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Channel Surfers

Investigation of how seven different entrepreneurs found distribution the key to maintaining a competitive edge.

As the stories of these and other smart companies show, how you distribute your wares can be as important as what they are and how you price them. In some cases your distribution channel can be your whole competitive edge

Who, really, are your customers? What's the most efficient way for them to shop? How do you earn their loyalty?

Entrepreneurs, unencumbered by their industry's traditions, are finding fresh ways to answer those questions. They're looking for market penetration at the lowest possible cost, and they're willing to take risks as they investigate new ways to garner customers. They know that having a distribution channel that isn't already clogged with competitors can make all the difference in the world.

It's tempting to dub these peripatetic adventurers "channel surfers," namesakes of TV's notoriously finicky and restless viewers. Always on the lookout for imaginative ways to expand markets, they reject complacency, and their search for a more productive channel of distribution is never over. Creative distribution is their growth lever, and their commitment to keeping ahead of the competitive pack shapes the very nature of their businesses. Here is a sampling of company owners who, in their relentless search for better channels of distribution, just can't lay off the remote.

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Fresh Coffee to Go
Product: Coffee beans

End-users: Supermarket shoppers

Conventional channel: Food brokers

Fresh approach: Direct to supermarkets

* * *

When Philip Johnson acquired Millstone Coffee from his employer, in 1981, he had already secured distribution for the company's coffee in 125 supermarkets. Since then Millstone has adhered to a simple but expensive strategy: in contrast to the way its competitors' ground coffee is sold, lined up in vacuum packages on supermarket shelves, Millstone Coffee's beans are presented whole, in bins, and grocery-store customers grind and package exactly the amounts they want. The Seattle-based company outfits each supermarket with the displays and the grinders, and the company's route-delivery drivers refresh stock on a regular basis.

In the jam-packed coffee marketplace, Millstone's fresher roasted coffee gave supermarkets a tactical reason to carry yet another brand. And, once they were installed, the display bins and grinders anchored supermarkets to Millstone for the long term by making it difficult for a competitor to lure Millstone's supermarkets with a less expensive product.

By 1986 the market was heating up, and Johnson and his managers wondered whether Millstone could afford to pursue its capital-intensive distribution strategy nationally. It costs Millstone $75,000 to get a single truck and driver on the road. Johnson pondered other options: food brokers, a network of roasters who'd need training, and franchising. "After three solid months of debate, we agreed that it was in our best interests to keep distributing the coffee ourselves," Johnson recalls. "If we went through distributors, our coffee could get lost among the 10,000 products in their warehouses. We weren't going to buy the best beans and roast them to perfection only to have them languish on the shelves and be ruined."

Johnson realized that the slow growth implied by his choice could mean leaving territories vulnerable to aggressive competitors. So he focuses on squeezing the maximum return from each truck-and-driver unit. Johnson continually fine-tunes his formula for choosing the ripest markets. He prefers metropolitan areas with more than two or three dominant grocery chains. (The business generated from a single chain can't justify the expense of a truck.) Johnson has also made it his business to know all about by-the-cup coffee consumption across the United States. That's why, for example, the Midwest, where coffee drinking is high, gets more attention from Millstone than the South does.

Because so much of the company's success hinges on how well stores are stocked with fresh beans, Millstone drivers' compensation package includes a performance incentive. And Millstone does everything it can to enhance its drivers' potential for success: Johnson spent several million dollars on a computer system that permits drivers to use their laptops to report bin-by-bin inventory directly to headquarters, where the data govern roasting and shipping schedules.

Millstone now sells its coffee in 42 states, sales are up to $72 million, and the company is profitable.

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Big Rock-Candy Mountains
Product: Penny candies

End-users: People with a sweet tooth

Conventional channel: Supermarkets and sweetshops

Fresh approach: Discount club stores

* * *

During the 1980s candy giant E.J. Brach was clobbering Chiodo Candy Co., based in Oakland, Calif., in the war for supermarket shelf space. By 1988 Luis Chiodo was casting about for alternative distribution directions.

"Club stores were new on the scene then. They were stealing supermarket shoppers away," he recalls. Club stores had no shelving fees and were receptive to new products. Chiodo pitched holiday candy displays to club-store purchasers, arguing that they would cheer up the drab stores. "After we moved the holiday candy, we talked them into handling candy year-round," says Chiodo.

In keeping with club stores' demand for large packages, Chiodo developed a plastic tub to hold up to two pounds of penny candy. Soon club buyers were ordering more than 8,000 tubs at a time -- considerably larger orders than those from Chiodo's conventional retail customers, who usually called for only a dozen or so cases of seven-ounce baggies.

Still, the new channel posed some difficult problems. Club stores were so new that suppliers like Chiodo were in no position to know which players were reliable. To his dismay, Chiodo was soon to find out.

One store, gushing red ink, told Chiodo to take back all its unsold inventory of jelly beans and promptly -- in complete disregard of a signed contract that precluded such refunds -- deducted the cost of that excess from its next payment to Chiodo. A second chain attempted to avoid paying for a huge order of chocolates that had melted for lack of refrigeration -- in the chain's own warehouse.

Despite such setbacks, Chiodo's business with such outlets as Costco has continued to grow. Costco's 1993 merger with Price Club, he feared, might jeopardize his strong relationships with Costco's buyers. To his relief, though, as Costco and Price Club melded their operations Chiodo's Costco contacts remained in charge of purchasing.

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