Distribution Whose point of view is considered Intermediariesfunctions

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Distribution • Whose point of view is considered? • Intermediaries--functions • Intermediaries--structures and their

Distribution • Whose point of view is considered? • Intermediaries--functions • Intermediaries--structures and their justifications • Channel power • Cross-national variations • Selectivity of distribution--do we want our product available at K-Mart? • Parallel Distribution Structures • Diversion MKTG 442 DISTRIBUTION Lars Perner, Instructor 1

Mini Case Study: The Roasted Chicken That Didn’t Sell • Manufactured offered pre-roasted chickens

Mini Case Study: The Roasted Chicken That Didn’t Sell • Manufactured offered pre-roasted chickens to stores too small to warrant in-store rotisserie • This product should appeal to time squeezed customers • Taste tests showed that consumers liked the product • HOWEVER, sales were disappointing. Why? MKTG 442 DISTRIBUTION Lars Perner, Instructor 2

Intermediaries: Adding Value MANUF. 1 WHOLESALER (or agent) 1 RETAILER MANUF. 2 MANUF. 3

Intermediaries: Adding Value MANUF. 1 WHOLESALER (or agent) 1 RETAILER MANUF. 2 MANUF. 3 PRODUCTS FROM OTHER MANUFACTURERS. MKTG 442 WHOLESALER (or agent) 2 DISTRIBUTION Value added: • breaking bulk • consolidating supplies • holding inventory Lars Perner, Instructor 3

Potential Channel Structures (U. S. ) Farmer Agents/ Brokers Manufacturer Consumer MKTG 442 Wholesalers

Potential Channel Structures (U. S. ) Farmer Agents/ Brokers Manufacturer Consumer MKTG 442 Wholesalers Retailers Consumer DISTRIBUTION Lars Perner, Instructor 4

Some Other Intermediaries • Processors • Co-ops CORN GROWER SLAUGHTER HOUSE FERTILIZER SELLER HOG

Some Other Intermediaries • Processors • Co-ops CORN GROWER SLAUGHTER HOUSE FERTILIZER SELLER HOG FARMER FOOD MANUFACRURER MARKET RESEARCH BRAND MANAGEMENT ADVERTISING/PROMOTION MKTG 442 DISTRIBUTION FERTILIZER MANUFACT. AUCTION HOUSE WHOLESALER GROCERY STORE Lars Perner, Instructor 5

Other Issues • Can you make money on “eliminating the middleman? ” It depends:

Other Issues • Can you make money on “eliminating the middleman? ” It depends: – How efficient is the existing distribution channel? • International variations – Some structures are less well developed – Tradition may govern structure • Power--who needs whom most? MKTG 442 DISTRIBUTION Lars Perner, Instructor 6

Types of Wholesalers and Substitutes for Food Products • Agents and brokers (do not

Types of Wholesalers and Substitutes for Food Products • Agents and brokers (do not take possession) • Manufacturers’ sales branches • General – Full service – Limited service – Cash ‘n’ carry • Specialty • Retailers’ distribution centers MKTG 442 DISTRIBUTION Lars Perner, Instructor 7

Approaches to Distribution— Manufacturer’s Perspective • These strategies require tradeoffs: – Wide--essential to low

Approaches to Distribution— Manufacturer’s Perspective • These strategies require tradeoffs: – Wide--essential to low involvement goods – Selective--desire to maintain image – Exclusive--very high prestige needed or very high service requirements MKTG 442 DISTRIBUTION Admission By INVITATION ONLY Lars Perner, Instructor 8

Constraints on Distribution Opportunities Product Type Distribution Options Major brand standard convenience good Intense

Constraints on Distribution Opportunities Product Type Distribution Options Major brand standard convenience good Intense distribution (limiting distribution would mean forfeiting brand status) Upscale brand convenience good Intense distribution possible but not appropriate; selective preferred Minor brand convenience good National regional intense distribution unrealistic; local or “invited” national distribution Major brand shopping good Moderately intense distribution (e. g. , TVs in discount store) Premium brand shopping good Moderately intense distribution inappropriate; selective distribution Minor brand shopping good National moderately intense distribution unrealistic; local or “invited” national distribution Niche brand Selective distribution MKTG 442 DISTRIBUTION Lars Perner, Instructor 9

Manufacturer and Retailer Distribution Interests • Full service retailers tend dislike intensive distribution •

Manufacturer and Retailer Distribution Interests • Full service retailers tend dislike intensive distribution • Low service channel members can “free ride” on full service sellers • Manufacturers may be tempted toward intensive distribution—appropriate only for some; may be profitable in the short run • Market balance suggests a need for diversity in product categories where intensive distribution is appropriate • Service requirements differ by product category MKTG 442 DISTRIBUTION Lars Perner, Instructor 10

Parallel Distribution Structures MANUFACTURER DISTRIBUTOR RETAILER MAJOR CHAIN (e. g. , Wal-Mart) DIRECT MARKETING

Parallel Distribution Structures MANUFACTURER DISTRIBUTOR RETAILER MAJOR CHAIN (e. g. , Wal-Mart) DIRECT MARKETING MKTG 442 FACTORY OUTLET DISTRIBUTION Lars Perner, Instructor 11

