Marketing Essentials n Chapter 21 Channels of Distribution

Marketing Essentials n Chapter 21 Channels of Distribution Section 21. 1 Distribution Chapter 21 n Channels of Distribution 1

Essential Question How is a product moved from the manufacturer to the customer? Chapter 21 n Channels of Distribution 2

SECTION 21. 1 Distribution What You'll Learn = Explain the concept of a channel of distribution = Identify channel members = Compare different channels of distribution = Describe how channels of distribution differ for consumer and business-to-business products Chapter 21 n Channels of Distribution 3

SECTION 21. 1 Distribution Why It's Important As you know, the marketing mix includes decisions about product, price, place, and promotion. In this chapter you will explore the place decision—that is, how the product will be distributed and sold in the marketplace. Making the correct place decision has an impact on the entire operation of a business. Chapter 21 n Channels of Distribution 4

SECTION 21. 1 Distribution Key Terms = channel of distribution = intermediaries = brick and mortar retailers = wholesalers = e-tailing = rack jobbers = agents = drop shippers = direct distribution = retailers = indirect distribution Chapter 21 n Channels of Distribution 5

HOW DISTRIBUTION WORKS • This is the Place part of the Marketing Mix. – This is where the marketer must decide how to get the product to the consumer. • To make a place decision, marketers must decide on their CHANNEL OF DISTRIBUTION. • This is the path a product takes from producer to consumer. • When the final user of a product is a business, the product is classified as an industrial product. • When the final use is a person, the product is classified as a consumer product. Chapter 21 n Channels of Distribution

SECTION 21. 1 Distribution Channel Members • All the businesses involved in sales transactions that move products from the manufacturer to the final user are called intermediaries or middlemen. • Intermediaries provide value to producers because they often have expertise in certain areas that producers do not have. Chapter 21 n Channels of Distribution 7

SECTION 21. 1 Distribution Intermediaries reduce the number of transactions required by manufacturers to reach their final customers. What expenses of doing business are lowered by this reduction in transactions? Chapter 21 n Channels of Distribution 8

Intermediaries • Classified on the basis whether they take ownership (title) of the goods and services – Merchant Intermediaries take title to goods • Two kinds: wholesalers and retailers – Agent Intermediaries, called agents, receive commissions Chapter 21 n Channels of Distribution 9

SECTION 21. 1 Distribution Wholesalers buy large quantities of goods (taking title) from manufacturers, store the goods, and then resell them to other businesses. Their customers are called retailers. They may be called distributors when their customers are professional or commercial users, manufacturers, governments, institutions, or other wholesalers. Slide 1 of 3 Chapter 21 n Channels of Distribution 10

SECTION 21. 1 Distribution Wholesalers Two specialized wholesalers are: =rack jobbers =drop shippers Rack jobbers manage inventory and merchandising for retailers by counting stock, filling it in when needed, and maintaining store displays. They provide the display racks and bill the retailer only for the goods sold. Slide 2 of 3 Chapter 21 n Channels of Distribution 11

SECTION 21. 1 Distribution Wholesalers Drop shippers deal in bulk items such as coal, lumber, and chemicals that require special handling. Drop shippers sell the goods to other businesses and have the producer ship the merchandise directly to the buyers. The products are owned, but never handled, by the drop shipper. Slide 3 of 3 Chapter 21 n Channels of Distribution 12

SECTION 21. 1 Distribution Retailers sell goods to the final consumer for personal use. Traditional retailers, called brick and mortar retailers, sell goods to the customer from their own physical stores. TV home shopping Chapter 21 n Channels of Distribution 13

SECTION 21. 1 Distribution Retailers sell goods to the final consumer for personal use. Non-store retailing operations include automatic retailing, direct mail and catalog retailing, TV home shopping, and online retailing (etailing). Automatic retailing – vending service Chapter 21 n Channels of Distribution 14

