1. İntroduction to Business 2 BUS 102
Erlan Bakiev, Ph. D.
Chapter 14: Distribution Strategies
Zirve University
BUS 102

2. Distribution Strategies
This chapter explores retailing—one of the most visible aspects of marketing—along with wholesaling and physical distribution, two other vital parts of the marketing equation, but ones that many consumers never see in action. You’ll start by learning about the role that all these marketing intermediaries play in the effort to move products from the companies that create them to the companies and consumers who buy them. You’ll also see how the Internet continues to create both challenges and opportunities for every company in the distribution sector. The second part of the chapter explains the complex decisions that marketing managers need to make regarding distribution strategies, then the final section explores the process of physical distribution. ,

3. Marketing Intermediaries
Retailers
Wholesalers
A company’s distribution strategy, which is its overall plan for moving products to buyers, plays a major role in the firm’s success.
Think of all the products you buy: food, toiletries, clothing, sports equipment, train tickets, haircuts, gasoline, stationery, appliances, CDs, videotapes, books, and all the rest. How many of these products do you buy directly from the producer? For most people, the answer is not many. Most companies do not sell their goods directly to the final users, even though the Internet is making that easier to do these days. Instead, producers in many industries work with marketing intermediaries (also called middlemen) to bring their products to market.
Two main types of marketing intermediaries are wholesalers and retailers. ,

4. Wholesalers and Retailers
Utility Value
Place
Time
Possession
Wholesalers and retailers are instrumental in creating three of the four forms of utility mentioned in Chapter 12: They provide the items you need in a convenient location (place utility), they save you the time of having to contact each manufacturer to purchase a good (time utility), and they provide an efficient process for transferring products from the producer to the customer (possession utility). In addition to creating utility, wholesalers and retailers perform seven distribution functions (see the following slide). ,

5. Seven Roles of Marketing Intermediaries
Transport and
Store Products
Gather Assortment
of Goods
Assume Risks
Provide Financing
Provide Market
Information
Match Buyers
and Sellers
Provide Promotion
and Sales Support
Two main types of marketing intermediaries are wholesalers and retailers. Wholesalers sell primarily to retailers, other wholesalers, and organizational users such as government agencies, institutions, and commercial operations. In turn, the customers of wholesalers either resell the products or use them to make products of their own. Retailers sell products to the final consumer for personal use. Retailers can operate out of a physical facility (supermarket, gas station, kiosk), through vending equipment (soft drink machine, newspaper box, or automated teller), or from a virtual store (telephone, catalog, website).
Wholesalers and retailers perform a number of specific distribution functions that make life easier for both producers and customers:
Match buyers and sellers.
Provide market information.
Provide promotional and sales support.
Gather an assortment of goods.
Transport and store the product.
Assume risks.
Provide financing. ,

6. How Intermediaries Simplify Commerce
As the slide above shows, without marketing intermediaries, the buying and selling process would be expensive and time-consuming. ,

7. Types of Wholesalers Merchants Agents or Brokers Rack Jobbers
Limited-Service
Full-Service
Drop Shippers
Securities Brokers
Insurance Brokers
Real Estate Agents
Manufacturer’s Reps
The majority of wholesalers are merchant wholesalers, independently owned businesses that buy from producers, take legal title to the goods, then resell them to retailers or to organizational buyers. Full-service merchant wholesalers provide a wide variety of services, such as storage, selling, order processing, delivery, and promotional support. Rack jobbers, for example, are full-service merchant wholesalers that set up displays in retail outlets, stock inventory, and mark prices on merchandise displayed in a particular section of a store. Limited-service merchant wholesalers, on the other hand, provide fewer services. Natural resources such as lumber, grain, and coal are usually marketed through a class of limited-service wholesalers called drop shippers, which take ownership but not physical possession of the goods they handle.
In contrast to merchant wholesalers, agents and brokers never take title to the products they handle, and they perform fewer services. Their primary role is to bring buyers and sellers together; they are generally paid a commission (a percentage of the money received) for arranging sales. Real estate agents, insurance brokers, and securities brokers, for example, match up buyers and sellers for a fee or a commission, but they don't own the items that are sold. Producers of commercial parts often sell to business customers through brokers. Manufacturers' representatives, another type of agent, sell various noncompeting products to customers in a specific region and arrange for product delivery. By representing several manufacturers' products, these reps achieve enough volume to justify the cost of a direct sales call. ,

8. Benefits of Retailers Save Time Save Money Build Traffic
Add Convenience
In contrast to wholesalers, retailers are a highly visible element in the distribution chain. Retail stores provide many benefits to consumers. Some, such as Target, save people time and money by providing a huge assortment of merchandise and—increasingly, services—under one roof. Still other retailers build traffic and add convenience by diversifying their product lines, a practice known as scrambled merchandising.
Regardless of product offerings or target markets, all retailing efforts can be divided into store formats—based in physical store locations—and nonstore formats—which take place anywhere and everywhere outside of physical stores. ,

