![\"distribution](\"https:\/\/masonmyers.com\/wp-content\/uploads\/2014\/10\/distribution-channel-less-traveled-300x186.jpg\")
<\/p>\nLess traveled distribution channels can become a large competitive advantage.<\/p>\n<\/div>\n
People attempt to draw-up lists in an effort to understand and remember the types of competitive advantage. \u00a0One common one is the competitive advantage of “network effects” — where a multi-constituent model becomes more entrenched the more users there are (Microsoft operating systems, Google search, Facebook, Visa\/Mastercard). \u00a0Another common one is “economies of scale” — particularly in older industries such as matches, cigarettes, and steel. (Maybe even in the future market for batteries according to Elon Musk and Tesla). \u00a0Another one to add to the list, in my opinion, is competitive advantage which develops by owning or perfecting a unique distribution channel.<\/p>\n
Competitive Advantage With Your Own Channel<\/h3>\n
A unique distribution channel can be a great way to differentiate your company and build a competitive advantage, often in industries where the product or service itself may be at risk of being undifferentiated (like some financial services products). \u00a0If your company can develop a more effective or less expensive channel to bring your product or service to the marketplace, you can develop a big advantage over companies that do not have your distribution channel. \u00a0It is even better if there is some reason why your competition cannot utilize your channel because of channel conflict (State Farm may have difficulty selling directly like Geico because their agents would get upset) or the expense of building out the distribution channel (Apple stores or Coca-Cola bottling plants). \u00a0Owning a distribution channel can also be very lucrative, such as the big three television networks or a city’s newspaper during the last century. \u00a0Or, Internet search is a lucrative channel thus far in this century.<\/p>\n
The flip side is also true. \u00a0If you do not own your distribution channel, your business just became much more difficult. \u00a0I see this all the time as small product companies get eaten alive by retail chains who capture too much of the value for distributing product through their channel. \u00a0Constant price negotiation, slotting fees, terrible payment terms, all make selling your product through the retail channel very difficult. \u00a0Unless, of course, you are P&G and can negotiate with equal weight with the retail channel. \u00a0On the other hand, I have also seen some companies (particularly food companies) grow their revenues very quickly by utilizing the existing retail channels (club stores, etc.), so there is always a counter point to every business strategy.<\/p>\n
Distribution as a Competitive Advantage<\/h3>\n
There are many examples of large businesses that were built where a unique distribution channel was a core piece of the puzzle and it made the company strong and effective for a long time. \u00a0 Here are some examples:<\/p>\n
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- Coca-Cola.<\/strong> \u00a0Most people list the brand as a primary reason for its success, but I believe it was the power of the coca-cola bottling network and distribution that placed Coke everywhere a customer could possibly want to buy. \u00a0A start-up today could never replicate Coke’s distribution network, making it a huge competitive advantage even in an era where the product itself may be waning in popularity.<\/li>\n
- GEICO.<\/strong> \u00a0A direct sales model to government employees (initially and now to everyone), cutting out the expensive insurance agent, has been and still is the competitive advantage of GEICO. \u00a0The company reinvests the cost savings from having a less expensive channel into lower car insurance premiums, which becomes a virtuous cycle for the company.<\/li>\n
- State Farm.<\/strong> \u00a0Before there was direct sales of car insurance, State Farm revolutionized the distribution channel for car insurance by utilizing existing networks (farmer associations) as explained in a nice book about the history of the company, The Man from Myrna. \u00a0USAA is doing this today by focusing on military personnel and their families.<\/li>\n
- Apple Stores.<\/strong> \u00a0Very unconventional when they made the investment, the Apple Stores have created a distribution channel that is a big advantage over other companies having to work through the retail network. \u00a0Apple can control the experience, create scarcity when they want, fix problems, and raise the level of service because they control the channel all the way to the customer.<\/li>\n
- Tesla.<\/strong> \u00a0Tesla decided to not work through car dealerships and to sell directly. \u00a0I love that it is different, because that is the first step to being better. \u00a0Time will tell if the dealership network is a necessary component to car sales or not.<\/li>\n
- Edward Jones.<\/strong> \u00a0A stock brokerage that has focused on building a broker network in small towns across America. \u00a0The other brokerage companies were not focused on small town America giving Edward Jones a wide open territory to approach and a safe base of profitable operations as a strong competitive advantage.<\/li>\n
- McDonald’s<\/strong> and the franchise network as a distribution channel. \u00a0Although this may stretch the idea a bit too far, I believe the franchise network of McDonald’s was an innovative (at the time) way to build out a network of stores with less capital from the parent company and a faster way to build a large network. \u00a0By perfecting the franchise model, it gave the company a unique advantage beyond just their food as the food is much more difficult to differentiate.<\/li>\n
- Peet’s Coffee<\/a>.<\/strong> \u00a0On a smaller scale, I was able to observe how Peet’s Coffee went about expanding beyond their coffee stores because I live in the San Francisco Bay Area and my wife worked at Peet’s. \u00a0Freshly roasted coffee makes a big difference in coffee quality and was a key component of the Peet’s strategy. \u00a0However, to sell coffee through retail often meant that the coffee could sit in warehouses and store shelves for up to six months. \u00a0That was not good enough for Peet’s. \u00a0To take better control over their coffee’s freshness and quality, Peet’s chose to invest in their own direct-store-distribution (DSD) network of trucks and drivers. \u00a0This was an expensive and very unconventional decision that many companies are not willing to make. \u00a0It worked out beautifully for Peet’s. \u00a0The investment paid off as DSD became the profit-driver for the whole company and the coffee stores became a marketing mechanism. \u00a0It became a competitive advantage for Peet’s and part of what made the company unique — beyond just a chain of coffee stores.<\/li>\n<\/ul>\n
If I were starting a business, I might first focus on having a unique distribution channel and then figure out what product or service could be sold through that channel. \u00a0In any case, I recommend that all business owners and entrepreneurs think hard about the distribution channel they are using, why they are using it, and how they can create sustainable competitive advantage through distribution channels.<\/p>\n
Related Posts and Topics:<\/strong><\/p>\n
- GEICO.<\/strong> \u00a0A direct sales model to government employees (initially and now to everyone), cutting out the expensive insurance agent, has been and still is the competitive advantage of GEICO. \u00a0The company reinvests the cost savings from having a less expensive channel into lower car insurance premiums, which becomes a virtuous cycle for the company.<\/li>\n