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Chapter 13: Distribution ChannelsAll 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 systemof a hospitality company.

Competition, a global marketplace, electronicdistribution 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 ChannelWhat is a Distribution Channel?

A set of organizations (intermediaries) involved in theconsumption by the consumer or business user.

process of making a product or service available for use or

Used to move the customer towards the product Selling through wholesalers and retailers usually is muchmore efficient and cost effective than direct sales.

Distribution Channel Functions

Information: gathering and distributing marketingresearch and intelligence information about the marketing environment. communications about an offer buyers

Promotion: developing and spreading persuasive Contact: finding and communicating with prospective Matching: shaping and fitting the offer to the buyersneeds, including such activities as manufacturing, grading, assembling, and packaging.

Distribution Channel FunctionsDistribution ChannelInformation Promotion Contact Matching Negotiation Physical Financing Risk Taking

Key FunctionsGathering and distributing marketing research about the environment Developing and spreading persuasive communications about an offer Finding and communicating with prospective buyers Shaping and fitting the offer to the buyers need Agreeing on price and terms of the offer so ownership or possession can be transferred Distribution: transporting and storing goods Acquiring and using funds to cover the costs of channel work Assuming financial risks such as the inability to sell inventory at full margin

Number of Channel LevelsChannel Level - Each Layer of Marketing Intermediaries that Perform Some Work in Bringing the Product and its Ownership Closer to the Final Buyer. 0-level channel Producer Producer 1-level channel Producer Producer 2-level channel Producer Producer Retailer Retailer Consumer Consumer

Consumer Consumer Consumer Consumer Consumer Consumer

Wholesaler Wholesaler Wholesaler WholesalerJobber Jobber

Retailer Retailer

3-level channel Producer Producer

Retailer Retailer

Marketing Intermediaries

Travel Agents

Tour Wholesalers

Concierges

Specialists: Brokers & Junket Reps Hotel Representatives

Internet Global Distribution Systems

National, State, and Local Tour Agencies Consortia & Reservations Systems

Marketing IntermediariesTravel Agents (TAs)

31,000 TA in the U.S.A. (1999) Decreasing due to Internet and less commission Commission: Airlines 5 %, hotels 10%, cruises 15% TAs use toll- free numbers, CRS or GDS* when makingreservation for hotels

Companies are a major source of travel bookings.

* Mostly used

Marketing IntermediariesTour WholesalersA 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.)Supplier Wholesaler Travel agent

Tour Packages Usually Air travel + lodging may include [ meals + entertainment + ground transportation + sightseeing tours + special entrance fees]

Marketing IntermediariesTour Wholesalers

Usually targeted at the leisure market Retail TAs 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 promotedthrough brochures and their web sites.

Marketing Intermediaries Specialists: Tour Brokers, Motivational Housesand Junket Reps.

Tour brokers sell motor coach tours. Trips to collegeand sporting events, tours built around Mardi Gras. companies offered to their employees.

Motivational houses provide incentive travel to Junket reps maintain lists of casino gamblers. Junketreps get a commission based on the amount the casino earns from the players.

Marketing IntermediariesHotel 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 (CVBs) Supply information and promote an area, a state or country. Usually they deal with conferences, exhibits or conventions

Marketing IntermediariesConsortia 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 services for hotels.

Reservation systems provide a central Hotel Chain Reservation Systems vs.Independent Reservation Systems

Marketing IntermediariesGlobal Distribution Systems

GDSs were originally developed by the airlines in 1960s GDSs are computerized reservation systems GDS connects many CRS of different hospitality companies. Major GDSs: Sabre, Worldspan, Galileo, Amadeus. Amadeus-largest in Europe and Latin America (155,000 TA) 500 airlines, Galileo connects TAs to operators. 40 Rent a Car companies, 47,000 hotels, 370 tourweb site: airlines, rental cars, and shows WorldspanrestaurantTAs can bookall from one site. and make reservations

Starwood CRS

Hertz CRS

Global Distributio n System GDS

Delta CRS

Choice Hotels CRS

Marriott CRS

Marketing IntermediariesTr av Internet elo Became an effective distribution channel. city(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 orderingPizza Hut, and Domino pizza. Expedia: Over 7 million visitors a month Pr ice Advantages-24 hours, color picture, video tour,ia lin accessible anywhere, print hard copy, low cost, ed p

In 2003, Internet sales reached $ 25.2 billion

e

Ex

Channel Behavior & Organizationbe most effective when all A channel willattain overall channel goals members the cooperate to and satisfy 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.

a channel each members role For the ofand conflict must be managed. must be specified

Conventional Distribution Channel vs. Vertical Marketing SystemsConventional marketing channel

Manufacturer

Wholesaler Retailer Consumer

Retailer

Consumer

Wholesaler

Vertical marketing channel

Manufacturer

Channel Organization Types of Vertical Marketing SystemsCorporateCommon Ownership at Different Levels of the Channel

Degree of Direct Control

ContractualContractual Agreements Among Channel Members

AdministeredLeadership is Assumed by One or a Few Dominant Members

Vertical Marketing System

Franchising

The franchisor permits the franchise to use its trademark, name and advertising. In U.S.A. 700,000 franchise ~about $ 850 billion sales Franchised hotels account ~ 65 percent of room supply.Starting a new business: 20 percent chance for survival Buying an existing business: a 70 percent chance for survival Buying a franchise: a 90 percent chance for survival Hotel franchises: Choice hotels, Holiday Inns, Sheraton Inns, Hilton inns Restaurant franchises: Mc Donalds, Burger King, KFC, Pizza Hut, T.G.I. Franchises

Vertical Marketing System

FranchisingFranchisor

Advantages1. Capital for growth 2. Faster growth 3. Additional management 4. Additional income

Disadvantages1. Lower potential profits 2. Controlling service quality 3. Controlling firm image

Franchisee 1. Lower risk 1. Franchisee fees 2. Established brand name 2. Lack of freedom 3. Successful business plan 3. Controlled by franchisor 4. Expert assistance

Vertical Marketing System

Alliances

Another form of contractual agreement Allow two or more organizations to benefit from each others 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 SystemPool policy expertise, costs, and capabilities Gain preferred access to each others local customer base

Alliances

c

Implement consumeroriented, commercially driven operations and services

Trade for preferred relationship with global networks

Horizontal Marketing Systems Horizontal Marketing Systems: Two or more companies atone level who join to follow a new marketing opportunity. Seaworld offers tickets at a discount to an automobile club. In