Text 10: retail distribution strategy

A major decision marketers must make is selecting retailers to sell their products. Different products call for different retail distribution strategies. There are three categories of retail distribution: intensive distribution, selective distribution, and exclusive distribution.

Intensive distribution puts pro intensive distribution include candy, cigarettes, gum, and popular magazines (convenience goods).

Selective distribution is the use of only a preferred group of the available retailers in an area. Such selection helps assure the producers of quality sales and service. Manufacturers of appliances, TV sets, furniture, and clothing (shopping goods) usually use selective

distribution.

Exclusive distribution is the use of only one retail outlet n a given geographic area. Because the retailer has exclusive rights to sell the product, he or she is more likely to carry more inventory, give better service, and pay more attention to this brand than others. Automobile manufacturers usually use exclusive distribution, as do producers of special goods.

Regardless of the strategy used, manufacturers often ship their goods through wholesalers. The reason is that wholesalers are more efficient at performing the distribution functions.

Text 11: WHOLESALE MIDDLEMEN

A wholesaler is a marketing middleman who sells to organizations and individuals, but not final consumers. For years no clear distinction was made in marketing between wholesaling and retailing. An early attempt to differentiate these two marketing middlemen occurred in 1932, when the government made a census of wholesale distributors. Today there is still much confusions as to the difference between wholesalers and retailers. For example, many retail outlets have signs that say "whole distributors" or something similar.

What difference does it make whether an organization is called a wholesaler or a retailer? One difference is that many states impose a sale tax on retail sales. To collect such a tax, the state must know which sales are retail sales and which are not. Retailers are sometimes subject to other rules and regulations that do not apply to wholesalers. On the other hand, the minimum wage laws have tended to exempt small, local retail stores, but not wholesalers.

For practical marketing purposes, it is helpful to distinguish wholesaling from retailing and to clearly define the functions performed so that more effective systems of distribution can be designed. Some producers will not sell directly to retailers but will deal only with wholesalers. Some producers will give wholesalers a bigger discount than retailers. What confuses the issue that some organizations sell much of their merchandise to other middlemen (a wholesale sale) but also sell to ultimate consumers (a retail sale).

The issue is really simple: A retailer sells product to consumers for their own use; a wholesaler does not. Wholesalers sell product to businesses and institutions (e.g. hospitals) for use in the business or to wholesalers, retailers, and individuals for resale. It bears repeating that wholesalers do not sell to consumers for their own use.

Text 12: FUNCTIONAL DISCOUNTS

Because wholesalers perform functions for manufacturers that retailers do not, manufacturers may give wholesalers a different discount on products than they would retailers. Similarly, retailers get a discount that is not available to consumers. This is called a functional discount. An example may help clarify how this works.

Imagine a manufacturer of bicycles that makes a bike that lists (retail price to you, the consumer) for $100. The retailer may get a functional discount of 30%. The cost to the retailer would then be $70 ($100 - $30 = $70). The wholesaler that serviced the retailer, stored the bikes, and provided other assistance to the manufacturer might get an individual 10% off the price to the retailer ($ 70 x 10%=$7). The wholesaler would pay $63 for the bike ($70 - $7). Another wholesale middleman may help the manufacturer find regional wholesalers. That wholesaler would get a functional discount of say 5% off the wholesaler's price ($63 x 5% = $3.15). That wholesaler would pay $59.85 for the bike ($63 - $3.15). The price of the bike to the first wholesaler would be $59.85 and the price to you, the consumer, would be $100. Note that about 40% of the cost of the bike would go to middleman for performing functions like transportation, storage, credit, delivery, market information, and sales assistance. Figure 1-19 illustrates the case.

Retail price	$ 100.00
Less discount to retailer (30%)	-30.00
Retail cost	$ 70.00
Less second wholesaler's discount (10%)	-7.00
Wholesaler's cost	$ 63.00
Less discount for first wholesaler (5%)	-3.15
First wholesaler's cost (manufacturer's	$ 59.85
price to wholesaler)

Figure 1-19.

Let's look at different wholesalers to see what they do for manufacturers to earn their discount. We begin with merchant wholesalers because they do the most.

Text 13: MERCHANT WHOLESALERS

Merchant wholesalers are* independently owned firms that take titles to goods that they handle. About 80% _Of wholesalers fall in this category. General merchandise or full-line wholesalers carry a broad assortment of merchandise. They are found in industries such as drug, hardware, and clothing. They perform _a|| eight distribution functions: transportation, storage, risk bearing credit, market information, grading, buying and selling.

