MKTG1001 Marketing Mix: Distribution Notes

Supply Chain Management

  • A supply chain is a system for efficiently and effectively producing, making, and delivering products to end-users, encompassing both physical goods and services.
  • Supply chain management involves managing the upstream and downstream value-added flows of materials, final goods, and related information among suppliers, the marketing organization, resellers, and final consumers.

Major Logistics Functions in a Supply Chain

The primary logistics functions include:

  • Warehousing:
    • Determining the number of warehouses.
    • Identifying the types of warehouses.
    • Deciding on warehouse locations.
  • Inventory Management:
    • Establishing inventory levels.
    • Implementing just-in-time (JIT) inventory systems.
  • Transportation:
    • Selecting transportation modes such as truck, rail, sea, air, and internet.
  • Logistics Information Management

Distribution Channels

  • Physical distribution refers to activities moving finished goods from manufacturers to final customers.
  • A channel of distribution is a series of firms or individuals facilitating the movement of a product to the final consumer.
    • Direct channels: involve no intermediaries.
    • Indirect channels: involve one or more intermediaries.

Why Distribution Channels Are Necessary

A distribution channel consists of individuals and firms involved in making a product or service available for consumption or use by consumers and industrial users.

How Channel Members Add Value to Firms

  • Expanding market reach: Channel members can increase customer reach and revenue potential.
  • Enhance brand recognition: They can place your brand in more locations, increase customer touchpoints, and promote the brand through advertising.
  • Reinforce positioning: Align intermediaries with the brand's positioning, such as distributing perfume through a high-end boutique fashion retailer.
  • Assist expanding profitability and share.
  • Create distribution efficiencies: Intermediaries have established logistics networks, warehousing, and delivery systems, which can reduce operational costs. They can store goods until customers want them.
  • Tap existing relationships: Wholesalers have relationships that limit the need for direct selling by producers.
  • Open partnership opportunities: Acting as a bridge between suppliers and a broader network of potential collaborators, customers, or complementary businesses.
  • Risk taking: Retailers take on the risk of product loss when they buy a product from a manufacturer.

How Channel Members Add Value to Customers

  • Create access: Provide goods in a timely manner.
  • Breaking bulk: Distributors purchase large quantities of goods from producers but sell small quantities to many customers.
  • Creating assortments: Distributors provide a variety of products in one location.
  • Facilitating functions: Make the purchase process easier for customers and manufacturers (e.g., offering credit to buyers).
  • Matching: Channels make desired products available when and where customers desire.

Cost and Efficiency

Intermediaries add efficiencies that can lead to lower consumer prices; buying direct can be more expensive.

Disadvantages of Using Intermediaries

  • Added costs and lower profits.
  • Dependency risk if few intermediaries are used.
  • Carry competitors’ products.
  • Brand dilution.
  • Conflicting objectives.
  • Less customer contact.
  • Lack technical expertise.
  • Less control.

Distribution Strategy

  • Relatively enduring.
  • A potential source of a “sustainable competitive advantage.”
  • A major “entry barrier” and determinant of profit (e.g., limited shelf-space in supermarkets).
  • Inextricably linked to “customer service."
  • Involve the customer as an active participant.
  • Typically involve independent but interdependent organizations.

Distribution Channel Decisions

  • Intensive, Selective, Exclusive, Direct, Indirect, Multi-Channel
  • Conventional vs. Vertical (e.g., Franchising)
  • Evaluating risks in losing operational control.
  • The potential impact on brand positioning.
  • Production capacity to manufacture required product supply.
  • The trade-off between the impact on future scale versus costs of attaining greater customer reach.

Channel Selection

  • A marketing channel (distribution channel) is a set of interdependent organizations that help make a product or service available for use or consumption by the consumer or business user
  • Customers
    • How to reach your customers?
    • How do they expect to be reached?
    • The size and distribution of the end customers
    • The role and position of the product in the end customer’s purchasing basket
  • Competitors
    • What is the channel strategy of competitors?
    • Are there any ways to differentiate channel strategy and form competitive advantages?
  • Producer
    • The nature of the product or service
    • The nature of the producer firm
    • The relative size of the producer firm
    • The business strategy of the producer firm

Number of Channel Levels

  • A channel level is a layer of intermediaries who perform some work in bringing the product and its ownership closer to the final buyer.
  • The number of intermediary levels indicates the length of a channel.
  • A direct marketing channel has no intermediary levels.
  • An indirect marketing channel contains one or more intermediary levels.
  • An example of direct distribution channel is Harry’s razor blades delivered directly to customers, with a single model, leading to higher profit.

