Ebook Marketing an introduction: Part 2

Part 2 book “Marketing an introduction” has contents: Marketing channels and supply chain management, retailing and wholesaling, communicating customer value - advertising, sales promotion and public relations, marketing in the digital age,… and other contents.

CHAPTER 10

MARKETING CHANNELS AND SUPPLY CHAIN

MANAGEMENT

AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO

● explain why companies use distribution channels and discuss the functions these channels perform

● discuss how channel members interact and how they organise to perform the work of the channel

● identify the major channel alternatives open to a company

● explain how companies select, motivate and evaluate channel members

● discuss the nature and importance of marketing logistics and integrated supply chain management

THE WAY AHEAD

Previewing the concepts

We now arrive at the third marketing mix tool –

distribution Firms rarely work alone in creating

value for customers and building profitable customer

relationships Instead, most are only a single link in a

larger supply chain and distribution channel As such, an

individual firm’s success depends not only on how well

it performs, but also on how well its entire distribution

channel competes with competitors’ channels To be

good at customer relationship management, a company

must also be good at partner relationship management

The first part of this chapter explores the nature of

distribution channels and the marketer’s channel design

and management decisions We then examine physical

distribution – or logistics – an area that is growing

dramatically in importance and sophistication In the

next chapter, we’ll look more closely at two major

channel intermediaries – retailers and wholesalers

To get us started, we’ll take a close look at a

medium-sized Spanish paint company, Pinturas Fierro, which has

had to solve quite a few distribution and logistical issues

as it has grown and entered international markets Good

management of the distribution system has been a key

component in enabling this family firm to survive and

thrive for over 70 years Read on and see why

Number of channel levels 338

Channel behaviour and organisation 339

Channel behaviour 340

Vertical marketing systems 341

Horizontal marketing systems 343

Multichannel distribution systems 343

Changing channel organisation 344

Channel design decisions 347

Analysing consumer needs 347

Setting channel objectives 348

Identifying major alternatives 348

Evaluating the major alternatives 349

Designing international distribution channels 350

Channel management decisions 350

Selecting channel members 350

Managing and motivating channel members 351

Evaluating channel members 351

Public policy and distribution decisions 352

Marketing logistics and supply chain management 352

Nature and importance of marketing logistics 352

Goals of the logistics system 353

Major logistics functions 354

Integrated logistics management 357

PINTURAS FIERRO: SLOW BUT SAFE GROWTH

Pinturas Fierro is a Spanish family

com-pany devoted to the production and

dis-tribution of paint for industrial use, such

as the car and the decoration industries;

the company also produces solvents

and other auxiliary products It

demon-strates some characteristic features for

a medium-sized business: a fairly small

number of employees, management of

the business handled by the owners, and

relatively few specialists in management

positions The company was created in

1930 by the family that owns and runs it

today Currently the third generation runs

the company while the fourth generation

is receiving training in the fields of

chem-istry and business administration in order

to take over control and management of

the company in the future.

Since its creation the company has

been characterised by great dynamism and an eagerness

to grow Initially, the company was a small local shop that

sold paint, varnish and accessories When the founder’s

son took charge of the business, in 1943, the location

changed to the commercial area of Barbastro, their home

town in northern Spain, and they established a provincial

and regional network for the exclusive distribution of the

most highly respected paint brands in Spain (such as Titan

and Valentine) During this period the company became

well established in its home region and began to expand

into neighbouring France In the early 1980s the

impor-tant decision was made to invest in manufacturing facilities

for paint, varnish and solvents The first production

activi-ties coincided with the arrival of the third generation into

the company’s management in 1986 However, although

members of the family had excellent knowledge of

chem-istry they had little training in business management, and

this began to hamper the company’s development After

a period of consolidation, during which managerial skills

were developed, the business began to look for expansion

opportunities nationally and internationally.

Today the company is divided into two fundamental

areas: first, production and distribution (wholesaling) to

industrial customers; and, second, distribution

(wholesal-ing) to commercial customers and retailers The company

has 16 employees, and in 2005 sales turnover amounted to

€4.5m The centre of operations is still in the Spanish market,

especially in Aragon, Catalonia, industrial areas of Madrid,

Valencia and Andalusia; there is an international presence through non-exclusive distributors in France, northern Italy and, on a smaller scale, in Portugal and Morocco.

