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Chapter 15 - Distributing Products
15-61
PPT 15-51
Test Prep
TEST PREP
15-52
• What four systems have evolved to tie together
members of the channel of distribution?
• How does logistics differ from distribution?
• What are inbound logistics, outbound logistics,
and reverse logistics?
1. The four systems that have emerged to tie firms to-
gether are: corporate systems, contractual systems,
administered systems, and supply chains.
2. Logistics differs from distribution in many ways.
Logistics is the planning, implementing, and control-
ling of the physical flow of materials, final goods,
and related information from points of origin to
points of consumption to meet customer require-
ments at a profit. Distribution is much less complex
than logistics and simply involves moving the prod-
uct from the manufacturer to the end consumer.
3. Inbound logistics is the process of bringing raw ma-
terials, packaging, other goods and services, and in-
formation from suppliers to producers. Outbound lo-
gistics manages the flow of finished products and in-
formation to business buyers and them to consumers.
Reverse logistics brings goods back to the manufac-
turer because of defects or for recycling.
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lecture
enhancers
“The solving of the problem lies in finding the solvers.”
Van Herpen’s Law
“The question for us is are you creating value? The Internet is a great place for
companies of all kinds that are creating genuine value for customers and it is a
terrible place for companies that are not.”
Jeff Bezos
“If you don’t need it and don’t want it, there’s always plenty of it.”
Murphy’s Law of Supply
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DESPERATE RESTAURANTS FOCUS ON GIMMICKS
Although it’s been more than six years since the start of the Great Recession, many in the restau-
rant industry have failed to adjust to the “new normal” created by the downturn. In fact, visits to U.S. res-
taurants have fallen by a staggering 1.3 billion since 2008. As American eateries become desperate for
business, many have turned to gimmicky menu items to drum up interest. From Taco Bell’s Waffle Taco
to the $100 “Never Ending Pasta Pass” at Olive Garden, restaurants are quickly kicking nutritional sense
to the side in an effort to get diners in the door.
For instance, IHOP recently added a new waffle that rides the line between breakfast food and
dessert. Clocking in at 750 calories, the chain’s Very Blueberry Cheesecake Waffullicious Waffle is
topped with blueberry compote and chunks of cheesecake along with a filling of cheesecake-flavored goo.
“If you think all this sounds desperate, you’re right,” said restaurant industry analyst Bonnie Riggs about
the sugary offering and its savory counterpart, the Bac ‘n’ Cheddar Waffullicious Waffle. Still, these
types of unhealthy but affordable items have been a staple on many American menus for years. Olive
Garden has offered the “$10 Never Ending Pasta Bowl” since 1995, and in the mid-2000s KFC began
mixing up its infamous Famous Bowl: a bland mass of mashed potatoes, corn, chicken and gravy all
lumped together in a bowl.
Despite these early adopters, the last few years have been the heyday for questionably tasty res-
taurant gimmicks. Taco Bell struck gold in 2012 when it released the Dorito’s Locos Taco, an item that
earned a tidy $1 billion in revenue in its first year on the market. However, sales of the recently released
Spicy Chicken Cool Ranch version have failed to live up to expectations. The original Doritos taco has
also started to decline in popularity, though the chain has seen early success with its new breakfast menu.
Meanwhile, overall growth has been stagnant at Taco Bell for years, a trait it shares with almost every
other restaurant chain save for IHOP. Sales have increased at the pancake house throughout the year, per-
haps thanks to its pair of novelty waffles. Restaurant reps haven’t credited the new items with the jump,
but they are willing to create more waffle hybrids if the concept continues to be successful.i
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WHATEVER HAPPENED TO DOOR-TO-DOOR DELIVERY?
Not too long ago in America, there were vendors who delivered goods door-to-door. One person
brought milk and left it on the porch. Another person brought ice for the “ice box.” They are now called
refrigerators and have their own icemakers. Still other people brought bread or coffee. Now, most of those
people are out of business. But is the idea a bad one? Maybe we can learn from the “good old days.”
