CHAPTER 8PLACE AND DISTRIBUTION

DISTRIBUTION CONCEPTS Wholesaling Retailing Alternative Types of Retailing Growth of Chain Stores

PUSH AND PULL PROMOTION DISTRIBUTION DECISIONS

Channel Length Types of Retailers Market Coverage

FACTORS AFFECTING DISTRIBUTION DECISIONS Product Characteristics Channel Control and Coverage Trade off ‐ Supplier’s Skill and Resources Retailing Trends

CHANNEL INTEGRATION Cooperatives & Buying Groups Franchises

BENEFITS OF FRANCHISING Established Brand and Reputation Bulk and Centralized Buying Regular Advertising and Marketing Support Merchandise and Menu development Managerial and Administrative Support

COSTS ASSOCIATED WITH FRANCHISING

01. DISTRIBUTION CONCEPTS

Wholesaling

We are now seeing many large suppliers (manufacturers and importers) dealing directly with the retailers. In effect, they have bypassed the traditional wholesaler by conducting their own wholesaling tasks.

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Servicing manufacturers (and importers). Wholesalers provide an invaluable marketing service to some manufacturers. These services or activities include:

I. Helping the manufacturer sell and promote its products to retailers. Wholesalers have a sales team to sell and promote the manufacturers’ goods to retail outlets. A small fisherman trying to sell his catch to scores of seafood outlets in Perth every day — and that’s after many hours at sea. He would rather sell the lot to a wholesaler.

II. Storing of goods and delivering to retailers. Small manufacturers or importers may not have such resources.

III. Operating servicing/repair centers for the manufacturers. IV. Taking credit risk. A wholesaler who quickly pays the manufacturer for the goods bought will

assume the risk of non payment by the retailers. ‐

Therefore, small manufacturers or importers still have to rely on traditional wholesalers to conduct most of the above tasks.

Servicing retailers. This includes wholesaling activities that assist retailers: (better control over the “destiny” of their goods).

I. Helping the retailer buy an assortment of goods from different manufacturers and importers. Small retailers depend on the support and expertise of wholesalers to stock their outlets with the right mix of merchandise. In Australia, most pharmacies are supplied by only three pharmaceutical wholesale giants (Sigma, API and Symbion).

II. Bulk breaking. Small retailers don’t sell in huge quantities nor do they have huge warehouses.

III. Helping retailers store goods and deliver to individual outlets. Fast expanding retailers may temporarily use wholesalers for their storage and delivery facilities.

Most large retail stores avoid independent wholesalers by dealing directly with manufacturers. Both parties can enter into direct negotiation, of trade terms, marketing support mutual responsibilities, etc. Also, by do their own wholesaling tasks, these retailers make wholesaling profits in addition to retailing profits.

Wholesaling of services. Travel wholesalers block purchase services from various service providers (suppliers) such as hotels.‐ Some travel wholesalers sell the packaged tour directly to the customers via the internet — effectively becoming retailers. The travel agent is bypassed.

RetailingA conventional retailer is in the business of buying and reselling goods. It doesn’t matter where the goods are bought from — it’s the selling to the consumer that makes a retailer. Retailers rely on the practice of goods well bought are half sold. Store based retailers operate along the following principles:‐

I. Limited shelf or floor space. The space available to display and stock merchandise is normally fixed, constrained by the size of the premises, Fixed freezers limit supermarkets

II. A balanced mix of goods & brands. The mix within the product category is reviewed periodically (e.g., different brands of shampoo).Retailers must strike a balance based on experience and trends. This is not to waste the limited space

III. Stock “saleable” goods & brands. A retailer who spends money promoting a particular brand is just helping other retailers (selling the same brand). Therefore, store based retailers are more‐ willing to carry tried and proven products ‐ ‐

Alternative Types of Retailing

The internet. Marketing on the internet serves two related functions i.e., Place and Promotion. As a promotion medium, the internet is commonly used as a source of company and product information — basically advertising on websites. The ability to order and purchase products via on line transactions (e.g. payment by credit card) makes the internet a Place function. ‐Airline tickets, music, computer software, Dell computers, eBay and Amazon.com.

Vending machines. Sophisticated machines can now dispense hot cappuccinos, postage stamps, “fresh” sandwiches, ice cream, parking tokens, movie tickets and even cash (ATMs). ‐

Dual distribution Dual distribution is the use of two channels of distribution to reach the consumer. A supplier may not want to completely cut off the conventional retailer, but at the same time, doesn’t wish to miss the opportunity to use alternative channels to expand its market share.Airlines sell their tickets through travel agents (conventional) as well as via the internet. University courses can be delivered face to face, on line or through print based learning materials. ‐ ‐ ‐ ‐

Growth of Chain Stores

Chain stores (or chains) are multiple businesses operating as a group. These are near identical‐ businesses that buy (supplies, stock, etc.) collectively and centrally, and are marketed as a group.

