8

Distribution
Objectives
After reading this chapter you should be able to:
● Understand the role of distribution as providing an integral part of the product’s
benefits
● Explain the way agents, wholesalers and retailers work in the distribution system
● Choose the best distribution channel for a given market segment and product
● Explain some of the challenges facing retailers
● Know what to expect of different types of wholesaler
● Understand the difference between logistics and distribution.

Introduction
Producing something that consumers would like to buy is only part of the story; people
can only buy products that are available and easily obtained. In terms of the seven Ps,
distribution is the means by which place is determined. Marketers therefore spend
considerable effort on finding the right channels of distribution and on ensuring that
the products reach consumers in the most efficient way.
In business-to-business marketing, distribution is often the real key to success.
Business buyers may buy through agents or wholesalers rather than direct from pro-
ducers, so that tapping into a good distribution network is the most important step a
company can take.
Chapter 8 DISTRIBUTION

Logistics versus distribution

Physical distribution is concerned with the ways organisations position physical
products at a point where it is most convenient for consumers to buy them. Logistics
takes a wider view; originally based on military terminology, logistics is concerned
with the process of moving raw materials through the production and distribution
processes to the point at which the finished product is needed. This involves strate-
gic decision-making about warehouse location, materials management, stock levels
and information systems. Logistics is the area in which purchasing and marketing
overlap.
In some ways the physical distribution of a product is part of the bundle of ben-
efits that make up that product. For example, a jacket bought online offers con-
venience benefits which a chain-store jacket does not. Conversely, the chain-store
purchase may include hedonic benefits (the fun of shopping around, the excitement
of finding a real bargain), which the Internet retailer does not supply. Even when
the actual jacket is identical, the benefits derived from the distribution method are
different.
The purpose of any physical distribution method is to get the product from its
point of production to the end consumer efficiently and effectively. The product must
arrive in good condition and fit the consumer’s need for convenience, or cheapness, or
choice, or whatever else the particular target market thinks is important. Thus, from
a marketing viewpoint, the subject of distribution covers such areas as transportation
methods, wholesaling, high street retailing, direct mail marketing and even farm-
gate shops.
Physical distribution is to do with transportation methods; distribution strategy
decisions are about which outlets should be used for the product.

Transportation methods
Transportation methods vary according to speed, cost and ability to handle the type
of product concerned. As a general rule, the quicker the method the more expensive
it is, but in some cases it may be cheaper to use a faster method because the firm’s
capital is tied up for less time. The same applies to perishable items.
Factos such as the physical characteristics of the product, the methods used by
the competition, the cost of the transportation method, reliability of the channel,
traceability and the level of customer service equired. In all these cases, there will be
trade-offs involved. Greater customer service will almost always be more expensive;
greater reliability may increase transit time, as will greater traceability because in
most cases the product will need to be checked on and off the transport method
chosen. As with any other aspect of marketing activity, the customer’s overall needs
must be taken into account, and the relative importance of those needs must be
judged with some accuracy if the firm is to remain competitive.

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 Logistics versus distribution

Distribution channels
Transportation method is also affected by the channel of distribution, or market-
ing channel. Figure 8.1 shows some of the possible channels of distribution that a
consumer product might go through.
The choice of delivery method will depend on a number of factors: first, the type
of product. For fragile products such as glass, distribution chains need to be short.
For perishable goods such as flowers and fresh vegetables, speed is important – in
some cases, airfreight is actually cheaper than surface transport because of reduced
spoilage.
Second, cost is obviously a factor. Again, the cheapest may not be the most cost-
effective: for high-value items, having capital tied up for a long time may mean that
surface transport is more expensive than air freight.
Third, reliability and security will be major considerations for transport of medi-
cal supplies or valuable cargoes. Traceability is also a factor here – knowing where
the shipment is at all times might be crucial to planning.
Fourth, customer service level is a factor. For most manufacturers, just-in-time
production methods mean that components must arrive within a narrow time-
frame: major car manufacturers, for example, only carry a few hours’ worth of com-
ponents as a buffer against late deliveries.
Finally, the methods used by the competition may affect the decision. Using a
method that competitors have not yet considered or cannot imitate may well pro-
vide a competitive edge.
Products are not always delivered directly from producer to consumer, but
instead pass through the hands of wholesalers, agents, factors or other middle-
men. For example, it is hardly likely to be very efficient for a tuna importer to
deliver directly to every small grocery business in the country. (It would be even
less efficient to deliver to each consumer.) The importer will probably employ
an agent (who will be working for several manufacturers) to take orders from
wholesalers. The importer will bulk-deliver the tuna to the wholesalers , who will
then break the delivery down to send out to the retailers. The wholesaler will
either deliver to the retailers along with the products of many other importers
and manufacturers or will offer a cash-and-carry service so that the retailers can
make all their supply purchases in one trip. The net result is a great saving in time
since the trucks are not going perhaps hundreds of miles with one case of tuna
on board.
In fact, food frequently passes through lengthy and complex distribution sys-
tems. Each intermediary in the process performs a useful function, increasing the
efficiency of the exchanges. Table 8.1 shows some of the functions carried out by
intermediaries.
‘Cutting out the middleman’ is popularly supposed to be a way of buying things
cheaper. In fact, for most products where agents and wholesalers are used, the sav-
ings made by greater efficiency more than cover the cost of the extra mark-up on the

