Channels of Distrubution

7/28/2019 Channels of Distrubution

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Product Distribution and Channels of distribution

Introduction:Most producers dont sell their goods directly to the final users; between them stands

a set of intermediaries performing a variety of functions. These intermediaries constitute marketing

channels (also called trade channels or distribution channels), sets of interdependent organizations

involved in the process of making a product or service available for use or consumption. Theyre the

set of pathways a product or service follows after production, culminating in purchase and use by

the final end user.

The Importance of Channels: A marketing channel system is the particular set of marketing channels

employed by a firm. Decisions about the marketing channel system are among the most critical

facing management. In the United States, channel members collectively earn margins that account

for 30% to 50% of the ultimate selling price, whereas advertising typically accounts for less than 7%

of the final price. Marketing channels also represent a substantial opportunity cost because they

dont just serve markets, they must also make markets.

The channels chosen affect all other marketing decisions. The companys pricing depends on

whether it uses mass merchandisers or high-quality boutiques. The firms sales force and advertising

decisions depend on how much training and motivation dealers need. In addition, channel decisions

involve relatively long-term commitments to other firms. When an automaker signs up independent

dealers to sell its automobiles, it cant buy them out the next day and replace them with company

owned outlets. Holistic marketers ensure that marketing decisions in all these different areas are

made to collectively maximize value.

Todays successful companies are also multiplying the number of go-to-market or hybrid channels

in any one area. For example, Hewlett-Packard uses its sales force to sell to large accounts,outbound telemarketing to sell to medium-sized accounts, direct mail with an inbound number for

small accounts, retailers for still smaller accounts and consumers, and the Internet to sell specialty

items. Consumers may choose their preferred channels based on price, product assortment, and

convenience, as well as their economic, social, or experiential shopping goals.

The firm must decide how much effort to devote to push versus pull marketing. A push strategy

uses the manufacturers sales force and trade promotion to induce intermediaries to carry, promote,

and sell the product to end users. This is appropriate where there is low brand loyalty in a category,

brand choice is made in the store, the product is an impulse item, and product benefits are well

understood. In a pull strategy, the manufacturer uses advertising and promotion to persuade

consumers to ask intermediaries for the product, thus inducing the intermediaries to order it. This is

appropriate when there is high brand loyalty and high involvement in the category, people perceive

differences between brands, and people choose the brand before they shop. Top marketing firms

such as Nike and Intel skilfully employ both push and pull strategies.

Value Networks: The Company should first think of the target market and then design the supply

chain backward from that point, a view called demand-chain planning. Northwesterns Don Schultz

says: A demand chain management approach doesnt just push things through the system. It

emphasizes what solutions consumers are looking for, not what products we are trying to sell them.

He suggests replacing the marketing four Ps with a new acronym, SIVA, which stands for solutions,

information, value, and access.

The concept of a value networka system of partnerships and alliances that a firm creates tosource, augment, and deliver its offeringstakes an even broader view. A value network includes a


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firms suppliers and its suppliers suppliers, and its immediate customers and their end customers.

The value network includes valued relations with others such as university researchers and

regulatory agencies.

Demand chain planning yields several insights. First, the firm can estimate whether more money is

made upstream or downstream, in case it might want to integrate backward or forward. Second, the

company is more aware of disturbances anywhere in the supply chain that might cause costs, prices,

or supplies to change suddenly. Third, companies can go online with business partners for faster,

more accurate, and less costly communications, transactions, and payments.

Channel Functions and Flows: A marketing channel performs the work of moving products from

producers to consumers, overcoming the time, place, and possession gaps that separate goods and

services from those who need or want them. Members of the marketing channel perform a number

of key functions Some functions (physical, title, and promotion) constitute a forward flow of activity

from the company to the customer; other functions (ordering and payment) constitute a backward

flow from customers to the company.

