978-0134129945 Chapter 12 Lecture Note Part 1

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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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