9. Types of Retail Stores Specialty Store Department Store Killer
Limited
Products
Extensive
Selection
Specialty
Store
Customer
Services
Wide
Variety
Department
Store
Category
Dominance
Wide
Variety
Killer
Lower
Prices
Wide
Variety
Discount
Store
When you shop in a pet store, a shoe store, or a stationery store, you are in a specialty store—a store, such as Payless Shoes, that carries only particular types of goods. The basic merchandising strategy of a specialty shop is to offer a limited number of product lines but an extensive selection of brands, styles, sizes, models, colors, materials, and prices within each line.
Department stores are the classic major retailers in the United States, with the likes of Bloomingdale’s, Macy’s, Nordstrom, Dillard’s, Marshal Field, Kohl’s, Sears, and J.C. Penney. These stores can have local, regional, or national presence and different price and quality offerings, but most tend to carry clothing, housewares, bedding, furniture in some cases, and similar items.
At the other end of the retail spectrum are the category killers—superstores that dominate a particular product category by stocking every conceivable variety of merchandise in that category. Home Depot, Toys “R” Us, Office Depot, and Barnes and Noble are category killers.
In contrast to category killers, discount stores offer a wider variety of merchandise, lower prices, and fewer services. One of the newest categories of discounters is supercenters, large discount stores that offer broad selection of groceries, toys, household items, and other products at discount prices. Since the early 1990s, Wal-Mart has opened over 1,140 U.S. supercenters with an average size of 190,000 square feet and is now one of the nation’s largest food retailers. ,

10. Retail Industry Challenges
Oversupply of
Store Space
Consumer
Demographics
Weakened
Economy
Nonstore Retailing
and E-Commerce
Like wholesalers, retailers are facing a number of pressing challenges in today’s competitive marketplace. Chief among them is an oversupply of physical retail store space. The United States now has about 1,800 malls, which industry watchers say is about one third too many. In addition to an oversupply of stores, retailers are grappling with a weakened economy, and changing consumer demographics, lifestyles, and shopping patterns. Finally, the growth of nonstore retailing and e-commerce is forcing many retailers to revise their sales and marketing strategies to accommodate new technologies. ,

11. E-Commerce and Non-Store Formats
Clicks-Only Internet
Clicks-and-Bricks
Mail-Order Firms
Automatic Vending
Interactive Kiosks
Nonstore retailing can trace its origin back to such classics as the mail-order catalogs sent out by Sears Roebuck and Montgomery Ward during the late 1800s, selling everything from household goods to ready-to-assemble houses. Online sales are still less than 10 percent of U.S. retail sales and obviously can’t replace all store-based retailing, but it’s safe to say that e-tailing will continue to grow far into the future.
Stores such as Amazon and Blue Nile, which sell exclusively online, are sometimes known as clicks-only or pure-play Internet retailers. Macy’s, Nordstrom, and other stores that sell both online and offline are often called clicks-and-bricks or clicks-and-mortar (a wordplay on “bricks and mortar”) operations. A clicks-and-bricks strategy integrates a company’s website (clicks) with its existing physical stores (bricks) and other retail channels so that all logistics and marketing programs are shared.
Meanwhile, the mail-order firms that inspired e-commerce are still going strong in many industries, as a look inside any mailbox in the country will verify.
Another common form of nonstore retailing is automatic vending, in which machines dispense everything from gasoline to candy bars to hot meals to train tickets.
Interactive kiosks, freestanding electronic displays that combine elements of vending machines and e-commerce, also play a role in retailing. ,

12. Retailing Innovations
Multichannel
Retailing
Hybrid Formats
Retail Theater
The Internet is the biggest story to hit retailing in decades, but it’s not the only area of innovation. Among the ongoing developments you can expect to encounter as a consumer and perhaps as a future marketer yourself are multichannel retailing, hybrid store formats, retail theater, and pop-up stores:
Multichannel retailing. The integration of offline and online operations is a good example of multichannel retailing, a term for any coordinated effort to reach customers through more than one retail channel.
Hybrid formats. The boundary-blurring tradition of scrambled merchandising is being taken to a new level in hybrid retail formats, which combine different types of retailers or different retail companies in the same facility.
Retail theater. Increasingly, retail stores aren’t just places to buy things; they’re becoming places to research new technologies, learn about cooking, engage in arts and crafts, or simply be entertained for a few minutes while going through the drudgery of picking out the week’s groceries
Pop-up stores. The lifecycle of retail stores is usually measured in decades, but pop-up stores are designed to last as little as a week. As a combination of retail channel and marketing event, pop-ups appear in such places as empty storefronts, parking lots, and open spaces inside malls.
Pop-Up Stores ,

