Chapter 13:

Distribution Channels

All roads lead to Rome

Chapter Objectives

• Describe the nature of distribution channels

• Understand the different marketing intermediaries and the benefits they offers.

• Know how to use the Internet as a distribution channel

• Discuss channel behavior and organization

• Illustrate the channel management decisions of selecting, motivating and evaluating channel members.

• Identify factors to consider when choosing a business location.

Nature and Importance of Distribution Channels

• Distribution channels is the circulatory system of a hospitality company.

• Competition, a global marketplace, electronic distribution techniques have increased the importance of distribution.

• In the global economic market, companies should create innovative ways to approach to new and existing markets

Distribution Channel

What is a Distribution Channel?

• A set of organizations (intermediaries) involved in the

process of making a product or service available for use

or consumption by the consumer or business user.

• Used to move the customer towards the product

• Selling through wholesalers and retailers usually is

much more efficient and cost effective than direct sales.

Distribution Channel Functions

• Information: gathering and distributing marketing research and intelligence information about the marketing environment.

• Promotion: developing and spreading persuasive communications about an offer

• Contact: finding and communicating with prospective buyers

• Matching: shaping and fitting the offer to the buyer’s needs, including such activities as manufacturing, grading, assembling, and packaging.

InformationInformation

PromotionPromotion

ContactContact

MatchingMatching

NegotiationNegotiation

PhysicalPhysical

Gathering and distributing marketing research about the environment

Gathering and distributing marketing research about the environment

Developing and spreading persuasive communications about an offer

Developing and spreading persuasive communications about an offer

Finding and communicating with prospective buyers

Finding and communicating with prospective buyers

Shaping and fitting the offer to the buyer’s needShaping and fitting the offer to the buyer’s need

Agreeing on price and terms of the offer so ownership or possession can be transferred

Agreeing on price and terms of the offer so ownership or possession can be transferred

Distribution: transporting and storing goodsDistribution: transporting and storing goods

FinancingFinancing Acquiring and using funds to cover the costs of channel work

Acquiring and using funds to cover the costs of channel work

Distribution Key Functions Channel

Risk TakingRisk Taking Assuming financial risks such as the inability to sell inventory at full margin

Assuming financial risks such as the inability to sell inventory at full margin

Distribution Channel Functions

WholesalerWholesaler JobberJobber RetailerRetailer ConsumerConsumer

ConsumerConsumer

RetailerRetailer ConsumerConsumer

ProducerProducer

0-level channel

WholesalerWholesaler RetailerRetailer ConsumerConsumer ProducerProducer

2-level channel

ProducerProducer

3-level channel

1-level channel

ProducerProducer

Channel Level - Each Layer of Marketing Intermediaries that Perform Some Work in Bringing the Product and its Ownership Closer to the Final Buyer.

Number of Channel Levels

Travel AgentsTravel AgentsTour WholesalersTour Wholesalers

ConciergesConcierges Specialists: Brokers & Junket Reps

Specialists: Brokers & Junket Reps

InternetInternet Hotel RepresentativesHotel Representatives

Consortia & Reservations Systems

Consortia & Reservations Systems

Global Distribution Systems

Global Distribution Systems

National, State, and Local Tour Agencies

National, State, and Local Tour Agencies

Marketing Intermediaries

Travel Agents (TA’s)• 31,000 TA in the U.S.A. (1999)

• Decreasing due to Internet and less commission

• Commission: Airlines 5 %, hotels 10%, cruises 15%

• TA’s use toll- free numbers, CRS or GDS* when making reservation for hotels

• Companies are a major source of travel bookings.

Marketing Intermediaries

* Mostly used

Supplier Wholesaler Travel agent

Tour Packages

Usually Air travel + lodging

may include [ meals + entertainment + ground transportation + sightseeing tours + special entrance fees]

Tour Wholesalers A company that operates as an intermediary between the travel product supplier and the retail travel agent in the marketplace. (Tour operators often operate as wholesalers.)

Marketing Intermediaries

Tour Wholesalers• Usually targeted at the leisure market• Retail TA’s sell wholesalers’ tour packages.• They get discounts from airlines or hotels• Break even point is usually achieved at 85 % of sale. • USTOA requires $100,000 indemnity bond.• Usually resort hotels are dependent on tour wholesalers • Almost all major airlines have vacation packages

promoted through brochures and their web sites.

Marketing Intermediaries

• Specialists: Tour Brokers, Motivational Houses and Junket Reps.

• Tour brokersTour brokers sell motor coach tours. Trips to college and sporting events, tours built around Mardi Gras.

• Motivational housesMotivational houses provide incentive travel to companies offered to their employees.

• Junket repsJunket reps maintain lists of casino gamblers. Junket reps get a commission based on the amount the casino earns from the players.

Marketing Intermediaries

Hotel Representatives• HR sell hotel rooms and services in a distant market

area and receive a straight commission, a commission plus a salary, or a combination of both.

National, State, and Local Tourist Agencies (CVB’s)• Supply information and promote an area, a state or

country.• Usually they deal with conferences, exhibits or

conventions

Marketing Intermediaries

Consortia and Reservation Systems• A consortium is a group of hospitality organizations that is

allied for the mutual benefit of its members (Leading Hotels of the World, Supranational, Utell, Tulip).

• Reservation systems provide a central reservation services for hotels.