Diversion • Products often end up where manufacturers did not intend them to go

Diversion • Products often end up where manufacturers did not intend them to go – Trade promotions in one region MKTG 442 DISTRIBUTION Lars Perner, Instructor 12

Types of Retailers • Supermarkets – High service – Low service • “Superettes”—small grocery

Types of Retailers • Supermarkets – High service – Low service • “Superettes”—small grocery stores • Convenience stores • Specialty • Stores with food as secondary products – Gas stations – Discount stores • Online • Restaurants (47% of consumer food expenditures) MKTG 442 DISTRIBUTION Lars Perner, Instructor 13

Characteristics of U. S. Supermarkets • 20, 000 -80, 000 SKUs (product variations—e. g.

Characteristics of U. S. Supermarkets • 20, 000 -80, 000 SKUs (product variations—e. g. , 4 oz Dannon light raspberry yogurt) • Average gross margin: 20 -25% (probably decreasing) • Average net margin: 1 -3% • 20% of SKUs may sell less than one case per month! • Location is most important variable for consumers but price competition is still intense! • “Wheel of Retailing” MKTG 442 DISTRIBUTION Lars Perner, Instructor 14

Wheel of Retailing “BARE BONES” RETAILERS ENTER TO SERVE PRICE SENSITIVE CONSUMERS CUSTOMERS DEMAND

Wheel of Retailing “BARE BONES” RETAILERS ENTER TO SERVE PRICE SENSITIVE CONSUMERS CUSTOMERS DEMAND MORE SERVICES RETAILERS ADD MORE SERVICES AND RAISE PRICES MKTG 442 DISTRIBUTION Lars Perner, Instructor 15

Category Management • Retailer tries to maximize profits from a given product category (e.

Category Management • Retailer tries to maximize profits from a given product category (e. g. , cola drinks) rather than for brand (e. g. , Coca Cola) – High cross-price elasticity – Additional gains by putting one brand on sale will be nearly cancelled out by losses from switchers from other brands • Increasing enforcement ability of manufacturers due to scanner technology MKTG 442 DISTRIBUTION Lars Perner, Instructor 16

Slotting Fees • Retailers may charge fees to retailers to stock their products –

Slotting Fees • Retailers may charge fees to retailers to stock their products – New products – “Slow” moving products • How fair is this? • Does this actually raise the price paid by consumers? • Additional concessions gained from manufacturers MKTG 442 DISTRIBUTION Lars Perner, Instructor 17

Micro-Segmentation • Adapting individual stores in chain to local conditions based on statistical analysis

Micro-Segmentation • Adapting individual stores in chain to local conditions based on statistical analysis of scanner data – “Brute force” analysis of sales volumes in store may reveal effects of • Ethnic or other demographic characteristics of the location • Seasonal patterns • Geographic location (e. g. , near beach) MKTG 442 DISTRIBUTION Lars Perner, Instructor 18

More Scanner Data Analysis • Store placement of products – Based on “correlated” products

More Scanner Data Analysis • Store placement of products – Based on “correlated” products – Multiple placement within the same store • Effects of promotional strategies – – MKTG 442 Product placement Price promotion Coupons Advertising DISTRIBUTION Lars Perner, Instructor 19

Margins • Margins – Gross = sale price - price paid to wholesaler •

Margins • Margins – Gross = sale price - price paid to wholesaler • Per unit • Per dollar • Per unit of space • Very large increases in sales volumes are needed to “break even” on low prices – Net margin = gross margin vs. allocated overhead MKTG 442 DISTRIBUTION Lars Perner, Instructor 20

Positioning Issues • Some generic profit strategies: – Sell large quantity with small margin

Positioning Issues • Some generic profit strategies: – Sell large quantity with small margin on each sale – Sell small quantity with large margin of each sale – Combination • Tiny (or negative) margins on “loss leaders” • Larger margins on other merchandise Why not medium margins on medium quantity? MKTG 442 • “Everyday low price” vs. “highlow” DISTRIBUTION Lars Perner, Instructor 21

Two Types of Retail Pricing • “High-low” – High everyday prices – Frequent sales

Two Types of Retail Pricing • “High-low” – High everyday prices – Frequent sales – Profit on price discrimination--only some people will bother to • Shop while sale is on • Switch brands MKTG 442 DISTRIBUTION • Every Day Low Price (EDLP) – Consistent prices-theoretically no sales, but lower non-sale prices – Typically lower service – Note that retailers provide for many promotions Lars Perner, Instructor 22

Strategic Issues • Importance of convenience • Increasing power of retailers • Private label

Strategic Issues • Importance of convenience • Increasing power of retailers • Private label branding – Lower price but higher margins – Longer history in Europe MKTG 442 DISTRIBUTION Lars Perner, Instructor 23

Retailing Polarity • Trend toward either – Low price--e. g. , Food-4 Less, Wal-Mart

Retailing Polarity • Trend toward either – Low price--e. g. , Food-4 Less, Wal-Mart supercenters – High quality--e. g. , Vons Pavilion MKTG 442 DISTRIBUTION Lars Perner, Instructor 24