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Distribution Channel Management
Chapter 4
Supply Side Channel Analysis:
Channel Structure and
Intensity Learning Objectives
Chapter 4 Outlines
Learning Objectives
• To understand why manufacturers prefer more coverage,
especially in the fast moving consumer goods.
• To understand why downstream channel members prefer less
coverage, while preferring more assortment in the manufacturer’s
product category.
• To understand why limited distribution is preferable for brands
with a high-end positioning or a narrow target market.
• To understand the mechanism by which limiting the number of
trading partners raises motivation and increase power.
• To understand the special challenges of multiple formats and of
dual distribution.
Channel Structure and Intensity
Channel structure summarizes the types of channel
members, the intensity or numbers of members of each
type that coexist in the market, and the number of distinct
channels that coexist in the market
“Channel design” presents three challenges:
• The level of intensity needed: How much coverage should the
producer have?
• How many different channel types should the producer have?
• Should the producer use its own channels or via third parties or
both (dual or concurrent distribution)?
Channel Structure and Intensity
Intensive distribution means that a brand can be purchased
through many of the possible outlets in a trading area.
Exclusive distribution means that a brand can be purchased
only through one vendor in a trading area.
The more intensively a manufacturer distributes its brand in
the market, the less influence the manufacturer can have over
the channel members.
The upstream members (manufacturers) consider how many
outlets to pursue (degree of selectivity). The downstream
members (resellers) consider how many competing brands to
carry in a product category (category selectivity).
Channel Structure and Intensity
Points of Discussion: Coverage vs Assortment
• Which one is your preferred distribution strategy;
intensive distribution or exclusive distribution?
• Why intensive distribution is better for manufacturers of
convenience goods?
• Why downstream channel members dislike intensive
distribution?
• Can the manufacturer sustain intensive distribution?
• How many brands a downstream channel member
should carry for each product category?
FIGURE 4- 1: SAMPLE REPRESENTATIONS OF THE COVERAGE/MARKET
SHARE RELATIONSHIP FOR FAST MOVING CONSUMER GOODS
D
100%
C
B ra nd
Ma rket Sha re
40%
B
15%
“ normal”
exp ectati on
A
100%
Extent of Dis tributio n Co vera g e f o r a B rand
(% of al l P o ss ib le Ou tl et s)
30%
50%
Function A is an example of t he t ype of relationship t hat would ordinarily be expected bet ween dist ribution coverage and m ark
Functions B, C and D are convex and are examples of approxim at e relat ionships often found in FM CG markets.
A brand can achieve 100% market share at less than 100% coverage because not every possible outlet will carry the product
cat egory. For example, convenience stores sell food but not every cat egory of food.
Based on Reibstein, David J., and Paul W. Farris (1995), "Market Share and Distribution: A Generalization,
A Speculation, and Some Implications," Marketing Science, 14 (3), G190-G202.
FIGURE 4- 2: SELECTIVE COVERAGE—
THE MANUFACTURER’S CONSIDERATIONS
Fo
Forr the
the Manufacturer
Manufacturer
Limited coverage is currency
M ore selectivity = more money
Exclusive distribution =
M anufacturers use the money to “pay” the Channel M embers for :
- limiting its own coverage of brand in product category
(gaining exclusive dealing is very expensive)
- supporting premium positioning of the brand
- finding a narrow target market
- coordinating more closely with the manufacturer
- making-supplier specific investments
• new products
• new markets
• differentiated marketing strategy requiring downstream implementation
- accepting limited direct selling by manufacturer
- accepting the risk of becoming dependent on a strong brand
M anufacturers need to “pay more” when :
- the product category is important to the Channel Member
- the product category is intensely competitive
FIGURE 4- 3: CATEGORY SELECTIVITY:
THE DOWNSTREAM CHANNEL MEMBER’S CONSIDERATIONS
For the Downstream Channel Member
Limiting brand assortment is currency
Fever brand = more money
Exclusive dealing =
Downstream Channel M embers use the money to “pay” the supplier for :
- limiting the number of competitors who can carry the brand in the Channel Member’s trading area
- providing desired brands that fit the Channel M ember’s strategy
- wording closely to help the Channel Member achieve competitive advantage
- making Channel-Member-specific investments
• new products
• new markets
• differentiated Channel M ember strategy requiring supplier cooperation
- accepting the risk of becoming dependent on a strong Channel M ember
Downstream Channel M embers need to “pay more” when :
- the trading area is important to the supplier
- the trading area is intensely competitive
Channel Structure and Intensity
Points of Discussion-How Much Selectivity to Trade Away
• The threat of complacency
• The nature of the product category
• Brand Strategy: Quality Positioning and Premium Pricing
• Brand Strategy: Target Market
Channel Structure and Intensity
Points of Discussion-Bargaining for Influence Over Channel Members
• Desired coordination
• Manufacturer-specific Investments by downstream channel
members
• Dependence balancing: trading territory exclusivity for category
exclusivity
• Reassurance: using selectivity to stabilize fragile relationships
• The price of the concession: factoring in opportunity costs
Channel Structure and Intensity
Points of Discussion-Back to the basics: cutting costs and raising sales
• Saving money by limiting the number of trading partners
• Do more trading partners really mean more revenue?
• A caution on the issue of limiting the number of trading partners
Channel Structure and Intensity
Points of Discussion
• Going to market via multiple types of channels
• Dual distribution: going to market via independent channels and
self-owned channels
• Carrier-rider relationships