CHANNEL AND

DISTRIBUTION
STRATEGY
COPYRIGHT 2003 BY NELSON, A DIVISION OF THOMSON CANADA LIMITED.

OBJECTIVES
1. Discuss channel strategy as one of the elements of the marketing mix.
2. Relate channel strategy to the concept of total customer satisfaction.
3. Explain the role of distribution channels in marketing strategy.
4. Describe the various types of channels in distribution.
5. Outline the major strategy alternatives in using marketing channels.
6. Identify the conditions under which a manufacturer is likely to assume wholesaling functions
rather than use independents.
7. Distinguish among merchant wholesalers, agents, and brokers.
8. Identify the major types of merchant wholesalers and instances in which each type might be
used.
9. Provide an overview of the many types of wholesaling intermediaries and their functions.

10. Describe conflict and cooperation in the distribution channel.

11.

Explain the issues involved in changing from the use of one channel intermediary type to a
different type.

ACHIEVING TRANSACTION ECONOMY WITH

WHOLESALING INTERMEDIARIES
(1 OF 2)

Manufacturer

Manufacturer

Manufacturer

Manufacturer

Customer

Customer

Customer

16 Transactions

Customer

ACHIEVING TRANSACTION ECONOMY WITH

WHOLESALING INTERMEDIARIES
(2 OF 2)

Manufacturer

Manufacturer

Manufacturer

Manufacturer

8 Transactions

Manufacturer

Customer

Customer

Customer

Customer

DISTRIBUTION CHANNELS
The paths that are goods -- and title to these goods -- follow from producer
to consumer.

MARKETING INTERMEDIARY
A business firm operating between the producer and the consumer or
business purchaser.

Producer

WHOLESALING
The activities of intermediaries who sell to
retailers, other wholesalers, and business users
but not in significant amounts to ultimate
consumers.

RETAILER
A store that sells products purchased by individuals for their own use and
not for resale.

DISTRIBUTION CHANNELS PERFORM

IMPORTANT FUNCTIONS
Facilitating the exchange process

Sorting to alleviate imbalances between outputs and consumer needs

Standardizing transactions
Holding inventories

Assisting the search process

Transporting materials and products

SORTING
The process that alleviates discrepancies in assortment by reallocating the
outputs of various producers into assortments desired by individual
purchasers.

ALTERNATIVE DISTRIBUTION CHANNELS (1 OF 3)

Consumer
Goods
Direct
channel

Producer

One-step
channel

Producer

Two-step
channel

Producer

Multistep
channel

Producer

Consumer

Agent/broker

Retailer

Consumer

Wholesaler

Retailer

Consumer

Wholesaler

Retailer

Consumer

ALTERNATIVE DISTRIBUTION CHANNELS (2 OF 3)

Business
Goods
Direct
channel
One-step
(wholesaler)

Business
user

Producer

Producer

Wholesaler

channel
Two-step
(agent)
channel

Producer

Agent/broker

Multistep
channel

Producer

Agent/broker

Business
user
Business
user

Wholesaler

Business
user

ALTERNATIVE DISTRIBUTION CHANNELS (3 OF 3)

Direct
channel

Services
Service
provider

One-step
channel

Service
provider

Consumer or
Business user

Agent/broker

Consumer or
Business user

AGENT
A wholesaling intermediary that differs from the typical wholesaler in
that the agent does not take title to the goods.

MERCHANT WHOLESALER
A wholesaler who takes title to the products carried.

INDUSTRIAL DISTRIBUTOR
A wholesaler that operates in the business goods market and typically
handles small accessory equipment and operating supplies.

REVERSE CHANNELS
The paths follow from consumer to manufacturer or to marketing
intermediaries.

FACILITATING AGENCY
An agency that provides specialized assistance for regular channel
members (such as producers, wholesalers and retailers) in moving products
from producer to consumer.