Throughout most of the history of Pinturas Fierro the company has relied less on formal management prin- ciples and more on the intuitive business sense of the owners Because the people that have run the company always knew that they were dealing with the present and future of their family, they were never tempted to take on excessive risks Besides, they were chemists rather than businessmen This has led to a fairly cautious approach to business expansion, with a clear focus on producing high- quality products even if this meant that prices sometimes had to be higher than those of rivals.

Let’s now take a look at how the company has managed its expansion, and how it has consistently and carefully aug- mented the distribution channels that it employs The first stage of the expansion was characterised by the creation of

a simple distribution network, covering 75–100 kilometres from the physical location of the firm The problem here was that the area is mountainous (near the Pyrenees) and the transport infrastructure was poorly developed How- ever, the company exploited the absence of competitors interested in the area This territory was neither attractive nor profitable for distant companies, whereas, for Pinturas Fierro, it was its home territory and all it needed was a driver with a van who could make deliveries and handle logistical matters Using this simple commercial network

Jesús Cambra Fierro

The retail team at Pinturas Fierro

Source: Photo by Jesús Cambra Fierro.

the company obtained exclusive dealership within the

local area for several of the most prestigious national and

international brands, like Valentine and Titan.

However, the growing business led to the need to increase the stock of products stored and to have actual

space for it The company acquired two fairly small

ware-houses in the same town, one for paints and varnishes,

the other for accessory products.

The 1980s saw further expansion of the business and the addition of a new product line: accessory machinery

This line included air compressors and power generators

However, this increased the complexity of the

manage-ment task considerably New brands like Peugeot and

Pintuc were added to the portfolio, and it became clear

that the company needed more space in which to exhibit

and store the products, and to offer technical support In

particular, in this industry, customers often give

equip-ment maintenance a low priority, and expect the dealer

to sort out any problems quickly when equipment breaks

down Customer service is a priority.

During this period more employees were hired: one

as warehouse manager, one to handle the accounts and

administration, and two as commercial salespeople

Two delivery vehicles were acquired and agreements on

physical distribution were signed with specialised

compa-nies so that commercial staff no longer had to handle the

physical distribution of the product As a result the sales

team could spend more time on existing customers and

prospecting for new customers.

As transport infrastructure improved in the 1980s, so eral competing companies became interested in the home

sev-territory of Pinturas Fierro At the same time several new

brands emerged with very aggressive pricing strategies All

these factors reduced profit margins and meant that the

company had to handle a wider range of brands In any case,

Pinturas Fierro had been able to build a commercial

net-work perfectly adapted to the physical and social features

of the territory The company had a good reputation for the

technical training of its salespeople, its commitment to meet

customer deadlines, the size of its product portfolio and its

willingness to meet the specific needs of every customer.

As the company developed its production facilities and began to sell its own products, rather than simply to dis-

tribute those of other companies, new challenges emerged

Establishing distribution channels, and handling logistics,

for its own products became matters of serious concern

Key target markets were in the industrial centres of

Catalo-nia and, inevitably, in Madrid, where the concentration of

business was highest Although Pinturas Fierro wanted to

establish exclusive distributorships, it was not well known

as a manufacturer and so found this very difficult

Conse-quently, it decided to sell its products through distributors

that also handled other brands The company looked for

distributors who specialised in industrial customers with

a wide portfolio Potential distributors were invited to the factory so that they could learn about the production pro- cess and how the product could be customised to meet the needs of particular industrial customers Pinturas Fierro managers regularly visited Madrid and Barcelona to meet potential customers This way they both demonstrated their support to the distributor and surveyed the actual needs of the market This information, together with the feedback generated by the distributor, considerably enriched the company’s knowledge of the market.

