Chapter 9 – Place (Distribution) Strategy
- Describe the basic types of channels in business-to-consumer (B2C) and business-to-business (B2B) markets.
- Explain the advantages and challenges companies face when using multiple channels and alternate channels.
- Explain the pros and cons of disintermediation.
- List the channels companies can use to enter foreign markets.
Figure 9.2 “Typical Channels in Business-to-Consumer Markets” shows the typical channels in business-to-consumer markets. As we explained, the shortest marketing channel consists of just two parties, a producer and a consumer. A channel such as this is a direct channel. By contrast, a channel that includes one or more intermediaries is an indirect channel. In an indirect channel, the product passes through one or more intermediaries.
That does not stop the producer from promoting the product to consumers: to keep it top of mind, to introduce new products and to defend itself against the competition. Levi’s jeans runs ads on TV and social media designed to appeal directly to consumers. Food product manufacturers may run social media and traditional advertising campaigns along with coupons in online and print flyers. However, the seller also has to focus its selling efforts on these intermediaries because the intermediary can help with the selling effort. It is important for Levis to be available to all its customers whether in a bricks and mortar store and online.
Figure 9.3 “Typical Channels in Business-to-Business Markets” shows the marketing channels common in business-to-business (B2B) markets. Notice how the channels resemble those in B2C markets, except that the products are sold to businesses and governments instead of consumers like you. The industrial distributors are companies that supply products that businesses or government departments and agencies use but don’t resell. Grainger Industrial Supply, which sells tens of thousands of products, is one of the world’s largest industrial distributors. Nearly two million businesses and institutions in 150 countries buy products from the company, ranging from padlocks to painkillers.
You might be tempted to think intermediaries, don’t add value to the process. If you can cut them out of the process (called disintermediation) could products be sold at a lower price? Large retailers, such as Walmart or George Weston Limited, sometimes bypass intermediaries. Instead, they buy their products directly from manufacturers and then store and distribute these products to their own retail outlets. Walmart is increasingly doing so and even purchasing produce directly from farmers around the word (Birchall, 2010). Sometimes cutting out the intermediaries is desirable, but this is not always the case. A wholesaler with buying power and excellent warehousing capabilities might be able to purchase, store, and deliver a product to a seller at a lower price than its producer could. Walmart doesn’t need a wholesaler’s buying power, but your local convenience store does. Likewise, hiring a distributor will cost a producer money. If the distributor can help the producer sell more product, it can increase the producer’s profits. Moreover, when you cut out the intermediaries you work with, you have to perform the functions they once did. Maybe it’s storing the product or dealing with hundreds of retailers. Many producers who stopped working with intermediaries may rehire them later because of the extra work involved.
While a difficult process, recent technological advances have, to some degree, eased the transition to disintermediation. The Internet has facilitated a certain amount of disintermediation by making it easier for consumers and businesses to contact one another without going through intermediaries. The Internet has also made it easier for buyers to shop for the lowest prices and to find the information they need to make the purchase. Most people book trips online without going through travel agents. However, that doesn’t mean that travel agents have gone out of business. To remain in business, resellers need to find new ways to add value to products or to target new markets. Flight Centre decided to target the small and medium business market (Sorrells, 2020). Due to the relatively small number of employees, this target group isn’t able access the same discounts as a large business. ‡
However, for some products, disintermediation via the Internet doesn’t work so well. Insurance is one example where online providers have had to add live chat and phone numbers in order to attract more customers beyond the initial launch to compete with insurance brokers. Many people prefer to buy through an agent they can talk to for advice. Insurance is also a service that has a more complicated purchase and usage cycle. Consumers make a purchase decision on the chance that they will need the service, that is, coverage in case of an accident. Regardless of how they purchased insurance coverage, when it comes to making a claim, 49% of insurance consumers trust a human advisor, 12% trust an automated phone/web/email service and 7% trust a chatbot (Saldanha & Staehle, 2021). ‡
It used to be said that it is impossible to cut out intermediaries in certain markets, such as food products. In 2021, Pepsi-Cola announced that in Canada it would do just that (Dallaire, 2021). Called Tasty Rewards Shop, consumers can access coupons, contests and recipes and order product directly from the site.‡
Multiple Channels and Alternate Channels
Marketing channels can get a lot more complex than the channels shown in Figures 9.2 and 9.3. Look at the channels in Figure 9.4 “Alternate Channel Arrangements”. Notice how in some situations, a wholesaler will sell to brokers, who then sell to retailers and consumers. In other situations, a wholesaler will sell straight to retailers or straight to consumers. Manufacturers also sell straight to consumers, and, as we explained, sell straight to large retailers like The Bay.
