“We recently completed our set of distributors per region in Luzon areas but we have not stopped serving our wholesalers.  This now causes channel conflicts which could lead to losing our distributors. The wholesalers are not loyal to our products and oftentimes sell anywhere and below our list selling price. Is it right to just stop serving them and focus selling through our distributors?”   - Val, Makati City
 
 
It is interesting that most organizations use the term rationalize when they mean terminate or eradicate.  Your concern is commonly experienced by most selling organizations that have wholesalers and distributors as their channel members. Most of these companies, after a certain period, decide to protect their established distributor network from wholesalers’ poaching by regulating the price and other supports for wholesalers. Others prefer to see the two channels compete. Whoever has the best price, credit term, and closer relationship with customers wins.  In the end, the brand owner loses.
 
 In her book, Marketing Channels (7th Edition), Prof. Anne T. Coughlan of Kellogg School of Management, discussed a set of marketing flows (from physical possession of the product to payment) to be undertaken in a channel like a wholesaler. She pointed that “a manufacturer must either assume responsibility for all channel flows itself or shift some or all of them to the various intermediaries populating its channel.” In your case, it seems you decided to initially use wholesalers to carry that distribution responsibility. Now, you want your new distributors to handle them in the belief that they are the better channel members to carry out your new set of objectives. Prof. Coughlan also explains that: “one can eliminate or substitute members in the channel, but the flows performed by these members cannot be eliminated. When channel members are eliminated from the channel their flows are shifted either backward or forward in the channel and, therefore, are assumed by other channel members. The obvious reason to eliminate a channel member from a channel is that the flows performed by that channel member can be handled as effectively and at least as cheaply by other channel members.
 
This reminds us to be cognizant of the fact that we do not simply eliminate and substitute a channel member without appreciating the roles it performs. So, the basic question for you is, can your new distributors effectively perform the flows currently done by the wholesalers?  I suggest you consider the following:
 
Consider the role of the wholesaler in the marketing flow. The wholesalers were able to develop a certain level of distribution base for your products. They can do this because of their knowledge of customers and territories, and their established customer relationship which is largely based on low price proposition.  There are also a good number of customers who prefer to buy from them because of their wider product assortment which are usually fast-moving items.  Do your new distributors have the capability to cover these customers and build better relationship with them? Do they know them? Are there other value propositions they can offer beyond price?
 
Consider the timing.  Timing is very important in shifting to another channel member or intermediary. If your market penetration is from mid to high level at this point, then your distributors are good candidates to perform the various distribution tasks. Wholesalers are good channels when your market penetration is still low.  Likewise, timing must be considered if you want to manage a hit in your sales performance and customer service as a result of the transition from wholesaler to distributor. A good time to rationalize your wholesalers is obviously, when distributors are ready to assume the servicing of those customers being served by wholesalers.
 
Consider the capability of your new distributors. Capability is not only measured in terms of number of sellers and strength of the distributor’s support systems. You also need to emphasize the level of customer understanding and customer management of your distributors.
 
 

 
Emilio “Bong” Macasaet III is Partner and Chief Distribution Strategist of Mansmith and Fielders, Inc. (www.mansmith.net), the leading marketing and sales training company in the Philippines. Please also send your marketing, sales and strategy questions to mentors@mansmith.net.