The question is not whether these channel functions need to be performedthey must bebut

rather who is to perform them. All channel functions have three things in common: They use up

scarce resources; they can often be performed better through specialization; and they can be shifted

among channel members. If a manufacturer shifts some functions to intermediaries, its costs and

prices go down, but the intermediaries must add a charge to cover their work. Still, if the

intermediaries are more efficient than the manufacturer, prices to consumers should be lower. If

consumers perform some functions themselves, they should enjoy still lower prices. Changes in

channel institutions thus reflect the discovery of more efficient ways to combine or separate the

economic functions that provide assortments of products to target customers. The route taken by

goods as they move from producer to consumer is known as Channel of Distribution. Distributionchannel profit margin Retailer any loss factors cost involved trans license fees area wise dist

competitor agents .

Channel Levels: The producer and the final customer are part of every channel. Well use the

number of intermediary levels to designate the length of a channel. Figure 13.2a illustrates

consumer-goods marketing channels of different lengths, while Figure 13.2b illustrates industrial

marketing channels. A zero-level channel(also called a direct-marketing channel) consists of a

producer selling directly to final customers through door-to-door sales, Internet selling, mail order,

telemarketing, home parties, TV selling, manufacturer-owned stores, and other methods. A one-

level channel contains one intermediary, such as a retailer. A two-level channel contains two

intermediaries; a three-level channel contains three intermediaries. From the producers


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perspective, obtaining information about end users and exercising control becomes more difficult as

the number of channel levels increases. Channels normally describe a forward movement of

products, but there are also reverse-flow channels, important for bringing products back for reuse

(such as refillable bottles); refurbishing items for resale; recycling products; and disposing of

products and packaging. Several intermediaries play a role in these channels, including

manufacturers redemption centres, community groups, and traditional intermediaries such astrash-collection specialists, recycling centres, trash-recycling brokers, and central processing

warehousing.

CHANNEL-DESIGN DECISIONS

Designing a marketing channel system involves analyzing customer needs, establishing channel

objectives, identifying major channel alternatives, and evaluating major channel alternatives.

Analyzing Customers Desired Service Output Levels.The marketer must understand the service

output levels its target customers want.

Channels produce five service outputs:

1. Lot size: The number of units the channel permits a typical customer to purchase on one occasion.

In buying for its fleet, Hertz wants a channel from which it can buy a large lot size; a household

wants a channel that permits buying a lot size of one.

2. Waiting and delivery time: The average time customers of that channel wait for receipt of the

goods. Customers normally prefer fast delivery channels.

3. Spatial convenience: The degree to which the marketing channel makes it easy for customers to

purchase the product.


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4. Product variety: The assortment breadth provided by the channel. Normally, customers prefer a

greater assortment, which increases the chance of finding what they need.

5. Service backup: The add-on services (credit, delivery, installation, repairs) provided by the

channel.

Providing greater service outputs means increased channel costs and higher prices for customers.

The success of discount resellers (online and offline) indicates that many consumers will accept

lower outputs if they can save money.

Establishing Objectives and Constraints

Marketers should state their channel objectives in terms of targeted service output levels. Under

competitive conditions, channel institutions should arrange their functional tasks to minimize total

channel costs and still provide desired levels of service outputs.

Usually, planners can identify several market segments that want different service levels. Effective

planning requires determining which market segments to serve and the best channels for each.

Channel objectives vary with product characteristics. Perishable products require more direct

marketing. Bulky products, such as building materials, require channels that minimize the shipping

distance and the amount of handling. Nonstandard products, such as custom-built machinery, are

sold directly by company sales representatives. Products requiring installation or maintenance

services, such as heating systems, are usually sold and maintained by the company or franchised

dealers. High-unit-value products such as turbines are often sold through a company sales force

rather than intermediaries. Channel design is also influenced by such environmental factors as

competitors channels, economic conditions, and legal regulations and restrictions. U.S. law looks

unfavorably on channel arrangements that substantially lessen competition or create a monopoly.