WHOLESALE CUSTOMERS DISTRIBUTION

Household consumers 5%
Foreign markets 10%
Retailers for resale 33%
Industrial commercial and other users 29%
Other wholesalers for resale 19%
Farmers for use in farm production 4%

WHOLESALERS
Wholesaling intermediaries who take title to the products they handle.

WHOLESALING INTERMEDIARIES
Intermediaries who assume title, as well as agents and brokers who perform
important wholesaling activities without taking title to the products.

POSSIBLE WHOLESALING FUNCTIONS FOR CUSTOMERS AND

PRODUCERS-SUPPLIERS (1 OF 2)
Buying
Acts as purchasing agent for
customers, anticipates customer
demands, possesses knowledge of
alternative supply sources.
Transporting
Customers receive prompt delivery
in response to their demands,
reducing their inventory investments.
By "breaking bulk," (purchasing in
carload or truckload lots, then
reselling in smaller quantities),
wholesalers reduce overall
transportation costs.

Selling
Maintains a sales force to call on
customers, thus providing a low-cost
method of serving smaller retailers and
business buyers.
Risk Taking
Aids producers by evaluating credit risks of
numerous distant retail customers and
smaller business users. Extending credit to
these customers is another form of risk
taking. Risk of possible spoilage, theft, or
obsolescence is assumed when the
wholesaler is responsible for transporting
and stocking goods in inventory.

POSSIBLE WHOLESALING FUNCTIONS FOR CUSTOMERS AND

PRODUCERS-SUPPLIERS (2 OF 2)
Storing
Performs a warehousing function,
reduces risk and cost of maintaining
inventory for producers, and provides
customers with prompt delivery
service.
Financing
Aids customers by granting credit
that might not be available if they
purchased directly from distant
manufacturers. Provides financing
assistance to producers by
purchasing goods in advance of sale
and through promptly paying bills.

Providing Marketing Information

Serves as key marketing research
input for producers through regular
contact with retail and business buyers.
Provides customers with information
about new products, technical
information about product lines,
information on competitive activities
and industry trends, and advisory
information concerning changes in
such areas as pricing and legal rulings.

MANUFACTURER-OWNED FACILITIES (1 OF 2)
ManufacturerOwned Facilities Description
Sales branch

Manufacturer-owned facility that

carries inventory and processes
orders to customers from
available stock.

Public warehouses

Independently owned storage

facilities. Manufacturer rents
space to store inventory for
shipment by the warehouse to
customers in the area.
Warehouse will break bulk (divide
a carload, package inventory, and
fill orders.

MANUFACTURER-OWNED FACILITIES (2 OF 2)
ManufacturerOwned Facilities

Description

Trade fairs

Manufacturers in a particular
industry display their wares at
some temporary venue for visiting
retail and wholesale buyers, e.g.
Montreal Toy Show.

Merchandise mart

Permanent exhibition at which

manufacturers rent showcases for
product offerings, e.g. Taipei.

SALES BRANCHES AND OFFICES

Sales Branch
Manufacturer-owned facility that carries inventory and
processes orders to customers from available stock.

Sales Office
Manufacturer-owned facility that does not carry stock but
serves as a regional office for the firms sales personnel.

Public Warehouse
Independently-owned storage facility.

15-20
COPYRIGHT 2003 BY NELSON, A DIVISION OF THOMSON CANADA LIMITED.

TRADE FAIRS
Periodic shows at which manufacturers in a particular industry display their
wares for visiting retail and wholesale buyers.

MERCHANDISE MART
Permanent exhibition at which manufacturers rent showcases for their
product offerings.

CLASSIFICATION OF INDEPENDENT
WHOLESALING INTERMEDIARIES
Independent
wholesaling
intermediaries
Agents and
brokers

Brokers
Selling agents
Manufacturers
agents

Commission
Merchants
Auction
houses

Merchant
wholesalers

Fullfunction

Limited
function

MERCHANT WHOLESALERS (1 OF 2)

AGENTS AND BROKERS (2 OF 2)

VERTICAL MARKETING SYSTEM

A network of channel
intermediaries organized and
centrally managed to
produce the maximum
competitive impact.

