The Distribution Channel

Chain of intermediaries, each passing the product down the chain to the next organization, before it finally reaches the consumer or end user. This process is known as the 'distribution chain' or the 'channel.' Each of the elements in these chains will have their own specific needs, which the producer must take into account, along with those of the all-important end-user.

Channels

A number of alternate 'channels' of distribution may be available:

• Distributor, who sells to retailers
• Retailer (also called dealer or reseller), who sells to end customers
• Advertisement typically used for consumption goods

Distribution channels may not be restricted to physical products alone. They may be just as important for moving a service from producer to consumer in certain sectors, since both direct and indirect channels may be used. Hotels, for example, may sell their services (typically rooms) directly or through travel agents, tour operators, airlines, tourist boards, centralized reservation systems, etc.

There have also been some innovations in the distribution of services. For example, there has been an increase in franchising and in rental services - the latter offering anything from televisions through tools. There has also been some evidence of service integration, with services linking together, particularly in the travel and tourism sectors. For example, links now exist between airlines, hotels and car rental services. In addition, there has been a significant increase in retail outlets for the service sector. Outlets such as estate agencies and building society offices are crowding out traditional grocers from major shopping areas.

Channel members

Distribution channels can thus have a number of levels. Kotler defined the simplest level, that of a direct contact with no intermediaries involved, as the 'zero-level' channel.

The next level, the 'one-level' channel, features just one intermediary; in consumer goods a retailer, for industrial goods a distributor. In small markets (such as small countries) it is practical to reach the whole market using just one- and zero-level channels.

In large markets (such as larger countries) a second level, a wholesaler for example, is now mainly used to extend distribution to the large number of small, neighborhood retailers or dealers.

In Japan the chain of distribution is often complex and further levels are used, even for the simplest of consumer goods.

In Bangladesh Telecom Operators are using different Chains of Distribution, especially 'second level'.

In IT and Telecom industry levels are named "tiers". A one tier channel means that vendors IT product manufacturers (or software publishers) work directly with the dealers. A one tier / two tier channel means that vendors work directly with dealers and with distributors who sell to dealers. But the most important is the distributor or wholesaler.

Foodservice Distribution System

From Wikipedia, the free encyclopedia

A foodservice distributor is a company that provides food and non-food products to restaurants, cafeterias, industrial caterers, and hospitals and nursing homes.

A foodservice distributor functions as an intermediary between food manufacturers and the foodservice operator (usually a chef, foodservice director, food & beverage manager, and independent food preparation businesses operator owners.) Foodservice distributors procure pallets and bulk inventory quantities that are broken down to case and sometimes unit quantities for the foodservice operator. Most foodservice operators purchase from a range of local, specialty, and broad line foodservice distributors on a daily or weekly basis.

Often a food manufacturer may hire a foodservice brokerage company to represent the manufacturer in a local market. The broker helps the food manufacturer market its products through the foodservice distribution system, which ranges from getting items stocked at the distributor to working with operators to purchase items from the distributor.

A broad line distributor services a wide variety of accounts with a wide variety of products, while a system distributor stocks a narrow array of products for specific customers, such as restaurant chains.

Foodservice distribution companies can range in size from a one-truck operation to larger corporations. There are many independent broad line foodservice distribution companies that service chain and multi-unit restaurants based on master distribution agreements with national foodservice groups. These groups provide distributor members procurement capabilities rival the purchasing power of largest distributors. These distributor groups also provide distributor members group private label brands as well as marketing and quality assurance services.

Tour Operators and Wholesalers

, or tour brokers, and "ad hoc" tour operators. (The word tour should not necessarily be construed as meaning groups.)

Generally, Tour operators differ from their counterparts in channel management options in that they take nominal possession, or secure allotment, of the hotel inventory to sell it to the public. Tour operators may also take nominal possession of the food and beverage product, by making res­ervations in a number of outlets at anticipated tour destination points, and they may arrange for ground transportation, side trips, historical site visits, etc. There are two types of tour op­erators: wholesalersthey all work through travel agent retailers, but these channels book as many, or more, individuals and couples.

The wholesaler or broker "blocks" space and then uses various combinations of the communi­cations and distribution mixes to market the fa­cilities to individual and group consumers. Bro­chures featuring a tour, or multiple tours, and all related accommodations are printed and distrib­uted to travel agents or mailed to existing and potential customers, usually on request. The consumer picks up a brochure at a travel agency (an example, Figure 16-30), or responds to an ad.