SECTION 21. 1 Distribution Shopping on the Web Top e-tailing sectors MILLIONS OF DOLLARS $318 Air Travel Books $224 Hardware $224 $187 Software $182 Apparel Hotels $164 Toys/games $146 Music $143 Health, beauty $143 Electronics Note the millions of dollars attributed to online sales by e-tailers in one month. Which three sectors lead the list? How might this list be changed if the month was December? $126 Source: Dow Jones Chapter 21 n Channels of Distribution 15

Real World Application • Tupperware and the Home Shopping Network • Handout (Individual) • Be ready to discuss! Chapter 21 n Channels of Distribution 16

SECTION 21. 1 Distribution Agents Unlike wholesalers and retailers, agents do not own the goods they sell. Agents act as intermediaries by bringing buyers and sellers together. = Example Real estate agents, food brokers, independent manufacturer’s representatives. Chapter 21 n Channels of Distribution 17

SECTION 21. 1 Distribution Brokers Principal job is to bring buyers and sellers together in order for the sale to take place. Rarely have a continued relationship Negotiate the sale, receive a commission, then look for other customers Chapter 21 n Channels of Distribution 18

SECTION 21. 1 Distribution Direct and Indirect Channels of distribution are classified as direct or indirect. • Direct distribution occurs when the goods or services are sold from the producer directly to the customer; no intermediaries are involved. • Indirect distribution involves one or more intermediaries. Chapter 21 n Channels of Distribution 19

Direct and Indirect Channels Distribution Alternative Channels of Distribution Chapter 21 n Channels of Distribution 20

SECTION 21. 1 Distribution Channels in the Consumer and Industrial Markets Different channels of distribution are generally used to reach the customer in the consumer and industrial markets. Both markets make use of direct and indirect distribution. Chapter 21 n Channels of Distribution 21

Channel Cooperation & Conflict • Channels are most effective when: – Each member performs the tasks it does best. – Channel members cooperate to attain overall channel goals. • Channel Conflict – Horizontal Conflict: conflict among firms at the same level of the channel (e. g. , retailer to retailer). • Example: Two retailers compete to carry a supplier’s “exclusive” product. – Vertical Conflict: conflict between different levels of the same channel (e. g. , wholesaler to retailer). • Example: Manufacturer competes with retailer in selling product to target market. • Some conflict can be healthy competition. Chapter 21 n Channels of Distribution

Channel Conflict: Goodyear’s conflicts with its independent dealers have decimated the firm’s replacement tire sales. Chapter 21 n Channels of Distribution

Channel Conflict Example Branded goods using the Wolfgang Puck, T. G. I. Friday’s, Taco Bell, Emeril’s, and Starbuck’s names are now being sold in grocery stores. Look at the items at right. Which stands the greatest risk of causing channel conflict? Why? Chapter 21 n Channels of Distribution 10 -24

Push vs. Pull strategies • Pushing the product “down” through the distribution channel TO the customer – Incentives to travel agents and intermediaries • Pulling the customer “up” through the distribution to the channel – Traditional media/private sales/CRM Chapter 21 n Channels of Distribution

21. 1 ASSESSMENT Reviewing Key Terms and Concepts 1. What is a channel of distribution? 2. Name two major types of merchant intermediaries. 3. What type of intermediary is a rack jobber? A drop shipper? 4. Distinguish between brick and mortar and online retailers. 5. Which type of distribution channel—direct or indirect—is used more frequently for consumer products? For industrial products? Chapter 21 n Channels of Distribution 26

21. 1 ASSESSMENT Thinking Critically Do you think e-tailing will eventually replace brick and mortar retailers? Explain. Chapter 21 n Channels of Distribution 27

21. 1 Graphic Organizer Channels of Distribution Manufacturers / Producers Agents Wholesalers Retailers Consumers Chapter 21 n Channels of Distribution 28

Marketing Essentials n Chapter 21 Channels of Distribution Section 21. 2 Distribution Planning Chapter 21 n Channels of Distribution 29

