Managing Under Selective Distribution Governance and Distribution Channel Strategy March 2000

Selective/Exclusive Distribution Selective/exclusive distribution programs call for the closing of the system and limiting membership at the reseller level Such systems: – Enhance reseller gross margins – Provide faster payback to promotions – Limit free riding on the resellers’ pre-sale and promotional activities – Enhance reseller dependence

Role of Intensity Supplier sales = h(reseller intensity, reseller promotion, supplier end-user and reseller advertising) Reseller GM% = f(reseller intensity, end-user search, trade allowances, supplier promotions) Reseller promotion = g(reseller intensity, supplier discount programs, reseller GM%) roman face = positive functional relationship italic face = negative functional relationship

Role of Reseller Pre-Sale Activities in Determining Intensity Reseller Intensity Low High (B) Supplier sales affected by reseller pre-sale cooperation. Reseller help diminishes with intensity. Supplier Market Sales B A Scenario B: High value to reseller from pre-sale activity Scenario A: Low value to reseller from pre-sale activity High (A) Supplier sales unaffected by reseller pre-sale. Cooperation remains as long as demand is sustained.

Ekornes-Home Furniture Building Retail Partnerships Reduced French retailers from 450 to 150 – Provided exclusive territories – Expanded GM to motivate greater promotion Build relationship – Visit Norwegian factory – Regional training sessions for retail sales force – Develop horizontal retail communications Substantial expansion in sales

Channel Coordination Elements Creating channel coordination – Common brand positioning across channel – Clear timing for new products, promotions Motivate reseller pre-sale marketing – Encourage investment in inventories, service – Build on reseller reputation to establish brand – Incentives for promotional activity, quotas Building reseller trust and satisfaction Managing resale prices

Frazier & Lassar Conjectures Distribution intensity decreases as: – Supplier brand quality increases – The more focused the supplier’s target market – Weak contractual restrictions – Retailer investments are lower – The stronger a manufacturer’s coordination and support programs (associated not causal) – Use of distributors (associated not causal)

Enhancing Coordination Channel coordination is enhanced by selective/distribution systems since payback to investments may be expected over a longer time period Suggestions and guidance do not require continuous short-term incentives Coordination programs become increasingly detailed and involve cost sharing activities

Initiation of Members The selection of members to a selective/intensive system takes on great importance – Extensive training and investment required – High costs to failure as sunk costs are lost – Termination processes may be difficult, costly, upset other resellers, and ultimately end in expensive court battles

Termination Limitations to termination rights of either party – Help to solidify a relationship – Increase breakup costs, especially to the reseller Resellers often – Read loosely read contracts as affirming permanent association – Fail to adequately protect themselves in case of loss of channel inclusion

Exclusive Dealing Exclusive dealing is the polar opposite to exclusive distribution Exclusive dealing calls for the reseller to reduce its choice of suppliers for a given line of products to one Exclusive dealing further ties parties in a distribution contract together by making termination more difficult and costly

Coercive Power in S/E Channels Coercive power: use of punishment or threats by a channel member to obtain cooperation Methods of application – Threats of termination, short termination clauses – More subtle reductions of cooperation Slow payments for promotional program benefits Refusing to accept returns Limiting information flow Slow delivery of best selling products Sending unwanted goods without authorization