Advertising in the print media is also a com­mon practice to attract tour customers. Con­sider, for example, the Liberty Travel ad in Fig­ure 16-31. The part shown is less than half of a full-page ad that Liberty Travel runs weekly on the back page of the Sunday New York Times Travel Section with various destinations and promotions. The small box for five Hyatt hotels in the Caribbean is paid for by Hyatt. The rest of the page is paid for by American Airlines, other advertised destinations, and Liberty Travel. Hyatt spends about 2 percent of its Caribbean wholesaler revenue on this type of advertising, for a wholesale market that is 30 percent of total rooms and 40 percent of FIT business for Hyatt in this destination. This activity, for Hyatt, does not really fall into the realm of advertising as discussed in Chapter 13, for nothing in the ad is stated but the name, location, and price. The activity flows through the distribution channels of the wholesaler, in this case GoGo Tours, and the retailer, in this case, Liberty Travel. GoGo Tours does millions of dollars of business in the Caribbean, as well as elsewhere. It takes an al­lotment of rooms from Hyatt, for example, at 20 percent off Hyatt's gross rate, in different rate categories, with cutoff time periods to sell them. Other wholesalers work on a "sell and report" basis, that is, they report sales only after they are made, free of a cutoff time. The hotel advises sellout periods. GoGo's inventory appears in the computers of 170 Liberty Travel agencies. GoGo also sells rooms for American Express under its private label, as was shown in Figure 16-29. The rooms are sold by travel agents at their regular rates, as if they called the hotel directly. Hyatt, of course, has paid GoGo a commission. GoGo pays a commission to the travel agent. Hyatt pays for the ad and has its own reservations system that books the rooms. Of course, other Hyatt adver­tising or experience complements this channel.

The wholesaler market includes people using a variety of transportation options. The whole­saler negotiates with the airlines, cruise lines, railroads, hotels, car rental firms, and bus com­panies to develop travel options to be resold as a total package. (Figure 16-32 shows some ex­amples.) Groups come from every realm of the spectrum, from a high school hockey team to an upscale corporate trip to the Super Bowl, to individual travelers. Wholesalers negotiate the best possible deals from the suppliers and then sell at a price to include their profit margins. Figure 16-33 shows a hotel advertising directly to tour operators.

International wholesalers exist both domes­tically and abroad. Domestic wholesalers under the umbrella of, for instance, "Visit USA," are called inbound operators; they handle tours and groups organized overseas, and manage their travel needs while in the United States. Their outbound counterparts handle the reverse travel internationally. This is true of all coun­tries serving international markets. Figure 16­-34 is an example of outbound and inbound tour cooperation between wholesalers in France and a travel agency in Canada.

"Ad hoc" groups are organizations already formed that want to book a tour to a previously-visited or new destination. An example of an ad hoc group is a Lions Club tour to the Ozarks in Arkansas, or an archaeology club to Mexico. The tour operator again takes possession of the inventory of hotel rooms and restaurant seats, but the risk is much lower because a solid book­ing is already in place.

The tour operator needs the full cooperation of channel members to be successful. Ad hoc groups are the least complicated to administer. Wholesale tours, on the other hand, are very risky; some hotels and restaurants have strict cancellation guidelines and, if the tour doesn't sell, the wholesaler can end up holding a large, perishable inventory.

Good channel management can work two ways. If a wholesale tour broker is attempting to coordinate a tour series to a destination, the hotels and restaurants should remain flexible to help in the development of the distribution network. The fall foliage season in New Eng­land may not be the time to help a channel member create a new series, since demand for the hotel product at that time exceeds the sup­ply of hotel rooms. If the wholesaler is attempt­ing to bring in business in a less-busy time, such as spring, every attempt should be made to encourage the effort. Short- term decisions regarding cancellation clauses could prejudice an active channel member in the future.

The other side of the coin is that, in times when business is slow, the tour operator will wield clout to obtain the lowest possible rates. In heavy destination areas such as the Algarve coast in Portugal, where extensive overbuilding has occurred, British tour operators have bar­gained for tens of thousands of room-nights to bring room rates down to ridiculously low levels.