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Figure 8.1 Channels of distribution

Producer Producer Producer Producer

Agents or
Brokers

Wholesalers Wholesalers

Retailers Retailers Retailers

Consumers Consumers Consumers Consumers

Source: Dibb et al. (1998).

product. This means that cutting out the middleman is more likely to increase the
cost of the product.
Direct producer-to-consumer channels are typical of personal services such as
hairdressing, where use of intermediaries would be impossible, and of major capital

Table 8.1 Functions of channel members

Function Explanation

Sorting out Separating out heterogeneous deliveries into homogeneous ones. For
example, sorting a tomato crop into those suitable for retail sale and those
suitable only for juice production.

Accumulation Aggregating small production batches into amounts big enough to be

worth shipping. Forwarding agents will arrange for small exporters to
share a container, for example.

Allocation Breaking down large shipments into smaller amounts. A wholesaler

receiving a truckload of baked beans will sell them on a case at a time. This
is also called bulk breaking.

Assorting Combining collections of products that will appeal to groups of buyers.

For example, clothes shops stock clothes from many manufacturers; food
cash-and-carry wholesalers will specialise in all the products needed by
caterers and grocers, including shop signs and plastic knives and forks.

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Critical thinking
If cutting out the middleman is such a bad idea, why do companies often advertise
it as if it’s an advantage? And if it reduces efficiency, why have so many developed
interactive websites so that people can order online?
Is it actually cheaper to order online (taking account of delivery costs) or is it more
about convenience? And how convenient is it, in fact, when one may have to visit
several websites to buy items which are available in one convenient retail store – why
not just stop on the way home from work and browse? Perhaps it depends on one’s
personal circumstances.

purchases such as houses or home improvements. This is because these products

cannot be broken down into smaller units, or assorted, or accumulated. There is
therefore no function for the middlemen to fulfil. There is also an increasing number
of companies selling products and services online and cutting out the middleman:
this reduces the need for storing stock in large warehouses or retail outlets and cre-
ates the opportunity to offer cheaper prices to the consumer and/or a greater profit
margin for the seller.
If the distribution network is efficiently managed, goods come down the chan-
nel and information goes up. Retailers can feed back information about what con-
sumers need, either formally (by carrying out a monitoring exercise and passing the
information to the manufacturer or wholesaler) or informally (since retailers order
only what is selling, producers can infer what is required by the consumers). A good
salesperson will also act as an information channel and will find out from the retail-
ers what they think consumers want, as well as convey information from the manu-
facturers to the retailer.
Major manufacturers often have several distribution channels, catering for dif-
ferent market segments. Food processing firms will usually have separate chan-
nels for caterers and for retailers; car manufacturers may deal directly with large
fleet operators rather than operating through their retail dealer network; electron-
ics manufacturers may have one channel for consumer products and another for
defence products.
Table 8.2 shows the functions of some of the members of a channel of distribution.

Wholesalers
Wholesalers carry out the following functions:
● Negotiate with suppliers
● Some promotional activities: advertising, sales promotion, publicity, providing a
salesforce

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Table 8.2 Categories of channel members

Channel member Function

Agents Agents usually act purely as a sales arm for the manufacturer, without
actually buying the products. The agent never takes title to the goods; agency
sales representatives call on major retailers and on wholesalers on behalf of
a number of manufacturers, and take orders and arrange delivery. This saves
the manufacturer the cost of operating a large salesforce to carry perhaps
only a small product range.
This is often a useful channel for producers who wish to enter international
markets that they know little about, as they will have a good knowledge of
the relevant marketplace.

Wholesalers Wholesalers actually buy the goods from the manufacturers, often through an
agent, then sell the goods on to the retailers or sometimes the final consumers.

Retailers A retailer is any organisation that offers goods directly to consumers. This
includes mail-order companies, door-to-door salespeople and e-commerce
organisations selling over the Internet.

● Warehousing, storage and product handling

● Transport of local and sometimes long-distance shipments
● Inventory control
● Credit checking and credit control
● Pricing and collection of pricing information, particularly about competitors
● Channel of information up and down the distribution network, again particularly
with regard to competitors’ activities.

