Traditional and fragmented sales channels

In traditional sales channels, the challenge is how to ensure the activation across a multitude of independent points of purchase of different sub-channels, roles and importance in terms of sales and image.

When it comes to the management and the economics of individual points of purchase of retail chains the same logic as for traditional and fragmented trade can be applied. The traditional sales channel consists of a multitude of sub-channels.

Activating each store effectively is normally beyond the reach of many manufacturers for reasons of cost, investment, resources or complexity, given the low value of each point of purchase itself. A first step is to group the points of purchase according to criteria, such as their role and importance, to define activation and investment priorities. There are three main dimensions to segment points of purchase: the role for the shopper, the attractiveness in terms of potential sales, and the attitude in the cooperation with suppliers to activate shoppers and generate sales. It is not only about the type of investments in shopper activation, but also about optimizing the level and length of the investment, not sub-optimizing shopper activation and loyalty initiatives.¹⁹

By understanding the concentration curve, investment can be directed toward the most important points of purchase. Additionally, by evaluating the attitude of the point of purchase in implementing brand, product and service strategies, investment in activation can be optimized. Based on the analysis shopper activation programs can be designed by segment and tier of points of purchase.

Figure 4.12 Number of points of purchase in the traditional sales channel in some Latin American markets

Number of points of purchase in the traditional sales channel in Mexico, Brazil, Argentina, Ecuador and Chile.

Source: Author, based on information from Euromonitor, The Coca-Cola Retailing Council Latin America & info economia.

Figure 4.13 Type and importance of different sub-channels in the traditional sales channel Number and type of sub-channels in the traditional sales channel in Colombia and Ecuador. Source: Nielsen, 2011

The sales force has a key role in activating points of purchase. In the case of retail chains, the activities that can be performed on the point of purchase level depend on the guidelines of the retail chains. In the case of traditional and independent sales channels the activities that can be performed at the point of purchase depends on each individual point of purchase. Managing the point of purchase can be divided into activities to be performed and the frequency of their performance. The activities can either be performed by the sales force at the point of purchase, or be outsourced to distributors or other partners. The frequency and time of the activity needs to be optimized in terms of investment in material and resources vs. the expected increase in sales and margins. Point of purchase activation resources investment is economical as long as the marginal productivity is positive. As long as the increase in resources results in more output, the investment makes economic sense. The resource allocation by point of purchase needs to be optimized in terms of type of activities, by whom they should be performed, the total time invested by the point of purchase in terms of frequency of performing it and the length of the activity. It is applying the neoclassical concept

Figure 4.14 Concentration curve

Concentration curve of the points of purchase of the traditional sales channel in Latin America with the percentage of all points of purchase and the percentage of sales in a specific category Source: Author

Figure 4.15 Marginal productivity function

Marginal productivity function that explains the additional profitability of additional resources. Investing more resources is only economical to the point where the function of marginal productivity reaches zero.

Source: Brewer, 2010

of marginal productivity to the optimization of shopper marketing resource investment by point of purchase.

Non-availability is a key driver of dissatisfaction among shoppers, and obviously of lost sales as well. Order taking, delivery and functioning supply chain operations are key dimensions for a successful shopper marketing.

The order-taking and supply-chain operations implications depend on the type of category. High value and low frequency purchase products often need a different order-taking

Figure 4.16 Factors having a negative influence on the shopping experience

Factors that most contribute to a negative shopping experience for shoppers in the UK.

Source: Cognizant, June 2011

and supply-chain system than categories of lower value and high frequency sales and turnover. In such categories the need for cost-efficient solutions are of higher concern as the margin per individual product and service sold is considerably lower. Often several ordertaking and supply-chain solutions are used to ensure availability at the different points of purchase, reaching from direct service, joint ventures, distributors, wholesalers and third-party logistics solutions. The order taking can be done directly, over the phone, or digitally, either through the internet, or through specific applications. For large customers, such as retail chains, volumes and annual discounts are normally negotiated, including supply-chain solutions like customers’ central warehouses. Orders can be automated through electronic data interchange (EDI) systems within the ECR framework to minimize out of stock, while optimizing the supply chain cost efficiency.

The optimum configuration of the route to market and management of the points of purchase touches the key question of in-sourcing vs. out-sourcing, as described in the Coase theory and the discussion of transaction costs, as first highlighted in the article “theory of the firm”.²⁰ When to outsource route to market activities, such as the management of the point of purchase, depends on the effectiveness and efficiency in terms of expected results, investments, and costs of the activities to be performed, by whom they should be performed, and where they should be performed in relation to area and zone, as well as point of pinchase. Solutions can be differentiated by segment of point of purchase, also depending on where more control out of strategic reasons is needed.

