Why It Matters: Place: Distribution Channels
Why learn about distribution channels?
More Than Just Another P
Of the elements in the marketing mix, product and price are perhaps the easiest to understand. We see products all around us, and we understand that we need to pay a specific price to buy them. Promotion is sometimes a little more difficult to grasp, but if we begin with the concept of advertising and then develop a more complete view of promotion from that, promotion is also fairly easy to understand.
“Place,” on the other hand, is not so straightforward. In fact, using the word “place” can be misleading. If I were to say, “We are going to talk about place related to groceries,” you would likely think about where you buy your groceries—as in, which store and which location. In this module, though, we want to discuss the process of determining where you want to find particular groceries and how to get those groceries to that place in the way that best aligns with your preferences.
While it inconveniently begins with the letter D rather than P, distribution is a more accurate description of this function. Distribution brings the products that you want to the place where you want to buy them, at a cost that supports the customer and company price requirements.
How do your groceries get to the right place at the right cost? To explore this question, let’s look at two high-end grocery stores that use very different methods to manage this process: Whole Foods and Trader Joe’s.
Whole Foods’ Approach to Distribution
Whole Foods’ motto—Whole Foods, Whole People, Whole Planet—emphasizes a vision that reaches beyond food retailing. The company has chosen a strategy of sourcing locally wherever possible. This, in turn, has driven the strategy of how Whole Foods fills its shelves—the distribution strategy. The video below explains how the company sources products.
In order to support local sourcing, store managers are empowered to make purchasing decisions for each store, independently of the regional offices. As a result, it is possible for Whole Foods to buy potatoes from a local farmer who would never dream of selling his produce to a large grocery chain. Essentially, Whole Foods is differentiated because all products are sourced locally. The stores operate under minimal governance and are given maximum freedom to source a product mix that is appropriate for their location. Whole Foods stores operate according to the premise that they need these freedoms to meet the unique buying needs of their local customers. The only governing rule put in place by the corporate office is that stores must not stock products with artificial flavors, preservatives, colors, sweeteners, or hydrogenated oils. A downside to this local purchasing policy is that consistency is compromised across the chain. Every retail location carries a variety of products that distinguishes it from other stores in the same chain.
Not surprisingly, it is difficult to achieve economies of scale with this model. Higher distribution costs lead to higher prices, which makes it important for Whole Foods to target customers with high incomes. To ensure ample access to their target consumer segments, Whole Foods opens stores in communities with a large number of college-educated residents with no fewer than two hundred thousand people within a twenty-minute drive.
Trader Joe’s Approach to Distribution
The mission of Trader Joe’s is to give customers the best food and beverage values they can find anywhere and to provide them with the information required to make informed buying decisions. The company strives to provide these with a dedication to the highest quality of customer satisfaction delivered with a sense of warmth, friendliness, fun, individual pride, and company spirit.
At the core of the Trader Joe’s “way” is a focus on cost control, simplicity, and fun. These company objectives are woven throughout each aspect of the business. Trader Joe’s aims to create a truly unique customer experience, offering high-quality gourmet foods at a low cost in a fun environment that keeps customers coming back for more.
Trader Joe’s manages its distribution networks by minimizing the number of hands that touch the product, thereby reducing costs and making products quickly available to their customers. The company orders directly from the manufacturer. The manufacturer, in turn, is responsible for bringing the product to a Trader Joe’s distribution center. At the distribution center, trucks leave on daily resupply trips to local stores. Because the stores are relatively small, there is little room for excess inventory, and orders from distribution centers need to be incredibly precise.
This quick and efficient distribution process is directly responsible for helping the company identify where to locate new retail stores. Trader Joe’s will only enter markets where the region has a distribution infrastructure that allows it to efficiently resupply products to stores. They have not opened stores in Florida or Texas—both large, lucrative markets—because the distribution networks are not yet strong enough to support their strategy.[1] [2]
Trader Joe’s strategy of implementing a low-cost and efficient distribution network has contributed to the democratization of gourmet foods by making them more readily available to customers at all income levels.
You can see that the distribution strategy for each company has an effect on where they open stores, how they price their products, which customers will buy, and who will have access to gourmet foods.
In this module, you’ll learn more about distribution strategies and their role in the marketing mix.