1. Chapter 21 Channels of Distribution

2. Chapter 21.1 Distribution

3. Objectives Explain the concept of a channel of distribution Identify channel members Compare channels of distribution for consumer and industrial products

4. Key Terms The path a product takes from its producer or manufacturer to the final user. Channel of Distribution Businesses involved in sales transactions that move products from the manufacturer to the final user. Intermediaries Businesses that buy large quantities of goods from the manufacturers, store them, and then resell them to other businesses. Wholesalers Wholesalers that manage inventory and merchandising for retailers by counting stock, filling it in when needed, and maintaining store displays. Rack Jobbers

5. Key Terms Own the goods they sell, but do not physically handle the actual products. Drop Shippers Sell goods to the final consumer for personal use. Retailers Sell goods to the customer from their own physical stores. Brick-and Mortar retailers Involves retailers selling products over the Internet to the customer. e-tailing

6. Key Terms Do not own the goods they sell; act as intermediaries by bringing buyers and sellers together. Agents When the producer sells goods or services directly to the customer, with no intermediaries. Direct Distribution Involves one or more intermediaries. Indirect Distribution

7. Distribution: How It Works To make a place decision, marketers must decide on their channel of distribution. Channel of Distribution is the path a product takes from its producer or manufacturer to the final user.

8. Channel Members Businesses involved in the sales transactions that move products from the manufacturer to the final user are called intermediaries. Intermediaries reduce the number of contacts required to reach the final user of the product. Intermediaries are classified on the basis of whether they take ownership (title) of goods and services. Merchant intermediaries take title; Agent intermediaries do not. Agent Intermediaries, or agents, are paid a commission to help buyers and sellers get together.

9. Wholesalers Businesses that buy large quantities of goods from manufacturers, store the goods, and then resell them to other businesses are called wholesalers. Wholesalers may be called distributors when their customers are professional or commercial users, manufacturers, governments, institutions, or other wholesalers.

10. Wholesalers Two specialized wholesalers are rock jobbers and drop shippers. Rack jobbers are wholesalers that manage inventory and merchandising for retailers by counting stock, filling it in when needed, and maintaining store displays. They supply the racks for display of the product in a retail store. They bill the retailer only for the goods sold, not for all the items on display.

11. Wholesalers Drop shippers own the goods they sell but do not physically handle it themselves. They deal in large quantities of items in bulk, such as coal, lumber, and chemicals that require special handling. Sell the goods to other businesses and have the producer ship the merchandise directly to the buyers.

12. Retailers 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. These stores get their goods from wholesalers and manufacturers. They serve as a final link between the manufacturer and the consumer.

13. Retailers Some brick-and-mortar retailers produce their own catalogs to reach consumers who like to shop at home. Online retailing, or e-tailing, involves retailers selling products over the Internet to customers. Brick-and-Mortar retailers such as Target and Williams-Sonoma, have even created Web sites. Some of the top e-tailing sectors are air travel, books, and hardware.

14. Agents Unlike wholesalers and retailers, agents do not own their own the goods they sell. Agents act as intermediaries by bringing buyers and sellers together. There are two different types of agents: 1.Manufacturers’ representatives 2.Brokers

15. Agents Independent Manufacturers’ Representatives Work with several related but noncompeting manufacturers in a specific industry. They are paid commissions based on what they sell. An independent manufacturers’ agent may carry a line of fishing rods from one manufacturer, insulated clothing for hunters from a different manufacturer, and outdoor shirts from another manufacturer.

16. Agents Brokers A brokers principle function is to bring buyers and sellers together in order for a sale to take place. They usually do not have a continued relationship with either party. The negotiate sales, paid commission, and look for other customers. Food brokers are different because they represent several manufacturers of products sold in supermarkets, etc.

17. Direct and Indirect Channels Channels of Distribution are classified as direct or indirect. Direct Distribution occurs when the producer sells goods or services directly to the customer. Indirect distribution involves one or more intermediaries.

18. Examples of Channels of Distribution Different channels are used to reach the customer in the consumer and industrial markets. When selling to the industrial market, a manufacturer would sell paper napkins to industrial distributors who, in turn, would sell the napkins to restaurants. When selling to the consumer market, the company would sell napkins to a wholesaler or use food brokers to sell to retailers such as grocery stores or party supply shops.

19. Distribution Channels for Consumer Products and Services Few consumer products are marketed using direct distribution (Channel A) because consumers have become accustomed to shopping in retail stores. The most common indirect channel in the consumer market is Prod

20. Manufacturer/Producer Directly to Consumer (Channel A) Direct distribution can be used in five different ways to deliver products to consumers: 1.Selling products at the production site. (Factory outlets, farmers’ roadside stands) 2.Having a sales force call on consumers at home. (Avon and Mary Kay) 3.Using catalogs or ads to generate sales. 4.Having sales representatives call consumers on the telephone. (telemarketing) 5.Using the Internet to make online sales.

21. Manufacturer/Producer to Retailer to Consumer (Channel B) This channel is used most often for products that become out of date quickly or need regular servicing. Clothing and automobiles are sold this way. Chain stores and online retailers use this channel.

22. Manufacturer/Producer to Wholesaler to Retailer to Consumer (Channel C) This method is most often used for staple goods. Staple goods are items that are always carried in stock and whose styles do not change frequently. Examples are: 1.Supermarkets 2.Flowers 3.Candy 4.Stationary supplies

23. Manufacturer/Producer to Agents to Wholesaler to Retailer to Consumer (Channel D) Manufacturers who prefer to concentrate on production and leave sales and distribution to others use Channel D. The agent sells to the wholesalers who are involved in storage, sale, and transportation to retailers. The retailer sells them to consumers.

