Distribution Channels

Understanding and Managing Channels to Markets

Business Model

Dr. Khaled EL Sakty Salma Elsayed

 01 Introduction

02 Distributors and Wholesalers

Contents
03 Final-tier Trade Channel Players

04 Retailers

Franchising as a Route to Market

05 Business Model Creation
01 Introduction
 Introduction

01 Distribution matters

02 Challenging business dynamics

03 Business models to value propositions

 01 Distribution matters

Matters

1. Around half the price paid for a product is involved in getting the product to the customer.
2. There is variation in the costs and profitability of channels in every industry.
3. Companies have invested in understanding and analysing their DC to take significant cost cut.
4. This leads to increasing profits, reducing prices and gain competition.
 01 Distribution matters
Significance

Routes to market control access.

▪ Without the right routes to markets, you simply won’t reach your target market.
▪ Your market access depends on understanding the role you want your channels to play

Routes to market control brand.

▪ Brand is built on low price.

▪ Brand is built on quality attributes.
▪ 6 Rs (return, replace, refund, repair, refurbish, recycle)

Routes to market control product differentiation

Competitors
02 Challenging business dynamics

▪ Distribution businesses are inherently difficult businesses.

▪ Typical types of distribution players and define their role in a distribution system.

Typical distribution structures

1. Direct
2. One-tier distribution
3. Two-tier distribution
4. Multiple-tiered distribution
5. Aggregators
6. Original equipment manufacturer channel (OEM)
 Typical distribution structures

Customer

Final tier Intermediary

Intermediary

First tier Intermediary

Supplier
Direct One-tier distribution Two-tier distribution
 02 Challenging business dynamics
Typical distribution structures

Direct One-tier distribution Two-tier distribution

1. Suppliers own and manage DCs 1. Employing one intermediary. 1. Many intermediaries.
2. Relying on online direct distribution 2. Well-defined segments of customers. 2. Reach more customer segments.
3. Respond directly to demand. 3. Leverage of investments. 3. Availability and variety every where
4. Interact directly to customers. 4. Grant trading margin to the intermediary.
5. Dilution of focus as the intermediary sells many brands.
 02 Challenging business dynamics
Typical distribution structures

Multiple-tiered distribution Aggregators Original equipment manufacturer

channel (OEM)
1. More tiers to reach end customers. 1. Brokers for example. 1. One supplier makes a product that is
embedded inside another.
2. Complex geography and economic conditions. 2. Bring demand of customers into bulk. 2. A prior channels to market channel.
3. Such as China. 3. Volume discounts.
4. Economics of scale.
5. Lower price.
6. Small percentage of revenue.
7. Focus on a very restricted set of products.
8. Gain market access via limited resources.
03 Business models to value propositions

What do we mean by business model?

▪ Term ‘business model
▪ How a business makes money from its activities
▪ It is a financial expression.
▪ It is based on the role, positioning, strategy and execution of a business plan.
▪ The intermediary want to know

1. Product ’s margin
2. Product ’s cost to sell
3. Product ’s life cycle
4. Level of returns and warranty claims
5. Promotional spends
6. Stocking requirements
7. Opportunity to sell related products and services
 Value Proposition
➢ A supplier need to understand the business model (downstream).
➢ Final-tier need to understand customers’ businesses.
➢ A well grounded approach of DC structure.
➢ Best DC position in term of channel’s objectives

Analyse channel’s Identify own unique Develop and sell value

Identify opportunities
business model strengths proposition

Business Competition doing

Unique assets Core trusts
objectives analyses

Assets deployed to Market gaps

Business measures Business impacts
DC existence
02 Distributors and Wholesalers
 Distributors and Wholesalers

01 The role of distributers 05 Productivity

02 How distributor business models works 06 Sustainability

03 Margins and profitability 07 Managing growth

04 Working capital 08 Sell to distributors

 Distributors and Wholesalers

01 The role of distributers

Core functions to Customers

▪ One stop shop

▪ Breaking bulk
▪ Credit
▪ Technical support
▪ Product marketing
▪ Logistics
▪ Order consolidation
▪ Project management
▪ Drop shipment
▪ Sourcing
 01 Distributors and Wholesalers

