Clugston Distribution

The internet has already become a mature technology, one which is noticed more when it is absent than when it is present. There is virtually no brand today that does not have an internet presence, but in the last few years we have seen more of these brands become accessible through multiple online channels, such as e-tailers, comparison sites and direct websites (for vendors). More interestingly, since the initial explosive arrival of social media such as Facebook and Twitter, these channels have moved into the commercial sphere and now no business can afford to ignore them. The emergence of ‘the cloud’ has gone from a meteorological reference to a distribution force, with an enormous impact in terms of changing many digital products into services, accessible from a huge variety of devices. Even the concept of downloading an album (a product) is now under threat from the concept of streaming that album live to your web-enabled device (a service).

Those of us who are accustomed to having our software and files on our own laptops are now learning about keeping it all in the cloud. The term ‘App’ has become part of everyday language and now represents the battleground between competing platforms. At the time of writing, iTunes’ head start and its 250,000 plus apps is giving Apple an advantage over competing platforms and devices. For many businesses in the software, media and entertainment sectors these are huge forces that will change not only their routes to market, but indeed their core offerings. For others, whose products are not capable of being made digital, their challenge is how do they ensure that they can make their physical channels of distribution work in harmony with their online channels? With very different cost structures, margin expectations and customer engagement models, these channels usually compete with each other, but smart brands have found ways to allow (even encourage) customers to shift seamlessly between channels to suit their preferences, moods, modes and point in the purchasing and ownership life cycles.

The growth of franchise systems has if anything accelerated through the recession, but even prior to that, franchising has proved itself effective in both mature economies and fast-growing emerging markets such as Brazil, India and China. Perhaps best known in the Quick Service Restaurant sector where McDonald’s and Subway have built over 30,000 stores each in a hundred or more countries, franchising can now be found in almost every consumer sector and many business-to-business sectors.

Typically around half the price paid for a product by a customer is absorbed by the activities involved in getting that product to the customer (and the customer to the product). And this is a proportion that has increased significantly over the past 15 years as production costs have fallen while markets have segmented and media and distribution channels have multiplied. Typically, this is the proportion of costs which is least well controlled and least well understood.

Markets are fragmenting as trends in consumer and business demographics create additional and more distinct customer segments. To make matters worse, product and service innovations are multiplying the options available. Even simple, commodity-type products may now be distributed to multiple customer segments through multiple routes that differ by country or region. Many of these routes to market involve one or more types of intermediary, such as wholesalers, distributors, dealers, brokers, aggregators and retailers, or rely upon influencers who shape customer preference or act as specifiers or their behalf, such as architects or designers. Very few companies can tell you what it costs to sell through a particular route to market whether that be direct, one-tier (eg supplier to dealer to customer) or two-tier (eg supplier to distributor to retailer to customer) distribution. Fewer still can inform you of the profitability of specific intermediaries. We have found wide variation in the costs and profitability of channels and specific intermediaries in every industry and distribution system we have investigated. Companies that have invested in analysing and understanding the business models of their distribution system have been able to take significant cost out of their own business, increasing profits or reducing prices to gain an edge over the competition.

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