THE DISTRIBUTION MIX:Intermediaries and Distribution Channels, Distribution of Business Products

<< UNDERSTANDING CONSUMER BEHAVIOR:The Consumer Buying Process

PHYSICAL DISTRIBUTION:Transportation Operations, Distribution as a Marketing Strategy >>

Introduction to Business MGT 211

Lesson 29

THE DISTRIBUTION MIX

In selecting a distribution mix, a firm may use any or all of eight distribution channels. The first

four are aimed at getting products to consumers, the fifth is for consumers or business

customers, and the last three are aimed at getting products to business customers. Channel 1

involves direct sales to consumers, Channel 2 includes a retailer. Channel 3 involves both a

retailer and a wholesaler, and Channel 4 includes an agent or broker who enters the system

before the wholesaler and retailer. Channel 5 includes only an agent between the producer

and the customer. Channel 6, which is used extensively for e-commerce, involves a direct sale

to an industrial user. Channel 7, which is used infrequently, entails selling to business users

through wholesalers. Channel 8 includes retail superstores that get products from producers or

wholesalers (or both) for reselling to business customers. Distribution strategies include

intensive, exclusive, and selective distribution, which differ in the number of products and

channel members involved and in the amount of service performed in the channel.

Wholesalers act as distribution intermediaries. They may extend credit as well as store,

repackage, and deliver products to other members of the channel. Full-service and limited-

function merchant wholesalers differ in the number and types of distribution functions they

offer. Unlike wholesalers, agents and brokers never take legal possession of products. Rather

they function as sales and merchandising arms of manufacturers who do not have their own

sales forces. They may also provide such services as advertising and display merchandising.

In e-commerce, e-agents assist Internet users in finding products and best prices.

Retailers fall into two classifications: product line and bargain. Product line retailers include

department stores, supermarkets, hypermarkets, and specialty stores. Bargain retailers

include discount houses, off-price stores, catalog showrooms, factory outlets, warehouse

clubs, and convenience stores. These retailers differ in terms of size, goods and services

offered, and pricing. Some retailing also takes place without stores. Non-store retailing may

use direct mail catalogs, vending machines, video marketing, telemarketing, electronic

retailing, and direct selling. Internet retail shopping includes electronic storefronts where

customers can examine a store's products, receive information about sellers and their

products, place orders, and make payments electronically. Customers can also visit

cybermallscollections of virtual storefronts representing a variety of product lines on the

Internet.

Physical distribution includes all the activities needed to move products from manufacturers to

consumers, including customer service, warehousing, and transportation of products.

Warehouses may be public or private and may function either as long-term storage

warehouses or as distribution centers. In addition to storage, insurance, and wage-related

costs, the cost of warehousing goods also includes inventory control (maintaining adequate

but not excessive supplies) and material handling (transporting, arranging, and retrieving

supplies).

Trucks, railroads, planes, water carriers (boats and barges), and pipelines are the major

transportation modes used in the distribution process. They differ in cost, availability,

reliability, speed, and number of points served. Air is the fastest but most expensive mode;

water carriers are the slowest but least expensive. Since transport companies were deregulated

in 1980, they have become more cost-efficient and competitive by developing such innovations

as inter modal transportation and containerization.

115

Introduction to Business MGT 211

The Distribution Mix

Getting products from producer to consumer is the next element of the marketing mix, known

as distribution, or place. An organized network of firms used to move goods and services

from producers to customers is called a distribution channel, or marketing channel. A

company's decisions about which channels to use, the distribution mix, plays a major role in

the firm's success.

Intermediaries and Distribution Channels

For most of your purchases, you rely on market intermediaries, also known as middlemen,

who channel goods and services from producer to end-users.

Wholesaler-intermediary those who sells products to other businesses for resale to final

consumers.

Retailer-intermediary those who sells products directly to consumers.

A firm's choice between using an independent intermediary and employing its own distribution

network and sales force depends on three factors: (1) the company's target markets (2) the

nature of its products (3) the costs of maintaining distribution and sales networks

The number and type of market intermediaries involved in the channel of distribution depend

on the kind of product and the marketing practices of a particular industry. There are

important differences among the channels of distribution for consumer products and

business products.

