The Power of Place: Alternatives in Distribution
Those of you who are, or have been around, marketing professionals know that marketers must mind their “P’s”, and as such are responsible for managing all aspects of Product, Promotion, Pricing, and Place strategies and implementation for their organizations. This is a tall order for any corporate executive and its challenges and increasing level of difficulty has resulted in the legitimization of marketing science over the last 30 years. Of particular interest to marketers of all branded products (personal care as an example) is the issue of place, answering the problem of how to distribute a product to the end-user.
Distribution channels have broadened over the last several years. For natural products that were largely sold exclusively in what is known as the “natural” channel, consisting largely of health food stores, the array of choices is great indeed. Let us take a look at three general categories of options:
This channel affords a very high opportunity for volume. Distributors both warehouse and re-sell truckloads of branded goods, usually to retailers of all kinds. This means that branded producers are able to maximize the number of units sold as a measurable, strategic objective. In this way, companies can also maximize total revenues since high volumes can be more easily reached. One could also argue that profit margins can be enhanced as well, since fixed costs can be spread across more units sold; however higher margins are realized using other distribution methods. The downside is distributors, as well as all other forms of intermediaries, cut into profit margins, specifically through obtaining a lower price point than the retailer enjoys, but also through mandated co-op promotional dollars.
Since many large store chains such as Wal-Mart and Safeway own their own outfits, distributors and other intermediaries often serve smaller companies, which in the case of natural personal care, are quite numerous. And, it is important to note that many retailers, especially in natural products, prefer to work exclusively with distributors rather than ordering direct from the manufacturer. This is true because distributors provide many functions besides its transactional role, such as logistics, managing shelves, setting up promotional displays, push-oriented sales promotions, etc.
In this scenario, the branded product manufacturer ships products directly to the retailer, without the use of distributors. Many retailers exclusively buy from distributors making this option a bit limiting, yet for the brands that are not offered by certain distributors and are in high consumer demand, direct-to-retail can still be an option. Obviously the profit margins are higher for the manufacturer in this case, but the volumes are often lower than if an organization used a distributor. In addition, the company can often grow at its own pace, one store at a time. A potential down side is that the supplier must ship many boxes to many locations as opposed to several pallets of goods to one location. Also, services commonly provided by distributors must be undertaken by the retailer or the supplier.
Several retail channels include:
- Natural products stores and supermarkets
- Mass merchandisers
- E-commerce sites
- Grocery stores
- Specialty stores-like those located in shopping malls.
This is the channel least often used by natural products companies, largely due to both the purchase behavior of natural products consumers and the high cost of promotion associated with a direct model. Direct selling involves no intermediaries whatsoever, distributor or retailer. Obviously the profit margins are very high, but access to buyers is often a major hurdle. In addition, the supplier has complete control over the end-user price point, the product itself, and all communications with customers so that it can grow very quickly. In so doing, the company can track consumer behavior and store it in a database for future promotional efforts, to develop customer profiles, and to foster Lifetime Customer Value. The direct channel is also growing at a much faster rate than retail channels and is fueled by the continued increase in sales on the Internet. On the down side, customers are more difficult to find and acquire, and direct marketing campaigns can be expensive, especially when it comes to television.
Several direct vehicles include:
- Direct (Junk) Mail
*90-120 second advertising spots, usually on cable stations or networks at off-peak time slots
- Personal selling/multi-level models
Indeed, an organization’s choice on which channel(s) to pursue depends on many factors such as organizational objectives, industry norms, and the amount of promotional dollars in the marketing budget. Many companies are opting for a multi-channel approach in an attempt to maximize shareholder value by acquiring customers wherever they might be. The important thing is for marketers to do their homework and assess the role of “place” in relation to other relevant areas of the marketing plan.
Darrin C. Duber-Smith, MS, MBA, is president of Green Marketing, Inc., a Colorado-based strategic planning firm offering marketing planning, marketing plan implementation, and other consulting services to natural products companies in all stages of growth. He has 15 years of specialized expertise in the natural products industry and is also Visiting Assistant Professor of Marketing at the Metropolitan State College School of Business in Denver, CO, as well as executive director of the International Association of Natural Product Producers. He can be reached at [email protected] .