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CHAPTER 12
GLOBAL MARKETING CHANNELS AND PHYSICAL
DISTRIBUTION
SUMMARY
A. A channel of distribution is the network of agencies and institutions that links producers
with users. Physical distribution is the movement of goods through channels. Business
–to-consumer marketing uses consumer channels; business-to-business marketing
employs industrial channels to deliver products to manufacturers or other types of
organizations. Peer-to-peer marketing via the Internet is another channel. Distributors
and agents are key intermediaries in both channel types. Channel decisions are difficult
to manage globally because of the variation in channel structures from country to country.
Marketing channels can create place utility, time utility, form utility, and information
utility for buyers. The characteristics of customers, products, middlemen, and
environment all affect channel design and strategy.
B. Consumer channels may be relatively direct, utilizing direct mail or door-to-door selling,
as well as manufacturer-owned stores. A combination of manufacturers' sales force,
agents/brokers, and wholesalers may also be used. Channels for industrial products are
less varied, with manufacturers' sales forces, wholesalers, and dealers or agents used.
C. Global retailing is a growing trend as successful retailers expand around the world in
support of growth objectives. Retail operations takes many different forms, including
department stores, specialty retailers, supermarkets, convenience stores, discount
retailers, hard discounters, superstores, shopping malls, warehouse clubs,
hypermarkets, supercenters, outlet stores, and outlet malls. Selection, price, store
location, and customer service are a few of the competencies that can be used
strategically to enter a new market. It is possible to classify retailers in a matrix that
distinguishes companies offering few product categories with an own-label focus; many
categories-own-label focus; few categories-manufacturer-brand focus; and many
categories-manufacturer-brand focus. Global retail expansion can be achieved via
organic growth, franchising, acquisition, joint venture, and licensing.
D. Transportation and physical distribution issues are critically important in a company’s
value chain because of the geographical distances involved in sourcing products and
serving customers in different parts of the world. A company’s supply chain includes all
the firms that perform support activities such as generating raw materials or fabricating
components. Logistics and logistics management integrate the activities of all
companies in a firm’s value chain to ensure an efficient flow of goods through the supply
chain. Important activities include order processing, warehousing, and inventory
management. To cut costs and improve efficiency, many companies are reconfiguring
their supply chains by outsourcing some or all of these activities. Six transportation
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modes—air, truck, water, rail, pipeline, and Internet—are widely used in global
distribution. Containerization was a key innovation in physical distribution that
facilitates intermodal transportation.
LEARNING OBJECTIVES
1 Identify and compare the basic structure options for consumer channels and industrial
channels.
2 List the guidelines companies should follow when establishing channels and working with
intermediaries in global markets.
3 Describe the different categories of retail operations that are found in various parts of the
world.
4 Compare and contrast the six major international transportation modes and explain how they
vary in terms of reliability, accessibility, and other performance metrics.
OVERVIEW
Supermarkets and convenience stores comprise just two of the many elements that make up
distribution channels around the globe. The American Marketing Association defines a channel
of distribution as “an organized network of agencies and institutions that, in combination,
perform all the activities required to link producers with users to accomplish the marketing task”.
Distribution channels are one of the most highly differentiated aspects of national marketing
systems. Retail stores vary in size from giant hypermarkets to small stores in Latin America
called pulperias. The diversity of channels and the wide range of possible distribution strategies
and market-entry options can present challenges to managers responsible for designing global
marketing programs. Channels and physical distribution are crucial aspects of the total marketing
program; without them, a great product at the right price and effective communication means
very little.
ANNOTATED LECTURE/OUTLINE
Distribution Channels: Objectives, Terminology, and Structure
√ (Learning Objective #1)
Marketing channels exist to create utility for customers.
The major categories of channel utility are:
place utility (the availability of a product or service in a location that is convenient to a
potential customer),
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time utility (the availability of a product or service when desired by a customer),
form utility (the availability of the product processed, prepared, in proper condition
and/or ready to use), and
information utility (the availability of answers to questions and general communication
about useful product features and benefits).
The starting point in selecting the most effective channel arrangement is a clear focus of the
company’s marketing effort on a target market and an assessment of the way(s) in which
distribution can contribute to the firm’s overall value proposition.
Who are the target customers, and where are they located? What are their information
requirements? What are their preferences for service? How sensitive are they to price?
Each market must be analyzed to determine the cost of providing channel services.
What is appropriate in one country may not be effective in another.
As defined previously, distribution channels are systems that link manufacturers to customers.
Although channels for consumer products and industrial products are similar, there are also some
distinct differences.
