MCM605_Marketing Management

Distribution Channel Decisions 193 Place Decision: The retailer’s choice of location is a key competitive factor in its ability to attract customers. Measuring Channel Effectiveness, Margin and Turnover. Assessment of profitability and success in retail operations depend on two factors- margin and turnover. The retailing activity must be strong in at least one of these factors to be 174 Marketing Management successful. The nature of the products handled, the style and size of operation, type of business or product lines, etc. will also influence the profitability of retail activity. Ronald Gist has formulated a Margin-Turnover Framework of retail business strategy. Margin is the percentage-mark-up at which the store inventory is sold and turnover is the number of times the average inventory is sold in a year. The framework consists of the following types: 1. Low Margin-High Turnover. E.g., Discount stores. 2. Low Margin-Low Turnover. Likely to close down. 3. High Margin-Low Turnover. E.g., Speciality stores. 4. High Margin-High Turnover. E.g., Convenience food stores. CU IDOL SELF LEARNING MATERIAL (SLM)

194 Marketing Management The other parameters used to measure efficiency of retail business are Investment productivity, Space productivity. Employee Productivity and Average size of transactions. Investment productivity is the retailing business productivity relative to investment, i.e., the ratio of net margin to total capital employed. Productivity per sq.ft. of shop area is the return per sq. ft. of shop area. Sales per employee are a critical measure of retailing efficiency. Manpower costs are normally high and employee productivity has to be kept high for efficient operations. Average size of transactions can be another control factors. It indicates the productivity of merchandising at the retail outlet. 12.6. Wholesaling – Types and Services The business of wholesaling comprises of all activities involved in selling goods and services to those buying for resale or business use. Wholesalers are firms engaged primarily in wholesaling activity. Wholesalers buy mostly from manufacturers and sell mostly to retailers, industrial consumers and other wholesalers. Wholesalers add value to products by performing one or more of the following channel functions: 1. Selling and Promoting: Wholesaler’s sales forces help manufacturers reach many small customers at a low cost. The wholesaler has more contacts and is often trusted by the buyer than the distant manufacturer. 2. Buying and Assortment Building: Wholesalers can select items and build assortments needed by their customers, thereby saving the customers much work. 3. Bulk-Breaking: Wholesalers save their customers money by buying in cartload lots and breaking bulk (breaking large lots into small quantities). 4. Warehousing: Wholesalers hold inventories, thereby reducing the inventory costs and risks of suppliers and customers. 5. Transportation: Wholesalers can provide quicker delivery to buyers because they are closer than the producers. 6. Financing: Wholesalers finance their customers by giving credit, and they finance their suppliers by ordering early and paying bills on time. 7. Risk Bearing: Wholesalers absorb risk by taking title and bearing the cost of theft, damage, spoilage and obsolescence. CU IDOL SELF LEARNING MATERIAL (SLM)

Distribution Channel Decisions 195 8. Market Information: Wholesalers give information to suppliers and customers about competitors, new products and price developments. 9. Management Services and Advice: Wholesalers often help retailers train their sales clerks, improve store layouts and displays, and set up accounting and inventory control systems. Types of Wholesalers Wholesalers can be classified into three major types. They are: 1. Merchant wholesalers 2. Agents and brokers 3. Manufacturer’s sales branches and offices 1. Merchant wholesalers: Account for 50% of all wholesaling. They include two types: fullservice wholesalers who provide a full set of services and limited service wholesalers who offer fewer services to their suppliers and customers. The services include carrying stock, maintaining a sales force, extending credit, arranging delivery, etc. 2. Brokers and agents: They do not take title to goods, and they perform only a few functions. They generally specialize by product line or customer type. A broker brings buyers and sellers together and assists in negotiation on commission basis. For example, real estate brokers, insurance brokers, and stock brokers. Agents represent buyers or sellers on a more permanent basis. Manufacturer’s agents are the most common type of agent wholesalers. 3. Manufacturer’s sales branches and offices: These are set up by manufacturers to conduct wholesaling operations by themselves. Separate branches and offices are dedicated to either sales or purchasing. Marketing Decisions of Wholesalers Wholesalers must make decisions on their target market, product assortment and services, pricing, promotion and place. Target Market Decision: Wholesalers, like the retailers, need to define their target markets and should not try to serve everyone. They can choose a target group of customers according to size criteria (only large retailers), type of customer (convenience food stores only), need for service (customers who need credit), or other criteria. Within the target group they can identify more profitable customers and design better offers and build better relationships with them. CU IDOL SELF LEARNING MATERIAL (SLM)

