CHANNELS OF DISTRIBUTION

Chandana Rathnayake USP, psc,MBA(LM)

 Introduction
• Marketing can be interpreted as a route taken by products as they flow
from production to points of intermediate and final use.
• Marketing is a key factor in a continuous cycle that begins and ends with
consumer wants.
• It is the role of the marketer to interpret consumer wants and combine them
with empirical market data such as location of consumers, their numbers and
preferences, to establish the starting point for manufacture.
• On completion of manufacture, the finished product is moved to the
consumer and the cycle is complete when he or she obtains satisfaction
resulting from product ownership.

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The Manufacturer –User GAP

• Today’s complex economy, most producers still do not sell directly to final
users. Between them and consumers lie marketing intermediaries.
• A distribution channel bridges the gap between user and producer, and so
plays an integral role in the operation of the marketing concept.
• Relationships among channel members are influenced by the structure of
the channel.
• Marketing channels can be described as sets of interdependent
organizations involved in the process of making a product or service
available for use or consumption.

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Distribution Channels

• A distribution channel - set of independent organizations involved in the

process of making a product or service available to the consumer or business
user.

• Used to move the customer towards the product or the product to the
customer.

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The Importance of Marketing Channels

• Intermediaries make distribution and selling processes more efficient.

Intermediaries offers supply chain partners more than they could achieve on
their own.

• Market Exposure
• Technical Knowledge/Information Sharing
• Operational Specialization
• Scale of operation

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Distribution Channel Functions

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Demand Stimulus

In addition to marketing channels satisfying demand by supplying goods and

services in the right location, at the correct quantity and price, they should
stimulate demand through promotional activities of retailers, manufacturers
and wholesalers.
In this way, a marketing channel should be viewed not just as a demand
satisfier, but as network that creates value for consumers through the
generation of form, possession, time and place utilities.

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Distribution System Design

The starting point for marketing channel design is the end consumer.
Although an understanding of consumer purchasing patterns is essential,
there are other factors that influence channel organization:
• There may be a restriction in choice of outlets available to suppliers,
e.g. retail outlets may already have been secured by established
manufacturers.
• Channel design will be influenced by the number, size and
geographic concentration of consumers. If customers are few in number,
but large and geographically concentrated, it may be that direct channels
will be suitable. If customers are dispersed, the mechanics of direct
channels become increasingly difficult and there will be a need for a
large number of intermediaries.
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• Product characteristics affect channel design. Industrial goods
manufacturers tend to use direct channels, but there are other factors
that influence the decision. Perishable goods, for example, need to be
turned over quickly so direct methods are often applied. Non-
perishable, non-bulky goods can be handled via indirect channels.

• Some products are more suited to indirect channels because of

environmental characteristics. For example, in some countries
shopping is seen very much as being a leisure activity especially for
items like clothing and furniture.

• Some organizations have limited discretion over marketing channel

choice owing to economic conditions and legal restrictions.

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• Any channel decision will have long-term implications for the
company, e.g. price will be affected depending on the number of levels
between the manufacturer and the end user. A decision to change
channels is likely be long term so it is important that existing channel
structures are constantly reviewed to exploit opportunities.

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Distribution System Design

• The starting point for marketing channel design is the end consumer.
Although an understanding of consumer purchasing patterns is essential,
there are other factors that influence channel organization:
• There may be a restriction in choice of outlets available to suppliers, e.g.
retail outlets may already have been secured by established manufacturers.
• Channel design will be influenced by the number, size and geographic
concentration of consumers. If customers are few in number, but large and
geographically concentrated, it may be that direct channels will be suitable.
If customers are dispersed, the mechanics of direct channels become
increasingly difficult and there will be a need for a large number of
intermediaries.

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Rationale for Intermediaries
• As numbers of transactions increase, the need for intermediaries becomes
greater.
• Manufacturers are dependent on the effectiveness of their intermediaries if
their channels of distribution are to meet their marketing goals.
• Their inclusion primarily depends on their superior efficiency in the
performance of basic marketing tasks.

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Position and Role
• Each channel member chooses a position or location in the channel.
• Channel intermediaries perform the distribution function at a lower unit cost
than the manufacturer who is the intermediary most distanced from the
consumer, and they balance the production efficiencies of the supplier to the
purchasing needs of the customer.
• Another reason is to break down large volumes into smaller quantities,
termed ‘breaking bulk’, e.g. a furniture retailer places an order for 100 tables,
but the individual buys only one.

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Intermediaries bring together a range of similar or related items into a large
stock, thus facilitating the buying process. A supermarket will buy in
thousands of lines to provide shoppers with choice, and a Hardware merchant
will provide everything from sand and gravel to light fittings that the builder
can use. In this way, intermediaries play an important role in facilitating the
flow of products from the manufacturer to the consumer.