Strategies for Distribution Channels

There are two major strategies for increasing usage of the product in a distribution channel: the "push" strategy and the "pull" strategy. In the pull strategy, inducements are offered to make the consumer want to "pull" the product down the channel. Examples of pull strategies in the hospitality industry are the frequent-traveler programs. With these promotions, the customer presumably has an increased desire for the product and seeks the appropriate distri­bution channel.

Channels of Distribution

By definition, channels of distribution are a set of independent organizations involved in the process of making a product or service available for use or consumption. Most companies that produce goods or services need assistance in distributing their products to the end-user, the consumer. Goods-producing firms such as Proc­ter & Gamble, Ford Motor Company, and Coca-Cola must somehow arrange to distribute their product that is, get it to where the consumer can buy it. Consumers do not have to go to the bottling plant each time they want a drink of soda, nor do they have to travel to Detroit to purchase a car.

In the same sense, hospitality companies like Sheraton, McDonald's, and American Airlines need distribution systems through which their customers can find their products and services. There is a growing need in the hospitality in­dustry to utilize channels of distribution as never before. In the past, when the demand for hotel rooms and restaurants exceeded the sup­ply, customers managed to find their way to the product offered. This is not the case today, with the proliferation of new hospitality products, all vying for the same customer.

How Distribution Channels Work

In the usual manufactured goods situation, the producer of the goods uses a wholesaler or a broker to assist in the distribution of the prod­uct. A wholesaler is a business unit that buys, or takes on consignment, merchandise from the producer and sells it to the retailer. A broker serves a similar function but may or may not actually acquire the merchandise. The retailer is the point of sale where the consumer can purchase the product. Wholesaler, broker, and retailer are all part of the distribution system.

Companies have found it necessary to utilize these separate channels of distribution not only because of the prohibitive costs of developing their own distribution systems but also because distributors can get closer to the customer Ford Motor Company, for example, distributes through its retailers, the local car dealerships, which sell Ford cars to the public. To purchase the real estate, construct the facilities, staff the organizations, and market the cars would be a tremendous burden on Ford's resources.

Procter & Gamble, on the other hand, works through brokers and wholesalers to get its prod­uct to the retailers, of which there are tens of thousands worldwide. Coca-Cola distributes through franchisees who buy syrup in bulk, make and bottle the final product, and deliver in to innumerable retailers. Variations of such distribution systems are endless. Some systems are vertically integrated: In these, retailers are owned by the manufacturer and sell only that company's products. An example would be activity of the channel member, and the rep firm will move on to more lucrative endeavors.

Each channel member seeks to create cus­tomers for a profit, but without some give-and-take on a regular basis by all channel members, the system becomes tedious and disruptive. Hospitality firms that have carefully selected their partners, and are managing them well, will be consistently increasing their customer base while others are looking for new channel members.

Evaluation of the Channel

This step is critical for the continued success of any program. If a hospitality entity is unable to tell how many bookings a rep firm produced, or how many coupons were turned in from the dining guide, then intelligent channel manage­ment is impossible. Often, channel members can report the statistics. If unit management is unable at least to spot check these numbers, the channel member will be in control when it comes time to negotiate the next agreement.

For example, the hotel that engages in a channel agreement with an airline sets an ob­jective. The objective needs to be set in a quan­titative format, to be used in the evaluation process. The success of the channel of distribu­tion might be defined as raising the productiv­ity of the airline reservation service from 100 rooms per month to 120 per month.

It is also beneficial to understand the break-even point of the channel. In the above example, it might take an additional ten rooms per month to cover the additional commissions and some combined advertising costs. After a prede­termined amount of time, the channel is evalu­ated. If it is producing less than 110 rooms per month, careful consideration might be given to either increasing the marketing support for the program or dropping the channel member com­pletely.

Evaluation is more than just a tally of dinner covers or room-nights. A channel may be driving the volume, but if the customer is unhappy, the effort is not only shortsighted but dangerous.

A dining guide, for example, can market a two-for-one dinner promotion in a number of different ways. If customers expect two lobsters for the price of one when making reservations, and find out the promotion applies only to chicken menu items, they will be sincerely dis­appointed. If the hotel guests were expecting deluxe accommodations, and agreement with the channel member was to offer run-of-the­-house rooms, the guests who get the inferior rooms will not be happy with their purchase. They may not be unhappy enough to complain, but still worse, they may be unhappy enough not to come back.