All of these functions would have to be carried out by each manufacturer individu-
ally if the wholesaler did not exist; by carrying them out on behalf of many manu-
facturers, the wholesaler achieves economies of scale which more than cover the
profit taken.
The wholesaler also provides services to retailers, as follows:
● Information gathering and dissemination
● One-stop shopping for a wide range of products from a wide range of manufac-
turers
● Facilities for buying relatively small quantities
● Fast deliveries – often cash-and-carry
● Flexible ordering – can vary amounts as demand fluctuates.

Again, from the retailer’s viewpoint it is much more convenient and cheaper to use
a wholesaler. Only if the retailer is big enough to order economic quantities direct

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 Wholesalers

from the manufacturer will it be worthwhile to do so. For example, few hairdressers
are big enough to order everything direct from the manufacturers, so a large part
of a salon’s stock-in-trade is bought from wholesalers. Similarly, small independent
convenience stores will not be able to go straight to the manufacturer to buy their
goods, instead they can purchase a range of products from a wholesaler.
There are many different types of wholesaler:
● Merchant wholesalers buy in goods and sell directly to retailers, usually deliver-
ing the goods and having a salesforce calling on retailers in their area.
● Full-service merchant wholesalers provide a very wide range of marketing ser-
vices for retailers, including shop design, sales promotion deals, advertising
(sometimes nationally), coupon redemption, own-brand products and so forth.
A good example is Spar, the grocery wholesaler, which supplies corner shops
throughout the UK and parts of the rest of Europe. The shops carry the Spar logo
and stock Spar’s own-brand products, but each shop is individually owned and
managed.
● General-merchandise wholesalers carry a wide product mix, but little depth,
dealing mainly with small grocery shops and general stores. They operate as
a one-stop shop for these retailers. Cash-and-carry warehouses are a good
example.
● Limited-line wholesalers offer only a limited range of products, but stock them
in depth. They are often found in industrial markets, selling specialist equipment
(such as materials handling equipment) and offering expertise in the field.
● Speciality line wholesalers carry a very narrow range, for example concentrating
on only one type of food (e.g. tea). They are typically found dealing in goods that
require special knowledge of the buying, handling or marketing of the product
category.
● Rack jobbers own and maintain their own stands or displays in retail outlets.
Typical products might be cosmetics, tights or greetings cards. The retailer pays
only for the goods sold, and usually does not take title to the goods – this can be
a big saving in terms of capital and, since the rack jobber undertakes to check the
stock and restock where necessary, the retailer also saves time.
● Limited-service wholesalers take title to goods, but often do not actually take
delivery, store inventory or monitor demand. A typical example might be a
coal wholesaler, who buys from a producer and arranges for the coal to be
delivered direct to coal merchants, without the coal first being delivered to the
wholesaler.
● Cash-and-carry wholesalers offer a way for wholesalers to supply small retail-
ers at minimum cost. The cash-and-carry wholesaler operates like a giant
supermarket; retailers call, select the cases of goods needed and pay at a check-
out, using their own transport to take the goods back to their shops. This is an
extremely flexible and efficient system for both parties.

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● Drop shippers (or desk jobbers) obtain orders from retailers and pass them on
to manufacturers, buying the goods from the manufacturer and selling to the
retailer without ever actually seeing the goods. The drop shipper provides the
salesforce and takes on the credit risk on behalf of the manufacturer, but does not
have the storage costs or the overheads of a merchant wholesaler.
● Mail-order wholesalers use catalogues to sell to retailers and industrial users. This
avoids the use of an expensive salesforce and works best for dealing with retail-
ers in remote areas. Goods are dispatched through the post or by commercial
carriers; these wholesalers take title to the products.

To summarise, wholesalers perform a wide variety of functions, all aimed at making

the exchange of goods easier and more efficient. This leaves manufacturers free to
concentrate resources on improving production efficiencies and the physical prod-
uct offering, and retailers free to concentrate on providing the most effective service
for the consumer.

Retailers
Retailers deal with any sales that are for the customer’s own use, or for the use of
family and friends. In other words, any purchases that are not for business needs are
the domain of the retailer.
Therefore, a retailer is not necessarily a high street shop or a market trader; mail
order catalogues, TV phone-in lines, online retailers such as Amazon and even door-
to-door salespeople are all retailers. Companies such as Avon (which sells cosmetics
through party plan and door-to-door agents) are as much retailers as Lidl, Aldi or
Tesco, even though the product is sold in the customers’ own homes.
Traditionally most retail outlets have been in city centres or suburban high
streets. Partly this was for convenience, so that shoppers had a central area to visit
for all their shopping requirements, and partly it was due to planning regulations
which zoned most retail shops in traditional retail areas, away from industrial parks
and housing estates.
More recently, out-of-town hypermarkets, shopping parks and designer outlets
(out-of-town shopping centres selling discounted designer and high street prod-
ucts) have been growing up. This is in response to the following factors:
● Greater car ownership means an increase in outshopping (shopping outside the
area where the consumer lives). The cost of inner-city parking and the fact most
shopping parks offer free parking has also had a major influence on outshopping.
● High city-centre rents and property taxes make out-of-town sites more attractive
for retailers.
● Town planners have used retail parks as a way of regenerating decaying indus-
trial sites on the edges of towns.