Many new developments have made the old door-to-door delivery person obsolete. A major
change has been the emergence of neighborhood 7-Eleven stores and other “convenience” stores that have
made it possible to quickly obtain milk and bread and eggs and other items: candy, soft drinks, and ice
cream. But another trend has emerged that has greatly increased the potential for door-to-door delivery.
The percentage of people over 65 has skyrocketed in the last few years and will continue to grow very
rapidly. Many of these people live in high-rise communities and have limited means for getting around.
Many have difficulty walking and some can’t drive.
Imagine, if you will, a mobile 7-Eleven store. It would come to each community at the same time
every day with staples such as milk, bread, eggs, soft drinks, butter, cheese, and the like. Over time, the
vendor would listen to customers and learn of special needs, like medicine from the local pharmacy. Soon
the mobile 7-Eleven would be like a custom-made retailer to the people served. You could call or e-mail
the night before and place your order for special items not normally carried on the truck.
It would be more expensive to buy such goods because there are added costs, but the convenience
may far exceed the additional costs. And the vendor could make a lot of money. Do you see how such
marketing intermediaries emerge?
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WHAT INTERMEDIARIES TO USE WHEN GOING INTERNATIONAL
It’s one thing to decide to sell a product internationally; it’s something else again to try to imple-
ment such a program. How are you going to reach the consumer? You could, of course, send sales repre-
sentatives to contact people directly, but that would be costly and risky. How can you get your product
into foreign markets at a minimum cost and still have wide distribution?
Use brokers. As explained in the chapter text, a broker is an intermediary who keeps no inventory and
takes no risk. A broker can find distributors for you. Brokers sell for you and make a commission
on the sale. This is the least expensive way to enter foreign markets, but you still assume the risks
of transportation.
Use importers and exporters. Importers and exporters take all the risks of business and sell your prod-
ucts to international markets. Their commission is much higher than that of brokers, but they do
much more for you. They may find you distributors or do the selling to ultimate consumers them-
selves.
Call on distributors directly. You can bypass exporters and brokers and call on distributors yourself. In
that case, you actually become your own exporter and deliver directly to distributors, but again
you assume the risks of transportation.
Sell direct. The most costly and risky way to sell internationally is to set up your own distribution system
of wholesalers and retailers. On the other hand, this maximizes potential profits in the long run.
Many firms start out selling through importers and exporters and end up setting up their own dis-
tribution system as sales increase.
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Use third-party logistics (3PL) providers. This new kind of company will distribute goods worldwide
for you. The U.S. market leader is Ryder Integrated Logistics. Ryder designs, implements, and
manages the whole system for delivering goods in the United States and overseas.
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THE MARKETING FIRM STOCKING AMERICA’S GROCERIES
Given the immense size of many supermarkets, the complicated process that brings food to store
shelves may be lost on many consumers. After all, retailers have a nearly limitless choice of items and brands
they could stock. While a few customer staples might be natural selections, a good deal of thought and consid-
eration goes into filling the rest of a store’s shelf space. That’s where food-marketing companies like the Jack-
sonville-based Acosta come in. It’s Acosta’s job to convince big retailers like Kroger and Walmart to carry its
clients’ products.
Acosta employs 13,000 people to patrol more than 130,000 stores in the United States and Canada in
order to secure prominent shelf space for clients like Kellogg, Procter & Gamble, and Nestlé. As the so-called
brand behind the brands, Acosta earned more than $1 billion in commissions last year. Even as food prices
climb and companies scale back on expenses, insiders expect Acosta’s revenue to rise regardless. Part of the
reason behind the company’s success is its entrenchment in many prominent food companies. One expert in
marketing strategy claimed, “Acosta has a seat in the boardroom when it comes to a brand's overall business
strategy.”
Of course, Acosta’s services expand beyond securing Cap’n Crunch a spot on the shelf befitting his
naval rank. It also spearheads manufacturer-funded promotions and sales scheduled for busy shopping times.
