Distribution Network — Basics

A distribution network is a set of interdependent organizations engaged in making goods and services available to customers. It includes primary channel partners such as wholesalers, distributors, retailers, agents and brokers who form the pipeline or link between manufacturer and customers. It also involves ancillary channel members who provide generic facilities such as transportation (logistics), financing, storage, promotion and other such services. These primary and ancillary intermediaries make the flow of goods to target customers efficient and cost-effective.

Distribution channels vary from one class of goods to another, and channel strategies too can differ from manufacturer to manufacturer.

The FMCG distribution network in particular is complex and widespread, and usually takes the form of a conventional channel, such as that depicted in Exhibit 30.0. The retail universe, as mentioned in the chapter Retail Tracking, comprises both the upper (modern) and the lower (traditional) trade. The trade formats are diverse varying from very basic to advanced retailing concepts like virtual shopping. Key FMCG trade formats are described in the next chapter Category Management.

The pipeline characteristics vary depending on the nature of the product and the size of the market. Markets covering large geographies such as China and India have extensive and elaborate distribution networks.

Products like bread that have a short shelf life require distribution networks that can cater for daily deliveries to retail outlets. Other products like pasteurized milk and fresh foods require cool chain distribution, whereas ice creams and frozen foods require cold chain distribution.

A soft drink like Coca-Cola is distributed not only in a very large number of stores, it is also available at food and beverage outlets, and at many other indoor and outdoor locations through vending machines. On the other hand premium quality, niche and exclusive products like gourmet foods or luxury personal care brands are only distributed in select outlets.

Building and sustaining a channel network for products that are widely distributed is time consuming and expensive. There are benefits as well as costs. As manufacturers expand their distribution, at some stage an optimum level is reached; the gains of distributing to additional outlets may not justify the cost of servicing them. Furthermore, the return on inventory for the outlets that do not handle the product might be too low to justify the distribution of the brand in these stores.

To know whether it is cost-effective, manufacturers need an understanding of how much sales and profits they stand to gain from further expansion in distribution, and how much this will cost them.

Exhibit 30.1   Relationship between sales and distribution.

Consider Exhibit 30.1, which depicts the relationship between sales and distribution of a brand which has sales of $2,000,000 and weighted distribution of 40%. As the sales manager crafts plans to build distribution, he needs some understanding on how much the brand stands to gain in sales, if its distribution is increased to 50% or 60% or 80%?

If the relationship between sales and distribution is linear, doubling distribution from 40% to 80% will result in doubling of sales to $4,000,000. Sales will increase to $3,000,000 if distribution is expanded to 60% and $2,500,000 if it is grows to 50%.

The linear model, however, is theoretically unsound because it suggests no cannibalization of sales between stores, no store switching behaviour, and a homogenous trade channel.

It is more realistic to assume either a logistic or an exponentially declining relationship between sales and distribution. Most products that are launched with substantial marketing efforts and investments would tend to exhibit an exponentially declining relationship, where incremental sales from expansion in distribution decline with increase in distribution. As the velocity of sales decreases with expansion of distribution into smaller stores, it becomes increasingly less viable for these smaller retailers to stock the brand, and for the manufacturer to distribute it.

Like the exponentially declining functional form, the logistic relationship captures the notion of saturation. This is the point at which cannibalization will offset the impact of any further gains in distribution. The logistic relationship also assumes that at low levels, the impact that distribution has on sales will be limited. This may hold true for products that have limited advertising, and rely on their in-store presence and in-store initiatives to gain share of mind.

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