Companies can and do utilize multiple channels. Take Levi’s jeans, for example. You can buy a pair of Levi’s from a retailer such as The Bay or you can buy a pair directly from Levi’s at one of its outlet stores, or online through Levi’s website. Choosing one or more channels is to understand the different target markets for your product and select the channel that best meets the needs of your customers. Is there a group of buyers who would purchase your product if they could shop online? Perhaps there is a another group of customers interested in your product but they do not want to pay full price. The ideal way to reach these people might be with an outlet store and low prices. Many people regularly interact with companies via multiple channels before making buying decisions.
Using multiple channels can be effective. Some studies has shown that the more marketing channels your customers utilize, the more loyal they are likely to be to your products (Fitzpatrick, 2005), but others have shown a variation by industry sector (Brun et al., 2017).‡ Companies must meet their consumers’ preference for where they would like to shop. Integrating their selling channels is key to providing a consistent experience. For example, The Shopping Channel’s TV channel, web and mobile interface, printed catalogue, text and email services, all have the same look and persuasive messaging to encourage customers’ purchase behaviour.‡
Some companies find ways to increase their sales by forming strategic channel alliances with one another. Harley-Davidson has a strategic channel alliance with Best Western. As a Harley-Davidson vehicle owner, you can sign up to receive points and other discounts by staying at Best Western hotels and motels (The Harley Owners Group Blog, n.d.). Indigo Books has Starbucks locations inside its stores. This is a mutually beneficial arrangement. Starbucks wants shoppers at Indigo, a book, lifestyle and specialty kids retailer seeking a cup of coffee to stay in the store to buy one. Indigo wants customers dropping in for a Starbucks cup of coffee to be tempted to buy its books or other products. Having coffee available may also increase the time spent in the store and that could lead to increased sales.‡
International Marketing Channels
Consumer and business markets in North America are well developed but growing slowly. Companies must look to other areas of the globe to continue to grow and meet investors’ expectations. Coca-Cola, for example, earns most of its income outside of North America. China alone is expected to have a largest share of the soft drink market by 2027 (ReportLinker, 2020). ‡
One of the easier ways of utilizing intermediaries to expand abroad is to create a joint venture with a company that already operates in the country to which you want to expand. A joint venture is an entity created when two parties agree to share their profits, losses, and control with one another in an economic activity they jointly undertake.
Another way to enter markets is to export your products. Companies can sell their products directly to other companies abroad, or they can hire intermediaries such as brokers and agents that specialize in international exporting to help them find potential buyers for their products.
Many companies have expanded their operations via franchising. Franchising grants an independent operator the right to use a company’s business model, name, techniques, and trademarks for a fee. McDonald’s is the classic example of a franchise. McDonald’s had no trouble making headway in Japan. It has done so by making thousands of franchise agreements there. In fact, Japan is McDonald’s second-largest market next to the United States. The company also has thousands of franchisees in Europe and other countries. There is even a McDonald’s franchisee in the Louvre, a famous museum in Paris.
Licensing is similar to franchising. For a fee, a company can buy the right to use another company’s manufacturing processes, trade secrets, patents, and trademarks for a certain period of time.
The act of directly purchasing or creating a company in a foreign country is referred to as making a direct foreign investment. This the most expensive way to enter a country however can lead to greater financial success. Some countries don’t allow foreign companies to do business within their borders or buy local companies. The Chinese government blocked Coca-Cola from buying Huiyuan Juice, China’s largest beverage maker. Other countries don’t have these barriers. In 2014, Tim Hortons, a well-known “Canadian” coffee chain became a subsidiary of the Canadian holding company, Restaurant Brand International, whose majority shareholder is Brazilian conglomerate 3G capital.
International marketing is expensive and takes effort and time. However, it is a way to increase revenue and through economies of scale, profit. There are many channel issues to be solved. Some third-world countries lack good intermediary systems. In these countries, companies are on their own in terms of selling and distributing products to users. Other countries have more complex marketing channels than the company’s home country. For example, Japan has an extensive, complicated system of intermediaries, each of which demands a cut of a company’s profits. Walmart tried to develop a presence in Japan, even acquiring the Japanese supermarket operator Seiyu, however it too ultimately failed (Tanaka, 2020). Tim Hortons, however, through its merger with Burger King and purchase of Popeyes has successfully increased its international presence. ‡