Perhaps most importantly, though, Acosta helps steer its clients through any crises that may occur. For in-
stance, in 2009 flooding and manufacturing mishaps led to the temporary closing of two out of the four plants
that produce Eggo waffles. As a result, shortages forced the Kellogg-owned brand to watch its share of the
frozen breakfast market fall by one-third to 19% by early 2010. Once the plants came back online, Acosta col-
laborated with Kellogg to plot the waffle’s comeback. They settled on a back-to-school promotion that
knocked $2 off Eggo’s most popular flavors. After that, Acosta parlayed with retailers to sell them on the idea
as well as ensure ample shelf space. By the beginning of 2011 Eggo’s market share rose back to 30%.ii
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HOW RETAILERS COMPETE
There are five major ways in which retailers compete for the consumer’s dollar: price, service, lo-
cation, selection, and entertainment. Since consumers are constantly comparing retailers on price, service,
and variety, it is important for retailers to use benchmarking to compare themselves against the best in the
field to make sure that their practices and procedures are the most advanced. The following sections de-
scribe the five means of competition.
Price Competition
Discount stores such as Walmart, Target, Kmart, and T.J.Maxx/Marshalls—not to mention all the
various Internet discount sites—succeed by offering low prices. It’s hard to compete with these price dis-
counters over time, especially when they offer good service as well.
Service organizations also compete on price. Note, for example, Southwest Airlines’s success
with its low-price strategy. The same is true of H&R Block in income tax preparation services, Hyatt Le-
gal Plans for legal services, and Motel 6 or Red Roof Inns for motel-room rentals.
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Price competition is getting fiercer as Internet firms like mySimon.com help consumers find the
best prices on a wide range of items. Look up BotSpot (www.botspot.com) for other companies that do
price searches. As you learned earlier, prices are easy to match, so most retailers have to turn to other
strategies—like service—to win and keep customers.
Service Competition
A second competitive strategy for retailers is service. Retail service involves putting the customer
first. This requires all frontline people to be courteous and accommodating to customers. Retail service
also means follow-up service such as on-time delivery, guarantees, and fast installation. Consumers are
frequently willing to pay a little more for goods and services if the retailer offers outstanding service.
The benchmark companies in this regard include Macy’s, Lord & Taylor, and Nordstrom. These
retailers show that if you hire good people, train them well, and pay them fairly, you will be able to pro-
vide world-class service. Service organizations that have successfully competed using service include
Scandinavian Airlines, Tokyo’s Imperial Hotel, and Florida Power & Light. Sheraton hotels are offering
your money back or a free night if you aren’t happy with their services. Small service providers, such as
The Hair Cuttery, Sam’s Auto Repair, and Beautiful Nails, also compete by offering superior service.
Location Competition
Many services, especially convenience services like banks and dry cleaners, compete effectively
by having good locations. That’s why you find automated teller machines in convenient places such as
supermarkets and train stations. Many fast-food stores, such as Burger King and Pizza Hut, now have lo-
cations on college campuses so that students can reach them quickly. Some dry cleaners pick up and de-
liver laundry at your home or business.
Often, nothing is more convenient than shopping online: You don’t have to go outside at all and
fight crowds or traffic. But online retailers have to learn to deliver goods faster and more reliably and
handle returns better, or they will lose the advantage of convenience. Also, many consumers are nervous
about giving their credit card numbers to online retailers for fear of having them stolen. Each of these
problems will be solved someday, but meanwhile competition between brick-and-mortar retailers and
online retailers will intensify.
Selection Competition
A fourth competitive strategy for retailers is selection. Selection is the offering of a wide variety
of items in the same product category. Category killer stores offer wide selection at competitive prices.
They are called category killers because they are so competitive that they usually overpower smaller
competitors that don’t offer comparable selection or price and drive them out of business. Tower Records
carries over 75,000 titles. Borders Books carries some 150,000 different titles. Sport Mart carries over
100,000 sporting goods items. PetSmart and other pet food superstores have some 10,000 items each.