Order taking and supply chain operations are key to ensure availability of products and services. There is a step between out of stock and out of shelf, and there needs to be a system and incentives in place to ensure that this step is fulfilled. The order taking and supply chain needs are often scrutinized under the eye of cost efficiency, but they are at the same time the precondition for the effectiveness of point of purchase activation.²¹ In traditional sales channels availability and minimizing both out of stock and out of shelf is often an important factor of competitive advantage.

Distributors often play a key role and provide service beyond just logistics to the point of purchase. They are normally more efficient due to a wider offering in terms of categories they cany and due to a more advantageous cost structure. For manufacturers with less sales, distributors often play a key role in distributing their products and services, as well as activating the point of purchase. The danger being that a distributor with a big variety of brands, products and services only gives limited attention to specific brands, products and services. Programs and agreements sometimes exist to incentivize the distributor to prioritize specific brands, products and services. Promotional programs can also be offered to the shopper to build a pull effect and increase the attractiveness of the point of purchase and the distributor to carry and deliver the brands, products and sendees. Other programs will target the distributor and his sales force, or the point of purchase and his salespeople to incentivize them to sell and prescribe specific brands, products and services. There exist agreements on exclusivity with distributors, either entirely, for specific categories, or specific products.

Designing the optimum route to market strategy is a tradeoff between potential sales and margins, and the cost efficiency, including strategic considerations. A route to market structure of many small points of purchase can be as efficient as one of only few large points of purchase. The driver of efficiency is the asset, resource and time investment to generate sales and margins. These can be the same in a route to market structure defined by a very high density of small points of purchase that can be managed with the same level of investment as few large points of purchase with a very low density. Different route to market alternatives have to be evaluated and compared over key criteria to design the optimum solution.

Figure 4.17 Model to evaluate the route to market strategy

Example of route to market strategy evaluation in beverages in Eastern Europe. Points to analyze are the importance of the different categories by main sales channel, the concentration curve and coverage economics of the point of purchase universe, the supply chain costs by point of purchase, and the margins of serving tire point of purchase.

CSD: carbonated soft drinks.

Source: Author

Figure 4.18 Framework to evaluate the cost efficiency of route to market alternatives

Example of the cost efficiency evaluation of two route to market alternatives, along the criteria of cost per sales and delivery route, productivity in working hours, point of purchase density in terms of number of visits per route, visits with sales, average sales per point of purchase. The result is the cost per sold unit. The illustration is indexed relative to both alternatives, with the index 100 as the more unfavorable result. The lower index indicates the advantage in percentage over the higher index. The cost per unit sold is the product of multiplying the other criteria and the result shows the relative advantage of one alternative over the other.

Source: Author

The interest of third parties to develop new brands, products and services is often limited as they do not generate much sales, at least at the beginning, and they prefer to focus on brands, products and services that are already successfol with higher sales and margins. Therefore, a fundamental decision is the evaluation of the effectiveness of different route to market strategies. Is a more efficient route to market strategy conducive in the longer term to develop new brands, products and services. Different route to market strategies can be used in parallel, not only for different sales channels, countries, or regions, but also for different brands, products and services, and also during their different development stages.

There are different route to market strategy solutions, from direct management, over distributors, to different joint ventures with complementary categories. To combine the advantages of a higher activation focus and effectiveness of direct route to market strategies and the operational efficiencies of third-party route to market solutions third-party logistics models have been developed. Within third-party logistics (3PL), the sales development effort stays with the brand, product and service owner, and the operational logistics part is conducted by a third party specialized in efficiency.

The possibility of generating interest directly with consumers and shoppers through direct activation, for example, advertisements, digital touchpoints or promotions in charnels to generate a pull instead of a push is an important consideration when evaluating route to market alternatives.

Each route to market model has its implications in terms of activation effectiveness, cost efficiency, investments, asset ownership and flexibility, and strategy realization. The configuration of the route to market system depends on the objectives and the reality of the market. Therefore, depending on the situation, different solutions may be needed for different markets, categories, and situations. Companies often use different route to market solutions in parallel. If the overarching route to market objective is cost efficiency the variety of route to market solutions is wider, while if the main objective is effectiveness, the variety is more limited.²²

Figure 4.19 Third-party logistics (3PL) system

Example of a 3PL system in which the manufacturer takes care of order taking and the logistics operator is responsible for the distribution and invoicing of customers.

Source: Author

Figure 4.20 Type of route to market models used across 23 countries

Example and spread of different route to market models used by a leading beverage manufacturer across 23 countries in Europe, Africa, Asia and the Americas.

Source: Author