Strategy Blog

Distribution Strategy

In the business world, the term “distribution” refers to the channels, logistics, and processes to move products and services from the point of manufacture, production, or creation to the ultimate end-users.

When “distribution” is linked to “strategy,” the question is: How can distribution serve as a component or variable to support a company’s overall business and marketing strategy?

Distribution is often an unrecognized and underappreciated element of strategy, yet it is almost always an important factor in a winning strategy. Some examples will illustrate this premise:

• Starbucks created a new distribution system for coffee, featuring its own stores and coffee shops, although the economics might have been better if Starbucks had simply sold its coffee in grocery stores and supermarkets. In the beginning years, however, it’s likely that Starbucks did not have the financial wherewithal for the heavy advertising, slotting allowances, and sales-development expenses required to achieve distribution in the supermarket channel. Nor did Starbucks have the brand awareness and reputation that would have allowed it to challenge the major national coffee brands in supermarkets. So, Starbucks wisely chose to develop its own distribution system and its own retail stores. This distribution strategy has been a key element in Starbucks’ success.
• Sam Walton recognized that many parts of the U.S. did not have access to big-box discount stores, so his initial strategy was largely a distribution strategy of building and logistically supporting large discount stores in geographic areas overlooked or avoided by the large national discount chains and department stores. Sears, JCPenney, Montgomery Ward, K-Mart, etc., sat on their haunches and watched Walmart build stores across the forgotten landscape of rural America—until it was too late. Walmart used profits from the rural areas to expand its distribution into urban America.
• Hallmark Cards developed the greeting-card industry. Factors in the company’s long-term success were the development of its own retail stores and the concentration of Hallmark Cards’ distribution in upscale gift shops and other high-end retailers who granted exclusivity to Hallmark. This distribution strategy played a major role in Hallmark’s growth, but it is scarcely mentioned on Hallmark’s website.
• Starting in 1893, Sears, Roebuck and Co. fashioned a catalog and a mail-order business, using a “direct-to-consumer” distribution strategy. This was made possible by the rapid expansion of “free” home delivery of mail in major U.S. cities after 1863 and, especially, by the rapid expansion of “free” home delivery of mail to rural areas after 1896 when a majority of Americans still lived in rural areas. This direct-to-consumer distribution strategy exploited the expanding home-delivery postal system and was core to Sears’ success.
• Founded in 1994, Amazon followed a direct-to-consumer business model and distribution strategy (not unlike the original Sears model) by exploiting a new communications medium called the internet. Amazon’s distribution strategy has been fundamental to its success.
• Uber is an example of a company founded on the creation of a new distribution system for “taxi” services. Enhanced distribution of taxi services is its strategy.

We could go on with an unlimited number of companies and examples of distribution strategies that helped propel those companies to success, but it might be more enlightening to summarize some of the ways that distribution can play a key role in strategy:

• Open new markets. Opening up a new channel of distribution, or expanding distribution into new geographic areas, can give new groups or new types of consumers access to a company’s products or services. For example, a coffee manufacturer selling its coffees only in supermarkets might decide to buy its own trucks and start an office coffee business to deliver its coffees directly to workplaces. Or, the coffee manufacturer might decide to open its own coffee shops, or it could decide to distribute its coffees in new geographic areas.
• Speed up delivery. Distributing a product or service more quickly is sometimes enough of an advantage to justify a new distribution strategy. Amazon combined speed-of-delivery with a direct-to-consumer business model to forge its distribution strategy. Uber combined speed of delivery with smartphone app convenience.
• Reduce costs. If a new system of distribution or improved logistics can significantly reduce costs and improve profit margins, then that distribution strategy might be worthy of pursuit. For example, if a retailer is operating a very expensive retail-store distribution system, the chain might benefit from shifting some of its sales to an online distribution system to save money.
• Reduce out-of-stocks. If retail out-of-stocks is a major problem in an industry or product category, then a new distribution strategy might be called for. Often, an out-of-stocks problem must be attacked with one eye on marketing and promotional activities and the other eye on supply chain and logistics. What looks like a logistics problem might actually be a promotional problem (i.e., consumer promotions might be causing the out-of-stock problem).
• Achieve distribution. If a small company with limited resources has developed an appealing new product but can’t get its new product on the shelf in retail stores, then it could approach a major retailer and offer to distribute its new product exclusively in that retailer’s stores. While this strategy limits the upside potential of a new product because it limits distribution possibilities, it might still be a wise strategy for a small company (limited distribution is better than no distribution). A variation of this strategy is to offer the new product to each retail chain under an exclusive brand name (i.e., each retailer has its own unique brand identity).
• Burnish a brand image. The types of stores a product is placed in can shape and reinforce the consumer’s image of that brand. So, a luxury brand might choose to be distributed exclusively in upscale, high-end retail stores. In contrast, a brand targeting a mass market might seek distribution in every channel and every nook and cranny of the economy.
• Block a competitor. If a manufacturer should become aware that a major competitor is planning to massively expand its online presence and direct-to-consumer business activity, then that manufacturer might aggressively expand its own direct-to-consumer channel of distribution as a blocking action or delaying tactic to blunt the competitor’s actions.

These are the primary (but not the only) ways that distribution can play a direct or supporting role in strategy. But how does a company get to an optimal distribution strategy?

The types of research of greatest value in developing an optimal distribution strategy for a given brand or business are listed below:

• Qualitative research among consumers, customers, dealers, salespeople, and workers in the distribution system provides observations, understanding, and knowledge that can suggest viable distribution strategies, identify logistic alternatives, and develop hypotheses about how to improve or optimize a distribution network.
• Survey-based research yields statistically projectable knowledge about the attitudes, observations, and behaviors of consumers, retailers, dealers, and distribution workers. The goal is to not only prove or disprove some of the major hypotheses developed during the Qualitative research but also to determine the relative appeal of various distribution models to end-customers, retailers, dealers, distributors, etc.
• Secondary data is often used to help optimize a distribution system. Such data might include population and demographic data; economic data and trends; consumer spending data by product category and type of household; transportation alternatives, delivery times, and relative costs; traffic patterns and congestion data; competitive data, etc. The exact types of secondary data required vary by type of product or service and the geographic area.
• Modeling and optimization might be a final step to combine all of this knowledge with the hypotheses, preferences, and the many types of data into one or more simulation models so that optimal solutions can be sought. The modeling process involves maximizing or minimizing a desired outcome, given various inputs and constraints.

The exact types of research, data, and modeling needed to craft an optimal distribution strategy would vary by business, category, and brand, but hopefully some of these ideas and concepts will stimulate your own thinking about how an optimal distribution strategy can shape and magnify your brand’s overall strategy and its long-term success.

Jerry W. Thomas

Chief Executive Officer

Jerry founded Decision Analyst in September 1978. The firm has grown over the years and is now one of the largest privately held, employee-owned research agencies in North America. The firm prides itself on mastery of advanced analytics, predictive modeling, and choice modeling to optimize marketing decisions, and is deeply involved in the development of leading-edge analytic software. Jerry plays a key role in the development of Decision Analyst’s proprietary research services and related mathematical models.

Jerry graduated from the University of Texas at Arlington, earned his MBA at the University of Texas at Austin, and studied graduate economics at SMU.

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