In business-to-consumer marketing (b-to-c or B2C), consumer channels are designed to put
products in the hands of people for their own use.
By contrast, business-to-business marketing (b-to-b or B2B), involves industrial channels
deliver products to manufacturers or other types of organizations that use them as inputs in the
production process or in day-to-day operations.
A distributor is a wholesale intermediary that typically carries product lines or brands on a
selective basis.
An agent is an intermediary who negotiates exchange transactions between two or more parties
but does not take title to the goods being purchased or sold.
Consumer Products and Services
There are six channel structure alternatives for consumer products (Figure 12-1). The
characteristics of both buyers and products have an important influence on channel design.
The first alternative is to market directly to buyers via the Internet, mail order, door-to-door
selling, and manufacturer-owned retail outlets.
The other options utilize retailers and various combinations of sales forces, agents/brokers, and
wholesalers.
Product characteristics such as degree of standardization, perishability, bulk, service
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requirements, and unit prices have an impact as well. Generally speaking, channels tend to be
longer (require more intermediaries) as the number of customers to be served increased and the
price per unit decreases.
Bulky products require channel arrangements that minimize the shipping distances and the
number of times products change hands before they reach the ultimate customer.
The Internet and related forms of new media are dramatically altering the distribution landscape.
E-Bay pioneered a form of online commerce known as peer-to-peer (p-to-p) marketing whereby
individual consumers marketed products to other individuals.
Time-pressed consumers in many countries are increasingly attracted to the time and place utility
created by the Internet and similar communication technologies.
Low-cost, mass-market nondurable products and certain services can be sold door-to-door via a
direct sales force. Door-to-door and house party selling is a form of distribution that is mature in
the United States and it is growing in popularity elsewhere.
In Japan, the biggest barrier facing U.S. auto manufacturers is that half the cars which are sold
each year are sold door-to-door! Toyota and its Japanese competitors maintain showrooms, but
they also employ more than 100,000 car salespeople.
Another direct selling alternative is the manufacturer-owned store or independent franchise
store.
For example, Singer established a worldwide chain of company-owned-and-operated outlets for
sewing machines.
Companies with strong brands establish flagship retail stores to showcase products or obtain
marketing intelligence.
Such channels supplement, rather than replace, distribution through independent retail stores.
Other channels include combinations of a manufacturer's sales force and wholesalers calling on
independent retail outlets, which in turn sell to customers.
For mass-market consumer products (i.e., ice-cream novelties, cigarettes), a channel that links
the manufacturer to distributors and retailers is required to achieve market coverage.
Wal-Mart's growth resulted from economies achieved from buying huge volumes from
manufacturers.
Perishable products impose special form utility demands on channel members who ensure that
merchandise is in satisfactory condition (form utility) at the time of customer purchase.
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In developed countries, distribution of perishable food products is handled by a company's own
sales force or by independent channel members.
In less developed countries, public marketplaces are important channels to provide a convenient
way for producers of vegetables, bread, and other food products to sell their goods directly.
A simple channel innovation in a developing country can increase an overall value proposition.
For example, using plastic bags to keep bread fresh evoked a favorable response among
Russians. The bags themselves created utility as a reusable "gift."
The retail environment in developing countries presents similar challenges for companies
marketing nonperishable items.
In Mexico, and other emerging markets, Proctor and Gamble products are packaged in single-use
quantities at a relatively high per-unit cost. Mexicans tend to shop in tiny independent “mom-
and-pop” stores called by P&G “high-frequency stores”.
Industrial Products
As is true with consumer channels, product and customer characteristics have an impact on
channel structure (see Figure 12-2).
Three basic elements are involved: the manufacturer's sales force, distributors or agents, and
wholesalers.
A manufacturer can reach customers with its own sales force, a sales force that calls on
wholesalers who sell to customers, or a combination.
A manufacturer can sell directly to wholesalers without using a sales force, and
wholesalers, can supply customers.
A distributor or agent can call on wholesalers or customers for the manufacturer.
Channel innovation can be an essential element of a successful marketing Strategy.
Dell's rise to market leader was based on the decision to sell directly to the consumer and build
computers to customers' specifications.
ESTABLISHING CHANNELS AND WORKING WITH CHANNEL INTERMEDIARIES
√ (Learning Objective #2)
A global company expanding across national boundaries must utilize existing distribution
channels or build its own. Channel obstacles are often encountered when a company enters a
competitive market where brands and supply relationships are already established.
If management chooses direct involvement, the company establishes its own sales force or
operates its own retail stores.