Despite their initial success, many category killer stores are in turn being killed by discount de-
partment stores like Walmart. Walmart has become a huge challenge to Toys “R” Us. Consumers are
finding it more convenient to shop for multiple items at stores like Costco rather than go out of their way
to find stores selling only sports equipment or only pet supplies. Thus, location may be more important
than selection for consumer items.
Internet stores can offer products from dozens of suppliers and offer almost unlimited selection
(e.g., Amazon.com). Small retailers sometimes compete by offering wide selection within one or a few
categories of items. Thus, you have successful small stores that sell nothing but coffee beans or party
products. Small retailers also compete by offering personalized service. Restoration Hardware, with stores
in the Bay Area of California and around the country, is one store that has survived the competition with
Home Depot and the other giant lumber and hardware stores. Restoration was able to succeed by offering
consumers products that couldn’t be found in the other stores.
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Service organizations that compete successfully on selection include Blockbuster (wide selection
of rental videos and DVDs), most community colleges (wide selection of courses), and Schwab Mutual
Funds (hundreds of funds).
Entertainment Competition
The Internet may be a convenient place to shop, but it can’t possibly be as much fun as a brick-
and-mortar store designed to provide entertainment as well as a place to buy things. When you approach a
Jordan’s furniture store in New England, for example, you notice that the design team has recreated
French Quarter facades like those in New Orleans. As you walk in, you see a Louis Armstrong look-alike
playing in a room that resembles Bourbon Street (in New Orleans). There is even a replica of a riverboat
that features live music every weekend. You can eat a free fresh-baked cookie and, if it’s raining, you can
get an umbrella.
One mall calls it “shoppertainment.” In any case, it’s making it more fun to shop at stores and
malls. At Bass Pro Shops, you are treated to giant aquariums, waterfalls, trout ponds, rifle ranges, and
classes in everything from ice fishing to conservation. In San Francisco, Sony’s Metreon is a Sony Enter-
tainment Center with a restaurant, an IMAX theater, and lots of exciting video games to play. You get to
see and experience all the latest high-tech equipment and have fun at the same time. Vans, Inc., a sporting
goods retailer, opened a 60,000-square-foot skate park and off-road bicycle track at Ontario Mills Mall.
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MAKING VENDING MACHINES SMARTER
People today are becoming less and less dependent on cash, though you wouldn’t know it from
looking at most vending machines. More than 40 percent of American adults said in a recent survey that
they could go a week without paying for something in cash. Meanwhile, many of the nation’s vending
machines continue to accept only bills and coins. This reluctance to change likely led to the vending in-
dustry’s 18.3 percent drop in sales between 2007 and 2011. When revenues recovered a bit in 2012, ex-
perts credited it to the increasing number of “smart” vending machines on the market.
Adding credit card capabilities is just the first step towards bringing a vending machine up to cur-
rent standards. While plastic-friendly units can boost sales by as much as 30 percent, a number of other
advanced features are transforming vending machines from 20th century relics into modern marvels. First
and foremost, connectivity to the Internet allows vendors to track every aspect of their machines from
stock to sales. Without the need to inspect each machine one at a time, operators can reduce their mainte-
nance truck fleets by as much as 40 percent. Access to the web also allows vendors to install digital touch
screens that periodically display advertisements. In fact, one researcher found that revenues per transac-
tion rise 15 to 20 percent when machines prompt consumers about additional items.
Experts estimate that there are 500,000 to 700,000 smart vending machines on the market today.
By 2018, there could be as many as 2 million of them located across the country. Although the benefits of
smart vending machines are apparent, making the switch can be expensive for many operators. New fully
loaded units sell for well over $10,000. Even adding a baseline service like web capabilities to an older
machine can cost north of $500. Most vending machine operators own fewer than 20 units and run on thin
margins, making even minor improvements a tall order. But like so many companies over the last decade,
in the end they may have no choice but to embrace this costly new technology in order to keep their busi-
nesses afloat.iii
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IMAGES TRUMP WORDS IN SOCIAL MEDIA
Engaging with customers through social media has become an essential part of doing business in this
digital age. But in many cases, it’s not what companies say on social networks that connect with consum-
ers; it’s what they show. A recent study of the top brand pages on Facebook found that photos gather
more than twice the likes of regular links. That’s nothing compared to videos, though, which are shared
by users 12 times more often than text.