13. Critical Thinking How can BİM be both a wholesaler and a
retailer at the same time?
2. Moving to he future, what effect is online
retailing likely to have on the over-supply
of retail store space in Turkiye?
3. Would it ever make sense for Amazon to
open retail stores? Why or why not? ,

14. Setting Distribution Strategies
Distribution Mix
Marketing Practices
Customer
Needs and
Expectations
Product
Support
Requirements
Segmentation,
Targeting,
Positioning
Competitor’s
Distribution
Channels
Established
Industry
Patterns
Type of Product
Managers must make critical decisions when designing and selecting channels for any product. A company’s decision about the number and type of intermediaries to use—its distribution mix—depends on the kind of product being sold and the marketing practices of the industry.
As either a marketing manager looking to expand your current distribution or an entrepreneur looking for your first distribution channel, start by considering these issues:
Customer needs and expectations. How do customers want and expect to purchase your product?
Your products’ support requirements, both before and after the sale. Complex machines require significant technical skills to sell and to support after the sale.
Segmentation, targeting, and positioning. Just as producers segment markets, choose target segments, and try to position your products within those segments, marketing intermediaries make strategic marketing decisions regarding their own businesses.
Competitors’ distribution channels. In some industries, you’ll wage an endless battle with your competitors within the distribution network.
The established patterns with your industry. Over the years, all industries develop certain patterns of distribution. ,

15. Distribution Channel Length
Consumer Goods and Services
Business Goods and Services
Producer
Agent/Broker
Wholesaler
Retailer
Consumer
Consumer
Consumer
Consumer
A company’s decision about the number and type of intermediaries to use—its distribution mix—depends on the kind of product being sold and the marketing practices of the industry.
Most businesses purchase goods they use in their operations directly from producers, so the distribution channel is short. In contrast, the channels for consumer goods are usually longer and more complex. The four primary channels for consumer goods are as follows:
Producer to consumer. Producers who sell directly to consumers through catalogs, telemarketing, infomercials, and the Internet are using the shortest, simplest distribution channel.
Producer to retailer to consumer. Some producers create longer channels by selling their products to retailers such as Ace Hardware, who then resell them to consumers.
Producer to wholesaler to retailer to consumer. Most manufacturers of supermarket and drugstore items rely on even longer channels. They sell their products to wholesalers, who in turn sell to the retailers.
Producer to agent/broker to wholesaler to retailer to consumer. Additional channel levels are common in certain industries, such as agriculture, where specialists are required to negotiate transactions or to perform interim functions such as sorting, grading, or subdividing the goods.
Business User
Business
User ,

16. Channel Selection Market Control Coverage Channel Cost Conflict ,
When establishing marketing channels, companies must consider four key factors: market coverage, cost, control, and channel conflict. ,

17. and Organizational Supplies
Market Coverage
Distribution
Intensive
Selective
Exclusive
The appropriate market coverage—the number of wholesalers or retailers that will carry a product—varies by type of product. Inexpensive convenience goods or organizational supplies such as computer paper and pens sell best if they are available in as many outlets as possible. Such intensive distribution requires wholesalers and retailers of many types. In contrast, shopping goods (goods that require some thought before being purchased) such as Sub Zero refrigerators require different market coverage, because customers shop for such products by comparing features and prices. For these items, the best strategy is usually selective distribution, selling through a limited number of outlets that can give the product adequate sales and service support.
If producers of expensive specialty or technical products do not sell directly to customers, they may choose exclusive distribution, offering products in only one outlet in each market area.
Convenience Goods
and Organizational Supplies
Expensive Technical
or Specialty Products ,

18. Cost Factors Selling Storage Distribution ,
Costs play a major role in determining a firm’s channel selection. It takes money to perform all the functions that are handled by intermediaries. Small or new companies often cannot afford to hire a sales force large enough to sell directly to end users or to call on a host of retail outlets. Neither can they afford to build large warehouses and distribution centers to store large shipments of goods. These firms need the help of intermediaries who can spread the cost of such activities across a number of noncompeting products. With time and a larger sales base, a producer may build enough strength to take over some of these functions and reduce the length of the distribution channel. ,

19. Sold in the Marketplace
Control Issues
Channel
Length
Shorter
Longer
How Goods Are
Sold in the Marketplace
A third issue to consider when selecting distribution channels is control of how, where, when, and for how much your product is sold. Longer distribution channels mean less control for producers, who become increasingly distant from sellers and buyers as the number of intermediaries multiplies. Shorter distribution channels, on the other hand, gives producers more control over how the goods are sold in the market, but there is a tradeoff. Concentrating too many distribution functions in the hands of too few intermediaries can increase the negotiating power of distributors.
Overall
Control
More
Less ,