• Hotel Chain Reservation Systems vs. Independent Reservation Systems

Marketing Intermediaries

Global Distribution Systems• GDSs were originally developed by the airlines in 1960s• GDS’s are computerized reservation systems• GDS connects many CRS of different hospitality companies.• Major GDS’s: Sabre, Worldspan, Galileo, Amadeus.• Amadeus-largest in Europe and Latin America (155,000 TA)• Galileo connects TA’s to 500 airlines, 40 Rent a Car

companies, 47,000 hotels, 370 tour operators.• Worldspan web site: TA’s can book airlines, rental cars, and

shows and make restaurant reservations all from one site.

Marketing Intermediaries

Global Distribution System

GDS

Starwood CRS

Marriott

CRS

Choice

Hotels CRS

Delta

CRS

Hertz

CRS

Internet• Became an effective distribution channel.• In 2003, Internet sales reached $ 25.2 billion (10% of the

total travel business market). • Total hotel sales over internet $5 billion• Marriott takes 10,000 reservation a day.• Southwest airlines over a billion dollars through its web site.• Restaurants on-line ordering–Pizza Hut, and Domino pizza.• Expedia: Over 7 million visitors a month• Advantages-24 hours, color picture, video tour, accessible

anywhere, print hard copy, low cost,

Marketing IntermediariesTravelocity

Expedia

Priceline

Channel Behavior & Organization

• A channel will be most effective when all members cooperate to attain overall channel goals and satisfy the target market.• Channel conflict occurs when channel members are

disagree over goals and roles• Conflict occurs at two level:

• Horizontal Conflict occurs among firms at the same level of the channel, i.e retailer to retailer.

• Vertical Conflict occurs between different levels of the same channel, i.e. wholesaler to retailer.

• For the of a channel each member’s role must be specified and conflict must be managed.

Verticalmarketingchannel

Manufacturer

Retailer

Conventionalmarketingchannel

Consumer

Manufacturer

Consumer

Retailer

Wholesaler

Wh

ole

sale

r

Conventional Distribution Channel vs. Vertical Marketing Systems

CorporateCommon Ownership at Different

Levels of the Channel

ContractualContractual Agreements Among

Channel Members

AdministeredLeadership is Assumed by One or

a Few Dominant Members

Degree of Direct Control

Channel Organization Types of Vertical Marketing Systems

•The franchisor permits the franchise to use its trademark, name and advertising.•In U.S.A. 700,000 franchise ~about $ 850 billion salesFranchised hotels account ~ 65 percent of room supply.

Starting a new business: 20 percent chance for survivalBuying an existing business: a 70 percent chance for survivalBuying a franchise: a 90 percent chance for survival

Vertical Marketing System

Franchising

Hotel franchises:

Choice hotels, Holiday Inns, Sheraton Inns, Hilton inns

Restaurant franchises:

Mc Donalds, Burger King, KFC, Pizza Hut, T.G.I. Franchises

Advantages Disadvantages Franchisor

1. Capital for growth2. Faster growth3. Additional management4. Additional income

1. Lower potential profits2. Controlling service quality3. Controlling firm image

Franchisee

1. Lower risk2. Established brand name3. Successful business plan4. Expert assistance

1. Franchisee fees2. Lack of freedom3. Controlled by franchisor

Vertical Marketing System

Franchising

• Another form of contractual agreement• Allow two or more organizations to benefit from each

other’s strengths.• 7-Eleven sells Dunkin Donuts in 2,000 of its stores• Embassy suites has Red Lobster restaurants located in

its hotels.• Chain fast-food operations are located in convenience

stores.• Airline alliances: SAS-Continental, Delta-Korean Airlines

Vertical Marketing System Alliances

Trade for preferred relationship with global

networks

Trade for preferred relationship with global

networks

Gain preferred access to each other’s local

customer base

Gain preferred access to each other’s local

customer base

Pool policy expertise,

costs, and capabilities

Pool policy expertise,

costs, and capabilities

Implement consumer-oriented,

commercially driven operations and

services

Implement consumer-oriented,

commercially driven operations and

services

c

Vertical Marketing System Alliances

Horizontal Marketing Systems

• Horizontal Marketing Systems: Two or more companies at one level who join to follow a new marketing opportunity.• Seaworld offers tickets at a discount to an automobile club.• In return, Seaworld gains access to several hundred

thousand automobile club members• Multi-channel Marketing Systems: Single firms that set up

two or more marketing channels to reach one or more customer segments.• McDonald’s sells its products through independent

franchises, but owns more than one-fourth of its outlets.

• Customer needs• Victoria House in Belize

• Attracting channel members• A small chain hotel be advised to choose one travel

agency chain or work in key cities that are likely to generate business.

• Evaluating major channel alternatives1. Economic criteria

MGM hotel; Tour Operators vs. Travel Agencies.2. Control criteria

Franchise control/quality control

Selecting Channel Members

• E-mail VictoriaHouse@centralamerica.com • For reservations use the e-mail Reservation Form • Call us toll free from US or Canada 1-888-535-8832 / 1-800-948-3770

• Three secrets of successful retailing: “Location! Location! Location!” • Location depends on the firm’s marketing strategy.• There are four steps in choosing a location.• 1. Understanding the marketing strategy and target

market of the company.• Downtowns, freeways, near airports,

• 2. Regional analysis involves the selection of geographic market areas. A firm needs to make sure that a region has sufficient and stable demand to support the firm, today and in the future.

The Business Location

• 3. Choosing the area within the region: Demographic, psychographic characteristics and competition are factors to consider.

• 4. In choosing the individual site, business will consider several factors: • Compatible businesses, Competition, Potential

demand generators, • Residential communities, profile of prospective

customers, shopping centers.• Accessibility, traffic, speed of traffic, visibility,

The Business Location

Chapter 19