment • Logistics companies are on a collision course with distributors for control of the supply chain, especially for warehouse management, order processing, and delivery. • Wholesaler-Distributors will retain an advantage in post-sales service and support. • Smaller wholesaler-distributors will face less of a threat because they rely more on personal relationships and selling skills for success.

17. Key Trends Among Suppliers • As retailer self-service grows, manufacturers will question the effectiveness of the distributor sales force. • Some manufacturers will leverage their design skills to deliver fee-based services to retailers -- maybe team up with distributors. • Online communication between distributors and manufacturers will grow dramatically.

18. Manufacturer Attitudes • “We are getting less service while our costs continue to increase.” • “Lack of sales talent has forced us to reach around our distributors.” • “Wholesaler-distributors that do not execute a value-added strategy will lose their customers to challengers -- some they know and some they don’t.”

19. Trends to Watch • Radio Frequency Identification • Mfrs and Retailers soon will know exactly where a shipment is • Offshore Customer Service • Real cost savings due to low cost telecom, low salaries, etc. • Sarbanes-Oxley Act of 2002 • Stresses financial transparency and accountability, may see demands from large public supplier