Identifying Major Channel Alternatives

Companies can choose from a wide variety of channels for reaching customers, each of which has

unique strengths as well as weaknesses. Each channel alternative is described by (1) the types of

available intermediaries; (2) the number of intermediaries needed; and (3) the terms and

responsibilities of each channel member

Types of Intermediaries A firm needs to identify the types of intermediaries available to carry on its

channel work. Some intermediariesmerchants such as wholesalers and retailersbuy, take title

to, and resell the merchandise. Agentssuch as brokers, manufacturers representatives, and sales

agents search for customers and may negotiate on the producers behalf but dont take title to the

goods. Facilitators, including transportation companies, independent warehouses, banks, and

advertising agencies, assist in the distribution process but neither take title to goods nor negotiate

purchases or sales. Companies should identify innovative marketing channels. For instance, seeing

its printed catalog as out of date, commercial lighting company Display Supply & Lighting developed

an interactive online catalog that cost less, sped up the sales process, and increased revenue.

Number of Intermediaries In deciding how many intermediaries to use, companies can use one of

three strategies: exclusive, selective, or intensive distribution. Exclusive distribution means severely

limiting the number of intermediaries. Firms such as automakers use this approach to maintain

control over the service level and service outputs offered by the resellers. Often it involves exclusive

dealing arrangements, in which resellers agree not to carry competing brands. Selective distribution

relies on more than a few but less than all of the intermediaries willing to carry a particular product.

The company doesnt have to worry about too many outlets; it can gain adequate market coverage

with more control and less cost than intensive distribution. In intensive distribution, themanufacturer places the goods or services in as many outlets as possible. This strategy is generally


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used for items such as snack foods, newspapers, and gum, products the consumer seeks to buy

frequently or in a variety of locations.

Terms and Responsibilities of Channel Members :

Each channel member must be treated respectfully and given the opportunity to be profitable.

The main elements in the trade-relations mix are price policy, conditions of sale, territorial rights,

and specific services to be performed by each party. Price policy calls for the producer to establish a

price list and schedule of discounts and allowances that intermediaries see as equitable and

sufficient. Conditions of sale are payment terms and producer guarantees. Most producers grant

cash discounts to distributors for early payment. Producers might also provide distributors a

guarantee against defective merchandise or price declines. A guarantee against price declines gives

distributors an incentive to buy more.

Distributors territorial rights define the distributors territories and the terms under which the

producer will enfranchise other distributors. Distributors normally expect to receive full credit for all

sales in their territory, whether or not they did the selling. Mutual services and responsibilities must

be carefully spelled out, especially in franchised and exclusive-agency channels. McDonalds providesfranchisees with a building, promotional support, a recordkeeping system, training, and general

administrative and technical assistance. In turn, franchisees must satisfy company standards for the

physical facilities, cooperate with promotional programs, furnish requested information, and buy

supplies from specified vendors. Using a sales agency poses a control problem because the agency is

an independent firm seeking to maximize its profits. Agents may concentrate on customers who buy

the most, but not necessarily of the producers goods. Furthermore, agents might not master the

details of every product they carry or handle all promotion materials effectively. To develop a

channel, the members must make some mutual commitments for a specified period; this reduces

the producers ability to respond to a changing marketplace. In dynamic, volatile, or uncertain

environments, producers need channels and policies that provide high adaptability.

CHANNEL-MANAGEMENT DECISIONS

After a firm has chosen a channel system, it must select, train, motivate, and evaluate individual

intermediaries for each channel. It must also modify channel design and arrangements over time.


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Selecting Channel Members

Companies need to select their channel members carefully because to customers, the channels are

the company. Producers should determine what characteristics distinguish the better intermediaries

and examine the number of years in business, other lines carried, growth and profit record, financial

strength, cooperativeness, and service reputation of potential channel members. If intermediaries

are sales agents, producers should evaluate the number and character of other lines carried and the

size and quality of the sales force. If the intermediaries want exclusive distribution, the producer

should evaluate locations, future growth potential, and type of clientele.

Training and Motivating Channel Members

A company needs to view its intermediaries in the same way it views its end users. It needs to

determine intermediaries needs and construct a channel positioning such that its channel offering is

tailored to provide superior value to these intermediaries. To improve intermediaries performance,

the company should provide training, market research, and other capability-building programs. The

company must also constantly reinforce that its intermediaries are partners in the joint effort to

satisfy customers. Producers vary greatly in channel power, the ability to alter channel membersbehavior so that the members take actions they wouldnt have taken otherwise. Often, gaining

intermediaries cooperation can be a huge challenge. More sophisticated producers try to forge a

long-term partnership with channel members. The manufacturer communicates clearly what it

expects from its distributors in the way of market coverage and other channel issues and may

establish a compensation plan for adhering to these policies.