The marketing-driven company with good channel-management skills will ensure its cus­tomer satisfaction throughout the process. If a channel member is producing customers who are consistently unhappy, it would be better never to have used that distribution method in the first place.

Motivation and Recruitment Of Channel Members

In channel management, two ongoing factors are needed to ensure continued success: motiva­tion and recruitment. It must be recognized that most channel members are carrying many similar products into the marketplace. Travel agents have a variety of hotels and airfares from which to choose. The representation firms have several hotels in their portfolio that match the needs of their customers. The number of promotional tie-ins available to both the con­sumers and the channel members is mind-bog­gling. Franchising options for the developers and independent managers are plentiful.

Motivation Some type of motivation must be continuously offered by the channel leader. Unless the product offered is so desirable that there are several channel members bidding on the rights to carry it, motivational techniques are necessary.

The "push" strategies mentioned earlier are the primary source of motivational support for channel members. Incentive trips for outstand­ing travel agents or the best franchisee in the system will go a long way toward smoothing operating channels of distribution. Many com­panies in the consumer goods and industrial products industries have full-time staff mem­bers who do nothing but organize and imple­ment channel incentives in order to keep mem­bers interested in their products.

Incentives need not be in the form of travel. Consumer goods such as appliances and televi­sions can make the bonus system easier to at­tain, and they provide short-term gratification for participants. The drawback of the magnifi­cent incentive trip to Europe may be that it takes a year to win, and only a very few employ­ees will ever have a chance to collect the prize.

Although the motivational options available are almost unlimited, an area that also needs attention is that of top management. All of the sales representatives can win trips and toast­ers, but the president of the company is often ignored. Travel agency owners do not need toasters and trips; what they need is the per­sonal attention that allows their views to reach someone important. An invitation to dinner by a senior executive of the hospitality company may buy more loyalty than 1,000 toasters. Too often, in the rush to motivate a channel mem­ber, the owner of the business is left out of the process.

Recruitment The second ongoing task for the channel manager is to recruit potential new channel members. If this task is not organized and planned, the channel is in perpetual dan­ger. Unfortunately, the danger is subtle because a company may not realize that it is exposed until a member drops out.

A travel agency may be one of your best pro­ducers in the Florida market, for example. It sends an unusually high number of guests to your hotel because it has done a good job mar­keting your facility, and it has built up a good clientele. One day the travel agent calls and says it is dropping your facility in favor of your competition down the street. Immediately the reservations slip and business starts falling.

This scenario is very realistic for a number of managers. First, the competitor had a good re­cruitment program in place and replaced its channel member with yours, thereby improving its distribution network overnight. Second, without having had a good recruitment pro­gram of its own, your hotel now has to begin the process of finding a strong replacement channel member. As you are now in dire need, the nego­tiations will swing in favor of the potential new channel member.

There will always be times when a channel member leaves and needs to be replaced. This is part of doing business. However, a good channel manager will have alternatives ready and pre-screened according to the criteria men­tioned earlier in the chapter.

Recruitment is also necessary to provide al­ternatives to channel members who are not per­forming satisfactorily. It is far easier to deal with an unsatisfactory situation once you have other options than to have to recruit channel members when at a disadvantage.

Travel Agents

In a channel of distribution a travel agent is an intermediary who makes reservations a variety of hospitality needs. The travel agent is compensated in the form of a commission, usually based upon the rate of the service purchased. As a rule of thumb in most cases, a 10 percent commission is paid to travel agents who book cruises and hotel rooms, while airlines and rental car firms pay a lesser rate. Travel agencies also form consortia, using the strength of many individual agencies to combine marketing and negotiating clout as a channel member.

As a channel of distribution, the travel agent is second to none. Table 16-1 shows the status of ravel agents in 1993.

In the less-recent past, the travel agent was primarily oriented toward the individual traveler, be it for business or pleasure. This practice has been changing, and agents are handling more meetings and group itineraries each year.
The travel agency also is more of a full-service channel whereby hotel-booking may be incidental to the airline and ground transportation already arranged. Because of this, travel agencies are actively soliciting corporate meeting accounts, especially when they have previously handled the company's individual business travel. By promising more clout in negotiating rates, the travel agency role in meeting plan­ning is bound to increase.

