UNIT 5 DISTRIBUTION Dr.
Vinay Rana
WHAT IS DISTRIBUTION?
Distribution is the activity of both selling and delivering products and services from
manufacturer to customer. This can also be called product distribution. As businesses become
more global it becomes important to improve distribution to ensure that customers and all
members of the distribution channel are happy. Depending on the length of the distribution
channel there can be many people involved in distribution.
Distribution means the process by which we make the goods or the service available to the
end consumer. Generally, the place of production is not the same as the place
of consumption. So, the goods must be distributed to overcome the barrier of place.
Now the distribution of the products can be done by the organisation itself which is direct
distribution. Or it can hire intermediaries and form distributions channel i.e. indirect
distributions. The plan will depend on several factors, some of which are
• Product: Whether the product is perishable or durable will be a factor in deciding its
distributions model.
• Market: The size of the market will be a factor. In a large market, the direct
distribution may not be a perfect choice. Also, if the markets are scattered indirect
channel will be more suitable
• Company: The size of the company and its product-mix are also deciding factors in the
decision about distributions.
• Marketing Environment: In a slow economy or depression a shorter distributions
chain is preferable. In a healthy economy, there is a wider choice for alternatives.
• Cost: The cost of the channel like transportation, warehousing and storage, tolls etc
are obviously a factor in this decision.
What Is the Importance of Distribution?
Distribution is an important element of operations as, without a role that tracks and improves
the relationship between manufacturers and customers, a company cannot ensure the best
possible service. If bottlenecks happen in distribution, deliveries fall short, customers,
retailers and suppliers get angry, and trust is lost. For product distribution to be truly
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successful a continuous feedback loop needs to be implemented to ensure everyone is happy
with the process and that any improvements that can be made, are made.
In terms of drop shipping and customers buying items online, merchants and customers do
not get to try the product before they buy so they trust that the item will arrive just like in the
pictures and descriptions. This means that the distribution channel needs to be efficient at
providing responses and comments across the whole channel.
Intermediaries (wholesalers, retailers, agents, brokers) are needed because manufacturers
lack the necessary financial and human resources to carry out direct marketing. Maruti Suzuki
Corporation sells its cars through more than 600 dealer outlets in India and abroad. It will not
be feasible for Maruti Suzuki Corporation to buyout its dealer network and sell car throughout
the country and abroad.
Distribution channels can be exemplified by the number of intermediary levels that separate
the manufacturer from the end consumer. The choice of a particular distribution channel is
determined by factors related to market size, buyer behaviour and organization’s
characteristics. A typical distribution channel must perform various functions as mentioned
below.
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All the above-mentioned functions should be considered logically in any market. The idea is
to know what functions are to be performed, who will perform them and how many levels it
requires to make the distribution efforts cost effective, is another important decision to take.
Types of Intermediaries
These are the middlemen that ensure smooth and effective distribution of goods over your
chosen geographical market. Middlemen are a very important factor in the distribution
process. let us look at the types of middlemen we usually find.
DISTRIBUTION STRATEGY FOR HOTELS
Distribution Strategy determines when and through which channels to sell hotel rooms based
upon an analysis of the costs of acquisition of the individual [Link] of the costs of
acquisition of each individual channel will be considered and calculated before the hotel
finalizes the list of channel distribution they will be using.
By using the right channel of distribution and driving business to more cost-efficient channels
during high demand periods hotels can maximise their profitability.
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There is wide range of channels a hotel can sell its rooms through. The main ones which
should be considered are Global Distributions Systems (GDS) and Consortia, Travel Agents
and Tour Operators, OTAs, DMCs, Tourist Offices & Convention Bureaus. Not to forget Sales
Representatives and of course the own (optimised) Hotel Website.
GDS-Global Distribution System
A global distribution system (GDS) is a computerised network system owned or operated by
a company that enables transactions between travel industry service providers, mainly
airlines, hotels, car rental companies, and travel agencies. The GDS mainly uses real-time
inventory (e.g. number of hotel rooms available, number of flight seats available, or number
of cars available) to service providers. Travel agencies traditionally relied on GDS for services,
products, and rates to provide travel-related services to the end consumers. Thus, a GDS can
link services, rates and bookings consolidating products and services across all three travel
sectors: i.e., airline reservations, hotel reservations, car rentals.
• A distribution channel for reservations that provides worldwide distribution of hotel
reservation information and allows selling of hotel reservations around the world,
usually accomplished by connecting the hotel reservation system with an airline
reservation system ( Eg - Amadeus, Saber, Galileo/Apollo , Worldspan and Pegasus.
etc.)