Limited-line wholesalers do the same functions with a narrower range of products such as health foods or automobile parts. Rack jobbers furnish racks or shelves full of merchandise to retailers, display products, and sell on consignment. This means that they keep title to the goods until they are sold, and they share their profits with the retailer. Merchandise such as toys, hosiery, and health and beauty aids are sold by rack jobbers. These wholesale are known as full- service wholesalers because they do many functions (see figure 1-20). If a rack jobbers does not supply credit to customers, he or she is classified as a limited-function wholesaler.

4. Provide a sales force to sell the goods to retailers and other buyers.

5. Communicate manufactures advertising deals and plans.

1. Maintain inventory, thus reducing the level of the inventory suppliers, have to carry.

2. Arrange or undertake transportation.

3. Provide capital by paying cash or quick payments for goods,

4. Provide suppliers with market information they cannot afford or are unable to obtain themselves.

5. Undertake credit risk by granting credit to customers and absorbing any bad debts, thus relieving the supplier of this burden.

6. Assume the risk of the product by taking the title.

The wholesalers may perform the services listed below for its customers:

1. Buy goods the end market will desire and make them available to customers.

1. Maintain inventory thus reducing customer's costs.

2. Transport goods to customers quickly.

3. Provide market information and business consulting services.

2. Provide financing through granting credit, critical to small retailers especially.

Order goods in the types and quantities customers desire.

Figure 1-20, Functions performed by a full-function wholesalers.

 

Limited-function wholesalers perform only selected functions, but do them especially well. Cash-and-carry wholesalers serve mostly smaller retailers with a limited assortment of products. Retailers go to them, pay cash, and carry the goods home; thus the term cash-and-carry wholesalers. Cash-and-carry wholesalers have begun selling to the general public in what are called warehouse outlets. One has to qualify as a non-consumer by showing that one is a member of a government agency, small business or other non-consumer group. It is surprisingly easy, however, to qualify and buy merchandise at "wholesale*¹ for yourself.

Drop shippers solicit orders from retailers and other wholesalers and have the merchandise shipped directly from a producer to a buyer. They own the merchandise, but do not handle, stock, or deliver it. That is done by a producer. Drop shippers tend to handle bulky products such as coal, lumber/and the chemicals. They provide no credit. They handle items like Truck jobber are small wholesalers who deliver goods by truck to retailers. They are like a cash-and-carry wholesalers on wheels.

Text 14: MANUFACTURER-OWNED WHOLESALER OUTLETS

Manufacturers may prefer to do some wholesaling functions themselves, especially for perishable or highly competitive products that require exceptional promotional effort. There are two kinds:

• A sales branch stocks the goods they sell and process orders from their own inventory. They are popular in industries such as chemicals and machinery.

 

• A sales office is a facility where sales are made, but no inventory is carried. Distribution is from warehouse located elsewhere.

Regardless of who does the wholesaling function, the greatest costs are involved in transportation and storage.

Text 15: PHYSICAL DISTRIBUTION

Physical distribution is the movement of goods from producer to consumer and involves functions such as transportation and storage. Wholesale, remember, cannot sell to the general public.

Physical distribution is still the most costly marketing function. One cannot overemphasize the importance of physical distribution, even in an era when the service sector is dominant. Physical distribution begins with raw materials (at the mine) that have to be shipped to manufacturers who change them into useful products. Physical distribution also includes those functions involved in purchasing goods, receiving them, moving them through the plant, inventorying them, storing them and shipping finished goods all the way to the final users (including all the warehousing, reshipping, and physical movements of all kinds involved).

Text 16: THE PHYSICAL DISTRIBUTION MANAGER

A smart physical distribution manager can do wonders for a firm's profitability. This person is response for co-ordinating and integrating all movement of materials including transportation, internal movement (materials handling), and warehousing. Few organizations actually have such a position, but many have accepted the concept, and the process of implementing a "total systems” approach" is slowly being carried out. Only very recently have firms begun to recognize the need for physical distribution management; throughout the channel system, rather than just within the firm itself. A primary concern of distribution managers is the selection of a transportation mode that will minimize costs and assure a certain level of service. Physical distribution management is sometimes called logistics management.

The largest percentage of goods are shipped by rail. Railroad shipment is best for bulky items such as coal, wheat, and heavy equipment.

The second largest surface transportation mode is motor vehicles (trucks, vans, and so forth). Trucks are more flexible than railroads in that they can deliver almost any commodity door-to-door.

Water transportation moves a greater volume of goods than you might expect. International shipments and water transportation takes on a new dimension as a key transportation mode.