The role of distributers Optional services offered by distributors to customers

Typical core offering Typical optional services

▪ Availability
One stop shop
▪ Simplified supply logistics
Breaking bulk ▪ Orders dispatching - Repackaging
Credit ▪ Extended credits
Technical support ▪ Technical training
Logistics ▪ Delivery
Order consolidation ▪ Shipping to multiple locations
Project management ▪ Shipping from multiple suppliers
Drop shipment ▪ Deliver to end customer
Sourcing ▪ Acting as a supplier to final-tier
 01 Distributors and Wholesalers
▪ Demand generation
▪ Supply fulfilment
The role of distributers Core functions to Vendors
▪ Market information
▪ Outsourced services
Optional services offered by distributors to Vendors

Typical core offering Typical optional services

▪ Channels accounts
Demand generation ▪ Channels database
▪ Channel financing offerings
Supply fulfilment ▪ Bulk breaking
▪ Reverse distribution
▪ Channel risk
▪ Vendor managed inventories
Market information ▪ Sales out reporting
▪ Channel research
▪ End customer research
Outsourced services ▪ Warranty management
▪ In-market representation
 Alternative models
A range of distributors types in term of their business model

Value added Fulfilment

distributors distributors

1. Limited distribution in market 1. ‘Bought rather than sold’ term

2. Very or one distributor 2. Acting as logistics engines for suppliers.
3. Small market size 3. Massive volume
4. Conducting marketing and sales activities. 4. High revenue

Broad line
distributors

1. Mainstream market coverage

2. Product range
3. Having market access
4. Price-competitive
 Distributors and Wholesalers
02
How distributor business models works

Role defines business model

Distributor’s business model is capital intensive, thin margins, and high volume.

Distributor financial statement Distributor income statement

➢ Inventory ➢ Sales
➢ Account receivable ➢ Cost of sales
➢ Account payable ➢ Gross profit
➢ Overheads
➢ Operating profit
➢ Taxation
➢ Profit after taxation
 Distributors and Wholesalers
03
Margins and profitability

Multiple margins The margin is to measure the profit of the business.

Gross margin and value add Margin mix and blended margin Contribution margin Net margin and operating margin
It is the difference between Distributing for brand leaders in Products need presale support Profitability measure
the price paid to supplier the market.
and the price obtained from
the customer
The higher the margin, the Lower margin, higher volume Deducts variable costs Deducts cost of sales
greater the value added by Sales management Cost to serve Deducts cost of sales
the distributor.
Discounted prices. 1. Marketing driven cost Deducts interest
2. Sales driven cost
3. Transaction driven cost
4. Logistics driven cost
5. Inventory driven cost
 Distributors and Wholesalers
04
Working capital

▪ A term used in a trading cycle of a distributor.

▪ It represents the capital needed to fund cash-to-cash cycle.
▪ It is not a source of fund, but it is an application of fund.
▪ Financial amounts converted into days.

Purchase products

Sell products Working Store products

capital
 Distributors and Wholesalers
05
Productivity

➢ Combine ‘earn’ and ‘turn’ aspects.

➢ Productivity measures.
➢ ‘Gross margin return on inventory investment’ measure.
➢ GMROII = Gross profit/inventory
➢ A powerful measure in the distribution business.
➢ It is considered by product managers as an ideal performance measurement of distribution.
➢ Applicable in distribution system.
 Distributors and Wholesalers
05
Productivity
Components of return on brand

Return on brand investment

Contribution profit Working capital

Gross profit Expenses inventory Receivables payables

 Distributors and Wholesalers
06
Sustainability

Two measures

RONA • Return on net asset

ROCE • Return on capital employed

 Distributors and Wholesalers
07
Managing growth
Growth dynamics
✓ Advertising and promotions
✓ Better prices
✓ Better service
✓ Availability
✓ Responsive delivery
✓ This leads to increase working capital and absorbs cash

Economics of scale

✓ Fixed costs spread over a larger volume of business.

