Distribution systems may evolve over time as a business grows and changes. Consider

a small one-store family restaurant named Gia's, with delicious, unique, homemade

salad dressings (e.g., Pomegranate Vinaigrette, Rum-Raisin-Orange Ranch, Blue

Cheese Catalina). Initially, the dressings were only available to customers eating at

Gia's. Then customers begin requesting bottles to buy. Initial sales and distribution of

Gia's Salad Dressings were from the restaurant to walk-in customers. The product was

packaged in a 32-ounce canning jar with a handmade label.

New distribution channels cause packaging and pricing changes. Then Gia's

Dressings were sold to a local grocery store at a discounted wholesale price, 28

percent less per ounce than the retail restaurant price, packaged in a smaller, 26-ounce

bottle. As local demand grew, Gia decided to have the dressings made in an

independent packing facility and sold to other stores in the area, which initially raised

the cost of making the dressings. Gia's husband, brothers, and a sister-in-law divided

up initial sales responsibilities to call on local and regional stores in their spare time.

The popularity of Gia's Dressings caused Gia to consider the possibility of selling

large pallet quantities to distributors in other states. The distributors needed another 25

percent discount from wholesale price, along with free shipping. Sales brokers were

also recommended, at 5 percent commission on net distributor sales, since the family

could no longer call on everyone. A separate company would have to be set up to

market the salad dressings; an enterprise requiring full-time management.

Distribution channels are key to pricing and packaging decisions. In this case, a

separate business, new distribution channels and sales representation grew out of Gia's

initial one-store restaurant. Gia's restaurant was initially able to sell the salad dressings

at $5.00 per 32-ounce jar (15.6 cents per ounce) directly to customers. However, once

a decision was made to sell Gia's Dressings as a shelf-stable item in grocery stores, the

bottles changed to a standard 26-ounce size to compete with other dressings sold in

this size.

Gia was concerned that grocery consumers, unfamiliar with the restaurant, would not

pay over $3.99 retail per 26-ounce bottle when competing brands ranged from $1.29 to

$2.69 for the same 26-ounce size. Wholesale prices were 28 percent less than retail, at

$2.89 per bottle. However, the cost of ingredients was substantially more than

competing brands, at $1.00 per bottle, and packaging and processing costs added

another $0.50 per bottle. Profits were reduced from restaurant sales per bottle, but still

acceptable (i.e., from $3.50 a bottle, or 11 cents per ounce, to $1.39 per bottle, or five

cents per ounce), since the total amount of sales and profits were expected to be

substantially greater through grocery sales.

Further research with marketing experts in the industry and sales brokers indicated a

further 40 percent reduction in delivered distributor price (including brokerage

commissions and shipping costs). Gia would net $1.73 per bottle at delivered

distributor price with brokerage commissions of 5 percent, leaving an unacceptable

gross margin of only 23 cents per bottle (13 percent), even at the higher retail price of

$3.99 per bottle.

Gia finally decided to upgrade the bottle and label to a unique, tall, triangular, Italian

glass bottle and cork, with gold and black labels and recipe hang-tags by a local design

studio. She sold the dressings directly to upscale specialty and grocery stores.

Distributors would not be used. Specialty brokers were hired to aid in selling directly,

at a 10 percent commission on net sales. The premium pricing was also retained in this

non-elastic , low-price- sensitivity market segment, with the new bottles retailing at

$4.99 each. Final net factory sales per bottle were $2.69 after deducting 10 percent

brokerage commissions, with net factory profits of $1.10/bottle. Specialty food stores

took a 40 percent gross margin, but paid for shipping.

Packaging and pricing decisions are intimately related to distribution and sales force

decisions : Gia's restaurant could have made several different distribution decisions,

with different packaging and pricing results:

Sell the salad dressings only from the restaurant in 32-ounce jars with

handmade black and white labels at $5.00 each. This distribution and sales

decision requires the least amount of extra resources, spending, and risk. This

also provides the smallest potential sales return.

Sell the dressings directly to all consumers through mail order or other

marketing channels with family members handling both marketing and sales.

This distribution and sales decision is a variation on selling only from the

restaurant and may require additional resources to manage and grow, but it

delivers better returns than selling only to local restaurant customers.

Sell through DSD (Direct Store Delivery) distributors. This distribution and

sales decision requires financial resources, management time, personnel, higher

margins, and spending support, but may be the fastest way to grow the

business.

Hire brokers for store and/or distributor sales. This sales decision depends

upon scope of operations and geographic and distribution channel expansion

plans.

Combine several distribution channels simultaneously. This distribution and

sales decision calls for the largest amount of resources, time and personnel,

with the objective of growing the business as fast as possible.

License the formulas and restaurant name to another manufacturer and

receive a 4 percent to 5 percent royalty on net sales. This distribution and sales

decision is also low-risk, with low-resource requirements. The long-term

potential return is much higher than selling out of a single restaurant.

Sell a different size bottle or jar directly to stores only, as Alice finally

decided to do. This distribution and sales decision preserves higher gross

margins and eliminates discounts to distributors and possibly sales

commissions to brokers, but requires more financing, management personnel

and time.

Please use the following questions as a guideline for your case analysis:

1. What should Gia's have done?

2. Based on your personal research, what distribution approach(es) would you use if

Gia's was your company? Why?

3. How your ideas relate to your target market(s), does your research change the

approach to the channel(s)? Why/why not?

Answer the ff. case study analysis:

1. Identify the most important facts surrounding the case.

2. Identify the key issue or issues.

3. Specify alternative courses of action.

4. Evaluate each course of action.

5. Recommend the best course of action.