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 STRATEGIC CHANNEL CHOICES

Intensive distribution where

products are placed in as many
outlets as possible. This is most
common when customers purchase
goods frequently, e.g. household
goods such as detergents or
toothpaste. The aim is to achieve
maximum coverage.
 STRATEGIC CHANNEL CHOICES

Selective distribution where

products are placed in a more
limited number of outlets in defined
geographic areas. e.g. high-end
‘designer’ clothes.
 STRATEGIC CHANNEL CHOICES
Exclusive distribution where products are
placed in one outlet in a specific area. This
brings about a stronger partnership between
seller and re-seller and results in strong
bonds of loyalty. dealer not to carry
competing lines, and the result is a more
aggressive selling effort by the distributor of
the company’s products, e.g. an exclusive
franchise to sell a vehicle brand in a specific
geographical area, in return for which the
franchisee agrees to supply an appropriate
after sales service back-up.
Types and Classification of Channels
Marketing channels can be characterized according to the number of channel
levels. Each institution that works to bring the product to the point of
consumption is included. The number of intermediaries involved in channel
operation determines on how many levels it operates.

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Types and Classification of Channels
Within each channel, intermediaries are connected by three types of flow:

• Physical flow describes movement of goods from raw material that is

processed in various stages of manufacture until it reaches the final
consumer. In the case of a towel manufacturer raw material is cotton yarn
which flows from the grower via transporters to the manufacturer’s
warehouses and plants.

• Title flow is the passage of ownership from one channel institution to

another; when manufacturing towels, title to raw materials passes from the
supplier to the manufacturer. Ownership of finished towels passes from
manufacturer to the wholesaler or retailer and then to the final consumer.

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• Information flow involves the directed flow of influence from activities
such as advertising, personal selling, sales promotion and publicity from one
member to other members in the system. Manufacturers of towels direct
promotion, and information flows to retailers or wholesalers, known as trade
promotion. This type of activity may also be directed to end consumers, i.e.
‘end user’ promotion.

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Conventional Marketing Channels
• Comprise autonomous business units, each performing a defined set of
marketing functions. Co-ordination among channel members is through
the bargaining process.
• Membership of the channel is relatively easy, loyalty is low and this type
of network tends to be unstable.
• Members rarely co-operate with each member working independently of
others. Decision makers are more concerned with cost and investment
relationships at a single stage of the marketing process and tend to be
committed to established working practices.
• Most food grocery products are marketed through conventional
marketing channels; independent food and grocery producers are
responsible for growing, rearing and manufacturing products and brands.
These are sold through a series of wholesalers and retailers.
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Vertical Marketing Systems
• Members co-ordinate activities between different levels of the channel to
reach a desired target market.
• The essential feature is that participants acknowledge and desire
interdependence, and view it as being in their best long-term interests.
• For the channel to function as a vertical marketing system, one of the
member firms must be acknowledged as the leader; typically the
dominant firm, which can be expected to take a significant risk position
and usually has the greatest relative power within the channel.
• An example of a vertical marketing system is that of franchising. The
franchiser, usually on the basis of having a powerful brand or perhaps a
patent/copyright, for a fee, allows franchisees to produce or distribute the
product or service. The franchiser effectively controls the channel,
including aspects such as product ingredients, advertising and marketing,
pricing, etc. 25
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Corporate Vertical Marketing
• In many economies corporate vertical channels have arisen as a result of
a desire for growth on the part of companies through vertical integration.
• Two types of vertical integration are possible with respect to the direction
within which the vertical integration moves a company in the supply
chain: when a manufacturer buys, say, a retail chain, this is referred to as
forward integration with respect to the chain.
• Backward integration is moving upstream in the supply chain, e.g. when
a retailer invests in manufacturing or a manufacturer invests in a raw
material source.

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Corporate Vertical Marketing

• Many companies formalize their obligations within channel networks by

employing legitimate power as a means of control achieved by using
contractual agreements.
• The most common form of contractual agreement are franchises and
voluntary and co-operative groups.

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Franchises
Franchises are where the parent company grants an individual person or
relatively small company the right or privilege to do business in a prescribed
manner over a certain time period in a specified place.
The parent company is referred to as the franchiser (or franchisor) and may
occupy any position in the channel network. The franchise retailer is termed
the franchisee. There are four basic types of franchise system:
Manufacturer/retailer franchise, e.g. service stations where most of the
garage petrol stations franchisees of the large oil exploration and refining
companies. (CEPETCO, IOC)

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• Manufacturer/wholesaler franchise: e.g. Coca-Cola sell drinks they
manufacture to franchised wholesalers, who in turn bottle and distribute soft drinks
to retailers. This type of arrangement is common in the food and drinks markets
with many of the large companies franchising part of their manufacturing and or
wholesaling activities to others.
• The wholesaler/retailer franchise. Many retail chains are franchisees of large
wholesalers. These wholesalers saw the value of securing a measure of control, and
of course a share of the retail profits, from marketing their products and brands.
The most notable example is ‘Spar’ which advertises itself as ‘Spar, your 8.00 till
late shop’, and of course all retail members must abide by this promise.
• The service/sponsor retailer franchise e.g. McDonald’s, Kentucky Fried
Chicken, Subway. This is the best known and certainly most ubiquitous of
franchising arrangements and it has enabled many organizations to rapidly expand
their global operations.

