1. Distribution Channels
Marketing for Hospitality and Tourism
Kotler, Bowen and Makens
Distribution Channels
Chapter 12

2. Learning Objectives
Describe the nature of distribution channels, and tell why marketing intermediaries are used.
Understand the different marketing intermediaries available to the hospitality industry and the benefits each of these intermediaries’ offers.
Discuss channel behavior and organization, explaining corporate, contractual, and vertical marketing systems, including franchising.
Illustrate the channel management decisions of selecting, motivating, and evaluating channel members.
Identify factors to consider when choosing a business location.

3. Supply Chain
The Supply Chain consists of Upstream and Downstream partners
Upstream partners are firms that supply what is needed to create a product or service
Downstream partners connect the firm with its customers
A better approach is to think of the supply chain as a Value Delivery Network where all parties partner with each to improve the performance of the entire system
Producing a product or service and making it available to buyers requires building relationships not just with customers, but also with key suppliers and resellers in the company’s supply chain
This supply chain consists of “upstream” and “downstream” partners
Upstream from the company is the set of firms that supply the raw materials, components, parts, information, finances, and expertise needed to create a product or service
Downstream marketing channel partners, such as wholesalers and retailers, form a vital connection between the firm and its customers
The term supply chain may be too limited
It takes a make-and-sell view of the business
A better approach is a value delivery network made up of the company, suppliers, distributors, and ultimately customers who “partner” with each other to improve the performance of the entire system

4. Distribution Channel Functions
Information
Promotion
Contact
Matching
Negotiation
Physical
Distribution
Financing
Risk Taking
A distribution channel moves goods from producers to consumers
Members of the marketing channel perform many key functions (The first five functions help complete transactions; the last three help fulfill the completed transactions):
Information
Gathering and distributing marketing research and intelligence information about the marketing environment
Promotion
Developing and spreading persuasive communications about an offer
Contact
Finding and communicating with prospective buyers
Matching
Shaping and fitting the offer to the buyer’s needs, including such activities as manufacturing, grading, assembling, and packaging
Negotiation
Agreeing on price and other terms of the offer so that ownership or possession can be transferred
Physical distribution
Transporting and storing goods
Financing
Acquiring and using funds to cover the costs of channel work
Risk taking
Assuming financial risks such as the inability to sell inventory at full margin

5. Major Hospitality Distribution Channels
Direct Booking
GDSs
Travel Agents
OTAs
Tour Wholesalers
Hospitality
Distribution
Channels
Direct booking
On average, reservations received directly at the hotel account for 54.3% of a hotel’s reservations, but only 46.5% of the revenue.
Managers often like to encourage direct booking because of the low transaction costs
Online Travel Agencies (OTA)
Online travel agencies only account about 6.5% of a hotel’s reservation
One way of dividing OTAs is into opaque and non-opaque
The non-opaque OTAs includes merchant, retail and referral models
The most popular non-opaque sites are merchant agencies which collect payment from the customer and include well-known names like Hotels.com, Travelocity and Expedia
Opaque sites reduce cannibalization of brand.com by not disclosing the brand and specific hotel one is purchasing until it is purchased in a nonrefundable transaction with the consumer
When using opaque OTAs one should consider that it can reduce the perceived value for those who purchase through brand.com, if people in the same hotel discuss what they paid for the room
It can also bring in price sensitive guests that will not spend money on food and beverage
One important feature of an OTA is people often search through hotel choices and then go to brand.com to book the reservation
Thus, it is important that the hotel have a good presence in terms of photos and description on the OTA
Another type of OTA is a retail agency, which is similar to a conventional travel agency
The hotel pays a commission to the agent and collects the mono the room rental directly from the guest
Global Distribution Systems
Global distribution systems (GDSs) are computerized reservation systems that serve as a product catalog for travel agents and other distributors of hospitality products
Travel Agents
One way of reaching a geographically diverse marketplace is through travel agent
The number of travel agents has been decreasing in recent years due to the growth of direct booking and customers self-booking travel on the Internet
Tour Wholesalers
Tour wholesalers assemble travel packages usually targeted at the leisure market
These generally include transportation and accommodations but may include meals, ground transportation, and entertainment
In developing a package, a tour wholesaler contracts with airlines and hotels for a specified number of seats and rooms, receiving a quantity discount
The wholesaler also arranges transportation between the hotel and the airport

6. Vertical Marketing Systems
Corporate
VMS
Contractual
VMS
Administered
VMS
For the channel as a whole to perform well, each channel member's role must be specified, and channel conflict must be managed
The channel will perform better if it includes a firm, agency, or mechanism that provides leadership and has the power to assign roles and manage conflict.
Vertical marketing system (VMS) consists of producers, wholesalers, and retailers acting as a unified system
One channel member owns the others, has contracts with them, or wields so much power that they must all cooperate
The VMS can be dominated by the producer, the wholesaler, or the retailer
Corporate VMS
Coordination and conflict management are attained through common ownership at different levels in the channel
A corporate VMS combines successive stages of production and distribution under single ownership
Administered VMS
Coordinates successive stages of production and distribution not through common ownership or contractual ties but through the size and power of the parties
Contractual VMS
Consists of independent firms at different levels of production and distribution who join through contracts to obtain economies or sales impact