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Such out-of-town sites have not necessarily damaged all town-centre retailers,
although there has been a shift in the composition of city-centre retail districts. For
example, food retailers have largely gone from central sites in major cities, except
for delicatessens and speciality food outlets. In the United Kingdom, supermarket
chains Tesco, Sainsbury’s as well as Marks & Spencer have begun to reverse this
trend, with the establishment of Tesco Express, Sainsbury’s Local and Marks &
Spencer Simply Food stores in city centres. These stores carry a limited range of
products, often in smaller pack sizes, and aim at office workers shopping in their
lunch hours or convenience shopping.
Here are some descriptions of different types of retail outlet:

● Convenience stores, or corner shops, offer a range of grocery and household

items. These local shops often open until late at night. They are usually family-
run; approximately 75 per cent of convenience stores are owned by independent
shopkeepers. They often belong to a trading group such as Spar, Nisa, Londis or
One Stop and cater for last-minute and emergency purchases. In recent years, the
convenience store sector has seen a good deal of growth as shopping behaviour
has shifted from large weekly shops to consumers typically making smaller more
frequent purchases.
● Supermarkets are defined as large self-service shops which rely on selling at low
prices. Typically they are well laid-out, bright, professionally run shops carrying a
wide range of goods.
● Hypermarkets are even bigger supermarkets, usually in an out-of-town or edge-
of-town location. A typical hypermarket would carry more than 200,000 lines at
any one time. The true hypermarket sells everything from food to TV sets.
● Department stores are located in city centres and sell everything; each depart-
ment has its own buyers and functions as a separate profit centre. Examples
are Harrods of London and El Corte Inglés in Spain. Within department stores,
some functions are given over to concessionaires, who pay a rental per square
foot plus a percentage of turnover to set up a store-within-a-store. Miss Selfridge,
Warehouse, Faith Footwear and Ted Baker all operate in this way within depart-
ment stores. The trend is towards allowing more concessionaires, and around
70 per cent of Debenham’s floor space is allocated in this way.
● Variety stores offer a more limited range of goods, perhaps specialising in clothes
(e.g. Primark) or in books and stationery (e.g. WHSmith).
● Discounters (sometimes called baby sharks) are grocery outlets offering a min-
imum range of goods at very low prices. Often the decor is basic, the displays
almost non-existent and the general ambience one of pile-it-high-and-sell-it-
cheap. German retailers Lidl and Aldi are examples of this approach; such stores
typically carry only 1,300 lines or so.
● Niche marketers stock a very limited range of products, but in great depth.
Examples are Accessorize, Body Shop and Lush. They frequently occupy tiny
shops (even kiosks at railway stations) but offer every possible type of product

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within their very narrow spectrum. Niche marketers were the success story of the
1980s but declined somewhat during the 1990s.
● Discount sheds are out-of-town DIY and hardware stores. They are usually busi-
nesses requiring large display areas, but with per-square-metre turnovers and
profits that do not justify city-centre rents. Service levels are minimal, the stores
are cheaply constructed and basic in terms of decor and ambience, and every-
thing is geared towards minimising the overhead.
● Catalogue showrooms have minimal or non-existent displays and are really an
extension of the mail-order catalogue. Customers buy in the same way as they
would by mail order, by filling in a form, and the goods are brought out from a
warehouse at the rear of the store. These outlets usually have sophisticated elec-
tronic inventory control. A good example of this would be Argos.
● Non-store retailing includes door-to-door selling, vending machines, telemarketing
(selling goods by telephone), mail order and catalogue retailing. Telemarketing may
be inbound or outbound; inbound means that customers telephone the retailer
to place an order, whereas outbound means the retailer telephones potential
customers to ask them to buy. Outbound telemarketing has grown in the UK in
recent years; it can be used to make appointments for sales representatives to call
for products such as fitted kitchens or double glazing, and is also used for direct
selling of some items which are then delivered by mail. In general, it is unpopu-
lar with customers and, in both the USA and the UK, systems have been set up
to allow people to be removed from the lists of telesales companies. In the UK,
the system is the Telephone Preference Service (TPS); firms that continue to call
after someone has registered with the TPS can be fined, although in practice this
is rare. The TPS has no power to prevent people being telephoned from outside
the UK, nor does it have any power to curb companies with whom the person has
an existing relationship: for example, the individual’s bank or electricity supply
company.

