04 April 2023
Intensive Distribution: The key to reaching maximum customers
Intensive distribution is a marketing strategy that aims to distribute a product as widely as possible through a variety of retail channels. The goal of this approach is to make the product readily available to as many customers as possible, regardless of location or market segment. It is a common strategy employed by businesses in the fast-moving consumer goods (FMCG) sector, such as food and beverage companies, personal care products, and household cleaning items.
In an intensive distribution strategy, the manufacturer (or import distributor) works closely with distributors, wholesalers, and retailers to ensure that the product is available in as many retail outlets as possible. This may include everything from small mom-and-dad stores to large national supermarket chains. The idea is to make the product available wherever and whenever the customer wants it.
Intensive distribution can be an effective strategy for products that have a broad appeal and are priced competitively. For example, products that are frequently used and purchased, such as soap or shampoo, are likely to be distributed intensively. By making these products available in as many retail outlets as possible, manufacturers can increase their sales volume and market share.
Intensive distribution - Advantages
- Intensive distribution is almost essential for low-value-high volume frequently purchased products (for example Fast Moving Consumer Goods) because convenience is high on the list of customer buying motivations. Customers expect to be able to buy such products not far from home, and alongside other frequently purchased items.
- Intensive distribution builds brand recognition and loyalty. By making products widely available, the marketer ensures that customers are exposed to their brand regularly. This can help to create a sense of familiarity and trust, making customers more likely to choose that brand over others.
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The obvious key advantage of intensive distribution is that it enables manufacturers to reach a large number of customers.
- Further, the high sales volumes generated through intensive distribution help achieve production efficiencies and therefore lower unit costs.
Intensive distribution - Disadvantages
However, there are some potential drawbacks to an intensive distribution strategy. One of the most significant is that it can lead to price competition, as retailers compete to offer the product at the lowest price.
In Australia it is almost impossible to achieve intensive distribution without including the major national retail chains.
This means that, for the vast majority of product brands, the major retailers have the upper hand in the business relationship and dictate terms.
Inevitably, the large retail chains will use their market access and buying clout to pressure the manufacturer (or import distributor) to drop their price so the retailer maintains their retail margin while offering the product at a lower price and thus gaining market share and sales volume. This can lead to lower profit margins for manufacturers and can make it difficult to maintain consistent pricing across different retail channels.
Importers/manufacturers (suppliers) dealing with major retail chains (in Australia: Coles, Woolworths, Bunnings, Dan Murphys, Repco, Supercheap Auto etc.) will be subject to tightly monitored and managed scrutiny from the retail chain buyers (typically known as Category Managers) and will need to conform to a range of demands...
- Performance Expectations. The retail chains treat their shelf space like real estate and monitor profit per linear metre of shelf. Products that perform below expectations are de-ranged. This puts considerable onus on suppliers to ensure consumer demand is generated through advertising (pull-through promotion) and/or through ensuring superior product performance, more attractive packaging, and competitive pricing. If a competitor's product out-sells yours and you get de-ranged - clawing back can be near impossible.
- Annual category reviews. The retail chain will go out to market and seek proposals from a range of suppliers and play them off against each other to get the best deal. Sometimes retailers have a policy of dumping a supplier (de-ranging) every couple of years and stocking a competitor's product range just to keep suppliers on their toes.
- Ability to interface with the retailer's computer system: Large retailers place re-supply orders via automated computer systems and communicate with the supplier's ordering system via EDI (electronic data interchange). Suppliers must have compliant systems and when first dealing with the retailer will go through a rigorous test regime to confirm that the systems talk to each other properly. For smaller suppliers who do not have suitable IT systems, some retailers permit data interchange with an intermediary who usually charges a percentage of transaction value to provide this service. For the small supplier gearing-up for working with EDI often requires a large investment in new warehouse management and accounting systems. Typically, $300k to $500k investment is required. The process of converting to the new system is never painless nor quick.
- Mandatory advertising fees: retailers charge a hefty "advertising" fee which effectively amounts to a discount on the amount they pay their suppliers for their products. These fees are not put toward advertising your product but to promote the retailer.
- Conforming barcodes and delivery pallets: Product supplied to retailers must have barcodes on individual products that fit with retailer's stock control system and many large retail chains also specify the way product is stacked on delivery pallets and how it is labelled. Typically pallets of product must have their own barcode (Serial Shipping Container Code (SSCC)).
- Strict delivery time slots: To prevent congestion at delivery docks (the delivery trucks from various suppliers arriving the same time) retailers will assign delivery time slots. Suppliers must coordinate with their trucking fleet (or 3rd party freight provider) to ensure compliance. This is often problematic as trucks do break down, traffic hold-ups occur etc. This is another problem to manage.
- Charge backs for anything that goes wrong: any problems with lost or damaged stock, late deliveries, or a whole list of transgressions are charged back to the supplier. This is usually done on a "charge first, ask questions later" basis. Managing these claw backs (time spent investigating, disputing claims, and making corrections to accounting entries) adds to the account management overhead.
- Complex volume rebates: If product sales are below agreed levels, the retailer will impose an additional charge back to the supplier. Managing these rebates is another task.
- Joint business planning: retailers will expect suppliers to participate in annual business planning where promotional plans, new product launches and other activities are agreed.
- Regular account reviews: Suppliers will also be expected to meet with Category Managers at least quarterly to review "how things are going."
- Merchandising costs: Some retailers (Bunnings for example) require suppliers to physically attend their stores (Bunnings has some 300 stores) to restock shelves. This requires the supplier to either maintain a team of merchandisers or to outsource this job to a 3rd party specialist (another cost). Strict timetables are maintained and the attendance of merchandisers to each store are tracked.
- Pipeline fill costs: When a supplier firsts gets ranged with a retail chain, often they are expected to fund part of the supply of initial product to "fill the pipeline." Before a new product can be offered for sale it needs to be placed on shelves in all stores, and often also in the retailer's own distribution warehouses. This is effectively dead working capital and retailers push this cost back on the supplier. This will often occur every time a new product is ranged.
For many suppliers managing all this grief (and when combined with the low margins) dissuades them from dealing with the majors, instead choosing to work with independent retailers or even selling direct or online.
However, large suppliers employ specialist account managers who are experienced at "playing the game" and can develop quite effective relationships with their category manager counterpart. Some retailers have a specific policy to rotate their category managers to prevent the development of personal relationships with suppliers before they get too cozy.
The step-up to pursuing a truly intensive distribution strategy means dealing with the major retail chains. This can be a steep and costly learning curve.