✓ Delay making investment that increase fixed costs, until after revenue growth has pushed up.
✓ How fast a market is changing.
✓ Competition Growth can lead to complexities, diseconomies of scale.
 Distributors and Wholesalers
08
Sell to distributors

▪ Sell through’ rather than ‘sell to’.

▪ Suppliers need distributors focusing on their products and promote their sale.
▪ Suppliers secure distributors.
▪ Long term relationship between suppliers and distributors.
▪ Distributors are key links in the route to market.
▪ Partner’s strategy.
▪ Positive forces on the distributors’ economics.
▪ Distribution channels become trade channels.
03 Final-tier Trade Channel Players
 Final-tier Trade Channel Players
Final-tier trade channel players refer to those players that interact with end customers

Industry Final-tier trade channel Typical activities

▪ Sell
Dealers
▪ Service
Automotive (cars, spare parts) ▪ Repair
Workshops
Consumables (oil) Tyres accessories ▪ Service
▪ Supply
Specialist repair shops
▪ Repair

Industry Final-tier trade channel Typical activities

▪ Sell
Dealers
▪ support
▪ Install and set up
Information technology & communications Value added dealers
▪ Solution
▪ Design
System integrators
▪ Integrate
 Final-tier roles definition

Solution integrator and

Extension of vendor Product completer Service provider
advocate to customer

Knowledge to
Knowledge of Knowledge to Knowledge to make the
product’s configure the make the product works
market product product works with other
products

Process Knowledge of
management the customer’s
knowledge requirement
 Different roles command different compensation models

Partner role

Extension of Product Service Solution

vendor completer provider integrator

Business model

Activity-based model, defined by contracts and service level agreements Value and risk based mode

Compensation model

Customer pays for bespoke value Customer pays fees

 Sell with players and strategic alliances

▪ Two or more suppliers need to partner.

▪ Forming a strategic alliance.
▪ The purpose is to

▪ Generate higher sales volumes.

▪ Provide better distribution rates.
▪ Enter new markets.
▪ Provide equal commitment of resources.
▪ Leverage market power.

▪ The relationship depends on the relative market power and the time horizon.
 Matrix of possible ‘sell with’ models
Revenue pull-through
Share efforts to land opportunities for shared returns
Market disruption
Secure penetration of key customer segments to gain attention
Partnering programmes
Exchange of information or value (access to customers vs. access to specialist skills)
Strategic partnership built on revenue pull-through
Reduce costs of working with each other and increase integration of resources

High power
Revenue pull Strategic
through partnership built

Partnering
Market disruption
programmes
Low power

Short term Long term

03 Final-tier Trade Channel Players
1- Business model of the final-tier trade
 Final-tier Trade Channel Players
1- Business model of the final-tier trade
Managing a service business

Service business
Volume sensitivity
measures

• The cost of people delivering service is fixed • ‘Value creation’ term

• There is seasonal cost • Financial statement People-based
• Employment legislation • Service-based business model value delivery

• Mange people
Contract-based • Training
Fixed capacity
value delivery • Work experience
• Staff skills
• Demand management • Fulfilment on time
• Providers’ resources • Standard quality
• Trade-off concept • Maximize profitability
• Planning capacity • Selling skills
Managing a service business

Managing a
service
Guide
03 Final-tier Trade Channel Players
2- Sales and utilization
 Final-tier Trade Channel Players
2- Sales and utilization

▪ Utilisation is the key measure of productivity used in service providers.

