10.2. Placing the Product – Distribution

What is distribution?

An organisation can spend millions of pounds on developing and advertising products, but if the right product is not in the right place at the right time for a consumer to buy, then all this money and effort will have been wasted. The objective of distribution is to make sure this does not happen.

Distribution is a significant element in a firm’s costs and so will require careful management. Firms will need to consider physical distribution, storage and transportation of goods and services, and the various methods and outlets through which a good or service can be sold to a consumer.

Unless the distribution method, location, image, and quality of sales advice offered at the place of sale are right, the customer will not buy. Place of sale is a key ingredient in the marketing mix.

Channels of distribution

A channel of distribution refers to the route a producer uses to reach the final consumer of the product.

There are two main types of distribution channel:

Direct from the product producer or service provider to the consumer. Direct sale methods include:

• factory sales

• telesales

• personal selling

• TV and radio sales

• pyramid selling

• mail/phone/fax order.

Indirect through an external organisation, such as a wholesaler, retail outlet, distributor, or agent. These organisations are known as intermediaries.

Distribution channels can be either national or international, involving sales to consumers and other organisations overseas. In some cases, a distribution channel can be made exclusive by restricting the number of outlets at which a product can be sold. For example, Dixons has an exclusive deal with Sanyo to sell one of their popular camcorder models.

Some producers distribute directly to the consumer from their factories or to their own retail outlets. For example, a bakery will need to get its products into the shops very quickly before they pass their sell-by date. To guarantee that shops stock their goods, some manufacturers will often own their own chains of retail outlets, and deliver direct. For example, many breweries own public houses. This gives them the advantage of a guaranteed outlet for their beers. It also allows the manufacturer to take all of the profit.

Other manufacturers may prefer to concentrate on making the product, and leave storage, selling, and distribution to outside specialist firms.

Indirect distribution via intermediaries

Wholesalers buy in bulk from manufacturers and are prepared to sell in smaller quantities to local retailers. This can be to the advantage of both the manufacturer and the retailer.

Advantages to the manufacturer:	Advantages to the retailer:
The wholesaler will: Buy in bulk and pay for storage Bear cost of transport to customers/retailers Relieve manufacturers of the cost of administering orders to many customers over a wide geographical area Provide a source of market research information from contact with retailers	The wholesaler will: Allow the retailer access to a wide range of products from different manufacturers Provide a delivery service Provide information on new product lines Sometimes help with storage and give credit

The disadvantages of using a wholesaler

Use of a wholesaler adds to the cost of the final product and so raises the price charged to the consumer. This also reduces the share of profit for the manufacturer and retailer. Because of this, wholesaling has gone into decline in recent years as manufacturers have tried to keep the wholesalers’ share of the profit for themselves by selling direct to retailers or straight to the final consumer.

Retailers

The retail sector consists of shops and stores who often provide the final link in a chain of distribution from the manufacturer to the final consumer. Retail outlets may either buy products direct from the producer or from a wholesaler, before adding their own mark-up on prices to charge the final consumer in order to cover their overheads and for profit.

A growing number of manufacturers now prefer to use their own distribution networks to sell directly to large retail outlets such as Sainsbury’s, Marks & Spencer, and WH Smith. Some retail chains are so large that they take on many of the functions of the wholesaler themselves. They also buy and stock in bulk, splitting up stock for distribution to their stores all over the country, or even the world. These large chains can reach many millions of consumers in different markets, and so are often able to influence manufacturers, demanding high product quality and guaranteed delivery times.

Agents and brokers

Agents are used by producers to obtain sales on their behalf. For example, travel agents sell holidays for tour operators and earn a commission, or share of the profits, for doing so. When entering a new foreign market, a firm will often seek the help of a business or individual with local knowledge to act as an agent to help with sales, distribution, and advertising in the overseas market.

Brokers are often used by producers to buy and sell commodities in bulk, such as tea, sugar, gold, and other metals on international markets. The bulk is then usually broken up to be sold on to processing industries.