What about international markets? They were sidered to be of secondary importance compared with getting established in Spain But by the 1990s the manage- ment felt that the company was mature enough to expand internationally The route selected to enter foreign mar- kets was by exporting, building relationships with distribu- tors in international markets in the same way that it had built relationships with Spanish distributors Expanding into inter-national markets was expected to enhance the reputation of the company back home in Spain Pinturas Fierro followed a typical internationalisation strategy for a medium-sized firm, making the nearby countries of France and Italy their first targets The company has taken part in trade missions and international trade fairs Gradually the proportion of exports in total sales has been increasing.

con-What are the challenges that Pinturas Fierro faces in the future? The company, true to its origins, still sells to the retail trade and still distributes the Valentine and Titan brands Although the retail trade is fairly small, it has always been there and has always provided funds for the company’s new ventures Further, the management

of the business is emotionally attached to the retail trade and would not want to see it go The company has been working on enlarging the central main warehouse and the manufacturing facilities, and investing in new, improved logistics technology designed to improve physical stock management Working relationships with suppliers are very satisfactory, and the managers are working hard

to maintain and improve them Similarly, the company understands that its distributors are the principal point of contact with the customers, and so will continue to invest time and effort in developing excellent distributor rela- tionships The challenge of further internationalisation is always present The company is hampered because few employees can speak a foreign language, and, in any case,

it currently has limited production capacity with which

to expand further in international markets However, as the next generation of the family comes into the busi- ness, fully trained in modern management and marketing techniques, perhaps they will take the plunge and launch Pinturas Fierro decisively into the international arena.

Sources: Based on interviews with the owners and managers.

Just like Pinturas Fierro, most firms cannot bring value to customers by themselves

Instead, they must work closely with other firms in a larger value-delivery network

SUPPLY CHAINS AND THE VALUE-DELIVERY NETWORK

Producing a product or service and making it available to buyers requires building tionships not just with customers, but also with key suppliers and resellers in the com-

rela-pany’s supply chain This supply chain consists of ‘upstream’ and ‘downstream’ partners

Upstream from the company is the set of firms that supply the raw materials, components, parts, information, finances and expertise needed to create a product or service Market-ers, however, have traditionally focused on the ‘downstream’ side of the supply chain – on

the marketing channels or distribution channels that look forward towards the customer

Downstream marketing-channel partners, such as wholesalers and retailers, form a vital connection between the firm and its customers

Both upstream and downstream partners may also be part of other firms’ supply chains

But it is the unique design of each company’s supply chain that enables it to deliver superior

value to customers An individual firm’s success depends not only on how well it performs,

but also on how well its entire supply chain and marketing channel competes with tors’ channels

competi-The term supply chain may be too limited – it takes a make-and-sell view of the business

It suggests that raw materials, productive inputs and factory capacity should serve as the

starting point for market planning A better term would be demand chain because it suggests

a sense-and-respond view of the market Under this view, planning starts with the needs of

target customers, to which the company responds by organising a chain of resources and activities with the goal of creating customer value

Even a demand-chain view of a business may be too limited, because it takes a step, linear view of purchase–production–consumption activities With the advent of the Internet and other technologies, however, companies are forming more numerous and com-plex relationships with other firms For example, Ford manages numerous supply chains

step-by-It also sponsors or transacts on many B2B websites and online purchasing exchanges as needs arise Like Ford, most large companies today are engaged in building and managing

a continuously evolving value-delivery network.

As defined earlier (see Chapter 2), a value-delivery network is made up of the company, suppliers, distributors and ultimately customers who ‘partner’ with each other to improve the performance of the entire system For example, Samsung, a leading manufacturer of mobile phones, manages a whole community of suppliers and assemblers of semiconductor components, plastic cases, colour displays and accessories Its network also includes offline and online resellers All of these diverse partners must work effectively together to bring superior value to Samsung’s customers

This chapter focuses on marketing channels – on the downstream side of the delivery network However, it is important to remember that this is only part of the full value network To bring value to customers, companies need upstream supplier partners just as they need downstream channel partners Increasingly, marketers are participating

value-in and value-influencvalue-ing their company’s upstream activities as well as its downstream activities

More than marketing-channel managers, they are becoming full value network managers

The chapter examines four major questions concerning marketing channels What is the nature of marketing channels and why are they important? How do channel firms interact and organise to do the work of the channel? What problems do companies face in designing and managing their channels? What role do physical distribution and supply chain manage-ment play in attracting and satisfying customers? We will look later at marketing-channel issues from the viewpoint of retailers and wholesalers (see Chapter 11)

THE NATURE AND IMPORTANCE OF MARKETING CHANNELS

Few producers sell their goods directly to the final users Instead, most use intermediaries

to bring their products to market They try to forge a marketing channel (or distribution channel) – a set of interdependent organisations that help make a product or service avail-able for use or consumption by the consumer or business user