E-commerce refers to retailing over the Internet. In its early days, e-commerce was dom-
inated by business-to-business marketing, but dot.com firms such as Amazon.com,
lastminute.com and priceline.com quickly made inroads into consumer markets. The
growth of such firms is limited mainly by the growth in Internet shoppers; as more
people feel comfortable about shopping online, the potential market increases
and is likely to do so for the foreseeable future. The other main limiting factor is
the degree to which people enjoy the process of shopping in the traditional way –
factors such as a social experience outside the home, the pleasure of bargaining,
diversion and sensory stimulation are all likely to ensure that people will continue
to enjoy visiting traditional retail stores. Traditional retailers have not been slow
to respond to the perceived threat, however; many retailers now offer an Internet
service, with free delivery. The Internet is more likely to be used when the customer
has high levels of experience with the product and the Internet, and a low perceived
risk; conventional retailers or call centres are more likely to be used when the cus-
tomer has low experience levels and high perceived risk (Rhee 2010).

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Because consumer needs change rapidly, there are fashions in retailing (the rise and
fall of niche marketing and the growth of convenience stores demonstrate this). Being
responsive to consumer needs is, of course, important to all marketers, but retailers
are at the ‘sharp end’ of this process and need to be able to adapt quickly to changing
trends. The following factors have been identified as being crucial to retail success:

● Location. Being where the consumer can easily find the shop – in other words,
where the customers would expect such a shop to be. A shoe shop would typically
be in a high street or city-centre location, whereas a furniture warehouse would
typically be out of town.
● Buying the right goods in the right quantities to be able to supply what the con-
sumer wants to buy.
● Offering the right level of service. If the service level is less than the customer
expects, he/she will be dissatisfied and will shop elsewhere. If the service level
is too high, the costs increase and the customer may become suspicious that the
prices are higher than they need be. Discount stores are expected to have low ser-
vice levels and consumers respond to that by believing that the prices are there-
fore lower.
● Store image. If the shop and its goods are upmarket, the image in the consumer’s
mind must be too. As with any other aspect of the product, the benefits must be
as expected or post-purchase dissonance will follow. Trust in the store extends
to trust in the store’s own-brand goods (see Chapter 6); conversely, mistrust will
reduce intention to buy the retailer’s own brands (LaForet 2008).
● Atmospherics. These are the physical elements of the shop design that encourage
purchase. Use of the right colours, lighting, piped music, odours and even flooring
can greatly affect purchasing behaviour (Bitner 1992; Imschloss & Kuehnl 2017).
For example, playing slow-tempo music to a supermarket queue makes people
feel more relaxed and satisfied and also makes the waiting time seem shorter;
however, music played when the supermarket is overcrowded can make people
irritable (Oakes & North 2008). Atmospherics can be developed on the Internet
also: for example, Kluge et al. (2013) suggest that organisations selling luxury
goods should use darker backgrounds, a horizontal navigation bar and a reduc-
tion of the elements displayed on the pages.
● Product mix. The retailer must decide which products will appeal to its custom-
ers. Sometimes this results in the shop moving away from its original product
range into totally unrelated areas.

Over the years, trends in retail have included use of EPOS (electronic point-of-sale)
equipment and laser scanners to speed up checkout queues (and, incidentally, to save
staffing costs), home delivery and the widespread use of loyalty cards. These cards
give the customer extra discounts based on the amount spent at the store over a given
period. The initial intention is to encourage customers to buy at the same store all
the time to obtain the discounts, and in this sense the cards are really just another
sales promotion. This type of loyalty programme, involving economic benefits,

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does have a positive effect on customer retention. The schemes also tend to help in terms of
increasing the retailer’s share of the customers (Verhoef 2003), particularly when the
rewards are more personalised to the individual shopper (Wierich & Zielke 2014).
EPOS technology has enabled organisations to keep very detailed records of
each customer’s buying habits and to establish the purchasing pattern, based on
the EPOS records. Theoretically, this could mean that customers could be reminded
at the checkout that they are running low on certain items, since the supermarket
computer would know how frequently those items are usually bought. The phrase
‘Domesday marketing’ has been coined by Professor Martin Evans to describe this;
whether it could be seen as a useful service for consumers or as an unwarranted
invasion of privacy remains a topic for discussion (Evans 1994). Loyal custom-
ers tend to be attracted to store brands during promotional periods, presumably
because they trust the store (Rajagopal 2008).
Perception is important in the retail environment. Store atmospherics have
already been mentioned, but people also like to be able to touch products, open the
boxes and see what they are buying. This can cause problems, since people will tend
to open the box to examine the product but then take an unopened box to the check-
out. The opened box will probably not sell until it is the last one, since people tend
to believe that the product is contaminated and no longer new if other people have
handled it. This phenomenon is known as shop soiling, but is explained by anthro-
pologists in terms of magic: the ‘contaminated’ product has had part of the essence
of the other shopper transferred to it (Argo et al. 2006).
Retailer power has become an increasing problem in recent years. Many retailers
(particularly supermarkets) have been criticised for the pressure they put on manufac-
turers to maintain low prices. This has resulted in many manufacturers and suppliers
being pushed out of the marketplace and in some cases having to close their operations.

