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As pointed out at the beginning of the chapter, the terms marketing channels, market channels and distribution channels are largely used interchangeably. How-ever, in the marketing literature, the term distribution is traditionally the most widely used, although it is sometimes criticized for allegedly implying that goods just need to be handed out.

In contrast to logistics, which is primarily concerned with the physical flow of products, designing of the channel structure focuses on the selection and interplay of suitable intermediaries and the marketing tasks they fulfill. This also involves the coordination between company owned distribution channels, for example online stores or a direct sales force, versus independent wholesalers and retailers.

7.3.1 Functions of Channel Members

External channel partners, also referred to as intermediaries, can perform three basic tasks.¹⁶Table7.1describes these three tasks, i.e. transactional, logistical and facilitating, in more detail.

15Please see Chap.10for a more detailed discussion of ethical issues.

16Mudambi and Aggarwal (2003).

The benefits that come with the functions performed by channel members also carry some costs; most notably the lack of control a company can incur once its product moves along the supply chain. Many companies that do not have a strong negotiating power are left at the mercy of their intermediaries when it comes to how their products will be positioned and at what price they will finally be sold for.¹⁷ Furthermore, intermediaries might be susceptible to competitor inducement, which might preempt rival products from getting sufficient shelf space.

7.3.2 Number of Channel Levels

The relationship between producers, intermediaries and customers falls into one of the following three categories: direct, indirect or hybrid. Producers that service their customers directly without the use of an intermediary may do this with their own direct sales force or via telemarketing, mail-order, online or catalogue sales. Some companies that would not use direct sales in their highly developed home markets are quite successful with door-to-door distribution strategies in emerging markets, where retail distribution networks are not fully developed yet and low wages or readily available freelancers offer a more attractive cost structure. For example, Hindustan Unilever Ltd. (HUL), India’s largest consumer-products company owned by Anglo-Dutch Unilever, develops a network of women—largely from very low-income households—into entrepreneurs, selling baskets of HUL products door to door. Today, 42,000 women earn a living by selling HUL products in more than 100,000 villages in 15 states.¹⁸

Indirect distribution channels contain one or more intermediaries. Sony for example exclusively depends on retailers for its distribution. Hardly any electronics Table 7.1 Channel functions performed by intermediaries

Types of function Description Transactional

functions

Contacting and promoting: contacting potential customers, promoting products, soliciting orders

Negotiating: determining how many products to buy and sell, type of transportation used, methods of payment, delivery and timing Risk taking: assuming ownership utility

Logistical functions

Physically distributing: transporting and sorting goods Storing: maintaining inventories and protecting goods

Sorting: breaking down a heterogeneous supply into homogeneous stocks Accumulating: combining similar products from different sources Allocating: breaking bulk into consumable quantities

Assorting: combing products and creating offerings for customers Facilitating

functions

Researching: gathering and sharing information about customers Financing: extending credit lines and other financial services

17Kalafatis (2000).

18Hadi and Harsh (2010).

retailer can afford not to carry the Japanese products, since the consumers would expect to see them in the store. To this end, Sony adds value to its intermediaries.

Intermediaries enable companies to reach customers that would otherwise be unreachable. Even Dell, the poster child of direct distribution over the internet, has recently reverted to indirect channels, because its potential customers in emerging economies such as China and India do not have internet access to order a PC or laptop.¹⁹

Many enterprises have also opted to deliver their products to the customer by using both direct and indirect channels. This structure is called a hybrid or multi-channel distribution strategy.

7.3.3 Organization of Channels

The biggest development of the past decades has been the increase in vertically or horizontally integrated distribution networks. With the advent of the internet, multichannel systems have also gained support.

7.3.3.1 Vertical Marketing Systems

Since each member of the supply chain aims to maximize its own profit, having one member (e.g. the producer, wholesaler, or retailer) in a position of power automati-cally reduces conflict and increases channel performance. Vertical marketing systems (VMS) consist of a producer and any number of intermediaries, whereby the channel controller coordinates all activities in order to eliminate inefficiencies.

This could, for example, be via centrally organized warehousing, data-processing or other facilities that provide scale efficiencies.²⁰

7.3.3.2 Horizontal Marketing Systems

Within a horizontal marketing system, two or more firms at the same supply chain level combine their marketing, production or financial resources in order to pursue opportunities, which one of them alone could otherwise not have achieved. This cooperation does not necessarily need to be permanent and the companies might even stem from different industries.

Take, for example, the partnership between Heinz and Japan’s Kagome.

Kagome is the biggest producer of vegetable juices and foods made from processed tomatoes in Japan, while Heinz is a top US food maker with a global sales network.

Both companies agreed to expand operations and earnings in the global market by combining their management resources. Heinz conducted market research in the US to see whether Kagome vegetable juices would be accepted by US consumers.

Meanwhile Kagome sent two corporate officers to Heinz Japan to promote the two companies’ cooperation in such fields as sales, production, quality control,

19Lawton (2007).

20Zentes et al. (2005).

distribution and procurement. As a symbol of the partners’ long-term cooperation, they each also acquired a 5 % stake in the other and vowed to help each other expand overseas operations.²¹

7.3.3.3 Multichannel Distribution Systems

Driven by the opportunities offered through the Internet, hybrid or multichannel distribution systems have now become the norm. Hereby the producer controls some distribution channels and intermediaries control others.²² Music labels, for example, were forced into this system because of rampant Internet piracy. While they still sell some of their CD’s in retail outlets like HMV, most of their profits are made online either over their own website or via aggregators like iTunes or Beatport. Similarly, airlines sell their tickets directly through the Internet, but also rely on travel agents. In this industry, some disintermediation occurred where airlines switched exclusively to online reservations and thus cut out the middleman completely.²³However, generally the trend of the last years has been to extend the number of channels in order to reach as many customers as possible.

Multichannel distribution systems carry a potential risk of channel conflict, espe-cially when the intermediaries perceive the producer as a competitor as well as a supplier. Dissatisfied retailers may, for example, view the Internet as (often lower priced) competition.²⁴