A company’s channel decisions directly affect every other marketing decision Pricing depends on whether the company works with national discount chains, uses high-quality speciality stores, or sells directly to consumers via the Web The firm’s sales force and com-munications decisions depend on how much persuasion, training, motivation and support its channel partners need Whether a company develops or acquires certain new products may depend on how well those products fit the capabilities of its channel members

Companies often pay too little attention to their distribution channels, sometimes with damaging results In contrast, many companies have used imaginative distribution systems

to gain a competitive advantage FedEx’s creative and imposing distribution system made

it a leader in express delivery Dell revolutionised its industry by selling PCs directly to sumers rather than through retail stores Amazon pioneered the sales of books and a wide range of other goods via the Internet

con-Distribution channel decisions often involve long-term commitments to other firms For example, companies such as PSA Peugeot Citroën, Samsung or Toshiba can easily change their advertising, pricing or promotion programmes They can scrap old products and intro-duce new ones as market tastes demand But when they set up distribution channels through contracts with franchisees, independent dealers or large retailers, they cannot readily replace these channels with company-owned stores or websites if conditions change Therefore, management must design its channels carefully, with an eye on tomorrow’s likely selling environment as well as today’s

How channel members add value

Why do producers give some of the selling job to channel partners? After all, doing so means giving up some control over how and to whom they sell their products Producers use inter-mediaries because they create greater efficiency in making goods available to target markets Through their contacts, experience, specialisation and scale of operation, intermediaries usually offer the firm more than it can achieve on its own

Figure 10.1 shows how using intermediaries can provide economies Figure 10.1A shows three manufacturers, each using direct marketing to reach three customers This system requires nine different contacts Figure  10.1B shows the three manufacturers working through one distributor, which contacts the three customers This system requires only six contacts In this way, intermediaries reduce the amount of work that must be done by both producers and consumers

From an economic point of view the role of marketing intermediaries is to transform the assortments of products made by producers into the assortments wanted by consumers Producers make narrow assortments of products in large quantities, but consumers want broad assortments of products in small quantities Marketing-channel members buy large quantities from many producers and break them down into the smaller quantities and broader assortments wanted by consumers

For example, Nestlé makes millions of KitKat bars each day, but you want to buy only a few bars at a time So big food, drug and discount retailers, such as Carrefour, Lidl, Aldi and Tesco, buy KitKat by the truckload and stock it on their stores’ shelves In turn, you can buy

a single KitKat, along with a shopping trolley full of small quantities of toothpaste, poo and other related products as you need them Thus, intermediaries play an important role in matching supply and demand

sham-In making products and services available to consumers, channel members add value by bridging the major time, place and possession gaps that separate goods and services from those who would use them Members of the marketing channel perform many key functions

Some help to complete transactions:

● Information: Gathering and distributing marketing research and intelligence information

about actors and forces in the marketing environment needed for planning and aiding exchange

● Promotion: Developing and spreading persuasive communications about an offer.

● Contact: Finding and communicating with prospective buyers.

● Matching: Shaping and fitting the offer to the buyer’s needs, including activities such as

manufacturing, grading, assembling and packaging

● Negotiation: Reaching an agreement on price and other terms of the offer so that

owner-ship or possession can be transferred

Others help to fulfil the completed transactions:

● Physical distribution: Transporting and storing goods.

● Financing: Acquiring and using funds to cover the costs of the channel work.

● Risk taking: Assuming the risks of carrying out the channel work.

The question is not whether these functions need to be performed – they must be – but rather who will perform them To the extent that the manufacturer performs these func-

tions, its costs go up and its prices have to be higher When some of these functions are shifted to intermediaries, the producer’s costs and prices may be lower, but the intermediar-ies must charge more to cover the costs of their work In dividing the work of the channel, the various functions should be assigned to the channel members who can add the most value for the cost

Number of channel levels

Companies can design their distribution channels to make products and services available

to customers in different ways Each layer of marketing intermediaries that performs some

work in bringing the product and its ownership closer to the final buyer is a channel level Because the producer and the final consumer both perform some work, they are part of every channel.