Corporate chain stores Are owned and managed as a group by a single company. Target & K Mart discount stores,

Franchises and buying groups are independently owned businesses that operate fully or‐ partially as a group. (KFC, McDonald’s). BENEFITS: established brands, franchisor Provides Advertising, Products, managerial support, One off franchise fee to “buy into” the business.‐

02. PUSH AND PULL PROMOTIONA supplier seeking retail outlets for its products must establish a relationship and incentive scheme with the retailers through Push promotion.

Push Promotion Or trade promotion is any promotional activity aimed at the retailers to secure supply, i.e., to encourage them to “stock and support” the products. The retailers “push” the products to their customers. This is the supply side of marketing. ‐

Retailers are more reluctant to carry them because demand is unproven Incentives given, in order to encourage these retailers to stock up. “Selling” is done through personal selling The objective is to foster a long term seller buyer relationship with these retailers‐ ‐ Retailers are also given financial incentives known as trade sales promotion.

Pull Promotion Or consumer promotion. Retail outlets stocking the new product giving their support for the product depends on the continued demand. A pull promotion is any promotional activity (advertising, publicity or consumer sales promotion) that is used to stimulate consumer demand. Aimed directly at the consumer and this is demand side marketing. (“Pull” the product off the shelf)‐

Ensures, consumer gets the right information about the product (Retailers could be biased) Particularly important for products that are often bought on a self service ‐ In the long run, demand drives supply — a strong consumer demand results in the retailer’s

continued willingness to (Kellogg’s, Kraft, Nestle)

03. DISTRIBUTION DECISIONS

Channel LengthChannel length refers to the makeup of the distribution channel. Direct marketing is the shortest route to the consumer. A long channel is where both wholesalers and retailers are employed.

Direct marketing: Different types of supplier‐owned and operated channels. (Direct marketing includes any form

of retailing that is owned and controlled by the supplier)

ideal when the market is very small and channel control (Direct mail, marketing on the internet and door to door)‐ ‐

Short channel: Product is sold directly through independent retailers Bypassing the independent wholesaler It is ideal if the number of outlets is relatively few and concentrated within the metropolitan

area. Both the supplier and retailer perform their own wholesaling tasks.

Long channel: Involves the use of independent wholesalers to handle the bulk of the product. The general rule is the bigger the market (consumers), the longer the channel — with channel

control being traded off or compromised. ‐ Small suppliers and single store retailers often have no choice but to rely on the services of‐

independent wholesalers.

Integrated channel Can be a short or long channel (above) where The parties form a very close working relationship for a common interest. (The marketing

success of the product or business in common) The supplier, wholesaler and retailer may all be independent, but their functions are integrated

as one. Ex: Corporate chain stores, franchises and buying groups

Types of RetailersIf the decision is to sell through independent retailers, the appropriate types of retail outlets have to be considered. Apple Store, now some independent computer stores are authorized Apple resellers, including department store David Jones. They are also available via the on line Apple Store. Similarly, if‐ wholesalers are to be used, there are different types of wholesalers available — each having its own specialty roles and functions.

Agents and brokers. Agents are used to assist in the “re selling” of the product to the‐ customer. Agents don’t buy or own the product that they sell — they lose nothing if it doesn’t sell. They are paid a commission for each sale. To the supplier, this represents a variable cost rather than a fixed cost. (Travel agents, recruitment agencies, insurance agents; and agents who recruit students for schools, colleges and universities)

Market Coverage (if the decision is to sell through retailers)

Intensive distribution The employment of as many appropriate outlets as possible This usually applies to convenience products where they appeal to the mass market Buyers will choose between brands that are available in the store that they patronize (Support) If a brand is not available, the buyer usually accepts another brand.

Selective distribution. Some suppliers are especially protective of the way their products and brands are presented Promoted and marketed by retail outlets. (select outlets). One would expect Levi’s jeans and

Clark shoes to be made available only in a select number of clothing and shoe stores.

Exclusive distribution Selective distribution where a very limited number of outlets (sometimes, just one) are used in

a given location. Specialty brands are usually distributed exclusively Serves to enhance the brand's image of exclusivity

Ex: rare wines, expensive imported sports cars and designer labels.

04. FACTORS AFFECTING DISTRIBUTION DECISIONS

Choosing the right channel configuration is never an easy task because of the resulting control and coverage trade off.‐ There are some factors (or guidelines) that have to be to be taken into consideration in order to assist the marketer in making the above distribution decisions. These include the product characteristics, control and coverage trade off, skills and‐ resources, and retailing trends.

Product CharacteristicsGenerally, this refers to the size of the market and the degree of in store involvement. The size of the‐ market is determined by the number of customers and the average number of purchases made in the year. (If 8 million shoppers purchase an average of 20 tubes of toothpaste a year, the market size (volume) would be 160 million units)

Convenience products, like groceries, have a large market and are purchased on a self-service basis. Therefore, they usually require a longer channel and intensive coverage to reach all sorts of retail outlets, big and small.