24. Manufacturer/Producer to Agents to Retailer to Consumer (Channel E) Manufacturers who do not want to handle their own sales to retailers use Channel E. The agent/intermediaries brings the buyer and seller together. Expensive cookware, meat, cosmetics, and many supermarket items are sold this way.

25. Distribution Channels for Industrial Products and Services Industrial users shop differently and have different needs from consumers, so they use different channels of distribution. The least used channel in the consumer market is Direct Distribution (Channel A) but the most used channel in the industrial market.

26. Manufacturer/Producer Directly to Industrial Users (Channel A) Most often used for major equipment used in manufacturing and other businesses. The manufacturer’s sales force calls on the industrial user to sell goods and services. For example: A Xerox sales representative sells copiers directly to manufacturers and commercial businesses.

27. Manufacturer/Producer to Industrial Distributors to Industrial Users (Channel B) Most often used for small standardized parts and operational supplies needed to run a business. The industrial wholesalers(distributors) take ownership of the products, stock them, and sell them as needed to industrial users. For Example: A restaurant supply wholesaler buys pots, pans, utensils, etc to sell to restaurant owners.

28. Manufacturer/Producer to Agents to Industrial Distributors to Industrial Users (Channel C) Small manufacturers who do not have time or money to invest in a direct sales force may prefer to use the services of an agent. The agent represents the manufacturer for sale of the goods but does not take possession or title. The agent sells the goods to the industrial wholesaler who stores, resells, and ships them to the industrial user.

29. Manufacturer/Producer to Agents to Industrial Users (Channel D) This is used when a manufacturer does not want to hire its own sales force. The merchandise is shipped directly from the manufacturer to the industrial user. Construction equipment, farm products, and dry goods are usually marketed this way.

30. Chapter 21.2 Distribution Planning

31. Objectives Explain distribution planning Name and describe the three levels of distribution intensity Explain the effect of the Internet on distribution planning Describe the challenges of distribution planning for international markets.

32. Key Terms Involves protected territories for distribution of a product in a given geographic area. Exclusive distribution Distribution system where manufacturers act as wholesaler and retailer for their own products. Integrated distribution. Limited number of outlets in a given geographical area are used to sell the product. Selective distribution Involves the use of all suitable outlets to sell a product. Intensive distribution Online shopping location. E-marketplace

33. Understanding Distribution Planning Distribution Planning involves decisions about a product’s physical movement and transfer of ownership from producer to consumer.

34. Multiple Channels A producer uses multiple channels when its product fits the needs of both industrial and consumer markets. The producer must always identify the best channel for each market.

35. Control vs. Costs All manufacturers and producers must weigh the control they want to keep over the distribution of their products against costs and profitability.

36. Control vs. Costs Who Does the Selling? A manufacturer must decide how much control it wants over its sales function. It can use its own sales force or hire agents to do the selling.

37. Control vs. Costs Who Does the Selling? A direct sales force is costly. In-house sales representatives are on the company payroll, receive employee benefits, and are reimbursed for expenses.

38. Control vs. Costs Who Does the Selling? With an agent, the manufacturer loses some of its control over how sales are made. This is because agents work independently, running their own business.

39. Distribution Intensity Exclusive distribution involves protected territories for distribution of a product in a given geographical area. *Characteristics of this distribution strategy are: Prestige Image Channel control High profit margin

40. Distribution Intensity Integrated distribution is where manufacturers act as wholesaler and retailer for their own products. With this distribution strategy manufacturers own and run their own retail operations. *For example: The Gap sells its clothing in company-owned retail stores

41. Distribution Intensity Selective distribution means that a limited number of outlets in a given geographic area are used to sell the product. The goal is to select channel members that can maintain the image of the product and are good credit risks, aggressive marketers, and good inventory planners. Intermediaries are selected for their ability to cater to the final users that the manufacturers want to attract.

42. Distribution Intensity Intensive distribution involves the use of all suitable outlets to sell a product. The objective is to complete market coverage, and the ultimate goal is to sell to as many customers as possible, wherever they choose to shop. *For Example: Motor oil is marketed in quick-lube shops, farm stores, auto part retailers, supermarkets, etc just to reach the maximum number of customers.

43. Distribution Intensity E-Commerce The means by which products are sold to customers and industrial buyers through the Internet. An online shopping location is called the e-marketplace.

44. Legal and Ethical Considerations in Distribution In most cases, businesses may use whatever channel arrangement they desire. Laws affecting channels generally prevent exclusionary tactics that might keep other companies from using a desired channel. The Clayton Antitrust Act of 1914: Prevents exclusive arrangements that substantially lessen competition, create a monopoly, or in which one party did not commit to the agreement voluntarily.

45. Legal and Ethical Considerations in Distribution Some distribution practices meet the legal requirements but may be ethically questionable. The American Marketing Association(AMA) Code of Ethics lists the following responsibilities in the area of distribution: 1.Not manipulating the availability of a product for purpose of exploitation 2.Not using coercion in the marketing channel 3.Not exerting undue influence over the reseller’s decision whether to handle the product.

46. Distribution Planning for Foreign Markets Foreign market environments require that businesses adjust their distribution systems. It also gives businesses a chance to experiment with different distribution strategies. Cultural considerations should also be weighed when planning distribution in foreign markets