Strategic Distribution Network

Lecture No. 04

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Marketing flows in channels

Producers Wholesalers Retailers

ConsumersIndustrial

&Household

Physical Possession

Ownership

Promotion

Negotiation

Financing

Risking

Ordering

Payment

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Channel Structure

A description of the channel structure summarizes the types of members that are in the channel, the intensity or number of members of each type that coexist in the market, and the number of distinct channels that coexist in the market

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Channel Design Challenges

Level of intensity / coverage??Channel Types

Retail Kiosk Kiryana General Store Pan Shop Grocery Pharmacy

Dual distribution / Concurrent distribution

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Channel Intensity

The more intensively a manufacturer distributes its brand in a market, the less the manufacturer can influence how channel members perform marketing channel flows

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Why more coverage is better for manufacturers of Convenience Goods

Low-involvement purchasesBuyers considers to be low-risk and minorFMCG market share is disproportionately

related to distribution coverageSmall retailers stock up only the top few

brandsHigher the market share higher the

chances that small retailers will stock upSpiral phenomenon of “rich getting richer”

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Why downstream channel members dislike intensive distribution

Intensive distribution means that a channel members competitors have the same brand, thereby eroding the outlets uniqueness

When the market is saturated – a channel member cannot present the brand as a reason to purchase – Inertia (hassle of going elsewhere) Price Cut leading to intrabrand price

competition

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There are rectification measures: Some channel members drop the brand

A. discontinue the saturated brand and substituting another that is less intensively distributed

B. discontinue the entire product category if they cannot find a satisfactory substitute brand AND THE CATEGORY IS NOT ESSENTIAL

C. may appear to carry a brand by offering nominal stock and display but attempt to convert prospective customers to a different brand once on site

• BAIT & SWITCH approach

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Free-Riding

Legitimate retailer operationsManufacturer gets into active distribution

on web-other mediumsBulk of store traffic is window shoppers

and purchasing elsewhereBait & Switch are costly propositions

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Can the manufacturer sustain intensive distribution

Contractual obligations – binding channel members by paperwork and legal documentation

Pull strategy to build brands – FMCG Resale price maintenance – RPM: it is

selectively allowed in few world markets – NOT IN PAKISTAN

Limit its market coverage as per market forces Channel Stuffing: loading up channel members with

more product that they can sell

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Channel conflicts

1. Manufacturers want to blanket a trading area with outlets, but the outlets prefer the reverse

2. Downstream channel members prefer to have multiple brands to offer in a category but manufacturers prefer the reverse

3. Manufacturers want downstream channel members to support their brands vigorously and take low margins, but channel members prefer lower costs and higher margins

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1. The threat of complacency

Intrabrand competition is low whenever the distribution is too selective

Channel members with the best intentions will not be inclined to give their most vigorous efforts to the brand Quasi monopoly in distribution encourages

complacency

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2. The nature of the product category

1. FMCG2. Small to medium electrical appliances3. High end boutique items

Differentiate between selective distribution and poor coverage

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3. Brand strategy: Quality positioning and Premium pricing

Manufacturers must pay particular attention to the image or reputation of the channel member representing the brand because this image will be imparted to everything the channel member sells Shahnawaz Motors Shezan Foods Limited

LVMH – Louis Vuitton Moet Hennessy has never discounted in its history of 125 years

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4. Brand strategy – Target Market

Some brand target a niche market, that is, a narrow and specialized band of buyers

Producers of brands targeting a narrow spectrum of the market will target a narrow spectrum of outlets. The more restricted the target market, the more selective the distribution Big & Tall Stores

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Bargaining for Influence Over Channel Members

The interventionist manufacturer would like to manage their channels as they manage their subsidiaries Reward Power Manufacture specific investments by Downstream

Channel Members Idiosyncratic knowledge: applications and features Unusual handling or storage: forklifters Brand specific parts: inventory Customer training: brand-specific instructions Mingling the identity of buyer & seller: Joint promotions

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Dependence Balancing: Trading Territory Exclusivity for Category Exclusivity

LVMH – Shoes and Bags marketed separately in France

Audi and VW – Separate dealers for both ranges of cars

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CARRIER – RIDER RELATIONSHIPS

Strong manufacturer with excess capacityWeak manufacturer with no capacity

Mutual benefit in category complementation Tea and Milk Cigarettes and Matches Cross territory understandings

• B&H distributed by PMI in Canada• Marlboro distributed by BAT in Africa

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Thank You