For an efficient channel network, the manufacturer should clearly define the target customers it intends to reach. Implicit in the definition of target customers is a decision about the scope of distribution the manufacturer wants to pursue. The strategic alternatives here are exclusive distribution, selective distribution, and intensive distribution.
Exclusive distribution means that one particular retailer serving a given area is granted sole rights to carry a product. For example, Coach leather goods are distributed exclusively through select stores in an area. Several advantages may be gained by the use of exclusive distribution. It promotes tremendous dealer loyalty, greater sales support, a higher degree of control over the retail market, better forecasting, and better inventory and merchandising control. The impact of dealer loyalty can be helpful when a manufacturer has seasonal or other kinds of fluctuating sales. An exclusive dealership is more willing to finance inventories and thus bear a higher degree of risk than a more extensive dealership. Having a smaller number of dealers gives a manufacturer or wholesaler greater opportunity to provide each dealer with promotional support. And with fewer outlets, it is easier to control such aspects as margin, price, and inventory. Dealers are also more willing to provide data that may be used for marketing research and forecasts. Exclusive distribution is especially relevant for products that customers seek out. Examples of such products include Rolex watches, Gucci bags, Regal shoes, Celine neckties, and Mark Cross wallets.
On the other hand, there are several obvious disadvantages to exclusive distribution. First, sales volume may be lost. Second, the manufacturer places all its fortunes in a geographic area in the hands of one dealer. Exclusive distribution brings with it the characteristics of high price, high margin, and low volume. If the product is highly price elastic in nature, this combination of characteristics can mean significantly less than optimal performance. Relying on one retailer can mean that if sales are depressed for any reason, the retailer is then likely to be in a position to dictate terms to other channel members (i.e., the retailer becomes the channel captain).
For example, assume that a company manufacturing traditional toys deals exclusively with Toys "R" Us. For a variety of reasons, its line of toys may not do well. These reasons may be a continuing decline in the birthrate, an economic
Exclusive Distribution recession, the emerging popularity of electronic toys, higher prices of the company's toys compared to competitive brands, a poor promotional effort by Toys "R" Us, and so on. Because it is the exclusive distributor, however, Toys "R" Us may put the blame on the manufacturer's prices, and it may demand a reduction in prices from the manufacturer. Inasmuch as the manufacturer has no other reasons to give that could explain its poor performance, it must depend on Toys "R" Us's analysis.
The last disadvantage of exclusive distribution is one that is easy to overlook. In certain circumstances, exclusive distribution has been found to be in violation of antitrust laws because of its restraint on trade. The legality of an exclusive contract varies from case to case. As long as an exclusive contract does not undermine competition and create a monopoly, it is acceptable. The courts appear to use the following criteria to determine if indeed an exclusive distribution lessens competition:
1. Whether the volume of the product in question is a substantial part of the total volume for that product type.
2. Whether the exclusive dealership excludes competitive products from a substantial share of the market.
Thus, a company considering an exclusive distribution strategy should review its decision in the light of these two ground rules.
The inverse of exclusive distribution is intensive distribution. Intensive distribution makes a product available at all possible retail outlets. This may mean that the product is carried at a wide variety of different and also competing retail institutions in a given area. The distribution of convenience goods is most consistent with this strategy. If the nature of a product is such that a consumer generally does not bother to seek out the product but will buy it on sight if available, then it is to the seller's advantage to have the product visible in as many places as possible. The Bic Pen Corporation is an example of a firm that uses this type of strategy. Bic makes its products available in a wide variety of retail establishments, ranging from drugstores, to "the corner grocery store," to large supermarkets. In all, Bic sells through 250,000 retail outlets, which represent competing as well as noncompeting stores. The advantages to be gained from this strategy are increased sales, wider customer recognition, and impulse buying. All of these qualities are desirable for convenience goods.
