Chapter 4 Supply-Side Channel Analysis: Channel Intensity and Vertical Restraints

Key Topics for Ch. 4 1.Decision Process Flow Chart 2. Three Elements of Channel Structure a) Ownership/Function b) Intensity: Market Coverage Issue: Selectivity Versus Assortment c) Level (or Length) 3. Using Dual-Multiple Channels

Use intermediaries?  Is demand for assortment/variety low?  Do we have capability to sell direct?  Can an independent channel member perform flow(s) at lower cost?  What is the value placed on control of the processes? No Yes Sell Direct What type(s) of intermediaries to use? Non-Retail Intermediaries  What channel flows do we want to outsource?  Who is willing and available in the target market who can perform the desired flows?  Is there synergistic value in allocating multiple flows to one intermediary? Retail Intermediaries  What flow(s) does the retailer need to perform?  What retailers are willing and available in the target market and can perform the desired flows?  How do target end-users currently buy in this category? Which specific intermediary(ies) to use?  How costly is it to use each retail intermediary?  Who is likely to be the most committed and cooperative channel partner to perform each desired flow? Create Channel Structure DECISION PROCESS: WHO SHOULD BE A CHANNEL MEMBER?

D 100% Brand Market Share Extent of Distribution Coverage for a Brand (% of all Possible Outlets) A “normal” expectation B C 100% SAMPLE REPRESENTATION OF THE COVERAGE-MARKET SHARE RELATIONSHIP FOR FAST MOVING CONSUMER GOODS Function A is an example of the type of relationship that would ordinarily be expected between distribution coverage and market share. Functions B, C and D are convex and are examples of approximate relationships often found in FMCG markets. A brand can achieve 100% market share at less than 100% coverage because not every possible outlet will carry the product category. For example, convenience stores sell food but not every category of food.

Manufacturers use the money to “pay” the Channel Members for : - limiting its own coverage of brand in product category (gaining exclusive dealing is very expensive) - supporting premium positioning of the brand - finding a narrow target market - coordinating more closely with the manufacturer - making-supplier specific investments new products new markets differentiated marketing strategy requiring downstream implementation - accepting limited direct selling by manufacturer - accepting the risk of becoming dependent on a strong brand Limited coverage is currency More selectivity = more money Exclusive distribution = SELECTIVITY (Territory Exclusivity) AS A BARGAINING CHIP FOR THE MANUFACTURER Manufacturers need to “pay more” when : - the product category is important to the Channel Member - the product category is intensely competitive

BRAND ASSORTMENT LIMITATION (Category Exclusivity) AS A BARGAINING CHIP FOR THE DOWNSTREAM CHANNEL PARTNER Downstream Channel Members use the money to “pay” the supplier for : - limiting the number of competitors who can carry the brand in the Channel Member’s trading area - providing desired brands that fit the Channel Member’s strategy - working closely to help the Channel Member achieve competitive advantage - making Channel-Member-specific investments new products new markets differentiated Channel Member strategy requiring supplier cooperation - accepting the risk of becoming dependent on a strong Channel Member Limiting brand assortment is currency Fever brand = more money Exclusive dealing = Downstream Channel Members need to “pay more” when : - the trading area is important to the supplier - the trading area is intensely competitive

Striking a Compromise: How much selectivity? I. Factors to Consider 1.Nature of Product Category* 2.Brand Strategy 3.Desired Level of Control II. Cutting Cost versus Raising Sales III. Number of Levels (Channel Length)

8 Analyzing Product Characteristics Product Characteristics –Unit value: length –Standardization: length, intensity –Bulkiness: length –Complexity: length, intensity –Stage of Product Life Cycle: intensity, ownership  Implications for Channel Design ©McGraw-Hill Companies, Inc. 2002

Using Dual-Multiple Channels I. Terminology Confusion 1.Dual Channels 2.Multiple Channels 3.Hybrid Channel 4.Composite Channel II. Benefits and Cost of using dual-multiple channels