▪ It is based on both; billable time and standard time.
▪ Billable time is the time spent working on agreed customer contracts or projects.
▪ Standard time is the number of hours or days that a billable person should be available to work

Capacity utilization rate = ( Actual output / potential output ) * 100

03 Final-tier Trade Channel Players
3- Gross margin and recoverability
 Final-tier Trade Channel Players
3- Gross margin and recoverability

Margin Model

Near to the product Near to the customer

Low value High value

Gross margin 10% Gross margin 80%

 Final-tier Trade Channel Players
3- Gross margin and recoverability
Recoverability

✓ It affects the profitability

✓ It refers to the proportion of the fully priced resources consumed by a contract.
✓ ‘final contract price paid by the customer’ term equals to the sales line.
✓ ‘total resources used’ term refers to the time of in -house people, external staff and services bought to deliver products.
✓ ‘standard price’ refers to the target prices the service provider has set for each of its resources.
 Final-tier Trade Channel Players
3- Gross margin and recoverability
Measures for the web - based service business model

▪ Volume processed
in total, by hour, by segment, degree of utilisation of infrastructure.
▪ Customer browsing behaviour
in term of visited sites, time spent in sites and selection.
▪ Customer buying behaviour
in term of average basket, payment methods, and purchases.
▪ Downtime
when a service is not available or consuming long time to calculate cost.
▪ Customer transaction success/failure rates
when a customer is lost by technical issues.
Measures for the web - based service business model
03 Final-tier Trade Channel Players
4- Sell to final-tier trade
 Final-tier Trade Channel Players
4- Sell to final-tier trade
❑ Selling to a distributor is about selling the business case for a commercial relationship.
❑ Or it refers to demonstrating how you can deliver business benefits from working together.
❑ Final -tier is not the end customer, but a route to market to the end customer and a critical element in the distribution model.
❑ Segmenting the final -tier trade channels.
❑ Segmentation enables you to allocate resources.
❑ Segmentation helps understand channel economics.
❑ Key dimensions of effective channel

Growth Profit Productivity

Brand New markets Margins Overheads Resources Marketing
New clients Positioning Funds Contracts Assets Capacity
Joint business New Tech Sales Training Leadership Co -branding
04 Retailers
1- Retailer business model
 Retailers
1- Retailer business model

Mapping of types of retailer in terms of ‘earn and turn’

❑ The store-based retail channel is a high-risk channel as errors made in site selection.
❑ Retailers describe their business model in terms of ’earn and turn’.
❑ The turn and earn index analyses inventory turnover and gross margin using a ratio.
To calculate turn and earn, multiply inventory turns by gross margin percentage.
❑ So, retailers are classified as:
➢ High earn and low turn
➢ Low earn and high turn High earn
Book stores Electronics and
Clothing stores appliance stores

Petrol station
Building stores
Low earn

Short turn Long turn

04 Retailers
2- Measures and management matters
 Retailers
2- Measures and management matters
Retailer profitability levers

Advertising costs

Store costs

Overhead Distribution costs

Net profit
Administrative
costs
Gross margin

Financial stores
04 Retailers
3- Sell to retailers
 Retailers
3- Sell to retailers
➢ Selling a commercial relationship to retailers that create economic value for the business model.
➢ Retailer challenges:

Globalisation
Changes in customer experience
Moving from products to services
Suppliers dynamics
Enabling technology
Available resources
Stock requirements
Forecast sales
05 Franchising as a route to market
What is a franchise?

❖ It is a right granted to an individual or group to market a company's goods or services.

❖ The franchisor grants the right and the franchisee acquires the right under a contract.
❖ The franchisor provides an operating manual, training and operational guidance.
❖ The franchisor is in the business of selling a proven business model.
❖ There are some costs and risks for the franchisor from lousy operators.
❖ Each country has specific legislation governing the ways in which franchise systems operate
Implications for distribution strategy

Exclusive
Contract Matter
Territories

▪ Knowing how to use contract.

▪ The right to market/distribute without competition from others.
▪ Knowing how to manage contract.
▪ The ability to control the location and density.
▪ Knowing how to manage disputes

Recruiting
Franchisees

▪ Awareness of legal aspects.