Selecting channels
Choosing a channel involves a number of considerations. These are as follows:
● Whether to use a single channel, or several channels
● Location of customers
● Compatibility of the channels with the firm
● Nature of the goods
● Geographic, environmental and terrain decisions
● Storage and distribution issues
● Import and export costs.

Above all, of course, the firm must begin by considering the customers’ needs.
Having said that, the needs of channel members will also be involved since they are
unlikely to cooperate if their needs are not considered.

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Using a single channel clearly provides the channel members with the security of
knowing that they will not be competing with other firms carrying the same product
line. Some retailers insist on being given exclusive rights to the products they carry,
so that they can make ‘price promises’ without fear of consumers actually being
able to buy the identical product anywhere else, whether at a lower price or not. On
the other hand, the needs of consumers are best met by having the product widely
available.
Location of customers influences the channel as well as the physical distribution.
Some channels might be unavailable in some countries – for example, distribu-
tion via the Internet is not viable in many African countries because few people are
online and the road infrastructure makes delivery difficult.
Channels need to be compatible with the firm’s capability and size: small manu-
facturers can become overwhelmed by dealing with large retailers, for example.
The nature of the goods determines which type of retailer would be best.
Sometimes firms have obtained a competitive advantage by using unusual routes to
market – jewellery firms have distributed through hairdressing salons, for example.
Geographic and environmental (in the sense of business environment) consid-
erations can render some routes unviable. For example, mail order in the United
States became popular with people living in remote regions during the nineteenth
century (a geographical consideration). Such people were unable to reach major
stores easily and local stores were unable to carry all the products people might
need. Mail order grew in Germany for a different reason; at one time, the business
environment required retail stores to close at 5 pm and prohibited weekend open-
ing except for one Saturday a month. This meant that most working people had seri-
ous difficulty in getting to shops, and mail order became a favourite way of buying
almost everything.
Storage and distribution costs, particularly for overseas markets, may mean that a
wholesaler becomes necessary simply because of the need to make a few large deliv-
eries rather than many small ones. Likewise, if storage is expensive, an on-demand
service such as that supplied by motor factors to small garages might be necessary.
Import and export costs, especially duties and tariffs, might mean that a local
agent (or even a local assembly plant) might need to be used. Shipping costs are
likely to make it more efficient to fill a shipping container rather than send small
quantities at a time, but the nature of the product needs to be considered – perishable
or expensive products might need to be sent immediately, rather than waiting until
there are enough to fill a container.

Managing distribution channels

Channels can be led by any of the channel members, whether they are produc-
ers, wholesalers or retailers, provided that the member concerned has channel
power. This power comes from seven sources, as shown in Table 8.3 (Michman &
Sibley 1980).

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Table 8.3 Sources of channel power

Economic sources of power Non-economic sources of power Other factors

Control of resources. The degree to which Reward power. The ability to Level of power. This derives from the
the channel member has the power to provide financial benefits or economic and non-economic sources
direct goods, services or finance within otherwise favour channel members of power
the channel

Size of company. The bigger the firm Expert power. This arises when the Dependency of other channel members
compared with other channel members, leader has special expertise which
the greater the overall economic power the other channel members need

Referent power emerges when channel Willingness to lead. Clearly some firms
members try to emulate the leader with potential for channel leadership
prefer not to have the responsibility or
are unable to exercise the potential for
other reasons

Legitimate power arises from a superior–

subordinate relationship. For example, if a
retailer holds a substantial shareholding in
a wholesaler, it has legitimate power over
the wholesaler

Coercive power exists when one channel

member has the power to punish another

Channel cooperation is an essential part of the effective functioning of channels.

Since each member relies on every other member for the free exchange of goods
down the channel, it is in the members’ interests to look after each other to some
extent. Channel cooperation can be improved in the following ways:

● The channel members can agree on target markets, so that each member can best
direct effort towards meeting the common goal.
● The tasks each member should carry out can be defined. This avoids duplication
of effort or giving the final consumer conflicting messages.

A further development is co-marketing, which implies a partnership between man-

ufacturers, intermediaries and retailers. This level of cooperation involves pooling
of market information and full agreement on strategic issues (Marx 1995).
Channel conflict arises because each member wants to maximise its own prof-
its or power. Conflicts also arise because of frustrated expectations; each member
expects the other members to act in particular ways, and sometimes these expecta-
tions are unfulfilled. For example, a retailer may expect a wholesaler to maintain
large enough stocks to cover an unexpected rise in demand for a given product,
whereas the wholesaler may expect the manufacturers to be able to increase pro-
duction rapidly to cover such eventualities.