Shopping products have a relatively smaller market and are purchased after some degree of in store involvement. Items like motor vehicles, electrical appliances and furniture can go ‐ short by dealing directly with a selective number of retail outlets.

Specialty brands like Bose, Rolex, have the smallest market. Therefore, exclusive distribution is ideal, and will also enhance the brand’s image.

Unsought products are the most difficult to sell because of buyers’ lack of knowledge. The best channel is direct where the suppliers can expend more marketing effort to persuade these usually reluctant buyers.

Channel Control and Coverage Trade‐offManufacturers or importers wanting to expand their business by increasing coverage (i.e., more outlets) will have to accept some loss of control over the “destiny” of the products. Many fashion designers restrict the number of outlets in order to exercise better marketing and retailing control.

Supplier’s Skill and ResourcesDirect marketing, including own store retailing, is the best distribution method as far as control is‐ concerned. The supplier doesn’t have to rely on independent, self serving wholesalers and retailers.‐ However, it’s not always possible for the supplier to have the skills or resources to operate a sufficient number of retail outlets. Retailing can be a very specialized skill — locating stores, merchandise mix, servicing of customers, and so on. Less resourceful suppliers can even avoid all marketing responsibilities.

On the other hand, the internet has enabled suppliers to market directly (on line) to their‐ customers — a skill that is not hard to gain and that’s why all the competitors are in it as well.

Retailing TrendsThe common ones include the conventional store based retailing, marketing on the internet,‐ franchising and the use of vending machines. In the past, tax accountants, financial planners and mortgage brokers have all been independently operated businesses relying on the owner’s skills and good name. Pharmacies are typically owned and operated by a local pharmacist. But the neighborhood pharmacies will soon face direct competition from supermarket owned full service pharmacies and‐ ‐ discount pharmacies like Wizard Pharmacy. The growth of chain stores is not only a retailing matter, but also affects the way suppliers deal with these retail giants. The next section examines this in more detail.

05. CHANNEL INTEGRATIONIntegration is achieved when the parties work together (cooperatively) for a common goal — through centrally coordinated activities. For example, some buying groups are often referred to as franchises, and some franchise agreements are known as licensing agreements. Channel integration ranges from the strict franchise agreement to a simple undertaking

Cooperatives & Buying GroupsA cooperative or buying group is an entity formed by the banding of a group of like businesses. The entity usually operates at the next level of the supply chain (backward integration or upstream) or distribution chain (forward integration or downstream).

Backward integration (upstream). A group of university students (consumers) can band together through the guild to operate the

university bookshop or cafeteria (retailer). A group of supermarkets (retailers) can band together and operated its own wholesale

business.

A group of small diamond merchants (wholesalers) can get together to import the stones directly from De Beers.

Forward integration (downstream). Farmers and fishermen (producers) can form cooperatives to wholesale or export their

produce. A wholesaler can form a buying group by sponsoring a group of independent retailers. The wholesaler coordinates their merchandising and buying tasks.

Therefore, a cooperative or buying group is a group of independent store owners all agreeing to buy‐ merchandise collectively and centrally from suppliers. At the very least, member stores share a common banner (store name) and advertise jointly. They are obligated to stock the advertised products, and sell these at the advertised price.

06. FranchisesA franchise is a license (or a right) given to another party to (a) duplicate and operate a business, or (b) to market a specific product. In some industries the term franchising and licensing are used interchangeably.

Duplicating a business. Here, a franchisor, having built a successful business, wishes to expand by inviting a third party (the franchisee) to start up an identical business elsewhere. There are more than‐ 34,000+ mostly franchised Subway restaurants globally — surpassing McDonald’s 33,000+. Franchised hotels (Hilton, Sheraton) include a management contract where the franchisor manages the hotel for the owner (the franchisee).

Marketing a product. Another franchise system involves a producer (the franchisor) giving the marketing rights to a franchisee to sell its branded range of products or provide a specific service. Shell supplies petrol to its franchised service stations. Independent Coca Cola bottlers (the‐ franchisees) produce and market a range of beverages under licence from Coca Cola USA (the‐ franchisor).

BENEFITS Established Brand and Reputation Almost instantly, the new business gains a nationally or

even globally recognized brand Bulk and Centralized Buying The franchise group buys merchandise (stock), supplies, parts,

equipment, components and raw materials collectively and in huge quantities. Sometimes, the franchisor directly supplies to the franchisees and makes wholesale profits along the way.

Regular Advertising and Marketing Support Advertising cost is shared by all the franchisees. A single advertisement costs the same for a business chain of 100 stores.

Merchandise and Menu development The franchisor is responsible for the development and testing of new products (including food) to be sold through franchised outlets.

Managerial and Administrative Support

COSTS Initial franchise fee (a one off payment) paid to the franchisor — to “buy in”. (more than‐

$100,000 for a McDonald’s restaurant, but less than $50,000 for a Subway) A royalty payment usually based on a percentage of turnover is paid annually

Franchisees contribute regularly to an advertising and promotion fund.