▪ Franchise business options.
▪ Franchising opportunities.
 Franchising as a route to market

Advantages of franchise

▪ Rapid expansion with less capital

▪ Lower cost of distribution network management
▪ Higher levels of motivation to provide greater service
▪ Easier and quicker penetration of international markets
▪ Benefits of scale
▪ Power of leverage over distribution channel

Disadvantages of franchise

➢ Brand exposure from trusting brand to franchisee

➢ Dependency upon franchisee for business performance
➢ Inability to influence pricing
➢ Poor adoption of training and customer service
➢ Difficult to respond quickly to unhappy franchisee
➢ Cost of exit from franchise contract
➢ Legal exposures from illegal or unsafe activates
How the franchised business model works

Grow sales

Grow Grow
Customers profits
Franchise system
wheel of success

Grow brand Add Stores

 Business Model Creation

Value Proposition
▪ What value/products do we deliver to the customer?
▪ Which customer problem do we solve?
▪ Which product or set of products (can be service too), are we offering to our customers?
▪ Which are the customer problems we are solving?
▪ Example: quality, performance, design, branding, strategy, cost reduction, pricing, risk reduction, production
efficiency, legal, etc…

Customer Segment
▪ For whom are we creating values with our products?
▪ Who are our most important customers?
▪ Do we have a pareto diagram of our customer?
▪ Example: Mass market, segmented market, niche market, diversified market
 Business Model Creation

Customer relationships
▪ How do we establish relationship with our customers?
▪ How are their expectations in terms of relationship from our customers
▪ How do we keep the relationship with our customers?
▪ Costs to keep the relationship, do we know them?
▪ Examples: Face to face, cold calls, support line, automated service, forums, etc…
 Business Model Creation

Distribution Channels

➢ How do we reach our customers? How do we reach our customers segments?

➢ How do they want to be reached? Did we qualify the quality of our channels?
➢ What are the best channels? Channel phases:

1) awareness: how do we raise awareness about our company and products and services?
2) evaluation: how do we help customers evaluate our organisation's value proposition?
3) purchase: how do we allow our customer to purchase specific products and services?
4) how do we deliver a value proposition to our customers?
5) after sales: how do we provide post purchase customer support?
 Business Model Creation

Revenue Stream

▪ What value are our customers willing to pay?

▪ How do they pay?
▪ Do we know the repartition of our revenues?
▪ type of revenue:
➢ Piece Price
➢ Asset Sale
➢ Commission
➢ Advertising
➢ Lending
➢ Subscription Fee
➢ Type Of Pricing
➢ Fixed Price
➢ List Price
➢ Volume Dependent
➢ Price Fixation
➢ Negotiation
 Business Model Creation

▪ What key activities are needed by:

▪ our value proposition?
▪ our distribution channel?
Key activities ▪ our customers?
▪ our revenue stream?
▪ our cost structure?

▪ What key resources are needed by:

Key resources ▪ our value proposition?
▪ our distribution channel?
▪ our customers?
▪ our revenue stream? our cost structure? example: financial, human, machine, material, intellectual,

▪ who are the key partners?

Key partners ▪ who are the key suppliers?
▪ which key resource is dependent of key partners or suppliers?
▪ example: reduction of risk, dependency, acquisition of resources,
 Business Model Creation

Cost structure

▪ What the biggest costs involved? which resource? which activity?

▪ how is our cost structure built? What are the repartition (fixed, variable, etc…)
▪ do we have a coherent cost structure?
▪ Are the revenues higher than the costs?
▪ Can investments be paid back?

Strategy

▪ Is there growth in our business?

▪ How shall it be achieved (organic, inorganic, …) ?
▪ What are the capital requirements for the growth?
▪ Do we have a vision of the future?
▪ Do we have a mission statement for the company?
▪ How can we raise capital if needed?
 Business Model Creation

Competition

▪ Who are our competitors?

▪ How are they ranked?
▪ How is the market developing (growing, stagnating)?
▪ How do we differentiate from our competitors?
▪ How big, how strong are our competitors?
▪ How are they seen from our common customers?
THANK YOU
Salma Elsayed