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An example of channel conflict occurred when EuroDisney (now Disneyland

Paris) first opened. The company bypassed travel agents and tried to market directly
to the public via TV commercials. Unfortunately, this did not work because at that
time European audiences were not used to the idea of booking directly (and also
were not as familiar with the Disney concept as American audiences), so few book-
ings resulted. At the same time Disney alienated the travel agents and had to expend
considerable time and money in wooing them back again. This is a general prob-
lem for companies seeking to use multiple channels of distribution; if the company
decides to deal direct with the public via its website or uses several different routes,
existing channel members may feel that the relationship is being undermined. This
does not mean that using multiple channels is impossible; it simply means that mar-
keters need to be cautious not to damage the interests of existing channel members.
In general, there is unlikely to be a problem if the new channels approach a segment
of the market which the existing channels do not reach.
Channel management can be carried out by cooperation and negotiation (often
with one member leading the discussions) or it can be carried out by the most pow-
erful member laying down rules that weaker members have to follow. Table 8.4
shows some of the methods which can be used to control channels. Most attempts to
control distribution by the use of power are likely to be looked on unfavourably by
the courts, but of course the abuse of power would have to be fairly extreme before
a channel member would be likely to sue.
Sometimes the simplest way to control a distribution channel is to buy out the
channel members. Buying out members across a given level (for example, a whole-
saler buying out other wholesalers to build a national network) is called horizon-
tal integration; buying out members above or below in the distribution chain (for
example, a retailer buying out a wholesaler) is vertical integration. An example of
extreme vertical integration is the major oil companies, which extract crude oil,
refine it, ship it and ultimately sell it retail through petrol stations. At the extremes,

Critical thinking
If controlling the channel is regarded as unfair, how about buyers who specify
particular ways in which potential suppliers can approach them? Is it unreasonable
to ask for salespeople to call on a particular day or only by appointment? Clearly not.
But then, would it be unreasonable to expect suppliers to draw up detailed reports on
their ability to meet delivery schedules and quality standards? Hmmm . . . perhaps.
Would it be unreasonable to expect suppliers to provide copies of their accounts and
allow the customer's auditors to check on the supplier's financial stability and probity?
Well, maybe not. Would it be reasonable to use knowledge of a supplier's financial
difficulties to force through lower prices? Maybe, maybe not.
Business isn't exactly a coffee morning, but there are ethical and practical issues at
stake. Knowing where to draw the line might not be so easy.

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Table 8.4 Channel management techniques

Technique Explanation Legal position

Refusal to deal One member refuses to do business with one or In most countries suppliers do not have to supply
more other members: for example, hairdressing anybody with whom they do not wish to deal.
wholesalers sometimes refuse to supply mobile However, grounds may exist for a lawsuit if the
hairdressers on the grounds that this is unfair refusal to deal is a punishment for not going along
competition for salons. with an anti-competitive ruling by a supplier or
is an attempt to prevent the channel member
from dealing with a third party with whom the
manufacturer is in dispute.

Tying contracts The supplier (sometimes a franchiser) demands Most of these contracts are illegal, but are
that the channel member carries other products as accepted if the supplier alone can supply goods of
well as the main one. If the franchiser insists that a given quality or if the purchaser is free to carry
all the products are carried, this is called full-line competing products as well. Sometimes they are
forcing. accepted when a company has just entered the
market.

Exclusive A manufacturer might prevent a wholesaler from Usually these are legal, provided they do not result
dealing carrying competitors' products, or a retailer might in a monopoly position in a local area: in other
insist that no other retailer be supplied with the words, provided the consumer has access to similar
same products. This is often used by retailers products, there will not be a problem.
to ensure that their ‘price guarantees’ can be
honoured – obviously consumers will not be able
to find the same product at a lower price locally if
the retailer has prevented the manufacturer from
supplying anybody else.

Restricted sales Intermediaries are prevented from selling outside Courts have conflicting views about this practice.
territories a given area. The intermediaries are often in favour On the one hand, these deals can help weaker
of this idea because it prevents competition within distributors and can also increase competition
their own area. where local dealers carry different brands; on the
other hand, there is clearly a restraint of trade
involved.

this type of integration may attract the attention of government monopoly regula-
tion agencies, since the integration may cause a restriction of competition.
Producers need to ensure that the distributors of their products are of the right
type. The image of a retailer can damage (or enhance) the image of the products
sold (and vice versa). Producers need not necessarily sell through the most prestig-
ious retailer, and in fact this would be counter-productive for many cheap, everyday
items. Likewise, a prestigious product should not be sold through a downmarket
retail outlet.
In the long run, establishing good relationships between channel members will
improve overall profitability for all members. As the relationship between members
of the distribution channel becomes closer, power and conflict still remain impor-
tant, but they are expressed in other ways and the negotiations for their resolution
change in nature (Gadde 2004).

