Physical Distribution Case Study

Branchwater

The marketing management of Branchwater were reviewing the next year's marketing
plan. It would concentrate on how changes to the physical distribution system could help
the company achieve greater profitability so that resources could be allocated elsewhere:
on trade and consumer divisions; or on making the product more price competitive; or on
improving the level of customer service via better availability; or a combination of all three.

Branchwater had started operations in the early 1980s as a regional bottled water
company in the north western part of the United States. As market demand grew, the
company increased the volume it sold within the existing area and expanded its area of
supply. It achieved a turnover of $10 million in the previous year. As Branchwater grew, it
faced steadily greater problems of profitability and customer service. Though the company
had a number of enquiries from new customers in three areas adjacent to the current sales
area, it was uncertain as to how these could be profitably exploited, given the steadily
rising distribution costs involved in servicing more distant market areas.

The company
Branchwater had a spring, high up in the Appalachian mountains, about 10 miles from the
nearest main town which had an interstate highway, and one of the main railway lines in
the country. The spring was 80 miles inland from a sea port serving the eastern seaboard
of the United States. It was approximately 100 miles from the nearest point at which there
was a navigable river, which could be used for the transport of product within the country.
The spring water met all the government regulations concerning purity and had been
certified satisfactory by the public health authorities ever since the company had started
manufacturing. Near the spring, the company had a simple bottling plant and warehouse.
Clear plastic bottles with attached labels were filled with spring water, sealed with tamper
proof tape, collected and stacked in cardboard cartons. A sample of each production batch
was removed for bacteriological inspection. Each of the cartons passed from the bottling
plant into the warehouse by conveyor belt. Here the cartons were stacked onto pallets and
stored, by fork lift trucks, on simple racking systems. The variable costs of manufacture
were $0.10 cents for each bottle.

The advantage of the site used by Branchwater was that it was very cheap, could be
extended easily should sales require it, and provided continuous volumes of high quality
spring water. But the site was poorly situated for distribution of the product, and this had
meant that costs tended to be higher than the competition. Overall fixed costs of the
operation, including all manufacturing labour, bank interest on the outstanding loan, was
$2.7 million.

The market
With the increase in disposable income and growing awareness of some of the
contaminates in municipal water, the market for pure bottled water had grown
substantially. Year on year volume increases were around 5 per cent, though consumption
patterns were erratic with substantial seasonal variations.

There were two separate components of the bottled water market, the restaurant / cafe
sector and retail. The restaurant sector was dominated by premium brands, like Perrier,
which were often imported. Packaging and attitudinal investment was all important in this
sector, and consumers were prepared to pay substantial prices for premium products. The
retail market, which made up the bulk of the total volume sold in the United States, was by
contrast, characterised by steep price and distribution elasticities. Consumers bought
mainly on price and availability. They tended not to be willing to pay premium prices for
products and would purchase those products that were available, rather than buy specific
brands. As might be expected in this price sensitive retail market, a substantial proportion
of total sales occurred during special offer periods. Purity of supply remained an important
promotional element, with the authorities providing certification of water content, which
was vital to achieve a reasonable level of sale. Large pack sizes were commonplace, with
gallon - 3.6 litre - plastic containers the favourite size.

The competition
The retail market was dominated by three brands, each with over 15 per cent of the
market: Deer Park, Appalachian Spring, and Mountain Dew. All three had a target $0.99
retail for a gallon, but each discounted heavily during sales promotions. The average
discount offer was for $0.10, or 5 gallons for the price of 4. Branchwater with its 5 per cent
market share in the areas where it was sold, aimed for a target price of $1.10 based
around a superior product benefit. It was believed that the price elasticity in the market
was high, around 7 to 10 which meant that pricing and cost control was vital to a
successful product.

Product benefit
Branchwater had detailed market research for its sales areas. This had shown that in
addition to price and availability there were two other important influences on purchasing.
The first was purity. The typical bottled water customer was interested in the source of the
water and the certification. The detail on the packaging was also perceived as another part
of the product benefit, confirming the quality of the water and its purity. The management
of Branchwater had taken this concept further and had introduced a clear plastic bottle -
the competition, in contrast, continued to bottle product in mottled or blue containers. The
choice of clear plastic had a minor, but unimportant effect on shelf life. Bottled water
generally had a long shelf life, in excess of 8 months, but clear plastic meant that the taste
of product might alter if exposed to strong sunlight over a long period of time. This change
reduced the shelf life by approximately 5 weeks, but had little real effect on the product
because of the normal speed of sale. The second important element of the product benefit
was attitudinal. In the restaurant/cafe sector the attitudinal component emphasised
sophistication, while in the retail sector traditional values were more important. The name
Branchwater was largely a result of this research. Branchwater was associated with pure
spring water, only available high up in the hills before it joined another stream (above the
branch, or branchwater).