7. Contractual VMS Contractual VMS Alliances Franchises
A contractual VMS consists of independent firms at different levels of production and distribution who join through contracts to obtain economies or sales impact
Franchising
Franchising is a method of doing business by which a franchisee is granted the right to engage in offering, selling, or distributing goods or services under a marketing format which is designed by the franchisor
The franchisor permits the franchisee to use its trademark, name, and advertising.
For the right to use the name, methods of operation, and other benefits that come with a franchise, the franchisee pays an initial fee, a royalty, and a marketing fee to the franchise organization
Alliances
Another form of contractual agreement, are developed to allow two organizations to benefit from each other’s strength
Alliances by two or more noncompeting firms are a popular and effective way of expanding markets
For example, restaurants are developing alliances with convenience stores and hotel properties to distribute their products

8. Advantages and Disadvantages of Franchises
Brand recognition
Less chance of failure
Premade ads and marketing plans
Faster business growth
Help with site selection
Architectural plans
Support for operational systems
National contracts with suppliers
Product development
Consulting
Help with financing
Disadvantages
Fees and royalties are required
Limits the products and recipes
Requirements for operating hours
Required to offer certain products
A poorly operated company can negatively affect the reputation of the entire chain
Franchisor’s performance affects franchisees
Some franchisees may benefit more than others

9. Other Management Systems
Horizontal Marketing Systems
Multichannel Marketing Systems
Horizontal Marketing Systems
Two or more companies at one level join to follow a new marketing opportunity
By working together, companies can combine their capital, production capabilities, or marketing resources to accomplish more than what one company can accomplish working alone
Multichannel Marketing Systems
With the proliferation of customer segments and channel possibilities, more companies have adopted multichannel marketing distribution
Such multichannel marketing occurs when a single firm sets up two or more marketing channels to reach one or more customer segments

10. Evaluating Channel Alternatives
Economic Feasibility of the Channel Member
Control Criteria
Economic Feasibility of the Channel Member
Each channel produces different levels of sales and costs
The business that channel members bring must offset the cost of paying and supporting the channel member
These costs are measured two ways
Directly
By opportunity costs
A company must regularly evaluate the performance of its intermediaries
As business changes, the value of an intermediary may change
Control Criteria
An important consideration in the choice of channels is control
Control is also an important consideration in franchising and choosing multiple channel members
Levels of Sales
Costs

11. Business Location Understanding the Marketing Strategy & Target Market
Conducting a Regional Analysis
Selecting an Area Within that Region
Choosing Individual Sites
One of the most important aspects of distribution for hospitality organizations is location
In general, there are four steps in choosing a location
Understanding the marketing strategy and target market of the company
Conducting a regional analysis
Involves the selection of geographic market areas
Selecting an area within that region
Choosing individual sites
A key consideration in site analysis is compatible businesses
A restaurant or hotel will look for potential demand generators
A firm also looks at competitors
Site evaluation includes accessibility

12. Key Terms
Administered VMS A vertical marketing system that coordinates successive stages of production and distribution, not through common ownership or contractual ties, but through the size and power of one of the parties.
Agent A wholesaler who represents buyers or sellers on a more permanent basis, performs only a few functions, and does not take title to goods.
Alliances Alliances are developed to allow two organizations to benefit from each other’s strengths.
Broker A wholesaler who does not take title to goods and whose function is to bring buyers and sellers together and assist in negotiations.
Channel conflict Disagreement among marketing channel members on goals and roles—who should do what and for what rewards.
Channel level A level of middleman that performs some work in bringing the product and its ownership closer to the final buyer.

13. Key Terms (cont.)
Contractual VMS A vertical marketing system in which independent firms at different levels of production and distribution join together through contracts to obtain more economies or sales impact than they could achieve alone.
Corporate VMS A vertical marketing system that combines successive stages of production and distribution under single ownership. Channel leadership is established through common ownership.
Direct marketing channel A marketing channel that has no intermediary levels.
Franchise A contractual vertical marketing system in which a channel member called a franchiser links several stages in the production distribution process.
Horizontal conflict Conflict between firms at the same level.
Horizontal marketing systems (HMS) Two or more companies at one level join to follow new marketing opportunities. Companies can combine their capital, production capabilities, or marketing resources to accomplish more than one company working alone.

14. Key Terms (cont.)
Multichannel marketing Multichannel distribution, as when a single firm sets up two or more marketing channels to reach one or more customer segments.
Online Travel Agent (OTA) A travel agency that conducts business through the Internet with no physical locations or stores.
Retailer Business whose sales come primarily from retailing.
Supply Chain Upstream and downstream partners. Upstream from the company is a set of firms that supply raw materials, components, parts, information, finances, and expertise needed to create a product. Downstream marketing channel partners, such as wholesalers and retailers form a vital connection between the firm and its customers.
Vertical conflict Conflict between different levels of the same channel.

15. Key Terms (cont.)
Vertical marketing system (VMS) A distribution channel structure in which producers, wholesalers, and retailers act as a unified system: Either one channel member owns the others, or has contracts with them, or has so much power that they all cooperate.
Wholesaler Firms engaged primarily in wholesaling activity.