Distribution

1. 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

2. 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?

3. Intermediaries: Adding Value WHOLE- SALER (or agent) 1 MANUF. 1 RETAILER MANUF. 2 WHOLE- SALER (or agent) 2 • Value added: • breaking bulk • consolidating supplies • holding inventory MANUF. 3 PRODUCTS FROM OTHER MANU- FACTURERS.

4. Potential Channel Structures (U.S.) Farmer Farmer Farmer Farmer Agents/ Brokers Manufacturer Wholesalers Wholesalers Retailers Retailers Retailers Consumer Consumer Consumer Consumer

5. CORN GROWER HOG FARMER AUCTION HOUSE SLAUGHTER HOUSE FOOD MANUFAC- RURER WHOLE- SALER MARKET RESEARCH BRAND MANAGEMENT ADVERTISING/PROMOTION GROCERY STORE Some Other Intermediaries • Processors • Co-ops FERTILIZER SELLER FERTILIZER MANUFACT.

6. 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?

7. 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

8. 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 Admission By INVITATION ONLY

9. Constraints on Distribution Opportunities

10. 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

11. Parallel Distribution Structures MANUFAC- TURER DISTRI- BUTOR RETAILER MAJOR CHAIN (e.g., Wal-Mart) DIRECT MARKETING FACTORY OUTLET

12. Diversion • Products often end up where manufacturers did not intend them to go • Trade promotions in one region

13. 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)

14. 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”

15. Wheel of Retailing “BARE BONES” RETAILERS ENTER TO SERVE PRICE SENSITIVE CONSUMERS CUSTOMERS DEMAND MORE SERVICES RETAILERS ADD MORE SERVICES AND RAISE PRICES

16. 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

17. 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

18. 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)

19. More Scanner Data Analysis • Store placement of products • Based on “correlated” products • Multiple placement within the same store • Effects of promotional strategies • Product placement • Price promotion • Coupons • Advertising

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

21. 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 • “Everyday low price” vs. “high-low” Why not medium margins on medium quantity?

22. “High-low” High everyday prices Frequent sales Profit on price discrimination--only some people will bother to Shop while sale is on Switch brands 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 Two Types of Retail Pricing

23. Strategic Issues • Importance of convenience • Increasing power of retailers • Private label branding • Lower price but higher margins • Longer history in Europe

24. Retailing Polarity • Trend toward either • Low price--e.g., Food-4-Less, Wal-Mart supercenters • High quality--e.g., Vons Pavilion