The number of intermediary levels indicates the length of a channel Figure 10.2A shows

several consumer distribution channels of different lengths Channel 1, called a directmarketing channel, has no intermediary levels; the company sells directly to consumers For example, both Avon and Essentially Yours sell cosmetic products through home and office sales parties and on the Web; Interflora sells flowers, gifts and greeting cards direct

by telephone and online The remaining channels in Figure 10.2A are indirect marketing channels, containing one or more intermediaries

Figure 10.2B shows some common business distribution channels The business marketer can use its own sales force to sell directly to business customers, or it can sell to various types

of intermediaries, who in turn sell to these customers Consumer and business marketing channels with even more levels can sometimes be found, but less often From the producer’s point of view, a greater number of levels mean less control and greater channel complexity

Moreover, all of the institutions in the channel are connected by several types of flows These include the physical flow of products, the flow of ownership, the payment flow, the information flow and the promotion flow These flows can make even channels with only

one or a few levels very complex

CHANNEL BEHAVIOUR AND ORGANISATION

Distribution channels are more than simple collections of firms tied together by various flows They are complex behavioural systems in which people and companies interact to accomplish individual, company and channel goals Some channel systems consist only of informal interactions among loosely organised firms Others consist of formal interactions guided by strong organisational structures Moreover, channel systems do not stand still – new types of intermediaries emerge and whole new channel systems evolve Here we look

at channel behaviour and at how members organise to do the work of the channel

FIGURE 10.2

Consumer and business marketing channels

Each channel member plays a specialised role in the channel For example, Sony’s role is

to produce consumer electronics products that consumers will like and to create demand through national advertising The role of electrical retailers like Fnac and Currys is to display these Sony products in convenient locations, to answer buyers’ questions and to complete sales The channel will be most effective when each member takes on the tasks it can do best

Ideally, because the success of individual channel members depends on overall channel success, all channel firms should work together smoothly They should understand and accept their roles, coordinate their activities and cooperate to attain overall channel goals

However, individual channel members rarely take such a broad view Cooperating to achieve overall channel goals sometimes means giving up individual company goals Although chan-nel members depend on one another, they often act alone in their own short-term best inter-ests They often disagree on who should do what and for what rewards Such disagreements over goals, roles and rewards generate channel conflict

Horizontal conflict occurs among firms at the same level of the channel For instance,

some Peugeot dealers in Madrid might complain that other dealers in the city steal sales from them by pricing too low or by advertising outside their assigned territories Or Holiday Inn franchisees might complain about other Holiday Inn operators overcharging guests or giving poor service, hurting the overall Holiday Inn image

Vertical conflict, conflicts between different levels of the same channel, is

even more common For example, Goodyear created hard feelings and conflict with its premier independent-dealer channel when it began selling through mass-merchant retailers For more than 60 years, Goodyear sold replacement tyres exclusively through its premier network of 5,300 independent Good-year dealers In mid-1992, however, Goodyear jolted its dealers by agreeing

to sell its tyres through Sears auto centres Similar pacts soon followed with Wal-Mart and Sam’s Club, pitting dealers against the nation’s most potent retailers Goodyear claimed that the change was essential Value-minded tyre buyers were increasingly buying from cheaper, multibrand discount outlets and department stores By selling exclusively through its dealer network, Goodyear simply was not putting its tyres where many consumers were going

to buy them Unfortunately, as Goodyear expanded into the new channels, it took few steps to protect its prized exclusive-dealer network

Not surprisingly, Goodyear’s aggressive moves into new channels set off a surge of channel conflict, and dealer relations deteriorated rapidly Some of Goodyear’s best dealers defected to competitors Other angry dealers struck back by taking on competing brands of cheaper private-label tyres Such dealer actions weakened the Goodyear name, and the company’s replacement tyre sales – which made up 73 per cent of its revenues – went flat, dropping the company into a profit funk more than a decade long Although Goodyear has since repaired fractured dealer relations, it still has not fully recovered ‘We lost sight of the fact that it’s in our interest that our dealers succeed,’ admits

a Goodyear executive.1Some conflict in the channel takes the form of healthy competition Such competition can be good for the channel – without it, the channel could

Channel conflict: Goodyear’s

conflicts with its independent

dealers have caused hard feelings

and flattened the company’s

replacement tyre sales

Source: Getty Images/Mike Ehrmann.

become passive and non-innovative But severe or prolonged conflict, as in the case of year, can disrupt channel effectiveness and cause lasting harm to channel relationships Companies should manage channel conflict to keep it from getting out of hand.