One gets an even stronger impression of the power of visual content when looking at primarily textless
social networks like Instagram and Pinterest. While the former’s user base is growing at a faster rate than
Facebook in its prime, the latter now refers more traffic to outside websites than Twitter. As a result,
many up-and-coming companies have thrown the bulk of their marketing efforts towards eye-catching
photos and video. At the Chicago-based apparel company Threadless, for instance, teams of three em-
ployees led by a marketing specialist focus on a single social media platform. This allows them to post
unique content that is customized to the layouts and culture of Tumblr, Vine, Vimeo and others.
While a project like this may seem expensive and time consuming, the ubiquity of today’s tech-
nology ensures that social media marketing remains relatively cheap. The Threadless team shoots most of
their stuff on iPhones and edits it with Adobe Premiere, a program that retails for less than $1,000. De-
spite its cost effectiveness, however, companies must not confuse social media marketing for traditional
advertising. Given the enormous amount of information available on the web, many young Internet users
have become resentful of publicity stunts. The best social media campaigns walk this fine line by display-
ing the company’s product in everyday use but steering clear of obvious promotional tropes like slogans
or logos. This ensures that users see the item in action without detecting a sense of inauthenticity that
could drive their interest away.iv
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THE HIGH-TECH FUTURE OF FREIGHT
The freight railroad system is one of the country’s earliest network businesses. And unlike so
many other older national networks, such as the U.S. Post Office, that have had trouble adapting to the
modern age, railroads continue to play a vital role in the shipping industry. In spite of its longevity the
freight railroad system needs to initiate changes that will allow it to enjoy the benefits that this digital age
can provide. In light of recent deadly train crashes, regulators and industry officials have been pushing
railway companies to integrate technology more deeply into America’s railways.
The biggest change arriving on the freight train scene is a new traffic system called positive train
control (PTC). Onboard computers and GPS gear allow trains to be tracked by a central station and even
stopped if an engineer misses a signal. Following a pair of major train crashes in 2008, the federal gov-
ernment mandated that PTC be implemented by 2015 on all major train lines that carry passengers or cor-
rosive chemicals. Industry insiders estimate the system will cost $13 billion to install and maintain over
the next 20 years.
Indeed, the soaring costs associated with upgrading have kept railway companies reluctant to
change their entrenched ways on a wide scale. For example, a new type of electronically controlled brakes
improves vastly on the air-based brakes used on locomotives for ages. Though the electronic system en-
hances handling and shortens braking distance, the cost and technical complication involved with installa-
tion will prevent widespread adoption at least for the near future. Other upgrades are too young to judge
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what kind of impact they’ll eventually have on the industry. One process uses cameras to take a 360-
degree picture of every car on a train in order to indentify mechanical problems early on. This so-called
CAT scan for freight cars is currently being tested at the Transportation Technology Center in Colorado. v
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critical
thinking exercises
Name: ___________________________
Date: ___________________________
critical thinking exercise 15-1
TOP 100 RETAILERS
The National Retail Foundation’s (NRF) website (www.nrf.com)vi contains numerous resources
for retailers and people interested in a retailing career. The site also provides links to other sites related to
retailing. (Sometimes the Web address for a location changes. You might need to search to find the exact
location mentioned.)
NRF publishes an online magazine, Stores, that contains stories about successful retail stores,
unique promotions, and retail statistics. It also publishes a listing of the year’s top 100 retailers. Go to the
Stores website (www.stores.org), navigate to the list of recent articles, and find the current listings for the
Top 100 Retailers. Use the information presented there to fill in the information below.
1. Which retailer has the highest revenue for the current year? _____________________________
a. Where is the headquarters?
b. Give the current year’s revenue figure.
c. Is this an increase or decrease from the previous year? By what percentage?
d. Give the current year’s earnings.
e. How many stores does the company have?