SECTION 21. 2 Distribution Planning What You'll Learn = Explain distribution planning = When to use multiple channels of distribution = Name and Describe three levels of distribution intensity = Explain the effect of the Internet on distribution planning = Describe the challenges involved in distribution planning for international markets Chapter 21 n Channels of Distribution 30

SECTION 21. 2 Distribution Planning Why It's Important Distribution decisions affect the entire company so it is important for you to know how they are made. It is also helpful to know how they are carried out in different markets, including international and e-marketplaces. Chapter 21 n Channels of Distribution 31

SECTION 21. 2 Distribution Planning Key Terms = exclusive distribution = integrated distribution = selective distribution = intensive distribution = e-marketplace Chapter 21 n Channels of Distribution 32

SECTION 21. 2 Distribution Planning Distribution planning involves decisions about a product's physical movement and transfer of ownership from producer to consumer. Distribution decisions affect a firm's marketing program. Some of the major considerations are: = the use of multiple channels = control vs. costs = intensity of distribution desired = involvement in e-commerce Chapter 21 n Channels of Distribution 33

SECTION 21. 2 Distribution Planning Multiple Channels Multiple channels are used when a product fits both industrial and customer markets. = Example: Cookies sold to supermarkets and airlines. Retailers also use multiple channels. = Example: A stationary store sells to the public and sells office supplies to businesses. Chapter 21 n Channels of Distribution 34

SECTION 21. 2 Distribution Planning Control vs. Cost All manufacturers and producers must weigh the control they want to keep over the distribution of their products against costs and profitability. Decisions can involve: = using an in-house sales force or independent sales agents = A direct sales force is costly Ø Adds payroll, benefits, expenses Chapter 21 n Channels of Distribution 35

SECTION 21. 2 Distribution Planning Control vs. Cost All manufacturers and producers must weigh the control they want to keep over the distribution of their products against costs and profitability. Decisions can involve: = using agents, which means losing some control over how sales are made = Agents interests may not always be the same as ours Chapter 21 n Channels of Distribution 36

SECTION 21. 2 Distribution Planning Who Does the Selling? A manufacturer can decide to use its own sales force or hire agents to do the selling, depending on how much control it wants over sales. = Direct Sales Force Costly; manufacturer maintains complete control. = Agent Less costly; manufacturer loses some control over how sales are made. Chapter 21 n Channels of Distribution 37

Real World Applications • Recommending Channels of Distribution • For each Scenario: 1. Identify the current channel of distribution 2. Then recommend a channel of distribution or multiple channels for the product 3. Indicate the intensity of distribution desired 4. Provide a rationale Chapter 21 n Channels of Distribution 38

SECTION 21. 2 Distribution Planning Who Dictates the Terms? Retail giants like Wal-Mart and Home Depot force manufacturers to adhere to strict criteria regarding shipping, pricing, packaging, and merchandising. Some manufacturers adhere to these wishes because of the large volume of business generated by the retail giants; some prefer to distribute products through smaller retailers. Chapter 21 n Channels of Distribution 39

SECTION 21. 2 Distribution Planning Distribution Intensity Distribution intensity has to do with how widely a product will be distributed. There are three levels of distribution intensity: =exclusive =selective =intensive Chapter 21 n Channels of Distribution 40

SECTION 21. 2 Distribution Planning Exclusive Distribution Exclusive distribution involves protected territories for distribution of a product in a geographic area. = Example: Retailers associated with National Auto Parts Association (NAPA) buy stock from NAPA and participate in its promotions. Chapter 21 n Channels of Distribution 41

SECTION 21. 2 Distribution Planning Integrated Distribution Integrated distribution is done at the same place as or done by the Manufacture. • Items such as Old Navy branded clothing is only found at Old Navy stores. ü If you want to buy these items you must go to the place of manufacture or to a store owned by the manufacture. ü Integrated = Direct distribution Chapter 21 n Channels of Distribution 42