Distribution channels
Supermarkets accounted for 95 per cent of all bottled water sold in the United States.
Volumes were highest in suburban locations, which served the main bottled water
segment, the ABC1 households, particularly those with younger children. Supermarkets
required frequent deliveries into their central depots. Though there were considerable
variations, the majority of outlets could hold 2-3 days' stock but not more. Most outlets also
demanded suppliers support their products with an annual listing fee. For each of the 30
depots that Branchwater supplied this averaged $10,000 per depot per year. A small, but
growing percentage of the market was supplied by home delivery to households with in-
home water coolers. Market surveys suggested that this part of the market was likely to
grow rapidly in the main urban centres. Retail margins were typically around 15 per cent
of the retail price.
Current physical distribution structure.
At present, the company used five of its own trailers to distribute product in the six states
in which it operated. Its network of 30 delivery sites were the depots of the main
supermarket outlets that the company supplied. These were all based in main centres of
population. Details of the market sizes in millions of value, the road distance in miles (one
way), and the rail-link in miles (if in existence) are provided in Table 6A.

Table 6A. Branchwater market analysis.

Centre Market size Deliveries Distance Rail Water

$ million No/ year miles miles (miles)
A 55 250 75 125N/a
B 35 164 80 140 300
C 40 155 40 55 150
D 65 283 90 200 300
E 25 127 45 60n/a

Each lorry carried 40,000 kilos of water - about 11,500 bottles. Between them, they had
driven 138,000 miles in the last year. Average travel speeds were fairly high at around 45
mph (speed limits on highways in the US being 55 mph maximum). Though there were no
limitations on the total number of hours per employee, the company had a general rule that
drivers should not work more than 10 hours a day. This meant a daily round trip limitation
of 450-500 miles. Maintenance costs had risen over the last 2 years as breakdown rates
increased with extra mileage. As a result, the company used subcontractors in
emergencies. The overall annual costs of the current operation were: vehicles - including
depreciation - $150,000; drivers $120,000; fuel $20,000; maintenance $60,000; and
emergency delivery $45,000 per annum.

Future plans
The company had identified four new areas for sales expansion, each of which had been
extensively researched. Three of the four areas were west of the factory, (Areas F-H), the
other (Area I) was far to the south. The main statistics of these areas are in Table 6B.

Table 6B. New centres for development.

Centre Population Market Deliveries Distance Rail-link Water

million ($million) (miles) (miles) (miles)
F 85 150 155 225 450 650
G 65 130 180 240N/a 330
H 60 155 240 355 270n/a
I 105 170 490 470 600 1000

The problems of supplying these areas would be acute. On the basis of the salesforce
volume forecast, additional vehicle mileage would be in excess of an extra 250,000 miles.
The company would have to invest in more vehicles, more drivers, more maintenance, and
incur far higher delivery charges unless it chose an alternative distribution method, or
combination of methods.

Distribution alternatives
A number of distribution alternatives had been identified. The first option was to investigate
the use of rail. Rail speeds were lower than road averaging 20 mph, but the network could,
and did, operate over 24 hours. Yet rail delivery was far less reliable than road with no
guarantee - unless the company paid premium rates - that delivery would occur under 72
hours to any point on the network. Rail costs were based on mileage and volume carried.
Normally around $3 per ton per 100 miles of track. Because the company would have to
deliver to the local rail-head near the factory, and then transport product from the railway
at the destinations, additional costs - storage and onward shipment - would be incurred.
Storage would cost around $1 per ton, per 24 hours, in third party warehousing organised
by the rail shipper, with an average delivery cost to the railhead of $50 and a collection
cost at the destination point of $100 dollars per 40 tonne load.

It was possible to use either sea freight - appropriate for the new market area I (Table 6B)
- or inland waterways for particular market areas. There was information about the
distances involved in servicing particular markets - given in Tables 6A and 6B. Water
freight was slower than rail and less reliable in delivery times, but was much cheaper than
rail and road. Costs per ton/100 miles were about $0.5, with journey speeds of 12 miles
per hour. Additional costs would include delivery to the river (approximately $100 per 40
ton load), storage and onward delivery charges similar to those of rail.

A final option was subcontracting the road transport operation. Five small to medium sized
road haulage companies had supplied quotes - based on full loads to the various centres -
to service particular market areas (Table 6C). Subcontracting road haulage had proved
difficult for many American manufacturers; many road hauliers had recently gone bankrupt
as a result of intense competition.

Table 6C. Costs ($) of road haulage to new areas in $ by haulage company.

Market area 1 2 3 4 5
A 450 500 370 400 500
B 400 525 525 420 430
C 120 150 135 170 80
D 600 530 500 550 540
E 250 300 320 270 230
F 900 1150 1200 1050 1000
G 1200 1400 1250 1300 1150
H 1500 1300 1450 1650 1700
I 3000 2800 3700 3300 3300

Promotional planning
Branchwater had ambitious plans to increase its level of promotional investment in the
following year. In the previous year, the company had spent $0.03 per bottle on average in
sales promotion, and in the current year planned to increase this to $0.05 per bottle. On
the basis of the price elasticity in the market, market share was likely to increase by
around 20 per cent with 6 rather than 5 per cent of the market in each region.
Accompanying the growth in expenditure and the plans to expand to new areas, the
company had decided to recruit additional sales staff. Total staff was likely to rise to 8,
costing $400,000 in the next year.

Action

How should the marketing management of Branchwater approach the choice of physical
distribution alternatives?
What criteria are important?
How does the choice of physical distribution fit into the overall marketing mix?