Evaluating Channel Members

Producers must periodically evaluate intermediaries performance against such standards as sales-

quota attainment, average inventory levels, customer delivery time, treatment of damaged and lostgoods, and cooperation in promotional and training programs (see Marketing Skills: Evaluating

Intermediaries). A producer will occasionally discover that it is paying particular intermediaries too

much for what they are actually doing. One manufacturer compensating a distributor for holding

inventories found that the stock was actually held in a public warehouse at its own expense.

Producers should set up functional discounts in which they pay specified amounts for the

intermediarys performance of each agreed-upon service. Underperformers need to be counseled,

retrained, remotivated, or terminated.

Modifying Channel Arrangements

Channel arrangements must be reviewed periodically and modified when distribution isnt working

as planned, consumer buying patterns change, the market expands, new competition arises,

innovative distribution channels emerge, and the product moves into later stages in the product life

cycle. No marketing channel remains effective over the entire product life cycle. Early buyers might

be willing to pay for high-cost value added channels, but later buyers will switch to lower-cost

channels. In competitive markets with low entry barriers, the optimal channel structure will change

over time; the firm may add or drop individual channel members, add or drop particular market

channels, or develop a new way to sell goods. Adding or dropping an individual channel member

requires an incremental analysis to determine what the firms profits would look like with and

without this intermediary. Increasingly, marketers are using datamining to analyze customer

shopping data as input for channel decisions.The most difficult decision is whether to revise the

overall channel strategy. Channels can become outmoded as a gap arises between the existing

distribution system and the ideal system to satisfy customers (and producers) requirements. This is


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why Avons door-to-door system for selling cosmetics had to be modified as more women entered

the workforce, for example.

CHANNEL INTEGRATION AND SYSTEMS

Distribution channels dont stand still. New wholesaling and retailing institutions emerge, and new

channel systems evolve. We look next at the recent growth of vertical, horizontal and multichannel

marketing systems and see how these systems cooperate, conflict, and compete.

Vertical Marketing Systems

One of the most significant channel developments is the rise of vertical marketing systems. A

conventional marketing channel comprises an independent producer, wholesaler(s), and retailer(s).Each is a separate business seeking to maximize its own profits, even if this goal reduces profit for

the system as a whole. No channel member has complete or substantial control over other

members.

A vertical marketing system (VMS), by contrast, comprises the producer, wholesaler(s), and

retailer(s) acting as a unified system. One channel member, the channel captain, owns the others,

franchises them, or has so much power that they all cooperate. The channel captain can be the

producer, the wholesaler, or the retailer. Channel stewardship is the ability of a given participant

(steward) in a distribution channel to create a go-to-market strategy that simultaneously addresses

customers best interests and drives profits for all channel partners. An effective channel steward

considers the channel from the customers point of view and advocates for change among all

participants, transforming disparate entities into partners with a common purpose.17 VMSs arose as

a result of strong channel members attempts to control channel behavior and eliminate conflict

from independent channel members pursuing their own objectives. They achieve economies

through size, bargaining power, and elimination of duplicated services. VMSs have become the

dominant distribution mode in the U.S. consumer marketplace, serving between 70% and 80% of the

total market. There are three types of VMSs: corporate, administered, and contractual. A corporate

VMS combines successive stages of production and distribution under single ownership. Companies

that desire a high level of control over their channels favor vertical integration. Sherwin-Williams, for

example, makes paint but also owns and operates 3,200 retail outlets.18 An administered VMS

coordinates successive stages of production and distribution through one members size and power.

Manufacturers of a dominant brand are able to secure strong trade cooperation and support from

resellers. Thus Campbell Soup can command cooperation from its resellers in connection with

displays, shelf space, promotions, and price policies. A contractual VMS consists of independent

firms at different levels of production and distribution, integrating their programs on a contractual

basis to obtain more economies or sales impact than they could achieve alone. Johnston and

Lawrence call them value-adding partnerships (VAPs).