The Travel Agent Role

The travel agent is faced with a blizzard of changing conditions in the marketplace. Air­lines, collectively, are reported to change fares as many as 80,000 times a day. To recommend a hotel, the agent needs knowledge of location, rates, amenities, dining, entertainment, park­ing, ground transportation, recreation facilities, and more. The technology of .the industry is changing at a furious pace in an attempt to keep up with all this information. Thus, the travel agent relies heavily on systems we have pre­viously discussed, plus some others.

Agencies that were on manual systems only a short time ago, now have sophisticated data­base equipment to manage their bookings. (Al­most 100 percent in the United States, but not so in Europe and Asia, as shown in Table 16-1.) Figure 16-23 shows one example of such sophis­tication. Other automated system are in fact, largely reservation terminals provided by the airlines ( e.g., Apollo by United Airlines)

FIGURE 16-11 Changing flags a continu­ous process

And quite similar. In general, we can say that none of the companies in these categories owns, manages, or franchises, although there are ex­ceptions to that as well. Also, some companies that own, manage, and/or franchise affiliate with other companies that do likewise.

Perhaps, if we could generalize, we could say that these companies represent distribution channels that are external to companies that are in the hotel operations business. They are, in fact, marketing tools and very important ones in the distribution process, especially in­ternationally. A given hotel or hotel chain may be involved with all four.

In general, a consortium is a group of individ­ual properties with different names that carry a common designation that groups them into the same product class. An affiliation is a group of hotels that carry the same common name, not necessarily in the same product class, or affili­ate with another group, also with a same com­mon name. Reservations companies' members carry their own names, or chain names, but use a common reservation system, as well as their own. Representation companies market and have sales offices to represent different proper­ties under different names. All four categories have their own reservations systems.

FIGURE 16-12 Prime hospitality manages multiple brands including its own

Philosophies of Franchising

Hospitality companies have different philoso­phies of franchising. Marriott, for example, franchises a relatively small amount of full-service hotels for a company its size, but widely franchises its Courtyard and Fairfield Inn prod­ucts. Contrarily, Holiday Inn has franchised over 85 percent of its product line. There are also some companies, such as Westin, Four Sea­sons, Stouffer, Fairmont, Oberoi of India, and Shangri La of Hong Kong, that do not franchise at all. Forte Hotels franchises its Travelodge. Brand but not most of its other product lines. The philosophy of the latter companies is that the level of service they are attempting to deliver can be maintained only by direct control.

As mentioned earlier, franchising can result in a wide variety of product offerings to the consumer. McDonald's has done an excellent job of maintaining its standards; few can tell whether McDonald's or a franchisee is running any given restaurant under that name. Simi­larly, Marriott has maintained strong control over franchisees, keeping a similar product in front of the customers. Hilton and Sheraton have been less fortunate. There is a big differ­ence between the company-managed St. Regis Sheraton in New York City, one of Sheraton's so-called "luxury collection," and the franchised Sheraton Inn in Bordentown, New Jersey. A similar discrepancy exists between Hilton's Waldorf-Astoria in Manhattan and the fran­chised Berkshire Hilton Inn in Pittsfield, Mas­sachusetts.

During the course of business cycles, compa­nies may change direction on their decision to franchise. In the beginning, Marriott chose not to franchise its Courtyard by Marriott con­cept. Given the low amount of capital invest­ment available for new construction, Marriott changed its mind. Hyatt recently changed direc­tion and started to look for franchisees in 1994. Omni Hotels has come full circle; upon acquisi­tion of the brand name in the early 1980s, no franchising was done. In the late 1980s and early 1990s, franchisees were pursued. The cur­rent direction is back to owned and managed properties.

A newcomer may obtain initial success in the distribution network through franchising. Radisson Hotel Corporation, originally operat­ing with a relatively unknown name, was quickly able to amass a network of close to 100 hotels with about 50 percent of them fran­chised. By marketing the chain as a "collection' of hotels, Radisson was telling the customer up.

In 1993 Sheraton announced plans to launch a three star divi­sion in Asia Pacific, dropping the Sheraton name in favor of a new name with the suffix. “By Sheraton.” Initial emphasis was in China where the company identified 29 possible locations.