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The other option is indirect involvement, which entails utilizing independent agents, distributors,
and retailers.
Channel strategy in a global marketing program must fit the company's competitive position and
overall marketing objectives in each national market.
Channel decisions are important because of the number and nature of relationships that must be
managed. Channel decisions typically involve long-term legal commitments and obligations to
various intermediaries.
It is important for companies to document the nature of the relationship with the foreign partner.
As the saying goes, "The shortest pencil is better than the longest memory."
Companies entering emerging markets for the first time must exercise particular care in choosing
a channel intermediary. Typically, a local distributor is required because the market entrants lack
knowledge of local business practices and needs a partner with links to potential customers.
Here are some specific guidelines for dealing with channel intermediaries:
Select distributors. Don't let them select you.
Look for distributors capable of building markets, not those with a few good customer
contacts
Treat local distributors as long-term partners, not temporary market-entry vehicles.
Support market entry by committing money, managers, and proven marketing ideas.
From the start, maintain control over marketing strategy.
Make sure distributors provide you with detailed market and financial performance data.
Build links among national distributors at the earliest opportunity.
When devising a channel strategy, it is necessary to be realistic about the intermediary’s motives.
On the one hand, it is the intermediary’s responsibility to implement an important element of a
company’s marketing strategy.
Agents sometimes engage in cherry picking—the practice of accepting orders only from
manufacturers with established demand for products and brands. Cherry picking can also take the
form of selecting only a few choice items from a vendor’s product lines.
A manufacturer with a new product or a product with a limited market share may find it more
desirable to set up some arrangement for bypassing the cherry-picking channel member.
In some cases, a manufacturer must incur the costs of direct involvement by setting up its own
distribution organization to obtain a share of the market.
An alternative method of dealing with the cherry-picking problem: a company may decide to rely
on a distributor's own sales force by subsidizing the cost of the sales representatives the
distributor has assigned to the company's products.
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This approach has the advantage of holding down costs by tying in with the distributor's existing
sales management team and physical distribution system.
GLOBAL RETAILING
√ (Learning Objective #3)
Global retailing is any retailing activity that crosses national boundaries. Global retailers
serve an important distribution function; they provide customers with access
to more products and lower prices than were available previously.
When global companies expand abroad, they often encounter local competitors. In India,
organized retail, a term that is used to describe the modern, branded chain stores,
currently comprises less than 5 percent of India’s market.
In some instances, it is a local retailer that breaks new ground by transforming the shopping
experiences.
Retail business models may undergo significant adaptation outside the country in which they
originated. Today’s global retailing scene is characterized by great diversity (Table
12-1).
Retail stores can be divided into categories according to the amount of square feet of floor space,
the level of service offered, width and depth of product offerings, or other criteria.
Types of Retail Operations
Department stores have several departments under one roof, each representing a distinct
merchandise line and staffed with a limited number of salespeople.
Specialty retailers offer less variety than department stores. They are more narrowly focused
and offer a relatively narrow merchandise mix aimed at a particular target market.
Supermarkets are departmentalized, single-story retail establishments that offer a variety of
food (e.g., produce, baked goods, meats) and nonfood items (e.g., paper products, health and
beauty aids), mostly on a self-service basis.
Convenience stores offer some of the same products as supermarkets, but the merchandise mix
is limited to high-turnover convenience and impulse products. Prices for some products may be
15 to 20 percent higher than supermarket prices.
Discount retailers can be divided into several categories. The most general characteristic that
they have in common is the emphasis on low prices.
Full-line discounters typically offer a wide range of merchandise, including nonfood
items and nonperishable food, in a limited-service format.
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The warehouse club is a segment of discount retailing; consumers "join" the club to
take advantage of low prices.
Dollar stores sell a select assortment of products at a single low price.
Hard discounters include retailers such as Aldi that sell a tightly focused selection of goods – at
very low prices.
Hypermarkets are a hybrid-retailing format combining the discounter, supermarket, and
warehouse club approaches under a single roof.
Supercenters offer a wide range of aggressively priced grocery items plus general merchandise
in a space that occupies about half the size of a hypermarket.
Superstores (also known as category killers and big-box retailers) is the label that many in the
retailing industry use when talking about stores such as Toy ‘R” Us, Home Depot, and IKEA.
Shopping malls consist of a grouping of stores in one place; an assortment of retailers that will
create an appealing leisure destination; typically one or more large department stores serve as
anchors. (Exhibit 12-7)
A current trend in “malls” is towards outdoor shopping centers called “lifestyle centers”.