There are two main disadvantages associated with intensive distribution. First, intensively distributed goods are characteristically low-priced and low-margin products that require a fast turnover. Second, it is difficult to provide any degree of control over a large number of retailers. In the short run, uncontrolled distribution may not pose any problem if the intensive distribution leads to increased sales. In the long run, however, it may have a variety of devastating effects. For example, if durable products such as Sony television sets were to be intensively distributed (i.e., through drugstores, discount stores, variety stores, etc.), Sony's sales would probably increase. But such intensive distribution could lead to the problems of price discounting, inadequate customer service, and noncooperation among traditional channels (e.g., department stores). Not only might these problems affect sales revenues in the long run, but the manufacturer might also lose some of its established channels. For example, a department store might decide to drop the Sony line for another brand of television sets. In addition, Sony's distinctive brand image could suffer. In other words, the advantages furnished by intensive distribution should be related carefully to product type to decide if this form of distribution is suitable. It is because of the problems outlined above that one finds intensive distribution limited to such products as candy, newspapers, cigarettes, aspirin, and soft drinks. For these types of products, turnover is usually high and channel control is usually not as strategic as it would be, say, for television sets.
Between exclusive and intensive distribution, there is selective distribution. Selective distribution is the strategy in which several but not all retail outlets in a given area distribute a product. Shopping goods—goods that consumers seek on the basis of the most attractive price or quality characteristics—are frequently distributed through selective distribution. Because of this, competition among retailers is far greater for shopping goods than for convenience goods. Naturally, retailers wish to reduce competition as much as possible. This causes them to pressure manufacturers to reduce the number of retail outlets in their area distributing a given product in order to reduce competition.
The number of retailers under a selective distribution strategy should be limited by criteria that allow the manufacturer to choose only those retailers who will make a contribution to the firm's overall distribution objectives. For example, some firms may choose retail outlets that can provide acceptable repair and maintenance service to consumers who purchase their products. In the automotive industry, selective criteria are used by manufacturers in granting dealerships. These criteria consist of such considerations as showroom space, service facilities, and inventory levels.
The point may be illustrated with reference to Pennsylvania House, a furniture company. The company used to have 800 retail accounts, but it cut this number to 500. This planned cut obviously limited the number of stores in which the company's product line was exposed. More limited distribution provided the company with much stronger support among surviving dealers. Among these 500 dealers, there was a higher average amount of floor space devoted to Pennsylvania House merchandise, better customer service, better supplier relations, and most important for the company, substantially increased sales per account.
Selective distribution is best applied under circumstances in which high sales volume can be generated by a relatively small number of retailers or, in other words, in which the manufacturer would not appreciably increase its coverage by adding additional dealers. Selective distribution can also be used effectively in situations in which a manufacturer requires a high-caliber firm to carry a full product line and provide necessary services. A dealer in this position is likely to require promotional and technical assistance. The technical assistance is needed not only in conjunction with the sale but also after the sale in the form of repair and maintenance service. Again, by limiting the number of retail outlets to a select few capable of covering the market, the manufacturer can avoid unnecessary costs associated with signing on additional dealers.
Obviously, the greatest danger associated with a strategy of selective distribution is the risk of not adequately covering the market. The consequences of this error are greater than the consequences of initially having one or two extra dealers. Therefore, when in doubt, it is better to have too much coverage than not enough.
In selective distribution, it is extremely important for a manufacturer to choose dealers (retailers) who most closely match the marketing goals and image intended for the product. There can be segments within retail markets; therefore, identifying the right retailers can be the key to penetrating a chosen market. Every department store cannot be considered the same. Among them there can be price, age, and image segmentation. One does not need to be very accurate in distinguishing among stores of the same type in the case of products that have no special image (i.e., those that lend themselves to unsegmented market strategies and mass distribution). But for products with any degree of fashion or style content or with highly segmented customer groups, a selective distribution strategy requires a careful choice of outlets.
To appraise what type of product is suitable for what form of distribution, refer to Exhibit 16-4. This exhibit combines the traditional threefold classification of consumer goods (convenience, shopping, and specialty goods) with a threefold classification of retail stores (convenience, shopping, and specialty stores) to determine the appropriate form of distribution. This initial selection may then be examined in the light of other considerations to make a final decision on the scope of distribution.
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