Good-Vertical marketing systems

For the channel as a whole to perform well, each channel member’s role must be specified and channel conflict must be managed The channel will perform better if it includes a firm, agency or mechanism that provides leadership and has the power to assign roles and manage conflict

Historically, conventional distribution channels have lacked such leadership and power,

often resulting in damaging conflict and poor performance One of the biggest channel

developments over the years has been the emergence of vertical marketing systems that

provide channel leadership Figure 10.3 contrasts the two types of channel arrangements

A conventional distribution channel consists of one or more independent producers, wholesalers and retailers Each is a separate business seeking to maximise its own profits, perhaps even at the expense of the system as a whole No channel member has much con-trol over the other members, and no formal means exists for assigning roles and resolving channel conflict

In contrast, a vertical marketing system (VMS) consists of producers, wholesalers and retailers acting as a unified system One channel member owns the others, has contracts with them or wields so much power that they must all cooperate The VMS can be dominated by the producer, wholesaler or retailer

We look now at three major types of VMSs: corporate, contractual and administered

Each uses a different means for setting up leadership and power in the channel

Corporate VMS

A corporate VMS integrates successive stages of production and distribution under single ownership Coordination and conflict management are attained through regular organisa-tional channels For example, French car manufacturer Citroën has local subsidiary compa-nies responsible for selling in national markets, such as Citroën Espana, Citroën Deutschland and Citroën UK.2 The fantasy games company Games Workshop designs, manufactures, distributes and retails its own range of products, so retaining complete control over the

FIGURE 10.3

Comparison of conventional distribution channel with vertical marketing system

entire VMS.3 And little-known Italian eyewear maker Luxottica produces many famous wear brands – including Ray-Ban, Vogue, Anne Klein, Ferragamo and Bvlgari It then sells these brands through two of the world’s largest optical chains, LensCrafters and Sunglass Hut, which it also owns.4

eye-Contractual VMS

A contractual VMS consists of independent firms at different levels of production and tribution who join together through contracts to obtain more economies or sales impact than each could achieve alone Coordination and conflict management are attained through contractual agreements among channel members

dis-The franchise organisation is the most common type of contractual relationship – a

chan-nel member called a franchisor links several stages in the production–distribution process

Although McDonald’s is undoubtedly the best known franchise in Europe, as it is around the world, Europe boasts many home-grown franchises Almost every kind of business has been franchised – from hotels and fast-food restaurants to dental centres and dating agencies, from wedding consultants and maid services to fitness centres and undertaker ser-

vices The largest European franchise operations include ‘5 à sec’ dry-cleaners from France,

Paellador restaurants from Spain, Groszek convenience stores from Poland and Chemex International commercial cleaning services from the UK.5

There are three types of franchises The first type is the manufacturer-sponsored retailer franchise system – for example, Peugeot and its network of independent franchised dealers

The second type is the manufacturer-sponsored wholesaler franchise system – Coca-Cola

licenses bottlers (wholesalers) in various markets who buy Coca-Cola syrup concentrate and then bottle and sell the finished product to retailers in local markets The third type is

the service-firm-sponsored retailer franchise system – examples are found in the commercial

cleaning business (Chemex International, Swisher), the fast-food service business ald’s, Paellador) and the hotel business (Mercure, Ibis, Travelodge)

(McDon-The fact that most consumers cannot tell the difference between contractual and rate VMSs shows how successfully the contractual organisations compete with corporate chains

corpo-Administered VMS

In an administered VMS, leadership is assumed not through common ownership or tractual ties, but through the size and power of one or a few dominant channel members

con-European franchising operations such as Paellador compete with global brands like McDonald’s

in the fast-food business

Source: http://www.paellador.es

Manufacturers of a top brand can obtain strong trade cooperation and support from resellers For example, Danone, Louis Vuitton and L’Oréal can command unusual cooperation from resellers regarding displays, shelf space, promotions and price policies Large retailers such

as Carrefour and Tesco can exert strong influence on the manufacturers that supply the products they sell

Horizontal marketing systems

Another channel development is the horizontal marketing system, in which two or more companies at one level join together to follow a new marketing opportunity By working together, companies can combine their financial, production or marketing resources to accomplish more than any one company could alone