Contractual VMSs are of three types:

1. Wholesaler-sponsored voluntary chains organize groups of independent retailers to better

compete with large chains through standardized selling practices and buying economies.

2. Retailer cooperatives arise when the stores take the initiative and organize a new business entity

to carry on wholesaling and possibly some production. Members of retail cooperatives concentrate


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their purchases through the co-op, jointly plan their advertising, and share in profits in proportion to

their purchases.

3. Franchise organizations are created when a franchisor links several successive stages in the

productiondistribution process. Franchises include manufacturer-sponsored retailer franchises

(Honda and its dealers); manufacturer-sponsored wholesaler franchises (Coca-Cola and its bottlers);

and service-firm-sponsored retailer franchises (Ramada Inn and its motel franchisees). Some

franchising uses dual distribution: vertical integration (franchisor owns and operates the units) and

market governance (franchisor licenses units to franchisees).

The New Competition in RetailingThe new competition in retailing is no longer between independent business units but between

whole systems of centrally programmed networks (corporate, administered, and contractual)

competing against one another to achieve the best cost economies and customer response. Other

developments include horizontal marketing systems and multichannel marketing systems.

Horizontal Marketing Systems In the horizontal marketing system, two or more unrelated

companies put together resources or programs to exploit an emerging marketing opportunity. Each

company lacks the capital, know-how, production, or marketing resources to venture alone, or it is

afraid of the risk. The companies might work with each other on a temporary or permanent basis or

create a joint venture company. Many supermarket chains have arrangements with local banks to

offer instore banking, the way Citizens Bank has placed 500 branches inside New England

supermarkets.

Integrating Multichannel Marketing Systems: Most companies have adopted multichannel

marketing, which occurs when a single firm uses two or more marketing channels to reach one or

more customer segments. An integrated marketingchannel system is one in which the strategies

and tactics of selling through one channel reflect the strategies and tactics of selling through other

channels. By adding more channels, companies can gain three important benefits. The first is

increased market coverage. Not only are more customers able to shop for the companys products in

more places, but customers who buy in more than one channel are often more profitable than

single-channel customers.21 The second is lower channel costselling by phone is cheaper than

personal visits to small customers. The third is more customized sellingsuch as adding a technical

sales force to sell more complex equipment. However, new channels typically introduce conflict and

control problems. Different channels may end up competing for the same customers, and, as the

new channels become more independent, cooperation becomes more difficult.

Channel motivation

To motivate intermediaries the firm can use positive actions, such as offering higher margins to the

intermediary, special deals, premiums and allowances for advertising or display. On the other hand,

negative actions may be necessary, such as threatening to cut back on margin, or hold back delivery

of product.

Channel conflict

Channel conflict can arise when one intermediary's actions prevent another intermediary from

achieving their objectives. Vertical channel conflict occurs between the levels within a channel and

horizontal channel conflict occurs between intermediaries at the same level within a channel.

Causes of Channel ConflictOne major cause of channel conflict is goal incompatibility. For example,

the manufacturer may want to achieve rapid market penetration through alow-price policy. Dealers,

in contrast, may prefer to work with high margins for short-run profitability. Sometimes conflictarises from unclear roles and rights. HP may sell PCs to large accounts through its own sales force,


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but its licensed dealers may also be trying tosell to large accounts. Territory boundaries and credit

for sales often produce conflict.Conflict can also stem from differences in perception, as when the

producer is optimistic about the short-term economic outlook and wants dealers to carry more

inventory, while dealers are more pessimistic. At times, conflict can arise because of the

intermediaries dependence on the manufacturer. The fortunes of exclusive dealers, such as auto

dealers, are greatly affected by the manufacturers product and pricing decisions, creating highpotential for conflict.

Managing Channel Conflict Some channel conflict can be constructive and lead to more dynamic

adaptation in a changing environment.24 Too much conflict can be dysfunctional, however, so the

challenge is not to eliminate conflict but to manage it better. There are several mechanisms for

effective conflict management (see Table 13.2).25 One is the adoption of superordinate goals, with

channel members agreeing on the fundamental goal they jointly seek, whether its survival, market

share, high quality, or customer satisfaction. Members usually come to agreement when the channel

faces an outside threat such as a more efficient competing channel, an adverse piece of legislation,

or a shift in consumer desires.