Distribution direct to the final consumer

Direct selling cuts out the intermediary and allows the manufacturer to deal directly with consumers. This is the fastest-growing method of distribution in the UK. Direct selling methods include:

Mail-order advertisement: many firms specialise in selling direct to the consumer through advertisements placed in newspapers, specialist magazines, and other publications, or by sending mailshots direct to potential customers. Products such as computers, cameras and camcorders, even garages, can be ordered simply by telephoning the firm and quoting a credit card number, or by filling in a printed form and sending it off with a check.

‘Factory’ sales: these are organised by the manufacturer direct to final consumers, either by allowing customers into factories every now and again to sell off surplus or old stock at 'knock-down prices', by opening up a shop on site, or by mail order. For example, many farms have opened farm shops to sell their produce. Similarly, customers can buy cars 'straight off the production line' at the showrooms at Ford Motors in Dagenham, Essex.

Retailing through the ‘World-wide Web’. Business is making increasing use of the ‘web’ of connections to the world-wide Internet. In 1994, sales generated in the USA by the Internet were around $100m. By the year 2005, analysts expect it to account for around 30% of the huge US retail market. At present anyone with a personal computer and a modem link to a telephone line can receive information downloaded through the Internet. At present, most users are business or academics exchanging financial, economic, and business news. However, this is about to change as business organisations begin to sell video films, computer games, music, multimedia books and magazines, and provide dating agencies, home shopping, and banking facilities over the Internet.

TV and radio sales: an increasing number of mail-order adverts are appearing on TV and radio with the benefit of sound and vision. With a growing number of commercial radio stations and cable or satellite TV channels, the cost of advertising via these media has fallen.

Mail-order catalogues: companies such as Littlewoods and Kays which operate mail-order catalogues are simply large wholesalers who deal direct with the general public, splitting bulk into individual items, and allowing the consumer to pay in instalments. The cost of credit and home delivery, which can often take up to 4 weeks, tends to be reflected in higher prices. As a result, the importance of mail-order catalogues in total sales has declined in recent years.

Personal selling: this involves personal contact with the consumer by company sales representatives, either over the phone (telesales), or face-to-face at meetings and 'on the doorstep'. Experienced sales teams can explain how the product works, give demonstrations, and tailor their marketing approach to suit the individual requirements of each consumer. However, personal contact can be expensive, and often consumers react adversely to ‘doorstep’ sales or being bothered on the phone.

Pyramid selling or multi-level marketing (MLM): this system is used successfully by a number of companies, notably the American company Amway, who produce a wide range of products including soap, jewellery, and perfumes from their factories in the USA. These products are sold directly to consumers in many countries. The principle of pyramid selling is that individuals agree to make regular purchases of a company’s products to sell on to other consumers – often their family and friends – in their spare time. At the same time, each new salesperson aims to recruit others who are willing to buy products in bulk from them, in order to sell on to other consumers. The incentive to recruit new salespeople is that the person recruiting will earn a percentage of the sales they make. Clearly, the salesperson at the top of the pyramid stands to make the most money by earning a percentage of the sales of each person below him or her. Salespeople at the bottom of the pyramid often make little money, as people are not always willing to buy products such as cleaning liquids and soaps in bulk for their own use, and on a regular basis – especially from companies they do not know. Selling to friends and family can also be awkward. The result is that the goods bought by sales recruits to sell on to other consumers often remain their own.

Physical distribution

Whatever the channel used to sell a product to the final consumer, most will require movement of goods from one place to another using various modes of transport. Firms will need to consider the relative costs of transport by road, rail, sea, or air, against the speed and possibility of damage, or deterioration of goods. For example, transport by air is very expensive for bulky items, but is a fast method of transporting smaller items over long distances, especially overseas.

Risk of damage to fragile products can be reduced by using packaging materials, while refrigeration units can be used to transport perishable products such as meats and vegetables. Some large organisations have their own vehicle fleets to transport goods by road within the UK. Distribution facilities are also provided by a large number of private operators such as DHL and TNT, who are willing to guarantee delivery times to their customers.