Session 4_Hard_Distribution

• VO Management I - Marketing (MA), Week 4 covers Distribution Channels.
• The course is taught by Univ.-Prof. Dr. Christoph Fuchs, Chair of Marketing.
• Distribution is part of the marketing plan, following prerequisites such as marketing research and consumer behavior, and a marketing strategy that includes segmentation, targeting, and positioning.

Definition of Distribution

• Distribution involves all stakeholders (individuals and organizations).
• It creates a revenue stream between manufacturers and consumers.
• Distribution is about making goods/services available at the right time, at the correct location, in the correct quantity, to the right customer, and better than competitors.

Channel Management Importance

• In the US, channel members collectively earn 30-50% margins of the selling price.
• Channel decisions are often structural, long-term, and sticky.
• A superior channel strategy can lead to sustainable competitive advantages.
• The role of retailers is changing, especially with online platforms.

Channel Management Objectives

• Objectives include reducing distribution costs, shaping the image of the channel, and cooperation and steering of channels
• Also key is flexibility and time to market.

Importance of Distribution

• Distribution breadth plays the largest role in the success of new brands.
• Distribution increases sales more than discounting, advertising, and features/displays.
• It interacts with other strategies, increasing their effectiveness, and must reinforce overarching strategy.

Channels

• A distribution channel comprises firms or individuals participating in product flow from manufacturers to customers; these are known as channel intermediaries.
• Decision 1 when creating a distribution channel is deciding on whether a direct or indirect channel will be used.

Channel Members and Functions

• Direct Sales Force: Keep title, work directly for the company, have direct control, and only handle the products.
• Distributors: Can be captive or sole distributors, take title, and work only for the products.
• Wholesalers: Take title but are not tied to any company.
• Agents: Act as manufacturer's representatives, don't take title, work for the firm and others.
• Brokers: Free agents, don't take title, have no ties to manufacturers.
• Retailers/Dealers: Often don't work directly for the firm, usually take title.

Setting up Distribution Channels

• Decision 2 considers vertical structure (direct or indirect channel) and horizontal structure, examining the intensity (intensive, selective, or exclusive distribution) and length (number of intermediaries).
• Intensity considers the type of intermediate, and includes, intensive, selective, or exclusive distribution.

Levels of Distribution Intensity

• Intensive Distribution: Involves all intermediaries willing to stock and sell a product such as Coke.
• Selective Distribution: Relies only on some intermediaries willing to stock and sell, such as Vichy.
• Exclusive Distribution: Severely limits the number of intermediaries, granting dealers exclusive rights as seen with Rimowa.

Tea Distribution in Taiwan

• Taiwan tea distribution involved 20,000 tea farmers in the hills, 280 middlemen, and 60 tea refineries
• Middlemen had a bad reputation for exploiting the market.
• The Taiwan governor-general established a tea auction house in 1923 near the refineries.
• Farmers were able to ship tea directly to the auction house.
• The auction house has been closed, but the middlemen continued to operate despite this.

Role of the Middleman

• Roles include facilitating search, visiting farms to find quality teas, taking samples to refineries, and asking for purchase orders
• Middlemen also search for buyers for the farmer's harvest and suppliers for the refineries
• Further roles include the skilled process of sorting and appraising different species of tea, assessing their quality.
• Middlemen create contact efficiency. Without them, there would have been 1.2M possible contacts to get the best price with 20,000 farmers and 60 refineries.

Functions of Distribution Channels

• Functions include overcoming discrepancies and manufacturers making narrow assortments in large quantities, while customers want wide assortments in small quantities.
• Also functions include contact efficiency, physical distribution, inventory management, sales and returns, service, and the information and market feedback up and down the channel

Trend Towards Disintermediation

• Common with Amazon.
• Direct selling through disintermediation is not suitable for every product.
• It can be effective if manufacturer-customer contacts are relatively low and there are small numbers of customers

Direct Selling

• Direct selling is also effective when: there are large orders, low order frequency, high importance to customer, high product customization, and when there is a need for lots of information.

Verticalization of Distribution Channels

• Is known as Vertical Control
• This encompasses taking control of more of a product's supply chain.
• Manufacturer starts taking over tasks of distributor (own stores, online channel).
• The distributor begins taking over tasks of manufacturer (own production, brands).

Channel Conflicts

• Include vertical, horizontal, and multi channel conflicts.

Divergent Interests

• Manufacturers priorities include high product demand including slow selling product lines.
• They need support in selling new products as well as greater detail about customer behaviour.
• Distributors priority is to shift faster selling lines with exclusive agreements.

Multichannel Conflicts

• These occur across multiple channels.
• 41% if sales are direct to consumer
• 21% is E-commerce
• 20% from brick and mortar stores.
• 59% of the time via wholesale.

Incentives for Intermediaries

• Can be push or pull strategies.
• Push strategies direct marketing efforts towards channel members
• Pull Strategies direct marketing efforts to end consumers
• Pull strategies include high brand loyalty, high category involvement and perceived brand differences.
• Push strategies are best when there's low brand loyalty, brand choice is made in the store, and when there's an impulse buy.

How Online Channels Differ from Offline Channels

• Online channels: Transparency in availability and pricing can increase competition, especially with identical merchandise.
• Online: Allows for varying buying processes, information about customers (big data), easy customization and reduced impulse purchasing

Physical Stores Advantages

• Help customers touch, feel, and try items before buying
• A physical store give information via human contact helping customers directly.
• Provide immediate availabililty
• Serve entertainment purpose within inner city locations
• Low price for bulky goods
• Function as a physical pickup location.

Distribution Channel Effect on Customers

• Imagine buying a beer on a hot beach, it would be more expensive from resort than corner store.
• The scenario ran in the early 1980s (replicated with MBAs) with the finding of store beer=$1.50 and hotel beer $2.65
• Percevied value is the same, and customers can not longer haggle down the rice in the store. "Place" is everything!
• People are willing to pay 73% more at the fancy resort relative to the run down grocery store
• Expectations Matter - Place can shape expectatrions

Key Points

• The hardest marketing mix element to change is the distribution channel
• Distribution serves several important functions; it is not just an additional cost.
• Manufacturers need to balance between push and pull strategies.
• Exclusive distribution can lead to a channel which provides better customer service and better merchandising
• Direct sales align incentives but increase costs
• Channels should be based on STP.

Explore marketing distribution strategies, channel management, and intermediaries. Understand the role of distribution in enhancing brand perception and achieving a competitive advantage. The impact of online retailers and time to market on channel decisions are also examined.