Companies might join forces with competitors or non-competitors They might work with each other on a temporary or permanent basis, or they may create a separate company For example, banks often install automated teller machines (ATMs) on the premises of major retailers, delivering mutual benefits to the customer, the retailer and the bank itself Similarly, both the coffee bar company Costa and the bookshop chain Waterstones clearly believe that their businesses benefit from having Costa coffee bars located in Waterstones stores Customers can stay in the store longer, rather than leaving to find a separate coffee shop when their book browsing makes them thirsty

Such channel arrangements also work well globally For example, because of its excellent coverage of international markets, Nestlé jointly sells General Mills’ cereal brands in 80 coun-tries outside North America Similarly, Coca-Cola and Nestlé formed a joint venture, Beverage Partners Worldwide, to market ready-to-drink coffees, teas and flavoured milks in more than

40 countries worldwide Coke provides worldwide experience in marketing and distributing beverages, and Nestlé contributes two established brand names – Nescafé and Nestea.6Multichannel distribution systems

In the past many companies used a single channel to sell to a single market or market ment Today, with the proliferation of customer segments and channel possibilities, more and more companies have adopted multichannel distribution systems – often called hybrid marketing channels Such multichannel marketing occurs when a single firm sets up two or

seg-more marketing channels to reach one or seg-more customer segments The use of multichannel systems has increased greatly in recent years

Figure 10.4 shows a hybrid channel In the figure, the producer sells directly to sumer segment 1 using direct mail catalogues, telemarketing and the Internet, and reaches

con-FIGURE 10.4

Hybrid marketing

channel

consumer segment 2 through retailers It sells indirectly to business segment 1 through distributors and dealers and to business segment 2 through its own sales force.

These days, almost every large company and many small ones distribute through tiple channels The Spanish banking organisation Grupo Santander is well established in both Europe and Latin America, and reaches customers by telephone, over the Internet and through its branch offices The office supplies company Staples originated in the USA but now operates in 22 countries, with stores in the UK, Germany, the Netherlands, Portugal, and catalogue businesses in several other European countries including Italy, Spain, Poland and Hungary Staples markets through its traditional retail outlets, a direct-response Internet site, virtual malls and 30,000 links on affiliated sites

mul-Siemens uses multiple channels to serve dozens of segments and niches, ranging from large corporate and institutional buyers to small businesses to home office buyers The Siemens sales force sells the company’s IT equipment and services to large and mid-size business customers Siemens also sells through a network of distributors and value-added resellers, which sell Siemens computers, systems and services to a variety of special business segments Both business and home office buyers can buy directly from Siemens by phone

or online from the company’s websites (the corporate website is www.siemens.com, and from there you can navigate to individual country websites such as www.siemens.ua, the Ukrainian site)

Multichannel distribution systems offer many advantages to companies facing large and complex markets With each new channel, the company expands its sales and market cover-age and gains opportunities to tailor its products and services to the specific needs of diverse customer segments But such multichannel systems are harder to control, and they generate conflict as more channels compete for customers and sales For example, when Siemens began selling directly to customers through its own website, many of its retail dealers were concerned that they might lose sales

Changing channel organisation

Changes in technology and the explosive growth of direct and online marketing are having

a profound impact on the nature and design of marketing channels One major trend is towards disintermediation – a big term with a clear message and important consequences

Disintermediation occurs when product or service producers cut out intermediaries and

go directly to final buyers, or when radically new types of channel intermediaries displace traditional ones

Thus, in many industries traditional intermediaries are dropping by the wayside For example, companies such as Dell and easyJet sell directly to final buyers, cutting retailers out of their marketing channels altogether In other cases, new forms of resellers are displac-ing traditional intermediaries For example, e-commerce has grown rapidly, taking business from traditional bricks-and-mortar retailers Consumers can buy flowers from Interflora (www.interflora.com), clothes from H&M (www.hm.com), and books, videos, toys, jewellery, consumer electronics and almost anything else from amazon.com or their national Amazon website (www.amazon.co.uk, www.amazon.fr, www.amazon.de) – all without ever stepping into a traditional retail store Disintermediation is a particularly strong force in the music and computer gaming businesses (see Marketing at Work 10.1)

Disintermediation presents problems and opportunities for both producers and mediaries To avoid being swept aside, traditional intermediaries must find new ways to add value in the supply chain To remain competitive, product and service producers must develop new channel opportunities, such as Internet and other direct channels However, developing these new channels often brings them into direct competition with their estab-lished channels, resulting in conflict

inter-To ease this problem, companies often look for ways to make going direct a plus for the entire channel For example, Bosch knows that many customers would prefer to buy its

Disintermediation is a fancy word, but the idea is quite

simple: the removal of intermediaries from the supply

chain or marketing channel.