FIGURE 16-10 Carlson Hospitality's product line

Front that the physical product might be differ­ent upon check-in, while the services inside were presumably the same. By adopting this concept, Radisson directly addressed one of the pitfalls of franchising, namely, that the product is not always the same. Carlson Hospitality Group, a division of Carlson Companies, Inc, the parent of Radisson, also manages, markets, and franchises Colony Hotels & Resorts, Coun­try Lodging (by Carlson), Country Kitchen, T.C.I. Friday's, around the globe (Figure 16-10), plus two cruise ships.

Other Distribution Channels

Strategic alliances between hotels and food-service companies are becoming common, espe­cially in the economy hotel sector where many properties have no food and beverage outlets of their own and, thus, will link up with a food-service operator either in the property or close by. There are, of course, numerous ways to dis­tribute the food-service product away from its place of production. Home or office delivery has become common. Other companies are also be­coming more innovative, as shown in Figures 16-13 and 16-14. We anticipate seeing this trend continue and grow stronger.

Consortia, Affiliations, Reservations Companies,

and Representation Companies

These four nomenclatures represent different distribution systems for hotel companies that can, at the same time, be both quite different state area, or an entire country, in which no other franchisee of the same product or service can operate. For example, separate franchisees in India have acquired exclusive rights to the Days Inn, Choice International, and Sheraton names in that country.

Until recently the leader in franchising for hotels was Holiday Inn Worldwide Corporation with its Holiday Inn, Crown Plaza, Holiday Inn Express, Garden Court, and Sun Spree Re­sort brands. By 1994, however, Hospitality Franchise Systems (HFS) had acquired five ma­jor brand names and become the world's largest franchise hotel company (Figure 16-4). In the fast-food segment of the hospitality industry, world leader is McDonald's; other familiar names proliferate (Figure 16-5). These companies and many others recognize that their abil­ity to distribute their products' names and iden­tities throughout the world is limited by the amount of capital available. Methodically, they have offered their names and services to poten­tial franchisees.

Major companies need to expose their prod­ucts to more customers, in effect creating brand-loyal consumers who will buy their prod­uct wherever it is available. Their rationale is that the more places the customer can buy the product, the more often that customer will be­come a new customer of the same product in another marketplace. This distribution of the brand name by franchising has become inte­gral to the growth of many major restaurant and hotel chains.

FIGURE 16-2 Changes in the U.S. market, 1990-1994

There are, however, notable and nonperforming assets in overbuilt markets. In the early 1990s, many of these investors de­faulted on their loans, forcing many hotels into receivership: and, with the failure of many banks and savings and loan institutions, the U.S. government ended up owning many hotels. In fact, there was a period when failed hotel investments were the major part of the assets taken over by the Resolution Trust Corporation (the government entity that took over failed banks and their assets). Capital monies were practically unavailable, compromising manage­ment companies' abilities to keep some products in their portfolios.

For example, them may be a Hilton Hotel in a tertiary marketplace. A group of local inves­tors may have provided the money to build the facility; Hilton manages the operation. As the marketplace becomes overbuilt and the tax incentives dry up, cash flow stagnates or dwin­dles. As the product becomes older in its life cycle, refurbishment becomes necessary to keep it competitive. The original investors can no longer depend on the asset itself to be self-sup­porting. Even if the hotel is covering its mort­gage payments, it is unlikely that additional money has been set aside from operating funds for necessary refurbishment after the normal five- or six-year life cycle.

Hilton would now have to make a decision. Although its name is on the facility, and Hilton customers are becoming less satisfied with the product, the owners may be unable or unwilling to fund the necessary renovation. If the hotel is important enough to the Hilton distribution system, Hilton may choose to provide the funds itself, waiting until the supply/demand imbal­ance corrects itself and the hotel again becomes profitable. Hilton's other option is to withdraw from the contract and forfeit this marketplace in its distribution system and the related fees generated from the hotel. Four Seasons Hotels, as one example, has financed refurbishments of hotels it manages but doesn't own, choosing not to manage a deteriorated product that carries its name.

Management companies are also changed by owners. For example, CP Hotels held the man­agement contract for L’Hotel in Toronto but failed to meet earnings projections called for in the contract. The owners went to court and threw out CP. Commonwealth Hospitality was brought in as the new management company with a Holiday Inn Crown Plaza franchise. Also in Toronto, when the Sutton Place Hotel managed by Kempinski went into receivership, the lenders brought in Le Meridian as the management company.