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Advantages to the franchisee are;
• The franchisee gains the benefit of being able to sell a well-known product or service.
• The franchisee enjoys access to the knowledge, experience, reputation and image of the
franchiser.
• The franchisee has the backing of what is often the large organization of the franchiser.
• The franchisee is often helped by national or international advertising and promotion
• The franchisee enjoys the use of the franchiser’s trademark, continuous research and
development and market information.
• The franchiser will normally provide a system of management controls such as
accountancy,
• Sales and stock control procedures.

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• Finding and recruiting a network of franchisees enables rapid growth as wider
distribution can be achieved with less capital.
• The individual franchisee is more motivated than a hired manager.
• The franchiser secures captive outlets for products or services.
• Franchise and royalty fees provide a regular stream of income for the franchiser.
• The franchiser substantial control over how the franchise is operated and normally the
franchiser can terminate a contract should the relationship turn out to be unsatisfactory.

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Disadvantages to Franchiser:
• The franchiser loses some control over the provision and marketing of the brand. Poor
service on the part of the franchisee can result in problems for brand image.
• Ideas and techniques can be copied even if seemingly well protected by patents and
copyright arrangements.
• Some proportion of profit has to be foregone.
• There may be less commitment and enthusiasm from the franchisee.
• Often franchisees lack business skills or experience.
• Lack of support from franchiser;
• Franchiser may go out of business;
• Lack of flexibility/scope to use initiative;
• Close control from franchiser.

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Voluntary and Co-Operative Groups
• The scope of co-operative effort has expanded from concentrated buying power to
the development of programs involving centralized consumer advertising and
promotion, store location and layout, financing, accounting and a package of support
services.
• Wholesale sponsored voluntary groups have been more effective competitors than
retail sponsored co-operative groups. Primarily this is because of the difference in
channel organization between the two. In the former, a wholesaler can provide
strong leadership, because it represents the locus of power within the voluntary
system and this is normally supported by a brand name.
• The principal purpose here is in bulk purchasing. In voluntary groups, retail
members have relinquished some of their autonomy by making themselves highly
dependent on specific wholesalers for expertise. In retail co-operative chains,
individuals retain more autonomy and this tends to depend much less strongly on the
supply unit for assistance and direction.
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Internet Channels
• Access to cheap computing power at home has enabled marketers to
develop systems of real time shopping where customers call up
descriptions and pictures of products on their computer screen, search
through computer-based catalogues, and order and pay over the Internet
through charge cards.
• Virtual reality shopping is now commonplace where the home shopper
calls up the shopping mall onto their screen and moves to different
selected outlets, taking trips down different aisles in the retail outlet, and
even selecting products from the ‘shelves’ for closer inspection.
• The customer places an order through the Internet and has it delivered.
Large supermarket groups offer such facilities.

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E-Commerce & E-Marketing

E-commerce involves buying and selling processes supported by electronic

means, primarily the Internet

E-marketing is company efforts to communicate about, promote, and sell

products and other services over the Intranet; also web or Internet Marketing

Not easy to separate but different issues

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E-Commerce Domains

• B2C (business to consumer)

Branded websites

• B2B (business to business)

Passkey

• C2B (consumer to business)

User groups

• C2C (consumer to consumer)

Blogs; review sites are blends of above

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Channels on the Television
A fast growing area of home shopping has been shopping channels on the
television. Cable television in particular has fostered this growth; in the
United Kingdom many television companies have a shopping channel
where customers view products and services and buy direct using only the
television, a credit card and the telephone. Home shopping is advantageous
for the elderly and infirm and it is likely that this type of retailing will
continue to grow.

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Channel Cooperation & Conflict
Channels are most effective when:
Each member performs the tasks it does best.
Channel members cooperate to attain overall channel goals.
Channel Conflict
Horizontal Conflict: conflict among firms at the same level of the channel
(e.g., retailer to retailer).
Example: Two retailers compete to carry a supplier’s “exclusive”
product.
Vertical Conflict: conflict between different levels of the same channel
(e.g., wholesaler to retailer).
Example: Manufacturer competes with retailer in selling product to
target market.
Some conflict can be healthy competition. 42
Disintermediation

• Occurs when producers sidestep intermediaries and sell directly to final

buyers, or when radically new types of channel intermediaries displace
traditional ones.

• The Internet has made the disintermediation of many traditional retailers

possible.

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