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Distribution

Distribution. Whose point of view is considered? Intermediaries--functions Intermediaries--structures and their justifications Channel power Cross-national variations Selectivity of distribution--do we want our product available at K-Mart? Parallel Distribution Structures Diversion.

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Distribution

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  1. Distribution • Whose point of view is considered? • Intermediaries--functions • Intermediaries--structures and their justifications • Channel power • Cross-national variations • Selectivity of distribution--do we want our product available at K-Mart? • Parallel Distribution Structures • Diversion

  2. Mini Case Study: The Roasted Chicken That Didn’t Sell • Manufactured offered pre-roasted chickens to stores too small to warrant in-store rotisserie • This product should appeal to time squeezed customers • Taste tests showed that consumers liked the product • HOWEVER, sales were disappointing. Why?

  3. Intermediaries: Adding Value WHOLE- SALER (or agent) 1 MANUF. 1 RETAILER MANUF. 2 WHOLE- SALER (or agent) 2 • Value added: • breaking bulk • consolidating supplies • holding inventory • financing MANUF. 3 PRODUCTS FROM OTHER MANU- FACTURERS.

  4. Other Issues • Can you make money on “eliminating the middleman?” It depends: • How efficient is the existing distribution channel? • International variations • Some structures are less well developed • Tradition may govern structure • Power--who needs whom most?

  5. Potential Channel Structures (U.S.) Farmer Farmer Farmer Farmer Agents/ Brokers Manufacturer Wholesalers Wholesalers Retailers Retailers Retailers Consumer Consumer Consumer Consumer

  6. CORN GROWER HOG FARMER AUCTION HOUSE SLAUGHTER HOUSE FOOD MANUFAC- RURER WHOLE- SALER MARKET RESEARCH BRAND MANAGEMENT ADVERTISING/PROMOTION GROCERY STORE Some Other Intermediaries FERTILIZER SELLER FERTILIZER MANUFACT. • Processors • Co-ops

  7. Types of Wholesalers and Substitutes for Food Products • Agents and brokers (do not take possession) • Manufacturers’ sales branches • General • Full service • Limited service • Cash ‘n’ carry • Specialty • Retailers’ distribution centers

  8. Type of Goods • Convenience • Shopping goods

  9. Approaches to Distribution—Manufacturer’s Perspective • These strategies require tradeoffs: • Wide--essential to low involvement goods • Selective--desire to maintain image • Exclusive--very high prestige needed or very high service requirements Admission By INVITATION ONLY

  10. Constraints on Distribution Opportunities

  11. Manufacturer and Retailer Distribution Interests • Full service retailers tend dislike intensive distribution • Low service channel members can “free ride” on full service sellers • Manufacturers may be tempted toward intensive distribution—appropriate only for some; may be profitable in the short run • Market balance suggests a need for diversity in product categories where intensive distribution is appropriate • Service requirements differ by product category

  12. Parallel Distribution Structures MANUFAC- TURER DISTRI- BUTOR RETAILER MAJOR CHAIN (e.g., Wal-Mart) DIRECT MARKETING FACTORY OUTLET

  13. Types of Retailers • Supermarkets • High service • Low service

  14. Types of Retailers • Mom and pop are closing up shop, hanging up their prosciutto knives, bagging the last plump tomatoes and calling it a day. Or, rather, a lifetime, as they take off their white grocers' aprons for good

  15. Types of Retailers • Convenience stores • Hotels • Waikiki

  16. Types of Retailers • Specialty coffee and tea shops Meat shops Fish shops Florist Local 'Kine' and Lifestyle Flower Shop, Hilo"Flower Shop, Hilo"

  17. Types of Retailers Stores with food as secondary products • Gas stations • Discount stores • Walmart Hilo is something of an experience. It actually caters to the local population, so you see things like udon and hawaiian shirts. Muumuu's too.

  18. Types of Retailers • Online http://hawaiianagriculturalproducts.com/

  19. Types of Retailers • Restaurants (47% of consumer food expenditures)

  20. Characteristics of U.S. Supermarkets • 20,000-80,000 stock-keeping units SKUs (product variations—e.g., 4 oz Dannon light raspberry yogurt)

  21. Margins Gross = sale price - price paid to wholesaler Per unit Per dollar Per unit of space Net margin = gross margin vs. allocated overhead Very large increases in sales volumes are needed to “break even” on low prices Margins

  22. Characteristics of U.S. Supermarkets Margins • Average gross margin: 20-25% (probably decreasing) • Average net margin: 1-3%

  23. Characteristics of U.S. Supermarkets • 20% of SKUs, may sell less than one case per month! • Location is most important variable for consumers but price competition is still intense!

  24. Slotting Fees • Retailers may charge fees to retailers to stock their products • New products • “Slow” moving products • How fair is this? • Does this actually raise the price paid by consumers? • Additional concessions gained from manufacturers

  25. Category Management • Retailer tries to maximize profits from a given product category (e.g., cola drinks) rather than for brand (e.g., Coca Cola) • High cross-price elasticity • Additional gains by putting one brand on sale will be nearly cancelled out by losses from switchers from other brands

  26. Category Management • Increasing enforcement ability of manufacturers due to scanner technology • As more products compete for space retailers have gained an increasing power to determine what is “in” and what is “out” • Hold out for better price • Concessions • Private label brands • Sell it at lower cost than the national brand

  27. Characteristics of U.S. Supermarkets • “Wheel of Retailing” The tendency of the stores to progressively add to their services

  28. Wheel of Retailing “BARE BONES” RETAILERS ENTER TO SERVE PRICE SENSITIVE CONSUMERS CUSTOMERS DEMAND MORE SERVICES RETAILERS ADD MORE SERVICES AND RAISE PRICES

  29. Micro-Segmentation • Adapting individual stores in chain to local conditions based on statistical analysis of scanner data • Exceptional physical power “Brute force” analysis of sales volumes in store may reveal effects of • Ethnic or other demographic characteristics of the location • Seasonal patterns • Geographic location (e.g., near beach)

  30. More Scanner Data Analysis • Store placement of products • Based on “correlated” products • Multiple placement within the same store

  31. More Scanner Data Analysis • Effects of promotional strategies • Product placement • Price promotion • Redeem Coupons • Advertising • Purchases can be compared to past purchases • Timing of purchases • How do a particular store’s sales compare to those in others

  32. Positioning Issues • Some generic profit strategies: • Sell large quantity with small margin on each sale • Sell small quantity with large margin of each sale • Combination • Tiny (or negative) margins on “loss leaders” • Larger margins on other merchandise • “Everyday low price” vs. “high-low” Why not medium margins on medium quantity?

  33. “High-low” High everyday prices Frequent sales Profit on price discrimination--only some people will bother to Shop while sale is on Switch brands Every Day Low Price (EDLP) Consistent prices--theoretically no sales, but lower non-sale prices Typically lower service Note that retailers provide for many promotions Two Types of Retail Pricing

  34. Strategic Issues • Importance of convenience • Increasing power of retailers • Private label branding • Lower price but higher margins

  35. Retailing Polarity • Trend toward either • Low price--e.g., Food-4-Less, Wal-Mart supercenters • High quality--e.g., Vons Pavilion

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