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 Case study 8 ASOS

Efficient consumer response

Efficient consumer response (ECR) seeks to integrate the activities of manufactur-
ers and retailers using computer technology; the expected result is a more respon-
sive stocking system for the retailer, which in turn benefits the manufacturer. Some
of the features of ECR are as follows:
● Continuous replenishment under which the supplier plans production using data
generated by the retailer.
● Cross-docking attempts to coordinate the arrival of suppliers’ and retailers’ trucks
at the distribution centres so that goods move from one truck to the other without
going into stock. Although transport efficiency falls because a supermarket truck
collecting (say) greengrocery might have to wait for several suppliers’ trucks to
arrive, the overall speed of delivery of products improves, which can be crucial
when dealing with fresh foods.
● Roll-cage sequencing allows storage of products by category at the warehouse;
although this adds to the labour time at the warehouse, it greatly reduces labour
time at the retail store and also ensures less disruption in the store while custom-
ers are shopping.

The main problem with ECR is that it relies on complete cooperation between sup-
plier and retailer. In any channel of distribution where the power base is unequal, this
is less likely to happen; despite the overall savings for the channel as a whole, self-
interest on the part of channel members may lead to less than perfect cooperation.

CASE STUDY 8 ASOS

ASOS is an online retailer of fashion items. The company has no high street stores, instead operating solely
on the Internet: the name comes from As Seen On Screen (and is pronounced ACE-OSS).
The company was founded in 1999 by Quentin Griffiths and Nick Robertson, two young entrepreneurs
who saw the potential for an online fashion shop. ASOS appeared one year after the launch of Boo.com,
another online fashion retailer: the differences between the two firms could not have been much greater.
While Boo.com focused on some very sophisticated technology to display the clothing and other items,
ASOS focused on ensuring that the website was accessible. Boo.com's software relied on customers having
cutting-edge computers in their homes, which, in 1998, simply wasn't the case. Most people found that the
Boo.com website was either extremely slow to load, or didn't load at all: ASOS was simpler, clearer and faster.
The company grew rapidly as more young people obtained access to good computer equipment. The
growth of Internet shopping has been largely driven by the young: people who have grown up with the tech-
nology have no problem in using it to shop, whereas many older people still have difficulty in trusting it. The
company's smartphone app has been downloaded ten million times, making it a major source of business
for the company.

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ASOS have a fulfilment centre in Bradford

from which the goods are dispatched to cus-
tomers. Company headquarters are in Cam-
den Town, London, and the company has a
customer services department in Hertford-
shire, in easy travelling distance from the
headquarters. Being heavily centralised does
bring problems: a major fire at a fuel depot
near its Barnsley centre closed the company
down for six weeks, and a fire in the centre
itself stopped business for three days.
The return of unwanted goods is a major
problem for any retailer, but for online
retailers it can be a major cost factor. In
fashion, the risk is that someone will order
an item, wear it once (for example to a spe-
cial event) and then return it. In the case of a
high street retailer, this does not involve any
great cost: if the item has been damaged, no
refund need be made. For an online retailer, however, the company must bear the shipping costs of any
returns, and should there be a dispute about damage to the product it would have to be carried out via
email, rather than face to face with the evidence before both parties. Much depends on honesty, and for an
online retailer this also entails maintaining a good reputation.
In the case of ASOS, the company has a large number of ways for customers to return goods should they
need to. Customers can drop off parcels at various locations (usually small general stores or newsagents)
which use courier services such as InPost, Doddle, Pass My Parcel and Hermes, or can simply use a Freepost
label (which comes with the goods) and send the item back by Royal Mail. There is a cost attached to this, of
course, which is covered by ASOS.
As one might expect, ASOS has a considerable presence on social media. The company has a Facebook
page, and is active on Twitter as well as other social media sites. The company updates the sites and monitors
comments in order to pick up any problems or complaints, and to tailor its offering to customers.
ASOS now has a worldwide presence, with fulfilment centres in the UK, USA, China, Russia and several
other European countries. It carries over 80,000 items, and can deliver to 140 countries – more than two-
thirds of the countries in the world. It has separate websites in English, Spanish, French, German, Italian,
Russian and Chinese. Straightforward distribution and returns ensure that the company's customers retain
confidence in the process – and all without any presence on the high street.

Case study questions

1 What difficulties might a supplier have in dealing with ASOS?
2 How might ASOS overcome the lack of social interaction involved in traditional retailing?
3 Why might the smartphone app have been such a success?
4 Why does ASOS emphasise the ease of returning goods?
5 What are the major strengths of online shopping compared with traditional high street shopping?
For answers to these questions, see the companion website at www.pearsoned.co.uk/blythe

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