Finally, to cover all the bases, there are man­agement companies like Service, mentioned earlier, that own and manage nothing but fran­chises; that is, the management company's name (such as that shown in Figure 16-3) does not appear in the hotel name. Unlike, for exam­ple, Marriott International, which we could say is in the hotel business (i.e., it wishes to per­petuate its name as a brand or chain and man­ages hotels owned by others but with its name),

FIGURE 16-3) Strictly a hotel management company

these companies are strictly in the hotel man­agement business. Their names don't appear on the hotels, and they own neither the hotels nor the franchise. Instead, the owner buys the fran­chise and hires the management company to manage it. Interstate Hotels Corporation of Pittsburgh is the largest franchise manager of Marriott hotels. It also manages New York's Palace Hotel, owned by the Sultan of Brunei.

Franchising

Franchising is a commonly used method for a hospitality entity to increase its distribution network, both to create more revenue and to obtain the geographic presence discussed above. Franchising is also a common method of distribution for non hospitality companies from Avis Rent-a-Car, Midas Mufflers, and H&R Block tax services to 7-11 convenience stores. Coca-Cola and Pepsi Cola franchise by allowing bottling plants to utilize their mixtures and then distribute their product. This method of distribution has been in common usage since what was called the franchise boom of the 1960s.

Franchising is the usage of a company name by someone else for the purpose of selling that product or service. Briefly, a company creates a product or service. It then offers other compa­nies or persons the opportunity to use the name to market the offering in a variety of geographic areas. The amount of control a franchisor (the parent company) has over the franchisee (the company that buys the name to distribute the product or service) varies as widely as the fran­chising options available.

There is always a contract between the fran­chisee and franchisor that outlines the terms of the relationship. Items such as marketing sup­port, revenues to the franchisor (usually deter­mined as a percentage of sales), and duration of the agreement are covered. Territorial rights are also negotiated at the same time. A franchi­see might obtain rights to a two-mile zone.

Tandy Corporation, which owns Radio Shack, the only stores that sell its product.

In conventional distribution systems, how­ever, the retailer carries many brands, includ­ing those of competing companies. Control of the channel lies in the strength of the product being sold. If an item is in very high demand, the producer of this product may be able to set the terms of the channel. If the producer is offering a very strong product, it may manipu­late the retailer into carrying and merchandis­ing other and weaker products as well. When the product is weak, the wholesalers and retail­ers will dictate the terms of the channel to the consumer. The same principles apply to the hos­pitality industry, only in reverse.

Hospitality Distribution Channels

Although the principles are the same, the chan­nels of distribution for the hospitality industry differ significantly from those used for manu­factured goods. For one reason, the hospitality product is normally not "moved" to the con­sumer like a bottle of soda or a tube of tooth­paste. For another, the product is often sold in conjunction with another product, such as air­line tickets or charter tours. Finally, because of the unusually high perishability of the hospital­ity product, many traditional channels simply would not work.

In distribution channels of the hospitality in­dustry, a separate wholesaler or retailer rarely takes physical possession of the product to be marketed and delivered to the end-consumer at a later date. (They may, however, take nominal possession, such as a wholesaler who purchases a block of rooms or airline seats to be packaged and sold to the ultimate consumer at a markup.) In hospitality, the manufacturer is not only the retailer, but manufacturer and seller of the product (delivers the service) simultane­ously. The problem, then, is not how to distribute the product to the retailer, but how to get the customer to the retail outlet—that is, make it convenient. Thus arises the need for a differ­ent kind of distribution system to broaden the base of customers and sell the product more efficiently.

Although there are thousands of hotels and food-service outlets all over the world carrying many familiar brand names, most of these at not owned by the companies whose names the bear. The industry is really three different bus nesses: one is development, building, and ownership; another is management; and a third i franchising. Some companies do all three. A well, they may be a franchisor (they sell the us of their name), a franchisee (they buy the use of another's name), or both.