A useful step is to exchange persons between two or more channel levels. General Motors

executives might work briefly in some dealerships, and some dealership owners might work in GMs

dealer policy department, to help participants appreciate the others viewpoint. Marketers can

accomplish much by encouraging joint membership in and between trade associations. Co-optation

is an effort by one organization to win the support of another organizations leaders by including

them in advisory councils, boards of directors, and the like. As long as the initiating organization

treats the leaders and their ideas seriously, co-optation can reduce conflict. Diplomacytakes place

when each side sends a person or group to meet with its counterpart to resolve the conflict.

Mediation means having a skilled, neutral third party reconcile the two parties interests.Arbitration

occurs when the two parties agree to present their arguments to an arbitrator and accept the

arbitration decision. When none of these methods proves effective, a company or channel partnermay choose to file a lawsuit.

Dilution and Cannibalization Marketers must also avoid diluting their brands through inappropriate

channels. This is especially a concern with luxury brands whose images are built on the basis of

exclusivity and personalized service. To reach affluent shoppers who work long hours and have little

time to shop, high-end fashion brands such as Dior and Louis Vuitton now sell through e-commerce

sites. These luxury makers also see their Web sites as a way for customers to research items before

walking into a store and a means to help combat fakes sold over the Internet.

Legal and Ethical Issues in Channel Relations

For the most part, companies are legally free to develop whatever channel arrangements suit them.In fact, the law seeks to prevent companies from using exclusionary tactics that might keep


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competitors from using a channel. Here we briefly consider the legality of exclusive dealing,

exclusive territories, tying agreements, and dealers rights. With exclusive dealing, the seller allows

only certain outlets to carry its products and requires that these dealers not handle competitors

products. Both parties benefit from exclusive arrangements: The seller obtains more loyal and

dependable outlets, and the dealers obtain a steady source of supply of special products and

stronger seller support. Exclusive arrangements are legal as long as they dont substantially lessen competition or tend to create a monopoly, and both parties have voluntarily entered into the

agreement.

Exclusive dealing often includes exclusive territorial agreements. The producer may agree not to sell

to other dealers in a given area, or the dealer may agree to sell only in its own territory. The first

practice increases dealer enthusiasm and commitment and is perfectly legala seller has no legal

obligation to sell through more outlets than it wishes. The second practice, whereby the producer

tries to keep a dealer from selling outside its territory, is a major legal issue. The producer of a

strong brand sometimes sells it to dealers only if they will take some or all of the rest of the line, a

practice called full-line forcing. Such tyingagreements arent necessarily illegal, but they do violate

U.S. law if they tend to lessen competition substantially. Note that a producers right to terminate

dealers is somewhat restricted. In general, sellers can drop dealers for cause, but not if, forinstance, the dealers refuse to cooperate in a doubtful legal arrangement, such as exclusive dealing

or tying agreements.

LOreal Disctribution channels Case Study

LOreal as an organization: To ensure its development, LOral relies on global Research and

Innovation; a unique portfolio of brands organized by distribution channel, and integrated industrial

production. LOral is richly endowed with a portfolio of international brands that is unique in the

world and that covers all the lines of cosmetics: hair care, coloring, skin care, make-up and perfume.

Very complementary, these brands are managed within the group by divisions that each has

expertise in their own distribution channel. This organization is one of LOral's major strengths. It

makes it possible to respond to the every consumer's expectations according to his or her habits and

lifestyle but also to adapt to local distribution conditions, anywhere in the world.

LOreal has dedicated distribution channels for each product divisions:

The Consumer Products Division makes the best of cosmetic innovation available to the

Greatest number of people on every continent. Its brands are distributed in mass retailing

Channels hypermarkets, supermarkets, drugstores and traditional stores. They offer an

Extensive range of products for hair color, hair care, make-up and skin care.