THREE TYPES OF VERTICAL MARKETING SYSTEMS

TYPE OF
SYSTEM
Corporate

(1 OF 2)

DESCRIPTION

EXAMPLES

Channel owned and

operated by a single
organization

Bata Shoes
Firestone
Sherwin-Williams
Singer
McDonald's (partial)

Administered

Channel dominated by one

powerful member that acts
as channel captain

Kodak
General Electric
Corning Glass

THREE TYPES OF VERTICAL MARKETING SYSTEMS

TYPE OF
SYSTEM
Contractual

(2 OF 2)

DESCRIPTION

EXAMPLES

Channel coordinated through

contractual agreements among
channel members

Wholesaler-Sponsored
Voluntary Chain
IGA
Canadian Tire
Independent Druggists
Alliance (IDA)
Allied Hardware
Retail Cooperative
Associated Grocers
Franchise Systems
McDonald's (partial)
Century 21 Real Estate
AAMCO Transmissions
Coca-Cola bottlers
Ford dealers

FRANCHISE
An agreement whereby one firm (franchisee) agrees to meet the operating
requirements of a successful business (franchisor) in return for the right to
carry the name and products of the franchisor.

CHANNEL SELECTION AND

IMPLEMENTATION PROCESS
Select the appropriate
type of channel
based on
market factors
product factors
competitive factors

Determine
distribution intensity
intensive distribution
selective distribution
exclusive distribution

Negotiate
arrangements
with channels

Support
channels

FACTORS AFFECTING CHOICE OF

DISTRIBUTION CHANNELS (1 OF 2)
FACTOR

CHANNELS TEND TO BE SHORTER WHEN

Market Factors

Consumer market or business

market
Geographic location of target market
Customer service needs

Order size

Users are in business market

Customers are geographically concentrated
Specialized knowledge, technical know-how,
and regular service needs are present
Customer places relatively small number of
large orders

Product Factors
Perishability
Technical complexity of product
Unit value

Products are perishable, either because of

fashion changes or physical perishability
Products are highly technical
Products have high unit value

FACTORS AFFECTING CHOICE OF

DISTRIBUTION CHANNELS (2 OF 2)
FACTOR

CHANNELS TEND TO BE SHORTER WHEN

Producer Factors
Producer resources -- financial,
managerial, and marketing
Product line

Manufacturer possesses adequate resources to

perform channel functions
Manufacturer has broad product line to spread

distribution costs
Need for control over the channel

Manufacturer wishes to control the channel

Competitive Factors
Need for promotion to channel
members
intermediaries

Manufacturer feels that independent

intermediaries are inadequately

promoting products

DETERMINE DISTRIBUTION INTENSITY

Intensive

Selective
Exclusive

INTENSIVE DISTRIBUTION
A form of distribution that attempts to provide saturation coverage of the
potential market.

SELECTIVE DISTRIBUTION
The selection of a small number of retailers to handle the firms product line.

EXCLUSIVE DISTRIBUTION
The granting of exclusive rights by manufacturers to a wholesaler or retailer
to sell in a geographic region.

LEGAL PROBLEMS OF EXCLUSIVE

DISTRIBUTION
Exclusive dealing

Tied selling
Market restriction

EXCLUSIVE DEALING
An arrangement whereby a supplier prohibits a marketing intermediary
(either a wholesaler or, more typically, a retailer) from handling competing
products.

TIED SELLING
An arrangement whereby a supplier forces a dealer who wishes to handle
a product to also carry other products from the supplier or to refrain from
using or distributing someone elses product.

MARKET RESTRICTION
An arrangement whereby suppliers restrict the geographic territories for
each of their distributors.

CHANNEL CAPTAIN
The most dominant member of the distribution channel.

CHANNEL CONFLICT
Rivalry and conflict between channel members because of sometimes
different objectives and needs.