SECTION 21. 2 Distribution Planning Selective Distribution Selective distribution means that a limited number of outlets in a given geographic area are used to sell the product. = top Example: Ralph Lauren selects only department and specialty stores to sell its products. Chapter 21 n Channels of Distribution 43

SECTION 21. 2 Distribution Planning Intensive Distribution Intensive distribution involves use of all suitable outlets for a product. The objective is complete market coverage, and the ultimate goal is to sell to as many customers as possible. = Example: Motor oil is sold in supermarkets, farm stores, parts retailers, hardware stores, warehouse clubs, even mini marts. Chapter 21 n Channels of Distribution 44

SECTION 21. 2 Distribution Planning Distribution Methods • Most frequently used transportation v Trucking • High initial cost but lower operational costs v Pipeline • Cheapest and slowest form of transportation v Marine Shipments • Most expensive but fastest form v Air Cargo Chapter 21 n Channels of Distribution 45

SECTION 21. 2 Distribution Planning E-Commerce E-commerce is the means by which products are sold to customers and industrial buyers through use of the Internet. In 2010 almost 75% of America's top retailers sold online. Slide 1 of 2 Chapter 21 n Channels of Distribution 46

E-Commerce Domains • B 2 C (business to consumer) • Branded websites • B 2 B (business to business) • Passkey • C 2 B (consumer to business) • User groups • C 2 C (consumer to consumer) • Blogs; review sites are blends of above Chapter 21 n Channels of Distribution

SECTION 21. 2 Distribution Planning E-Commerce Businesses use the Web to sell to consumers and to facilitate industrial sales. = Example: Panasonic uses its public Web site for information only, but it has a B 2 B Web site where retailers can check orders, pricing, and promotions. Slide 2 of 2 Chapter 21 n Channels of Distribution 48

SECTION 21. 2 Distribution Planning Projected 2010 Online Travel market Online travel is a growing Internet industry. Which area of the industry has the largest share of the travel market? Chapter 21 n Channels of Distribution 49

SECTION 21. 2 Legal & Ethical Distribution The Clayton Antitrust Act of 1914 Prevents exclusionary tactics that prevent less competition. The Sherman Antitrust Act Prevents the creation of monopolies Chapter 21 n Channels of Distribution 50

SECTION 21. 2 Distribution Planning for Foreign Markets Distribution planning takes on a new dimension when businesses get involved in international trade. Different environments in foreign markets require that businesses adjust their distribution systems. This also gives businesses the opportunity to experiment with different distribution strategies. Chapter 21 n Channels of Distribution 51

LO 3 Small Businesses as Global Enterprises • Globalization § The expansion of international business, promoted by converging market preferences, falling trade barriers, and the integration of national economies. • Size does not limit a firm’s international activity, and small companies often become global competitors to take advantage of their unique resources. Chapter 21 n Channels of Distribution

LO 4 Before Going Global • Decide if firm is up to the task of globalization. • Firms need to obtain adequate, initial exporting knowledge • Study the different cultural, political and business practices in foreign markets. • Identify viable sales prospects abroad • Understand business protocols • Be prepared to modify products to meet design specifications that may vary from country to country. • Select suitable target markets abroad Chapter 21 n Channels of Distribution

LO 4 Questions to Consider Before Going Global Exhibit Chapter 21 n Channels of Distribution 8 -4

LO 4 Preparations for Global Marketing • Researching a Foreign Market § Secondary sources of information § § § § Department of Foreign Affairs (DFAIT) Canadian Commercial Corporation (CCC) Canadian International Development Agency (CIDA) Statistics Canada Business Development Bank Export Development Canada Canadian Trade Commissioner Chapter 21 n Channels of Distribution

LO 4 Assistance for Global Enterprises • Connections With International Customers § Trade Leads § Trade Missions § Trade Intermediaries • Export management companies • Export trading companies • Export agents, merchants, or remarketers • Piggyback marketers Chapter 21 n Channels of Distribution