Distribution of Consumer Products

Channels for consumer goods are usually the most complex, although

they can be categorized. Typical channels include:

1. Channel 1: Direct Distribution of Consumer Products, ex.

Avon, Fuller Brush, Tupperware

2. Channel 2: Retail Distribution of Consumer Products, ex.

Levi's, Goodyear, PeaPod.com

3. Channel 3: Wholesale Distribution of Consumer Products,

ex. combination convenience store/gas station

4. Channel 4: Distribution through Sales Agents or Brokers,

ex. food brokers, travel agents, realtors

ii.

The Pros and Cons of Non-direct Distribution

Non-direct distribution becomes higher priced for end users because

each distribution link charges a markup or commission.

1. Intermediaries can save consumers both time and money by

providing added value.

iii.

Channel 5: Distribution by Agents to Consumers and Businesses,

ex. some travel agencies. Channel 5 differs from the other channels in

two ways: (1) it includes an agent as the sole intermediary (2) it

distributes to both consumers and business customers

116

Introduction to Business MGT 211

Distribution of Business Products

Industrial Distribution-network of channel members involved in the flow of manufactured

goods to industrial customers.

Channel 6: Direct Distribution of Business Products, ex. Dell

Computers

ii.

Channel 7: Wholesale Distribution of Industrial Products, ex.

distribution of office equipment and accessories

iii.

Channel 8: Wholesale Distribution to Business Retailers, ex.

Staples, Office Depot, Office Max

Distribution Strategies --- A distribution strategy is a company's overall plan for moving

products to buyers and it plays a major role in the company's success. One part of that

strategy, choosing the appropriate market coverage, depends primarily on the type of product,

as convenience goods require different strategies from organizational supplies.

Intensive distribution, where the market is saturated with a product,

almost certainly needs a long distribution chain. Normally used for low-

cost consumer goods with widespread appeal such as candy and

magazines.

ii.

Exclusive distribution severely limits the number of outlets for the item

in a particular geographic area and is most often used for expensive

specialty or technical products, such as Jaguar automobiles and Rolex

watches.

iii.

Selective distribution uses a limited number of outlets and might work

better for shipping goods that a buyer is likely to want to compare for

features and prices. Examples are fashions and appliances.

Channel conflict --- can occur when one channel member places its own success above the

success of the entire channel, or when the members of a distribution channel disagree over the

roles they should play or the rewards they should receive.

Channel Leadership --- can occur when a channel member who is most powerful in

determining the roles and rewards of other members. That member is called the Channel

Captain. Power may come from the desirability of a producer's product, or from the large sales

volume generated by a wholesaler or retailer.

Wholesaling --- Wholesalers sell primarily to retailers, other wholesalers, and industrial or

institutional users. Wholesalers provide a variety of services to customers who are buying

products for resale or business use. The types of wholesale intermediaries are:

Merchant wholesalers -- independent wholesaler who takes legal possession of goods

produced by a variety of manufacturers and then resells them to other businesses. Merchant

wholesalers also provide storage and deliver; the merchant wholesaling industry employs 6

million people in the United States.

Full-Service Merchant Wholesaler--merchant wholesaler who provides

credit, marketing, and merchandising services in addition to traditional

buying and selling services. Approximately 80 percent of all merchant

wholesalers are full-service merchant wholesalers.

117

Introduction to Business MGT 211

ii.

Limited-Service Merchant Wholesaler--merchant wholesaler who

provides a limited range of services, sometimes only storage.

iii.

Drop Shipper--limited-function merchant wholesaler who receives

customer orders, negotiates with producers, takes title to goods, and

arranges for shipment to customers.

iv.

Rack jobbers--limited-function merchant wholesaler who sets up

displays in retail outlets, stock inventory, and mark prices on

merchandise displayed in a certain area of a store.

Agents and Broker -- independent intermediary who usually represents many manufacturers

and sells to wholesalers or retailers. Provides a wide range of services including shelf and

display merchandising and advertising layout. Agents and brokers never actually own the

merchandise they sell.

The Advent of the E-Intermediary -- Internet distribution channel member who assists in

moving products through to customers or who collects information about various sellers to be

presented in convenient format for Internet customers.

Syndicated Selling--e-commerce practice whereby a Web site offers

other Web sites commissions for referring customers.

ii.

Shopping Agent (E-Agent) --e-intermediary (middleman) in the

Internet distribution channel that assists users in finding products and

prices but who does not take possession of products.

iii.