One example is the Embassy Suites in Palm Beach, Florida. This hotel, built by a developer from the Midwest, is managed by Servico Management of Florida, which also owns and operates other hotels under different franchise names (Figure 16-1) and carries the Embassy, Suites name as a franchise affiliation. Servico however, does not franchise its own name. Major hotel companies such as Hilton, Sheraton and Marriott are primarily hotel managers who operate hotels for owners who could be a partnership, trust, bank, insurance company, or some combination of these. They also franchise their names to others. In 1993, in fact, Marriott Corporation divided into two companies: Marri­ott International, Inc. manages hotels and re­sorts and franchises its name to those owned, and sometimes managed, by others; Host Mar­riott, Inc. is a real estate company that buys and owns properties, usually managed by Mar­riott International.

From an operator's point of view, it is critical to the successful distribution of a brand name to be in the right geographical areas, as opposed to specific desirable locations for a specific hotel or restaurant. These are often defined as pri­mary, secondary, and tertiary markets. There are 15 so-called primary cities in the United States, including Boston, New York, Los Ange­les, and Chicago. Secondary markets include Hartford, Connecticut, Salt Lake City, Utah, Portland, Oregon, and San Antonio, Texas. Fi­nally, there are tertiary markets such as Des Moines, Iowa, Lexington, Kentucky, Boise, Idaho, and Spokane, Washington. The ranking depends on the size of the market and its buying power. There are also, of course, many smaller or even isolated market areas.

The same is true internationally. Primary in­ternational locations are Paris, Frankfurt, Lon­don, Tokyo, and Singapore. Secondary ones are Brussels, Amsterdam, Lisbon, Madrid, and Kyoto. In the tertiary category are Cologne, Marseilles, Athens, Stockholm, and Dusseldorf.

FIGURE 16-1 An owning and management company

Resort locations likewise abound, from the Rocky Mountains to Florida to Honolulu to Bali, to the Cote d'Azur in France, Phuket in Thai­land, the Costa del Sol in Spain, and the Fiji Islands. Having a property in Buenos Aires or Mexico City may be as important to a hotel company as it is for a fast-food chain to have a position on the New Jersey Turnpike.

Upscale hotel chains usually strive to be in the primary markets first, and then move into the other markets. Middle-tier, economy-tier, and restaurant chains, however, may do it the other way around. Certainly McDonald's is in about every conceivable level of market. Pizza Hut is not far behind. The point, of course, is to distribute the product to the right markets—first, by being there, and second, by being able to capture the same customer in another place. In order to increase the number of customers in the distribution system, it is necessary to offer the product in a variety of marketplaces where the customer either is or goes. Having a pres­ence in the correct marketplace is critical to the -success of a distribution channel.

A case in point is the Marriott Marquis Hotel in New York City, which opened in the mid-1980s, a rather late ar-4 expensive entry into the New York market. Marriott wanted to cap­ture large conventions from the existing net­work of Hilton and Sheraton hotels. Major con­vention planners could buy the Hilton or Sheraton product in New York City, Chicago, and Las Vegas, among others. The Marriott product had a market presence in the corporate business segment, but its hotels were not large enough in size and meeting space to attract the really major conventions and associations. The Marriott Marquis in Atlanta was the first step into this distribution system, but no major player in the convention circuit can maximize its customer base without a hotel in New York City. Thus, the individual profit and loss statement of the New York City hotel was of Jesse importance than that hotel's contribution to the overall Marriott convention network nation wide. The channel of distribution of convention hotels to national associations was very important to Marriot.

Budget and middle-tier hotel chains an food-service chains behave likewise in pursuing, different markets—Days Inn is in India, Best Western is worldwide, Howard Johnson is in Israel, Jordan, Egypt, Turkey, Cyprus, an( Greece under a management contract agreement, and McDonald's and Pizza Hut are world wide, all adding to the distribution system o these chains.

Hospitality companies may use several different methods to distribute their products and services. These include their own channels—owning (wholly or partially), managing; (through management contracts), and franchising. In 1994 Hilton Hotels wholly owned I' hotels, partially owned 15, managed 23, and franchised 227 hotels. All of them bear the Hilton name. In addition, hotels use the channel: of others. They may join consortia or affiliations, hire sales representatives, or join reservations systems to provide customers will greater access. Finally, firms use various intermediaries such as incentive houses, travel agents, and tour operators to increase their distribution networks. In any case, the major issue of distribution is where to be found, so the customer can reach you. We will first discuss dis­tribution systems that are similar to those used by manufacturers: _ company-owned/-managed or franchised properties. We will then discuss some unusual distribution channels used in the hospitality industry.