Multiple Distribution Channels (Omnichannel)

Multi-channel distribution systems are systems in which a single firm sets up two or more channels to reach one or more customer segments.

  • Example: Apple uses a multi-channel approach
    • Own stores
    • Electronic stores
    • Online
    • Department stores
    • Phone stores
    • Direct to business
    • Direct to government
    • Using a mix of direct channels and indirect (reseller) channels

More Channels (Retailers)

  • Retailer fit with brand image?
  • Potential channel conflict?
  • Need more sales reps = greater cost of service
  • More in-store merchandisers?
  • Cost of maintaining/building channel orders
  • More logistics planning
  • Possible geographic and climate issues

Distribution Intensity

  • Intensive: Focus on as many retailers as possible.
  • Exclusive: Focus on brand, few exclusive rights to sell within a region.
  • Selective: Focus on access to key retailers that enhance brand image.

Retailing Types of Retailers

  • Retailers can be classified by:
    • Amount of service offered (e.g., self-service, limited service, and full service).
    • Product line sold (e.g., length and breadth of their product assortments; ‘product line’ can be a service (e.g., hotel, bank).
    • Relative prices charged (e.g., discount store, warehouse clubs).
    • How they are organized (e.g., corporate chains, voluntary chains, retailer cooperatives, franchise organizations).

Other Ways of Distributing Products

  • Online
  • Vending
  • Direct factory outlets
  • Direct (Catalogues, TV, mail etc.)
  • Door to door
  • Referral/party etc

New Shopping Behaviors

  • Showrooming: Checking out merchandise in stores, then buying it online.
  • Webrooming: Checking out merchandise online, then buying it in traditional stores.

Channel Integration

  • Channel integration is largely about managing channel conflict.

Channel Behavior

  • Ideally, all channel firms should work together smoothly.
  • Channel conflict is a disagreement among marketing channel members on goals, roles, and rewards.
    • Horizontal conflict is conflict between firms at the same channel level. E.g., Franchisees complaining about the pricing practices of other franchisees.
    • Vertical conflict is conflict between different levels of the same channel. E.g., Wine company sells direct to customers, undercutting Dan Murphy’s.

Conventional Channel vs. Vertical System

  • Conventional Distribution Channel

    • Definition: Made up of independent businesses each seeking to maximize their own profits, often with little coordination between them.
    • Key Characteristics:
      • Each member acts independently.
      • No formal system of cooperation.
      • Potential for conflict between channel members.
      • Less efficiency and control over the entire supply chain.
    • Example: A farmer sells produce to a wholesaler, who then sells to a grocery store, which sells to consumers. Each party works separately and negotiates individually.

  • Vertical Distribution Channel (or Vertical Marketing System)

    • Definition: A more coordinated system where channel members work together, often where one channel member owns the others, has contracts with them, or with one member exerting significant control or ownership over others.
    • Key Characteristics:
      • High level of coordination.
      • Unified system with shared goals.
      • Reduces conflict and increases efficiency.
      • Can be corporate, contractual, or administered.
    • Example: Apple designs and manufactures its products and sells them directly through its own Apple Stores (Corporate VMS).

Types of Vertical Distribution Channel

  • Corporate Vertical Marketing System
    • Definition: A single company owns and controls multiple levels of the distribution or production process.
    • Examples:
      • Apple Inc.
      • Zara (Inditext)
  • Contractual Vertical Marketing System
    • Definition: Independent firms at different levels of production and distribution integrate their efforts through formal agreements or contracts.
    • Examples:
      • Franchises like McDonald’s or Subway
      • Voluntary chains like IGA (Independent Grocers Alliance)
  • Administered Vertical Marketing System
    • Definition: Coordination is achieved not through ownership or contracts but through the power and influence of one dominant channel member.
    • Examples:
      • Woolworths
      • Procter & Gamble (P&G)
      • Amazon

Distribution objectives Examples

  • To launch the brand with an online retailer store by Q1, 2025.
  • To increase distribution amongst wholesalers from 20% potential wholesaler coverage to 70% by end December 2025.
  • To increase distribution amongst major grocery retailers from 60% to 80% by end December 2025
  • Expand the number of franchised stores from 16 to 18 in Victoria by end December 2026.