Outlet stores are a variation on the traditional shopping mall: retail operations that allow
companies with well-known consumer brands to dispose of excess inventory, out-of-date
merchandise, or factory seconds. They are often grouped together in outlet malls. (Exhibit 12-8)
Trends in Global Retailing
Currently, a variety of environmental factors have combined to push retailers out of their home
markets in search of opportunities around the globe.
Saturation of the home-country market, recession or other economic factors, strict regulation on
store development, and high operating costs are some of the factors that prompt management to
look abroad for growth opportunities.
Even as domestic retailing grows more challenging, an ongoing environmental scanning effort
will evolve in underdeveloped or where competition is weak.
Economic growth, a growing middle class, a high proportion of young people, and less stringent
regulation make some country markets attractive.
For example, Laura Ashley, Body Shop, and Disney Stores are being lured to Japan by
developers who need established names to fill space in large malls.
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The large number of unsuccessful cross-border retailing initiatives suggests that anyone moving
into global retailing should proceed with great caution and due diligence.
The critical question for a would-be global retailer is, "What advantages do we have relative to
local competition?"
The answer will often be, "Nothing," when competition, local laws governing retailing practice,
distribution patterns, or other factors are considered.
However, a company may possess competencies that can be the basis for competitive advantage.
Competencies also occur in less visible value chain activities such as distribution, logistics, and
information technology.
Japanese retailers offered few extra services to their clientele; whereas the Gap offered liberal
return policies and special orders, consumers switched loyalties.
Due to economies of scale and distribution methods unknown to some Japanese department
stores, foreign retailers offer a greater variety at lower prices.
A matrix-based scheme for classifying global retailers is shown in Figure 12-3.
IKEA and other retailers in quadrant A typically use extensive advertising and product
innovation to build a strong brand image.
In quadrant B, the private-label focus is retained, but many more product categories are offered.
Private label retailers that attempt to expand internationally face a double-edged challenge: They
must attract customers to both the store and the branded merchandise.
Retailers in quadrant C offer many well-known brands in a relatively tightly defined
merchandise range. This type of store tends to quickly dominate smaller established retailers by
out-merchandizing local competition and offering customers superior value by virtue of
extensive inventories and low prices.
Retailers in quadrant D offer the same type of merchandise available from established local
retailers. What the newcomers bring to a market is competence in distribution or some other
value chain element.
Global Retailing Market Expansion Strategies
Retailers can choose from four market entry expansion strategies when expanding outside the
home country.
These strategies can be diagrammed using a matrix that differentiates between (1) markets that
are easy to enter versus those that are difficult to enter and (2) culturally close markets versus
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culturally distant ones. (Figure 12-4)
Organic growth occurs when a company uses its own resources to open a store on a greenfield
site or to acquire one or more existing retail facilities from another company.
Franchising is the appropriate entry strategy when barriers to entry are low yet the market is
culturally distant in terms of consumer behavior or retailing structures.
In global retailing, acquisition is a market-entry strategy that entails purchasing a company with
multiple retail locations in a foreign country.
Joint ventures and licensing are advisable when culturally distant, difficult-to-enter markets are
targeted.
INNOVATION, ENTREPRENEURSHIP AND THE GLOBAL STARTUP
An American Retailer in London
Retailers may have a difficult time crossing borders if they fail to appreciate differences in
retailing environments and consumer behavior and preferences. However, just the opposite was
true when Selfridge opened his department store just off Oxford Street. In traditional British
stores, articles were kept behind counters and shoppers had to ask clerks for help. By contrast,
Selfridge put the goods out for people to see and touch. “The customer always comes first,”
Selfridge declared.
Londoners had never seen anything like it. In the twenty-first century, Selfridges continues to be
at the forefront of retailing innovation. Its flagship London store is home to Europe’s largest
cosmetics department. Window displays have featured buzz-building “performances” such as
humans in animal costumes modeling lingerie.
As Peter Williams, CEO of Selfridges, said, “Our competitors are not just other department
stores. Our competitors are restaurants, theaters, a weekend away, or other entertainment
venues.”
Achieving retailing success outside the home-country market is not simply a matter of consulting
a matrix and choosing the recommended entry strategy. Management must also be alert to the
possibility that the merchandise mix, sourcing strategy, distribution, or other format elements
will have to be adapted. Management at Crate & Barrel, for example, is hesitant to open stores in
Japan. Part of the reason is research indicating that at least half the company's product line would
have to be modified to accommodate local preferences. Another issue is the company's ability to
transfer its expertise to new country markets.
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