20. Channel Conflict Inadequate Product Support Too Many Intermediaries
Multiple Sales Channels
Because the success of individual channel members depends on the overall channel success, ideally all channel members should work together smoothly. However, individual channel members must also run their own businesses profitably, which means that they often disagree on the roles each member should play. Such disagreements create channel conflict. Channel conflict may arise when suppliers provide inadequate product support, when markets are oversaturated with intermediaries, or when companies sell products via multiple channels, each of which is competing for the same customers. ,

21. Critical Thinking Does exclusive distribution limit the
potential size of manufacturer's market?
Why or why not?
2. İs the continuing growth of e-commerce
likely to increase or decrease instances of
channel conflict? Explain … ,

22. Managing Physical Distribution
In-House Operations
Outbound Transportation
Developing a distribution strategy involves more than selecting the most effective channels for selling a product. Companies must also decide on the best way to move their products and services through the channels so that they are available to the customers at the right place, at the right time, and in the right amount. Physical distribution encompasses all the activities required to move finished products from the producer to the consumer, including the in-house operations of forecasting, order processing, inventory control, warehousing, materials handling, and outbound transportation. ,

23. In-House Operations Forecasting Order processing Inventory control
Warehousing
Materials handling
The components of the distribution process can be divided into in-house operations and outbound transportation. The in-house steps include forecasting, order processing, inventory control, warehousing, and materials handling.
To control the flow of products through the distribution system, a firm must have an accurate estimate of demand. To some degree, historical data can be used to project future sales; however, the firm must also consider the impact of unusual events (such as special promotions) that might temporarily boost demand.
Order processing involves preparing orders for shipment and receiving orders when shipments arrive. It includes a number of activities, such as checking the customer’s credit, recording the sale, making the appropriate accounting entries, arranging for the item to be shipped, adjusting the inventory records, and billing the customer.
If your inventory is too large, you incur extra expenses for storage space, handling, insurance, and taxes; you also run the risk of product obsolescence. On the other hand, if your inventory is too low, you may lose sales when the product is not in stock. The objective of inventory control is to resolve these issues.
Products held in inventory are physically stored in a warehouse, which may be owned by the manufacturer, by an intermediary, or by a private company that leases space to others. Some warehouses are almost purely holding facilities in which goods are stored for relatively long periods. Other warehouses, known as distribution centers, serve as command posts for moving products to customers.
An important part of warehousing activities is materials handling, the movement of goods within and between physical distribution facilities. One main area of concern is storage method--whether to keep supplies and finished goods in individual packages, in large boxes, or in sealed shipping containers. ,

24. Outbound Transportation
Mode
Cost
Flexibility
Capacity
Reliability
Speed
Rail
Truck
Water
Air
Pipeline
Average
Lower
Higher
Lower
Average
Higher
Higher
Lower
Average
Higher
Average
Average
Lower
Higher
Each of the five major modes of transportation has distinct advantages and disadvantages:
Railroads can carry heavier and more diverse cargo and a larger volume of goods than any other mode of transportation. However, trains are constrained to tracks, so they can rarely deliver goods directly to customers.
Trucks are a preferred form of transportation for two reasons: (1) the convenience of door-to-door delivery, and (2) the ease and efficiency of travel on public highways, which do not require the use of expensive terminals or the execution of right-of-way agreements (customary of air and rail transportation). Trucks cannot, however, carry all types of cargo cost effectively; for example, commodities such as steel and coal are too large and heavy.
The cheapest method of transportation is via water, and is the preferred method for such low-cost bulk items as oil, coal, ore, cotton, and lumber. However, ships are slow, and service to any given location is infrequent. Furthermore, another form of transportation is usually needed to complete delivery to the final destination, like it is for rail.
Air transportation offers the advantage of speed—but at a price. Airports are not always convenient to the customers. Moreover, air transport imposes limitations on the size, shape, and weight of shipments and is the least dependable and most expensive form of transportation. Weather may cause flight cancellations, and even minor repairs may lead to serious delays. But when speed is a priority, air is usually the only way to go.
For products such as gasoline, natural gas, and coal or wood chips (suspended in liquid), pipelines are an effective mode of transportation. Although they are expensive to build, they are extremely economical to operate and maintain. The downside is transportation via pipeline is slow (3 to 4 miles per hour), and routes are inflexible.
Shippers can combine the benefits of each mode by using intermodal transportation (a combination of multiple modes). For instance, a company may ship goods in over-the-road trailers that ride part of the way on flat bed railroad freight cars and part of the way on highways. ,

25. Critical Thinking İf another high-tech company approached
Dell with partnership proposal to build
and operate several distribution centers
that would ship both companies’ products
to customers, what would you advice Dell
to do? Why?
2. Given huge volume of small packages that
Amazon ships every year, should it consider
starting its own transportation company
instead of giving all that business to FedEx and
other shipping companies? Why or why not? ,