Business-to-Business Broker--e-commerce intermediary serving the

business customer.

Retailing --- Retailers sell to individuals who buy products for ultimate consumption and are a

visible element in the distribution chain. Retailers represent the end of the distribution

channel, making the sale of goods or services to final consumers. Today's retail stores

include department stores, discount stores, warehouse clubs, hypermarkets, factory outlets,

category killers, supermarkets, convenience stores, and catalog stores. Retailers save

consumers time and money.

Types of Retailer Outlets

Product Line Retailer-retailer featuring broad product lines.

1. Department Store--large product line retailer characterized by

organization into specialized departments.

2. Supermarket--large product line retailer offering a variety of

food and food-related items in specialized departments. Ex.,

Safeway, Kroger, etc.

3. Hypermarket--very large product line retailer carrying a wide

variety of unrelated products.

4. Specialty Stores--carry only a particular type of good, but an

extensive selection of brands, styles, sizes, models, and prices

within each line stocked such as children's clothing, books, or

sporting goods.

5. Category killers are superstores such as Toys R Us or Office

Depot that dominate a market by stocking every conceivable

variety of a particular line of merchandise.

6. Scrambled merchandising--retail practice of carrying any

product that is expected to sell well regardless of a store's

original product offering

118

Introduction to Business MGT 211

ii.

Bargain Retailer--retailer carrying a wide range of products at bargain

prices.

1. Discount House--bargain retailer that generates large sales

volume by offering goods at substantial price reductions. K-Mart,

Wal-mart

2. Off-Price Store--bargain retailer that buys excess inventories

from high-quality manufacturers and sells them at discounted

prices. Marshall's is one of the most successful.

3. Catalog Showroom--bargain retailer in which customers place

orders for catalog items to be picked up at on-premises

warehouses.

4. Factory Outlet--bargain retailer owned by the manufacturer

whose products it sells.

5. Warehouse Club (or Wholesale Club) --bargain retailer offering

large discounts on brand-name merchandise to customers who

have paid annual membership fees. Ex., Price Club, which

merged with rival Costco.

6. Convenience Store--retail store offering easy accessibility,

extended hours, and fast service. Ex. 7-Eleven and Circle K.

Non-store and Electronic Retailing

Major Types of Non-store Retailing

1. Direct Response Retailing--non-store retailing by direct

interaction with customers to inform them of products and to

receive sales orders, including mail-order (catalog) marketing,

telemarketing, direct selling (Avon), and electronic marketing

(including video shopping), and mail marketing.

ii.

The Boom in Electronic Retailing

Electronic retailing is non-store retailing in which information about the

seller's products and services is connected to consumers' computers,

allowing consumers to receive the information and purchase the

products in the home. The Internet is a borderless shopping

environment with great potential for some products. Some companies,

known as pure-plays, only do business through the Internet.

1. Internet-Based Stores--Use of the Internet to interact with

customers is booming. Internet usage by small businesses in the

United States doubled in 1998, nearly doubled again in 1999,

and added another 2.1 million Websites during 2000. Similar

growth has been seen in the B2B market.

2. Electronic-Catalog--a way of using the Internet to display

products and services for both retail shoppers and business

customers. This format reaches an enormous number of

potential customers at relatively low cost. Some catalogs have

connected with FedEx's Business Link for ordering and shipping.

3. Electronic Storefronts and Cybermalls

a. Electronic Storefront--a Web site in which consumers

collect information about products and buying

opportunities.

b. Cybermall--A cybermall is a Web-based retail complex

that houses dozens of electronic storefronts or Internet-

119

Introduction to Business MGT 211

based stores that sell everything from computer software

to gourmet chocolates. These Internet storefronts offer

the advantage of "walk-in" traffic and provide Web pages

and servers to their tenants for a sizable fee.

iii.

From Door-to-door to E-Sales

c. Multilevel Marketing--channel in which self-employed

distributors are paid commissions for recruiting new

customers and new company representatives. Ex.

Amway.

d. Interactive and Video Marketing Interactive Marketing--

multimedia Web sites using voice, graphics, animation,

film clips, and access to live human advice. Ex.

LivePerson.com Video Marketing-non-store retailing to

consumers via standard and cable television. Ex. QVC

120

Table of Contents: