Chapter 14: Retail and Distribution

1. Place: the final frontier

Distribution may be the final frontier. Advertising and other forms of promotion are so
commonplace they have lost some of their impact.
Place may be the only one of the 4 Ps to offer opportunity for competitive
advantage!

1.1 Sales promotion directed at the trade.

Value Chain= A series of activities involved in
designing, producing, marketing, delivering, and
supporting any product. Each link in the chain has the
potential to either add or remove value from the product
the customer eventually buys; how firms deliver benefits
to consumers

Supply Chain: All the activities necessary to turn raw

materials into a good or service and put it in the hands of
the consumer or business customer.
Distribution channels: Subset of the supply chain.
Logistics management: Process of actually moving goods through the supply
chain.
o Primary activities:
1. Inbound logistics (receiving inputs, warehousing, inventory control)
2. Operations (activities transforming raw materials into final product)
3. Outbound logistics (ship product to customers)
4. Marketing and sales (handle advertising, promotion, channel selection,
and pricing)
5. Service (enhance or maintain value of product, via installation or repair)
o Support Activities: (see picture)

Supply Chain Management: coordination of flows among firms in the supply chain
to maximize total profitability. Physical movement of goods and sharing the info
about it (which goods, marketing campaign to assure the demand, and the logistics, to
know where the products are)
Insourcing: A practice in which a company contracts with a specialist firm to
handle all or part of its supply chain operations. external company is brought
into the client company to run essential operations
o Flows do not only include physical movement of goods, but also info sharing
about goods!
o Trend: companies traditionally known for other things are remaking
themselves as specialists who take over coordination of clients supply
chains for them
Outsourcing: Company delegating nonessential tasks to subcontractors

Difference between supply chain and channel of distribution: number of members and
their function; supply chain is broader
Channel of distribution = The series of firms or individuals that facilitates the
movement of a product from the producer to the final customer.

1.2 The Importance of Distribution

Direct channel= consisting of, at a minimum, a producer and the customer
Channel intermediaries= Firms or individuals such as wholesales, agents, brokers,
or retailers who help move a product from the producer to the consumer or business
user.
Direct channel: minimum channel, consisting only of producer and customer
 Indirect channel: channels containing additional intermediaries compared to a
direct channel
Functions of Distribution Channels:
Increase efficiency of flow from producer to consumer (esp. internationally)
reducing number of necessary transactions for each party in the chain, functions as
follows:
Breaking bulk: Dividing larger quantities of goods into smaller lots in order to meet
the needs of buyers. sell to many customers
Creating assortments: Providing variety of products in one location to meet the
needs of buyers.
Many items from one seller at one time
Facilitating functions: Functions of channel intermediaries that make the purchase
process easier for customers and manufacturer (eg. purchase). less transactions
reduce the TC of obtaining a product for the customer.
Transportation and storage of goods
Offer credit to buyers
Customer services are even more imparting in B2B markets (larger quantities of
high-price products)
Perishable items present high risk of spoilage wholesaler take that risk
Providing repair and maintenance at the wholesaler and retailer level
Intermediaries perform variety of communication and transaction functions
Manufacturer Retailer Customer & Customer Retailer Manufacturer
Channel members can provide two-way communication for manufacturers &
sources of information)
Supply the sales force, advertising, and other types of marketing
communication necessary to inform consumers and persuade them that a
product will meet their needs
Invaluable sources of info regarding consumer complaints, changing tastes
and new competitors in the markets

The Internet in the Distribution Channel:

Small firms with limited resources enjoy the same opportunities as global ones
E-commerce has resulted in radical changes in distribution strategies
Disintermediation (of the channel of distribution): The elimination of some
layers of the channel of distribution in order to cut costs (less employees, no shop
to decorate, less expensive retail shops,) and improve the efficiency of the
channel direct retails no need for intermediaries
Knowledge management: A comprehensive approach to collecting, organizing,
storing, and retrieving a firms information assets (database, company
documents, practical knowledge of employees).
o Sharing knowledge with supply-chain members can result in win-win
situation for all partners
Connect partner in the supply chain quickly and easily

Channel Composition Types of Wholesaling Intermediaries (see table p499):

Wholesaling intermediaries: Firms that handle the flow of products from the
manufacturer to the retailer or business user.
Take title: To accept legal ownership of a product and assume the accompanying
rights and responsibilities of ownership.

Independent intermediaries: Channel intermediaries that are not controlled

by any manufacturer but instead do business with many different manufacturers
and many different customers serve customers throughout the world while
keeping prices low.
- Wholesalers: independent intermediaries that buy goods from
manufacturers and sell to retailers and other business-to-business customers
 take title of the goods assume risk
own marketing strategies: free to set the prices
o Full-service merchant wholesalers: take title & provide a wide range of
services for their customers, including delivery, credit, product-use
assistance, repairs, and advertising
often have their own sales force to call on businesses
o Limited-service merchant wholesalers: take title to merchandise but
provide fewer services for their customers. Specific types:
Cash-and-carry wholesalers: provide low-cost merchandise for
retailers that are too small for other wholesalers sales representatives to
call on, customers pay cash for products & provide their own delivery
(E.g. groceries, office supplies, )
Mail-order wholesalers: sell to small retailers located in remote areas,
through catalogues, require advanced payment. (Eg. cosmetics,
hardware, sporting goods).
o Merchandise agents or brokers: provide services in exchange for
commissions but never take title to the product. Agents normally represent
buyers or sellers on an ongoing basis & brokers are employed by clients for a
short period of time
Manufacturers agents/reps: independent salespeople carrying several
lines of non-competing products. Contractual arrangements (outlines
territories, selling prices,) Have little or no supervision and are
compensated with commissions based on a % of what they sell.
strong customer relationships
Selling agents: incl. export/import agents, market a whole product line
or 1 manufacturers total output. Often seen as independent marketing
departments because they perform the same functions as full-service
wholesalers but do not take title to products. unlimited territories and
control the pricing and distribution
(Eg. in furniture, clothing & textile industries)
Commission merchants: sales agents receiving goods, primarily
agricultural on consignment = they take possession of products without
taking title. They are free to sell the product for the highest price they can
get receive commission on the sales
Merchandise brokers: incl. export/import brokers, intermediaries
facilitating transactions in mkts such as real estate, food and used
equipment in which there are lots of small buyers and sellers identify
buyers and sellers and bring them together

Manufacturer-owned intermediaries:
Have separate business units that perform all the functions of independent
intermediaries & maintain complete control over channel
o Sales branches: carry inventory, provide sales and services to customers in a
specific geographic area (i.e. Petroleum products, industrial machinery, motor
vehicles).
o Sales offices: like agents, do not carry inventory but provide selling functions in
geographic area. Located close to customers reduce selling costs and provide
better customer service.
o Manufacturers showrooms: permanent-display facilities for customers to visit

2. Types of Distribution Channels

Channel levels: The number of distinct categories of intermediaries that make up a
channel of distribution.
- Many factors impact the decisions
- No single best channel for all products
- Producer and customer are always members Shortest channel possible has two
levels
- Service: from producer to customer directly BUT can include an agent, who help
the partie complete the transaction

2.1 Consumer Channels

- Direct channel (the simplest) may allow producer to serve customers better &
at lower price than using retailer.
o Using channel intermediaries may boost the price above what consumers are
willing to pay
o Direct channels offer control of pricing, service & delivery
o Gain insight into trends, customer needs & complaints, and effectiveness of its
marketing strategies
- Indirect channels sometimes most familiar choice for consumers by creating
utiity and transaction efficiencies Make producers lives easier and enhance
ability to reach customer
o The producer-retailer-consumer channel portrays the shortest indirect channel
(eg. Heinz)
As the retail giants provide transportation and storage no need for
wholesalers
o The producer-wholesaler-retailer-consumer channel is a common distribution
channel in consumer marketing (eg. ice cream) results in a broad selection
of products

2.2 Business-to-Business channels

- May be direct or indirect direct more common than in B2C due to high-priced,
high-profit items to a market made up of only a few customers make sense to
develop its own sales force

2.3 Dual distribution systems

Interaction with more than one type of channel; variety as in the promotion mix
(eg. Pharmaceuticals)

2.4 Hybrid marketing systems

A marketing system that uses a number of different channels and communication
methods to serve a target market. Offers competitive advantages:
Increased market coverage
Lower marketing costs
Greater potential for customization of service to local markets

Steps in distribution planning:

2.5 Planning a channel strategy
Focus on distribution planning by producers/manufacturers (rather than
intermediaries) take a leadership role in creating a successful distribution
channel.

Step 1: Develop distribution objectives:

- Objectives should be in line with the overall marketing goals
- Make product available when, where, and in quantities customers want at the
minimum cost
- More specific distribution depend on the characteristics of the product and the
market

Step 2: Evaluate internal and external environmental influences:

- Short Channels (often direct channels) better suited for B2B marketers with
geographically concentrated and require high levels of technical know-how
Expensive/complex products are frequently sold directly to final customers
Short channels and selective distribution make more sense with perishable
products
- Longer channels with more intensive distribution generally best for
inexpensive, standardized goods
- Organization also has to look at issues such as handling ability of distribution
functions
- Study competitors strategies and learn from their successes and failures

Step 3: Choose distribution strategy:

- The distribution planning includes decisions about:
o Number of channel levels
o Channel relationships: conventional system or highly integrated system
o Distribution intensity: nb of intermediaries at each level of the channel

Conventional, vertical, or horizontal distribution system?

o Conventional marketing system: A multi-level distribution channel in
which members work independently of one another do have the same
goals (demand, costs, c.satisfact)
o Vertical marketing system (VMS): A channel of distribution in which
there is formal cooperation among members at the manufacturing,
wholesaling, and retailing levels. To reduce costs + maximize
effectiveness and efficiency.
Members share info & provide services to one other, coordinat makes everyone
more successful

Administered VMS: channel members remain independent but

voluntarily work together due to single channel member being most
powerful strong brands able for it
Corporate VMS: single firm owning manufacturing, wholesaling, and
retailing operations firm has complete control over all channel
operations
Contractual VMS, cooperation enforced via contracts (legal agreements)
- Wholesalers sponsored VMS =get retailers to work together under
their leadership un a voluntary chain common name, advertising,
private-label products
- Retailer cooperative = group of retailers cooperating to organize a
marketing channel system to compete more effectively against large
chains
- Franchise organizations = franchiser (manufacturer/service provider)
allows entrepreneur (franchisee) to use franchise name and marketing
plan for a fee
franchiser help the franchisee & receive a % of revenue

o Horizontal marketing system: Two or more firms at the same channel

level agreeing to work together to get product to their customer. Sometimes
an agreement between unrelated businesses.

Intensive, exclusive, or selective distribution too many retailers

duplication and inefficiencies. Not enough not maximized
o Intensive distribution: selling a product through all suitable wholesalers
or retailers that are willing to stock and sell the product. quickly
consumed goods (soft drinks)
availability is very important
o Exclusive distribution: selling a product only through a single outlet in a
particular region. High price tags, considerable service requirements &
limited nb of buyers.
o Selective distribution: Distributing using fewer outlets than intensive
distribution but more than exclusive distribution. Suitable for shopping
products = items consumers are willing to spend time on visiting different
retail outlets.
Step 4: Develop distribution tactics:
Type of distribution system to use (direct or indirect), implementation of the strategy
(selective or exclusive), managing the channel
Select Channel Partners: will the channel member contribute to profitability?
Does the channel member have the required ability? What impact will a potential
intermediary have on control?
o Selecting channel partners usually long-term commitment ensure match
between firms
o Size = power, so bigger partner normally assumes control
o Make sure products are displayed near competitors products
o Firms dedication to social responsibility may be important in selecting
channel partner
Managing the Channel
o Channel leader (channel captain): A firm at one level of distribution that
takes a leadership role, establishing operating norms and processes based on
its power relative to other channel members:
Economic power: control resources
Legitimate power: legal authority (eg. franchiser)
Reward/coercive power: engages in exclusive distribution and has the
ability to give profitable products and to take them away from channel
intermediaries
o Power die recently shift from producer to retailer consolidation
o Cooperation helps everyone & is also stimulated when the channel leader
takes actions to ensure its partners success

Distribution Channels and the Marketing Mix

- Place decisions affect pricing
- Distribution decisions & the choice of retailers and other intermediaries can
sometimes give a product a distinct position in its mkt

Logistics: Implementing the Supply Chain

Logistics: The process of designing, managing, and improving the movement
of products through the supply chain. Logistics includes purchasing,
manufacturing, storage, and transport.
- Implementation: marketing success is the art of getting the timing right and
delivering on promises.
- Takes place for firm from inbound (raw materials, parts, supplies) to outbound
(WIP and finished goods) logistics
- Reverse logistics: relevant consideration regarding product returns, recycling
and material re-use, and waste disposal

Understanding logistics
Physical distribution: The activities used to move finished goods from
manufacturers to final customers, including order processing, warehousing, materials
handling, transportation, and inventory control. For logistics planning: focus is on the
customer, not just to deliver at lowest cost! The appropriate goal is to provide the
product at the lowest cost possible so long as the firm meets delivery requirements.
Logistics Functions
1) Order processing: The series of activities that occurs between the time an
order comes into the organization and the time a product goes out the door.
Enterprise resource planning (ERP) systems: A software system that
integrates information from across the entire company, including finance, order
fulfillment, manufacturing, and transportation and then facilitates sharing of the
data throughout the firm.
2) Warehousing: Storing goods in anticipation of sale or transfer to another
member of the channel of distribution enables marketers to provide time utility
to consumers by holding on to products until consumers need them (match
demand and supply)
Private warehouses: high initial investment but lose less stock due to damage
Public warehouses: allow firms to pay for a portion of warehouse space rather
than having to own an entire storage facility
Distribution center: warehouse that stores goods for short periods of time and
that provides other functions (eg. breaking bulk)

3) Materials handling: The moving of products into, within, and out of

warehouses.

4) Transportation: The mode by which products move among channel members.

Dependability: deliver goods safely and on time
Cost: the total transportation costs
Speed: the total time for moving a product
Accessibility: the number of different locations the carrier services
Capability: the ability of the carrier to handle a variety of different products
Traceability: the ability of the carrier to locate goods in shipment

Internet: for services such as banking, news and entertainment

Inventory control: JIT and fast fashion:

Activities to ensure that goods are always available to meet customers demands in
terms of quantity, quality and time = stock control
- Radio frequency identification (RFID): Product tags with tiny chips containing
information about the items content, origin, and destination.
Ensure that products are on the shelves when people want to buy them.
- Just in time (JIT): Inventory management and purchasing processes that
manufacturers and resellers use to reduce inventory to very low levels and ensure
that deliveries from suppliers arrive only when needed.
o Inventory reasons:
Stockouts are fatal!
Seasonal demand
o Most JIT systems are largely invisible to end consumers
o Fast Fashion: JIT in terms of the textile industry (e.g. Zara and H&M); stock-
keeping units (SKUs)

Retailing: Special Delivery

Retailing: The final stop in the distribution channel by which goods and services are
the retailer adds or subtracts value from the offering with its image, stock, service
quality, location and pricing policy!

Retailing: a mixed (shopping) bag

Wheel-of-retailing hypothesis:
A theory that explains how retail firms change, becoming more upscale as they go
through their life cycle.
Economics, social, and cultural changes over time cause different types of
retailers to emerge
Wheel does not explain all retail developments (e.g. some never trading up,
starting upscale)

The Retail Life Cycle:

Retailers are products, as they provide benefits such as convenience or status
From the value chain perspective: manufacturers selection of retail location adds
value in two ways:
o Utility provided by retailer
o Enhancement of product image through store
The Retail life cycle: A theory that focuses on the various stages that retailers pass
through from introduction to decline. Stages:
1) Introduction: retailer, aggressive entrepreneur, who takes a unique approach to
do business competing on low price
2) Growth: sales and profits rising, opening of more outlets profits and sales rise
but competitors copy (which cuts profits)
3) Maturity: industry has over expanded, intense competition, profits decline. Firms
seek to increase their share of the mkt or to attract new customers
4) Decline: stores become obsolete as new businesses emerge offer lower prices
and the wheel turns once more
o Anticipate the shift and find other growth opportunities
- Pop-up retailing: A retail strategy in which a store opens and then closes after
a short period of time (here today and tomorrow gone)
o (value retailers: operating stores with bare-bones fixtures and offering cash-and
carry checkout only)

Three Factors motivating innovative merchants to reinvent ways of doing

business:
1. Demographics
Keeping up with changes in population characteristics
o Convenience for working consumers: expanding operating hours
o Recognizing cultural diversity: retailers that tailor their strategies to the
cultural make-up of specific areas
2. Technology
o The internet brought the age of e-tailing
o Point-of-sale (POS) systems: Retail computer systems that collect sales data
and are hooked directly into the stores inventory-control system.
Computer programs analyze patterns of demand for different products and
automatically planned to match supply with demand
o Future Store Formats: trolley top computers that allow shoppers to scan their
purchase for payment and further information, no checkouts needed anymore
3. Globalization
o World is becoming smaller and flatter
o Retailers that leverage innovations and management philosophies from foreign
markets
o Recognizing that the way things are sold differs from country to country
Family shops to hypermarkets: Classifying Retail Stores:
Classifying by what they sell:
Merchandise mix: The total set of all products offered for sale by a retailer, including
all product lines sold to all consumer groups.
Too limited not enough customers;
Too broad jack of all trades, master of none
- In retailing, a product line is a set of related products offered by a retailer (eg.
kitchen appliances)
- Even through marketers like to distinguish between food and non-food retailers,
in reality these lines are blurring

Classifying by Level of service:

Trade-off between service and price: Retailers differ in the amount of service they
provide for consumers. Customers who demand higher services must be willing to pay
more:
Self-service retailers (lowest prices)
Full-service retailers (higher price for service)
Limited-service retailers (somewhere in between upper 2)

Classifying by Merchandise selection:

Merchandise assortment or selection of products sold, has two dimensions:
Merchandise breadth: The number of different product lines available
o Narrow: limited selection of product lines
o Broad: wide range of items available
Merchandise depth: The variety of choices available for each specific product
line
o Shallow: eg. only limited to standard sizes
o Deep: variety of sizes, colors, styles,
- Convenience stores: Neighborhood retailers that carry a limited number of
frequently purchased items and cater to consumers willing to pay a premium for the
easy of buying close to home.
- Supermarkets: Food stores that carry a wide selection of edible and non-edible
products.
- Specialty shops: Retailers that carry only a few product lines but offer good
selection within the lines that they sell. (very targeted, often high level of
knowledgeable service)
o Factory outlet store: A discount retailer, owned by a manufacturer, which sells
off defective merchandise and excess inventory. (mostly located in outlet malls)
- Department stores: Retailers that sell a broad range of items and offer a good
selection within each product line (in many countries thriving and remaining primary
shopping location)
o Concentrate more on Soft goods = e.g. clothing, home furnishing
o Less focus on Hard goods = e.g. appliances
- Hypermarkets: Retailers with the characteristic of both warehouse stores and
supermarkets; hypermarkets are several times larger than other stores and offer
virtually everything, from grocery items to electronics. (US consumers dislike it for size
and time constraints) Eg. Carrefour

Non-shop retailing
Any method used to complete an exchange with a product end user that does not
require a customer visit to a store (catalogues, websites)

Business-to-consumer (B2C) e-commerce

Online exchanges between companies and individual consumers (to become dominant
form online, enormous potential)
- Experiential shoppers: Consumers who engage in online shopping because of
the experiential benefits they receive.
- Advantage of e-commerce: easy to get price info.