196 Marketing Management Product Assortment and Services Decision: All the products handled by the wholesaler combine to form an assortment. The wholesalers have to group their items on an ABC analysis basis according to the profitability of items. They have to find an ideal mix of services valued by their customers. Pricing Decision: Wholesalers usually make up the cost of goods by a conventional percentage, say, 20% to cover their expenses. They may cut their margin on some lines in order to win important new customers. They will ask suppliers for a special price break when they can turn it into an opportunity to increase supplier’s sales. Promotion Decision: Most wholesalers are not promotion-minded. They need to develop an overall promotion strategy. They also need to make greater use of supplier promotion materials and programmes. They should also take up promotional activities like displays, consumer contacts, canvassing of sales by their own salesmen, etc. Place Decision: Wholesalers typically locate in low rent, low tax areas and put little money into their physical setting and offices. Wholesaling is holding its own in the economy. Progressive wholesalers are adapting their services to the needs of target customers and are seeking cost reducing methods of transacting business. 12.7 Vertical and Horizontal Marketing Systems Vertical Marketing Systems The emergence of vertical marketing systems is a significant recent channel development. The conventional marketing channel consists of an independent manufacturer, wholesalers and retailers, where each is a separate business unit with its own goal of profit maximization. None of the channel members have complete or substantial control over other members. In a vertical marketing system (VMS), the manufacturer, wholesaler and retailer act as a unified system. One channel member, the channel captain, owns the others or franchises them or has so much power that they all co-operate. Major examples are Coca-Cola in soft drinks, and Gillette in shaving products. The strong channel captains achieve economies through volume, and bargaining power, and eliminate conflicts. There are three types of VMS: Corporate VMS Administered VMS Contractual VMs CU IDOL SELF LEARNING MATERIAL (SLM)

Distribution Channel Decisions 197 A corporate VMS combines successive stages of production and distribution under single ownership. The controlling company buys majority of the product it sells from companies that it partly or wholly owns. An administered VMS co-ordinates successive stages of production and distribution through the size and power of one of the members. Manufacturers of a dominant brand manage to get trade cooperation and support from other channel members. Distribution programming is done in this system to meet the needs of both the producer and the distributors. A contractual VMS consists of independent firms at different levels of production and distribution integrating their programmes on a contractual basis to obtain more economies or sales impact than they could achieve alone. It is a ‘value-adding partnership’. The contracts could be of three types – wholesaler sponsored voluntary chains, retailer co-operatives and franchise organizations. This is different from the traditional system of manufacturer-sponsored retail franchise. The service-firm-sponsored retail franchise is a newer system (Example: McDonald’s, DTDC couriers, Hutch, etc.). In the franchising system, the manufacturer or the service provider (franchiser) leases out a trade or service mark and licenses it to franchisees in return for royalty payments as per a contract. The franchisee operations are planned, directed and controlled by the franchiser. Quality standards and a system for doing business is provided by the franchiser. This system is mutually beneficial to both the partners. Horizontal Marketing Systems In the horizontal marketing system, two or more unrelated companies combine resources or activities to exploit an emerging marketing opportunity. On their own, these companies lack capital, know-how, and production or marketing resources to venture alone, or are afraid of the risk factor. The joint activity of these companies could be on temporary or permanent basis. The combination provides a synergy to both companies. Example: Property builders and finance companies — the builders have the know-how and the purchasing power is provided by the finance companies. 12.8. Multi-Channel Marketing Systems Nowadays many companies are adopting multichannel marketing due to the growth of many customers segments and the availability of more channel possibilities. Multichannel marketing involves a single company using two or more marketing channels to reach one or more customer segments. A company can gain three benefits by using multiple channels. They are as follows: CU IDOL SELF LEARNING MATERIAL (SLM)

198 Marketing Management 1. Increased market coverage. 2. Lower cost of operation. 3. More customized selling. Example of a network marketer: Just one of the many lessons we’ve learned along the way: the search for better solutions almost always starts with our ears. And the results are nothing short of spectacular. It ensures you get products you actually need. Products that work better and products that show great results. That’s Amway for you, a company that spends money where it matters. In research & development. We have scientists instead of sales assistants. We’re sure we must be doing something right to win the trust of million of people across the globe. After all, quality tends to speak for itself. Nurtition & Skin CareWellnes & Agro Products | ww.amwayindia. com Personal Care, Home Care Cosmetics, PRESENT IN 80 COUNTRIES & 100% MONEY-BACK GUARANTEE, 500 SCIENTISTS, 450 PRODUCTS, 600 PATENTS TERRITORIES. Multichannel marketing has some disadvantages also. New channels often bring in conflicts and control problems. Different channels may end up competing for the same customers. Companies have the freedom to decide on their channel arrangements and channel types, but they have to consider and conform to certain legal and ethical norms with regard to practices such as exclusive dealership, exclusive territorial rights, tying arrangements (insisting on the dealers to buy slow-moving products along with a strong or fast-moving brand), and the dealer’s rights. 12.9. Network Marketing This is a form of direct marketing, also known as multilevel marketing. It involves one-to- one selling, door-to-door or at home sales parties. In India, companies like Amway, Avon, Electrolux, Eureka Forbes, Tupperware and Mary Kay Cosmetics have successfully introduced network marketing. A sales person visits the home of a host (on prior appointment), who has invited friends, relatives and neighbours. The sales person demonstrates the product to the group and takes orders. The multi-level marketing system was pioneered by Amway. It consists of recruiting independent business people, mostly housewives, who act as distributors. These distributors capture other customers and distributors through their network of friends, neighbours and relatives. The distributor’s compensation includes a percentage of sales of those the distributor recruits as well as earnings on direct sales to customers. CU IDOL SELF LEARNING MATERIAL (SLM)