LO 4 Risk Levels and Levels of Involvement Exhibit 8 -5 Chapter 21 n Channels of Distribution

LO 4 Strategy Options for Global Firms • Foreign Licensing § Allowing a company in another country to purchase the right to manufacture and sell a company’s products in international markets § Licensee • The company buying the licensing rights § Licensor • The company selling the licensing rights § Royalties • Fees paid by the licensee to the licensor for each unit produced under a licensing contract Chapter 21 n Channels of Distribution

LO 4 Challenges to Global Business §Political Risk § The potential for political forces in a country to negatively affect the performance of businesses operating within §Economic Risk § The probability that a government will mismanage its economy and thereby change the business environment in ways that hinder the performance of firms operating there. • Exchange rates—the value of one country’s currency relative to that of another country. Chapter 21 n Channels of Distribution

LO 5 Sources of Trade and Financing Assistance §Financing and Information § Private banks • Letters of credit— an agreement issued by a bank to honour a draft or other demand for payment when specified conditions are met. • Bill of landing— a document indicating that a product has been shipped and the title to that product has been transferred Chapter 21 n Channels of Distribution

SECTION 21. 2 Distribution Planning Going to Marketplace Sales of goods and services via electronic marketplaces are projected to skyrocket E-marketplaces for B 2 B operations provide one-stop shopping and savings for industrial buyers. Why would a business opt to be part of an e-marketplace rather than have its own Web site? Chapter 21 n Channels of Distribution 61

Marketing Logistics • Definition: The physical flow of goods, services, and related information from points of origin to points of consumption. • Includes: • Inbound distribution • Outbound distribution • Reverse distribution Chapter 21 n Channels of Distribution

Inventory Management • Must strike a balance between • too much and too little inventory • buffers and shortages • carrying costs and ordering/setup costs • Just-in-time inventory systems • RFID or Smart Tag technology RFID technology promises to automate the entire distribution chain, resulting in significant cost savings. Chapter 21 n Channels of Distribution

RFID – The Wave of the Future? Key benefits • fewer stock-outs • reduced logistics labor costs • more accurate inventory information • more efficient flow of goods • happier customers Retailers may soon mandate supplier use of RFID. Chapter 21 n Channels of Distribution

Evaluation of Channels • • Control and cost of each channel Tracking of statistics to better negotiate contracts in the future Understand when and why to use a channel Good channel management ensures customer satisfaction AND revenue optimization AND profit maximization Chapter 21 n Channels of Distribution

LO 2 Determining the Scope of Physical Distribution • Transportation—which mode to use? § Common carriers • Transportation intermediaries available for hire to the general public. § Contract carriers • Transportation intermediaries that contract with individual shippers. § Private carriers • Lines of transport owned by shippers. Chapter 21 n Channels of Distribution

LO 2 Determining the Scope of Physical Distribution • Storage § Lack of storage space is a common problem. • Materials Handling § Protecting the firm’s output during warehousing. • Specifying Responsibility for Delivery Terms § Paying freight costs. § Selecting the carriers. § Bearing the risk of damage. § Selecting the modes of transport. Chapter 21 n Channels of Distribution

21. 2 ASSESSMENT Reviewing Key Terms and Concepts 1. What key factors are considered when developing an effective distribution plan? 2. When are multiple distribution channels used? 3. Give two reasons for using a direct sales force instead of independent sales agents. 4. What are the levels of distribution intensity? 5. Explain the challenges businesses face when getting involved with distribution planning in Japan. Chapter 21 n Channels of Distribution 68

21. 2 ASSESSMENT Thinking Critically What problems might be created by a clothing manufacturer that establishes its own Web site to sell to the final consumer, while it also sells the same items to retailers for resale to consumers? Chapter 21 n Channels of Distribution 69

Marketing Essentials End of Section 21. 2 Chapter 21 n Channels of Distribution 70