Limitations of B2C e-commerce

- Instant gratification lack: is a big limitation to B2C E-Commerce; as you
cannot walk out of a retail shop immediately
- Traditional bricks-and-mortar companies are actually more likely to be successful
in cyber-space than are internet-only start-ups because they already have
established brand names and a base of loyal customers.
- Alternative for payments:
o Digital cash: prepaid cards and smart cards eg. prepaid phone cards
o Digital bank account E-cash; allows you to make payments to internet retailers
directly from the account while online
- Marketers worried that their sales online may cannibalise their actual retail store
sales.

- Suitable online marketing metrics:

Look-to-click rate
Click-to-basket rate
Basket-to-buy rate

B2C E-Commerce Effect on the future of retailing:

Traditional channels will not immediately disappear due to:
Customers being too accustomed to usual ways + Social aspect
In the future: Trend: destination retail consumers visiting retailers less for buying,
but rather for entertainment

Developing a Shop Positioning Strategy:

Shoppers = audience to entertain. The play can cleverly employ stage sets
(shop design) and actors (retail assistants) that tgt create a scene

Shop image: The way a retailer is perceived in the marketplace relative to the
competition.
- Atmospherics: The use of color, lighting, scents, furnishings, and other design
elements to create a desired store image.

Shop design: setting the stage:

Shop layout: arrangement of merchandise in the shop
Determines Traffic flow: The direction in which shoppers will move through the
store and what areas they will pass or avoid.
o Grid layout: supermarkets & discount stores, rows of neatly spaced shelves
with staples remote
o Free-flow layout: department & specialty stores, more conducive to browsing
Fixture type and merchandise density: furniture, fixtures (shelves and
racks), how stuff is packed into the sales area.
Sound of music
Color and lighting: (warm vs. elegant & clean)

Shop personnel:
- Need to complement desired store image & They need to play a part in a theater
play
- Scripts, costumes and roles to play
- Most people rate the quality of service low because shops do not hire enough
people

Pricing policy:
- Price points (price range) of merchandise is critical
- Everyday-low-pricing (EDLP) strategy about setting prices between manufacturer
and deeply discounted stores, who mainly compete on price

Building the theatre: shop location:

Types of shop locations:
Important factors are: proximity to motorways, major routes, by selecting
undiscovered areas a company may be able to acquire land in town with expanding
populations
Business districts:
o Central business district (CBD): The traditional downtown business area
found in a town or city.
o Many people shop, work here and public transportation is available
o Lack of parking and lack of customer traffic at evenings and weekends
Shopping centers:
o Group of commercial establishments owned as a single property
o Offer variety and the ability to combine shopping with entertainment
o Rents tend to be high and small specialty shops may find it hard to compete with
key stores
Freestanding retailers: eg. IKEA
o Lower rents and less parking problems,
o But store needs to be attractive to customers as there is usually low consumer
traffic
Non-traditional store locations
o Carts: small, moveable shops that can be set up in many locations, including
inside shopping centers
o Kiosks: slightly larger and offer shop live facilities including telephone points and
electricity

Site Selection: Choosing where to build:

Long-term population patterns, the location of competitors an the demographic make-
up of an area enter into retailers decisions:
Trade area: A geographic zone that accounts for the majority of a stores sales and
customers.
Site evaluation considers factors such as:
o Traffic flow
o Number of parking spaces available
o Ease of delivery access
o Visibility from street
o Local planning laws determining types of buildings, parking, and signals
allowed
o Cost factors like length of lease as well as local taxes
Population Characteristics: as age profile and demographic characteristics, as
well as mobility
Degree of competition
o Saturated trade area: sufficient stores but possibility to compete
successfully as entrant given
o Understored trade area: too few stores exist, possibility to establish
dominant presence
o Overstored trade area: too many stores selling same goods, uncompetitive
have to close
Target consumer segment also plays role in choice of location