• GDS is different from a computer reservations system, which is a reservation system
used by the service providers (also known as vendors). Primary customers of GDS are
travel agents (both online and office-based) to make reservation on various
reservation systems run by the vendors. GDS holds no inventory; the inventory is held
on the vendor's reservation system itself. A GDS system will have real-time link to the
vendor's database. For example, when a travel agency requests a reservation on the
service of a particular airline company, the GDS system routes the request to the
appropriate airline's computer reservations system.
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Travel Agents
A travel agency's main function is to act as an agent, selling travel products and services on
behalf of a supplier. They do not keep inventory in-hand unless they have pre-booked hotel
rooms or cabins on a cruise ship for a group travel event such as a wedding, honeymoon, or
other group event. A travel agency is a private retailer or public service that provides travel
and tourism-related services to the public on behalf of accommodation or travel suppliers.
• Travel agencies can provide outdoor recreation activities, airlines, car rentals, cruise
lines, hotels, railways, travel insurance, package tours, insurance, guidebooks, public
transport timetables, car rentals, and bureau de change services. Travel agencies can
also serve as general sales agents for airlines that do not have offices in a specific
region.
• Travel agencies often receive commissions and other benefits and incentives from
providers or may charge a fee to the end users. Hotel owners and tour operators
typically pay a higher commission rate to travel agencies, whereas airlines typically
pay a low commission. The customer is normally not made aware of how much the
travel agent is earning in commissions and other benefits.
• There are two types of travel agents: Implant and Independent. Implant is a retail
travel agency office that is located on the premises of the corporate client. There are
travel agents who specialize in package tours and railway bookings. Rebating is paying
back part of the commission to the customer.
Tour Wholesalers
Tour wholesaler is the organisation which plans, prepares, markets, and administers vacation
and travel packages. These packages are usually a combination of the services of various
suppliers like carriers, hotels, guides, catering, local transportation etc. Tour operators are
sometimes called wholesalers but this is partially true because a wholesaler buys goods and
services in bulk at his own account to prepare a tour package and then retails it through the
travel agencies or directly to clients. However, a tour operator who has his own one or more
tourists products components, (SOTC, TCI, Thomas Cook, Indo Asia KUONI formulates a new
tourist product for example ‘inclusive tours.’
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Tour Operators
Tour operator is an organization, firm, or company who buys individual travel components,
separately from their suppliers and combines them into a package tour, which is sold with
their own price tag to the public directly or through middlemen, is called a Tour Operator.
• Tour Operator is a person or Organisation which operates package tours prepared by
tour wholesalers. Sometimes tour operators themselves provide necessary ground
services like local transport, guides, and escorts. Ground operators are those who
provide services at destinations. Tour wholesalers and tour operators are terms which
can be used interchangeably.
• More precise tour operators are primarily responsible for delivering and performing
the services specified in each package tour. They can provide these services
themselves as some have their own cars and coaches, hotels, and other travel-related
services or can obtain these from the other suppliers. That is why they are called
manufacturers of tourism products.
• A tour operator typically combines tour and travel components to create a package
holiday. They advertise and produce brochures to promote their products, holidays
and itineraries. The most common example of a tour operator's product would be a
flight on a charter airline plus a transfer from the airport to a hotel and the services of
a local representative, all for one price. each tour operators may specialise in
destinations, e.g. Italy, activities, and experiences, e.g. skiing, or a combination
thereof.
• Tour plan is based on market research. When tour plan is being prepared the tour,
planners, begin to negotiate with hotels, carriers, caterers etc. for prices and bookings,
etc. These negotiations thus form the basis of costing and pricing the tour. The
brochures are printed and distributed to tour operators and travel agents. Tours can
be planned on a partnership basis with carriers, hotels, tourism promotion boards etc.
Tour operators are basically categorized into four types. These are categories based on their
nature of the business and its operations.
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Inbound Tour Operators
These are also known as incoming tour operators. Technically, the operators who receive
guests, clients/tourists, and handle arrangements in the host country are called inbound tour
operators. For example, a group of American Tourists is coming through TCI Ltd. to India and
the company decides and handles the group in India then TCI is called an inbound tour
operator.
Outbound Tour Operators
Tour operator who promote tours for foreign destinations, maybe business tour or leisure
tour is called outbound tour operators. For example, a group of American tourists going to a
trip of India and Thomas Cook handle arrangement in America like as ticket reservation, hotel
booking etc. then Thomas Cook is called Outbound Tour operators in the context of America
Domestic Tour Operators
Domestic tour operators are those who assemble, combine tourist components into inclusive
tours and sell it to the domestic travellers. In general, these tour operators provide travel
services within the tourist’s native [Link] domestic tour operators operate within the
boundary of the home country and offer package tour to the travellers viz. Domestic inclusive
tours or independent tours.