Distribution Channel Decisions 199 12.10 Summary Members of the marketing channel perform many key functions. Basically, they ensure physical distribution efficiency by bringing together the manufacturer and the customer in a cost- effective manner. Marketing channels handle and take care of all the flows involved in distribution – the physical flow of products, the title or ownership flow, the risk flow, the negotiation flow, the financing or payment flow, the information flow and the promotion flow. A channel level is a distinctive layer or tier of marketing intermediary which functions as a channel member, doing fully or partly the work of bringing products and their ownership closer to the customers. The number of intermediary levels indicates the ‘length’ of a channel. The channel level is short if there is only one intermediary and long if there are more levels. Distribution channels can be of different levels – zero level, one level, two levels, and three levels. Channel members perform a number of functions which are useful for the manufacturer as well as the customers. Channels are of different types, the major ones being retailers and wholesalers. Each of them have to take many marketing decisions. A company should evaluate the various types of intermediaries available to carry out its channel work, and decide on the best. The company can expand direct sales force, or find industrial distributors. Companies have to decide on the number of middlemen to use at each channel level. Nowadays many companies are adopting multichannel marketing due to the growth of many customers segments and the availability of more channel possibilities. Multichannel marketing involves a single company using two or more marketing channels to reach one or more customer segments. 12.11 Key Words/Abbreviations Channels of distribution: Dealers Retailer: Small dealers who sell to customers Wholesalers: Large volume seller who sells to retailers Multichannel marketing: Using different levels of channels Network marketing: Chain distribution by one dealer getting others Departmental store: Different product categories put in different departments Speciality store: Stores selling speciality products like watches, electronics, gold Supermarket: Retailer with large floor space and high assortments of products Hyphermarket: Store larger than supermarket Category killers: Dominant large retailer specialising in one type of discounted products CU IDOL SELF LEARNING MATERIAL (SLM)

200 Marketing Management Marketing systems: Network of buyers, sellers and producers Vertical marketing systems: Vertical relationships in marketing system Horizontal marketing systems: Horizontal relationships Negotiation: Discussions regarding price and terms Channel members: Dealers Channel levels: Zero, one, two, and three levels in dealers Breaking bulk: Reducing bulk products into small lots Assortments: Collection of different brands Price negotiation: Discussing to finalise price Risk taking: Bearing risk of theft, damage, etc Flows of distribution: Product, money, information flow Intensive distribution: Appointing large number of dealers Exclusive distribution: Only company outlets Selective distribution: A few selected dealers only Convenience stores: Neighbourhood kirana stores 12.12 Learning Activity 1. Take the example of BIG BAZAAR and Reliance Fresh and study their functioning with reference to any store near you. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 2. Visit a departmental store and a supermarket and compare and contrast their way of operating. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 3. Identify 5 companies using multi-channel marketing in India and explain their system. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- CU IDOL SELF LEARNING MATERIAL (SLM)

Distribution Channel Decisions 201 4. Identify 2 companies practising vertical marketing system and explain their way of functioning. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 5. Visit 4 speciality stores in your city and study the pattern of operations. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 12.13 Unit End Questions (MCQ and Descriptive) A. Descriptive Types Questions 1. Marketing channels have many important functions to be performed. Justify. 2. Channels of distribution can be of different levels. Do you agree? 3. Compare and contrast horizontal and vertical marketing systems. 4. Elaborate the need, role and types of retailers in the market. 5. Are wholesalers necessary in marketing? Discuss with examples. 6. Based on the number of intermediaries compare the different strategies that a company may use for distribution of products. 7. “Members of the marketing channel perform a number of key functions.” Elucidate. 8. “Marketing channels operate at various levels, depending on the number of intermediaries a producer has to designate in order to reach the final consumer.” Illustrate these different levels of marketing flows at various levels. B. Multiple Choice/Objective Type Questions 1. Benefits of using multiple channels are (a) Increased market coverage. (b) Lower cost of operation. (c) More customized selling. (d) All of above 2. VMS are of different types (a) Corporate VMS (b) Administered VMS (c) Contractual VMS (d) All of above CU IDOL SELF LEARNING MATERIAL (SLM)

202 Marketing Management 3. Wholesalers are classified as (a) Merchant wholesalers (b) Agents and brokers (c) Manufacturer’s sales branches and offices (d) All of above 4. Speciality stores carry (a) Variety of product lines (b) Narrow product lines (c) FMCG and durables (d) Different brands of different companies (e) None of the above Ans.: 1. (d), 2. (d), 3. (d), 4. (b). 12.14 References Text Books Dr. K.Karunakaran, Marketing Management, HPH Reference Books Philip Kotler, Marketing Management, 11th Ed., Pearson/PHI. Web Resources 1. www /businessmanagementideas.com 2. www.tutorialspoint.com 3. www.marketingmo.com CU IDOL SELF LEARNING MATERIAL (SLM)