Place (Distribution)

What this topic is about

• The meaning and purpose of place (distribution)

• Different distribution channels

• Factors to consider when choosing distribution channels

Think about…

• How can a business ensure that its products reach existing and potential customers?

• How and where do customers prefer to buy the product?

• How important are factors such as stock availability, price, speed?

The Objective of Distribution

To make products available in the right

place at the right time in the right quantities

What is a distribution channel?

A distribution channel moves a product from

production to consumption

Channels can have various levels

Producer Producer Producer

WholesalerDistributors

/ Agents

Retailer

Customer Customer Customer

Each party in a distribution channel is called an “intermediary”

Main Types of Intermediary

Retailer

Distributor

Wholesaler

Agent

Retailers - Introduction

• Retailer is the final step in the chain – deals directly with the customer

• Focused on consumer markets• Various kinds of retailer:

– Multiples – chains of shops owned by a single company (e.g. Sainsbury’s or Next)

– Specialist chains (e.g. fast fashion, perfume)– Department stores (e.g. Debenhams, John Lewis)– Convenience stores (e.g. Spar, Costcutter)– Independents – a shop run by an owner– Franchises (retail format operated by franchisee)

Key Trends in Retailing

• Trend towards out-of-town stores • Decline in independents • Growth of retailer “own label” brands• Continued growth in franchising • Increase in international retailing within

Europe • Increasing technology in retailing

Key Advantages of Retail Distribution

• Convenience for customers• Often UK-wide reach to

customers• Retailer chooses the final price• Retailer handles the financial

transaction• Retailer holds the stock• After-sales support (e.g.

returns)

Wholesalers

• Wholesalers “break bulk”– Buy in large quantities from producers– Break into smaller quantities to sell to retailers

• Advantages– Reduce the producer’s transport costs (fewer journeys to

the wholesaler rather than many journeys to retailers)– Retailers can order in smaller amounts from wholesalers

• Wholesaler makes money by buying at a lower price from the producer and adding a profit margin onto the price paid by the retailer

Wholesaler - Example

Producer

Wholesaler

Retailer

Customer

Sale of Daily Newspapers

Newspaper Publisher – e.g. The Sun, The Times – who send bulk print runs of newspapers to large depots run by wholesalers

Wholesaler (e.g. John Menzies) packs newspapers into bundles for retailers (e.g. newsagents)

Retailer (e.g. newsagent; petrol station) displays newspaper in store and delivers to homes

Customer = newspaper buyer

Distributors

• Distribute (sell on) products and serve as a local sales point

• Usually specialise in a particular industry– Examples – building supplies, electrical

components, industrial clothing

• Offer products from many producers = greater choice

• Different from agents in that a distributor holds stock

Producer

Distributor

Customer

Agent

• Specialist type of distributor• Does not hold stock• Tend to operate in tertiary

sector (services)– Travel– Insurance– Publishing

• Earn commission based on sales achieved

Producer

Agent

Customer

Functions of a distribution channel

• Provide a link between production and consumption

• To gather market information• Communicate promotional offers• Find and communicate with prospective

buyers• Physical distribution - transporting and

storing• Financing – other parties finance the stock• Risk taking – other parties take some risk

Channel strategy decisions

• Channel length - direct or indirect?• Choice of intermediary• Use just one or several channels?• How to move the goods through the

channel?• Control over the channel – e.g. who

decides price, promotion, packaging?

Direct or Indirect Channels?

• A business faces a choice of using direct (short) or indirect (long) channels

• Direct– Channel where a producer and consumer deal

directly with each other without the involvement of an intermediary

• Indirect– Involves the use of intermediaries between the

producer and consumer

Direct Channels

• Increasingly popular• Various Methods:

– Direct mailing– E-commerce– Telemarketing (telephone selling)

• Examples– QVC (TV Selling)– Boden (clothes from catalogue)– Direct Line (insurance online)

Producer

Customer

So why use intermediaries?

• Geography- customers may live too far away to be reached directly or spread widely

• Consolidation of small orders into large ones

• Better use of resources elsewhere• Lack of retailing expertise• Segmentation - different

segments of the markets can be best reached by different distribution channels

Short or long channels?

• Short distribution channels– Few if any intermediaries used– Greater control over the marketing of the product– Keeps greater proportion of profit– But means increased distribution costs

• Long distribution channels– Reduced costs– Reduces the producer’s control over marketing

Factors to Consider (1)

• Nature of the product– Perishable/fragile?– Technical/complex?– Customised – Type of product – e.g.

convenience, shopping, speciality

– Desired image for the product

Factors to Consider (2)

• The market– Is it geographically spread?– The extent and nature of the competition

• The business– Its size– Its nature– Does it have established distribution network?

Short channels are used for…

• Industrial products• Expensive and complex goods• Bulking products• Customized products• Services • Products sold in geographically concentrated

market• Products bought infrequently by relative

small numbers of customers

Long channels are used for…

• Consumer goods• Inexpensive and simple goods• Small products• Standardised products• Goods sold in dispersed markets• Goods sold frequently and to many

customers

Test Your Understanding

http://www.tutor2u.net/business/quiz/place/quiz.html

Place (Distribution)