Reynolds Metals Company Distribution Channel Strategy Managing Incentives under Intensive Distribution March 2000

The Incentive Problem Under intensive distribution, there is continuing pressure by larger, powerful resellers to: – Seek special discounts to bolster margins that are otherwise competed away – The discounts are not fully passed along to consumers – To take advantage of these discounts to forward buy – And to divert discounts received in one region to another region This process serves to raise manufacturing and logistics costs through out the channel

Tying Discounts to Promotion The MDF plans require that: – Retailers provide promotional support for all discounts in order to “earn” them – Further, the plans limit the discounts to the volume of product sold during the time the discount is available. This eliminates the economic benefits to be derived from forward buying and diverting

Impact of Plan to Retailers Retailers lose the significant increment to gross margin that derives from a simple discount plan These discounts provide a major income stream that is greater than savings from reduced stock Retailers run a full set of promotional programs at all times, there is seldom any slack Support for Reynolds must therefore come at the cost to another supplier and another promotion

Impact of Plan on Supplier Suppliers benefit from: – Reductions in manufacturing and inventory cost – More effective use from promotional plans and the extra sales gained Suppliers risk: – Loss of retailer support for earned promotions – Loss of some distribution breadth and depth – Competitor opportunism

The Role of Price Elasticity The role of price elasticity has a key impact upon the impact upon the supplier – Higher price elasticities will result in a greater loss of sales if retail prices rise as a consequence of the strategy – The shift to the new strategy, as a consequence, can only be led by suppliers with strong brands – Resistance to choice compromise is critical

Logistic Savings Logistic and manufacturing savings are a free gain to the supplier of one to several percent Logistic savings to retailers may be ephemeral since they can may be competed away Unrestricted trade discounts are less vulnerable and a boon to retailers