Another transportation mode that is not visible to the average consumer is movement by pipeline. There have been experiments with sending other solids in pipelines, (pipelines are used primarily for the transportation of petroleum products) and this could be a major mode of distribution in the future.

Today only a small fraction of shipping is done by air. Airlines carry everything from small packages to luxury cars and elephants and could expand to be a very competitive mode for other goods.

Text 17: CHANNEL SYSTEMS

All the firms involved in moving goods from producer to consumer are known collectively as a channel of distribution. Marketing managers tend to concentrate on product decisions, price decisions, and promotion decisions, while channels of distribution tend to grow in an uncontrolled, uncoordinated manner.

At one time, channel relationships were rather informal in that manufacturers, wholesalers, retailers, and other channel members were tied together only loosely by short-term agreements. Two systems emerged to tie firms together: corporate systems and contractual systems.

A corporate distribution system is one in which all the organizations in the channel are owned by one firm. If the manufacturer owns the retail firm, clearly it can influence much greater control over its operations.

If a manufacturer cannot buy retail stores, it can try to get the retailers to sign a contract to co-operate. A contractual distribution system is one in which members are bound to co-operate through contractual agreements. There are three forms of contractual systems: First, there are franchise systems such as Me Donald's, Kentucky Fried Chicken, Baskin-Robbins, and AAMCO. The franchisee agrees to all of the rules, regulations and procedures established by the franchiser. This results in the consistent quality and level of service you find in most franchisee organizations.

Second, there are the wholesaler-sponsored chains such as IGA food stores. Each store signs an agreement to use the same name, participate in chain promotion, and co-operate as a unified system of stores, even though each store is independently owned and managed.

A third system is a retail co-operative. This agreement is much like a wholesaler-sponsored chain except it is initiated by the retailers. The same co-operation is agreed to, however, and the stores remain independent.

What does the producer do if it cannot buy retailers or get them to sign an agreement to co-operate? The best thing to do is to manage all the marketing functions yourself, including display, inventory, control, pricing, and promotion. The management by producers of all the marketing functions at the retail level is called an administered distribution system. Retailers co-operate with producers in such systems because they get so much help for free.. AH the retailer has to do is ring up the sale and make money.

Text 18: THE CHANNEL CAPTAIN

The greatest problem in traditional independent systems are human problems. People just do not want to give up some of their freedom to benefit the system. Thus retailers do not like to do what wholesalers want, wholesalers do not want to do what manufacturers want, and manufacturers do not respond to their suppliers, distributors, and dealers. The channel becomes a source of conflict, antagonism, and inefficiency.

But in the wings there stands a champion of co-operation and coordination - the so-called channel captains. The captain may be the manufacturer, the wholesaler, or the retailer.

A channel captain, therefore, is one organization in the channel that gets the other members to work together in a cooperative effort. The captain may have more financial resources, better marketing intelligence, or more managerial know-how. Regardless of the source of power, this organization maintains control.

There is some evidence that much of our grocery shopping in the future will be done from home. There will be a handy catalogue of everyday grocery items in the kitchen. When we want something we will just pick up the phone, call the local food distribution centre, order what we want, and have it delivered in an hour or two. The principle is, move goods, not people.

5. C omprehension questions. Завдання 5. Підготуйте письмові відповіді на питання:

1. What is the distribution mix?

2. What utilities do middlemen add?

3. Are there different categories of retailers?

4. What are the out-of-store categories?

5. What is a scrambled merchandising?

6. What are the three retail distribution strategies?

7. What is a functional discount?

8. What are the different types of wholesalers?

9. What is a physical distribution manager?

10. What is the major transportation mode?

6. Discussion questions. Завдання 6. Підготуйте коротку інформаціюб використовуючи запитання як план:

1. Wouldn't it be cheaper to get rid of middlemen?

2. When you are visiting retailers, ask who their suppliers are. Call up a few wholesale organizations and visit their facilities. Do they look like nice places to work? What are the opportunities, salaries, and chances for advancement? What kinds of jobs are available?

7. G roup activities. Завдання 7. Підготуйтесь до бесіди, використайте задану ситуацію:

 

¨ In which kind of store would you prefer to shop-malls, department stores or a typical supermarket? Why? What are their benefits and drawbacks? What kind of goods do they sell (special goods, convenience goods, shopping goods, etc.)

¨ How important are middlemen such as wholesalers, retailers, trucking firms, and warehouse operators to the progress of less developed countries?

¨ What products should be distributed first? Is there a lack of middlemen in poor countries?

¨ How much are such middlemen worth to a poor country?