Ground Operators/Destination Management Companies
These are commonly known as handling agencies and their main function is to organize tour
arrangements for incoming tourists on the behalf of overseas operators. Let us take the case
of India as a destination that – has a varied culture.
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When a tour operator himself promotes beach holidays, wildlife holidays, adventure tours,
heritage tours at the different places, the difficulty arises. It is the ground operator then who
by handling the incoming travellers in the same season but at different places ensures that
the entire operation is according to the package tours or agreements.
Corporate Travel Management
Corporate travel management (CTM) is the function of managing a company’s strategic
approach to travel (travel policy), the negotiations with all vendors, day-to-day operation of
the corporate travel program, traveller safety and security, credit-card management and
travel and expenses ('T&E') data management.
CTM should not be confused with the work of a traditional travel agency. While agencies
provide the day-to-day travel services to corporate clients, they are the implementing arm of
what the corporation has negotiated and put forth in policy. In other words, CTM decides on
the class of service which employees can fly, negotiates corporate fares/rates with airlines
and hotels and determines how corporate credit cards are to be used. The agency on the
other hand makes the actual reservation within the parameters given by the corporation.
For many companies T&E costs represent the second highest controllable annual expense,
exceeded only by salary and benefits, and is commonly higher than IT or real estate costs.
T&E costs are not only limited to travel (airline, rail, hotel, car rental, ferry/boat, etc.) but
include all costs incurred during travel such as staff and client meals, taxi fares, gratuities,
client gifts, supplies (office supplies and services), etc. Furthermore, this area often includes
meeting management, traveller safety and security as well as credit card and overall travel
data management.
The management of these costs are usually handled by the Corporate Travel Manager, a
function which may be part of the Finance, HR, Procurement or Administrative Services
Department.
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Incentive Travel Planning/Planner
Incentive, recognition, and loyalty programs are used by companies as a motivational tool to
achieve certain business objectives, for example to increase sales.
Participants—which might be the company’s employees, distributors / re-sellers, or
customers—usually must qualify by achieving a certain level of performance, pre-defined by
the terms of the incentive program, e.g. achieving pre-set sales targets.
Those that meet the relevant criteria are then rewarded by taking part in the incentive travel
trip (sometimes referred to as the ‘award’). These are usually group trips with a set itinerary
where all those qualifying take part in the same program of events and activities, however
individual incentive trips are also used by some companies.
Incentive Trips/Awards
To fulfil the award, the company will use some form of event / meeting planner to co-ordinate
the trip and design the itinerary, including all travel arrangements, accommodation,
receptions, dinners, activities, excursions, entertainment, and special events.
Often, this will involve the meeting planner hiring a Destination Management Company
(DMC), located in the city where the event is being held, to assist them in booking and
managing local elements, such as restaurants, venues, transport, staffing, production, décor,
entertainment, activities, and excursions.
Types of Incentive Programs
Companies might create incentive programs for several different reasons, some examples
are:
Sales Incentives
Incentives are a very effective way to drive sales. An incentive program might be aimed at a
company’s employees i.e. the sales team, or its distributors / re-sellers.
For example, a car manufacturer might create an incentive program for its dealers, whereby
they must meet a certain sales target each month. At the end of the term of the program, a
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year perhaps, those that made the required amount of sales will be rewarded by coming
together with management executives, and the other qualifying dealers, to attend the award
trip.
This might consist of a three-day trip to Monte Carlo during the Monaco Grand Prix with a
cocktail reception on a yacht, a private dinner at the world famous casino, followed by leisure
activities and excursions such as sailing, wine tastings, golf, or a private tour of The Prince’s
Palace.
Rewards and Recognition
Group travel can also be used as part of an employee reward and recognition program.
Whereas incentive programs aim to inspire or influence someone’s efforts, the purpose of
rewards and recognition programs are to reinforce certain behaviours. A qualifying employee
may be deemed to be improving customer service, living the corporate values, or meeting
productivity goals. A company might create a group travel program ‘award’ to engage with
their employees, recognize performance, and reward top achievers.
Employee Motivation
Group travel is often used for employee motivation; to engage people, change attitudes, build
morale, and embed new values. This might be to address low productivity, employee
turnover, and poor customer service, or to foster teamwork and introduce new products. In
this case, a group travel program might be created to inspire employees through an itinerary
of experiential activities, which the group share together as a team. These activities are
specifically designed to deliver engagement, learning, and action that will translate back to
the work environment.