L'Oral Luxe offers a unique universe of beauty. Its international brands incarnate all the

facets of elegance and refinement in three major specializations: skin care, make-up and

perfume. Their distribution is selective and is shared between department stores,

cosmetics stores, travel retail, but also own-brand boutiques and e-commerce.

The Professional Products Division distributes its products in hairdressing salons

worldwide. Thanks to its portfolio of brands, the division meets their needs for hair

coloring, hair styling, shampoo and treatments. A privileged partner of hairdressers, this

division offers them products made with the best technologies as well as high-level

training, to ensure professional service.

The Body Shop, true to its pioneering spirit, combines innovation, sensory experience and

performance, while maintaining their values, in particular with regard to fair trade and


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environmental protection. In fact, it is the first brand to have introduced fair trade into the Beauty

industry. Its products are distributed mainly through a network of exclusive boutiques.

An integrated Production and Distribution model:

LOral made the decision to integrate its production facility. Established around the world, its 41factories produce nearly 90 % of the units of cosmetic products sold. A guarantee of quality and

traceability, this model makes it possible to reduce risks and optimize the industrial tool. A single

unit, the Operations Division, steers worldwide production and product distribution. It unites 7 lines

of business purchasing, packaging, production, quality, logistics, environment, hygiene and safety

and it oversees the whole production chain, from purchasing raw materials to product delivery. To

become more responsive and adapt to the specifics of local markets, the industrial tool is spread out

over five major geographical zones. This proximity reduces the distance that separates consumers

from the factories and ensures them access to products at the best possible price. The group also

bases its industrial success on its exacting criteria in the selection of suppliers with whom it creates

long-term partnerships and joint ventures for innovation.

LOreal in India:

In India LOreal India has a manufacturing Unit in Chakan near Pune with a production capacity of

250 million units per year.

Distribution channel includes primarily a two tier model in which manufactured products are

transported to the warehouses and from their wholesalers are provided with the ordered shipments

and the products reach to the retailer from the wholesalers and finally to the consumer from the

retail outlets.

Loreal India also follow 3 Tier distribution model as an alternate means to reach its customer as

having specific brand retail outlets adds to the cost so products are channelled through

intermediatries and reach to cosmetic stores, chemist stores and local kiryana shops so as to

maximize the reach of the brand to the consumer. This model is India specific so as to maximize the

reach to the diverse Indian consumers.

Cost and Margins involved:

To understand the cost involved lets consider one of the most selling products of the brand LOreal

Paris Total Repair 5 shampoo.

The product is manufactured in Chakan plant with 3 lakhs unit produced per month and then the

product is transported to the five Warehouses present all across India, out of which one is located in

Bhiwandi, Mumbai.

From the warehouse the products are channelled through two routes:

1. Warehouse to Retail showrooms/websites and are then sold to consumers.2. Warehouse to Wholesalers and from wholesalers to local cosmetics/ chemist shops which

sells the product to consumers.


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Double Routed Distribution Channel model LOreal India.

LOreal Paris Total Repair 5 shampoo (375 ml pack, MRP Rs 225) costs around Rs 96 per unit to the

manufactured (including the transport cost to the warehouse).

1. The product is then transported to The retail showrooms(owned by the company/Franchises) and the transportation cost involved(considering Bhiwandi warehouse to

Phoenix city Outlet) is added to the cost and other cost are also part of the net cost including

Rent, and other cost that are involved in the retail division. Which finally adds up and the net

cost for the retail outlet goes to Rs 130 per unit. Then these franchises sell the product to

the customer (End user) on MRP Rs225.

2. In case of channel involving third party retailer/ cosmetic shops/ chemist stores. The productis transported to the wholesaler which adds the cost of transportation and inventoryholdings and also its profit margin to the cost and sells it to the retailers outlets/shops.

These costs add up to the price and the price goes up to around Rs 140 per unit. Now these

outlets sell the product to the consumer at MRP or discount, which vary from retailer to

retailer.

Manufacturer(Chakan, Pune)

Warehouse (Internal)

(Bhiwandi, Mumbai)

Wholesaler (1 per district)Retail Showrooms

The Bod Sho

Cosmetic/ chemist shops

Consumer

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