Customer Loyalty
Another variation of an incentive program is when group travel is used to reward customer
loyalty and repeat business.
Consortia
Consortia and Travel Management Companies (TMCs) can be groups of independent travel
agencies that come together under one umbrella, Franchise groups or wholly owned chains.
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They often negotiate preferred rates with hotels for the benefits of their corporate clients. In
travel and tourism, a consortium refers to an organization made up of independent travel
agents and agencies. They join to increase their buying power, commissions, and amenities
they can provide clients.
Agents and agencies must meet a threshold sales volume requirement to be invited to join a
consortium. Member benefits include marketing programs, commission overrides, agent
training and education, FAM trips, technical tools, client referrals, and networking
opportunities.
Consortia negotiate with hotels, resorts, cruise lines, and other suppliers on behalf of their
agent members. The resulting "preferred supplier" relationship benefits agency clients in the
form of upgrades, room amenities, and special promotions not available to the public.
Consortia can deliver huge volume, thanks to many members. That provides an incentive for
suppliers to offer preferred benefits that are exclusive to consortia clients.
Some of the most well-known consortia include
Consortia are Associations or Marketing organizations which link together small to medium
sized independent travel agencies to leverage purchasing power and marketing
opportunities. Examples of Consortia are American Express, Carlson Wagonlit, BCD Travel
or HRG, Virtuoso, Signature Travel Network, Ensemble Travel Group, and [Link].
The consortia rate is negotiated between the hotels and travel agencies and is only available
to contracted consortia.
The advantages for a Hotel working with Consortia are:
1. Greater booking potential: travel agents first look at participating hotels when
selecting the right property for their clients
2. High-yield business: travel agents generally make higher average daily rate (ADR)
bookings
3. Increased book ability: greater exposure in the GDS by being able to use the
Consortia’s negotiated rate code
4. Increased visibility: additional exposure in agency marketing collaterals, databases,
communications, etc. promoting the Consortia’s hotel programme
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Franchising
Franchising is an arrangement where franchisor (one party) grants or licenses some rights and
authorities to franchisee (another party). Franchising is a well-known marketing strategy for
business expansion.
A contractual agreement takes place between Franchisor and Franchisee. Franchisor
authorizes franchisee to sell their products, goods, services and give rights to use their
trademark and brand name. And these franchisee acts like a dealer.
In return, the franchisee pays a one-time fee or commission to franchisor and some share of
revenue. Some advantages to franchisees are they do not have to spend money on training
employees, they get to learn about business techniques.
In recent decades, franchising has become a popular expanding business tool that combines
a variety of products, services, and strategies of the company. This business model has
become an effective option for small tourism enterprises that cannot afford to fund their
development.
In other words it means that the parent Hotel Franchise Company provides permission for the
local owner to use the parent company’s name (brand) and products. A franchise can be
owned as a corporation, sole proprietorship, limited liability company or other business
structure.
In hospitality industry, a Hotel Franchise can be vaguely compared to a chain, since it is a
management agreement, that provides certain services (brand, reservation system, support,
etc.) in return to follow specific regulations and procedures. In other words the hotel brand
is shared by other proprietors.
Beneficial is that the Franchisees can brand their hotel with a well-known and popular brand,
while the franchise contract provides them with a powerful set of tools to drive new business.
Franchisees operate business for themselves but not by themselves.
The advantages of a Hotel Franchise (for the Franchisees) are:
1. strong brand portfolio
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2. specific set of tools
3. strong approach to standards
4. good reputation
5. training programmes
6. consultation and advice service
7. marketing programmes
The benefits for the franchisor, on the other hand, is an alternative to building “chain stores/
hotels” to distribute their products. It avoids the investments and liability of a chain. The
franchisor’s success however depends on the success of the franchisees. Not only hotels but
also many chain restaurants (i.e. McDonalds) and retail stores (i.e. 7-Eleven) are owned as
franchises.
The most known franchises are businesses within the hospitality industry. Restaurants and
hotels are extremely popular franchises due to their longevity in their respective industries as
well as the high rate of return on an investment in either industry for the franchisee. When
executed successfully, lodging and restaurant franchises can be profitable for both the
franchisee and franchisor. Some early franchises dating back to as early as the beginning of
the 1900s include: Howard Johnson, White Castle, Kentucky Fried Chicken, and Dairy Queen.
Owners of these businesses were limited in outreach and their ability to expand their
business. They used early methods of franchising to create a national brand that was well
known among the everyday consumers. This way, they could garner loyal customers in many
locations despite their inability to travel long distances or the technology needed to single-
handedly manage restaurants spread across the country.
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