A traditional channel for something like baked beans would include the farmer growing the beans, merchants

buying beans from many farmers and shipping them

to processors like Heinz, who also brand and package

them before passing them on to retailers, perhaps via a

wholesaler Each of those businesses does specific jobs

that create added value, and has specific goals, and each

is rewarded with a proportion of the price that the end

user pays in order to have the key ingredient for that

gourmet meal – beans on toast Rewards are not equal

between the members of the supply chain Maybe the

retailer takes 40 per cent of the final selling price while

the originator of the raw materials – in this case a farmer

– probably receives between a tenth and a twentieth of

that: 2–4 per cent If you were a farmer, you might think

this unfair, and wonder whether you could cut out some

intermediaries and increase your share of the revenue It

is possible for cooperative groups of farmers to consider

integrating activities closer to the customer into their

own business model – activities like processing,

packag-ing and even brandpackag-ing In practice this kind of ‘forward

integration’ is very difficult It is considerably easier for a

major retailer to integrate activities further away from the

customer into its business model, in a process of

‘back-ward integration’.

However, what is difficult for farmers is not so ficult for producers in some other markets In particu-

dif-lar, disintermediation is much easier where the product

comprises data, so that it can be delivered digitally

Apple has disintermediated the supply chain for music –

bands supply music to labels like Sony BMG and Virgin,

who pass MP3 files to Apple for sale through the iTunes

online store and customers buy their music (and films

and TV programmes) directly This eliminates the

physi-cal shipping of CDs and other media, and bypasses

high-street retailers like HMV Some artists like Radiohead,

David Byrne and David Bowie have gone a step further

– offering their music direct to fans with essentially no

intermediaries.

That these products are data based is the key attribute – the consumers receive the product electronically via an

Internet connection and there is no need for a physical

component to the offering – as long as the ones and zeros

can be rearranged back into the appropriate structure,

the product can be delivered The same principle also

applies to software, and has become extremely important

in the computer gaming software market.

Steam is the dominant player in the downloadable games market for PC games, with an estimated 75 per cent market share and 75 million active user accounts at the beginning of 2013 Year-on-year sales have increased

by more than 100 per cent for five years What does Steam do from the perspective of customers? It enables them to buy and download games software without requiring physical media such as a DVD Even better, their purchased games can be updated, repaired or improved

by ‘patches’ distributed automatically They can load additional content to extend the value and life of the games and participate in online communities – perhaps discussing best strategy, asking for help with puzzles or gossiping about upcoming titles.

down-Steam is as much a brand as a piece of software – it gives a screen presence to an otherwise invisible organi- sation The community aspect allows Valve Corporation, the creators of Steam, to create, build and maintain rela- tionships with its customers Steam creates marketing opportunities for Valve in three key areas – marketing communications, customer insight and partnering.

At a basic level, Steam enables the transmission of near-traditional advertisements as image or video files

After exiting a game, users can be presented with a series

of advertisements tailored to their interests The online forums and communities allow peer-to-peer word of mouth to snowball Steam users can receive special offers such as discounts on current or future titles or early access to the hottest new releases Demo versions of a game can be downloaded and trialled Purchasers of a game might be given a ‘guest pass’ to allow a pal to join them on an adventure for a week before having to decide whether to pay for the full game These promotions can

be tailored and targeted very specifically to identified segments.

What about customer insight? The transmission of data between Steam and users is by no means one way Data flows back from the user to Valve As well as the obvious information about games bought and means and method

of payment, the system collects information about how long was spent playing each game, how the individual interacts with the wider community – either in a forum or

in a multi-player game – and how well or badly the player

is doing, not to mention all the personal information incorporated within the user’s online profile Addition- ally, Steam returns information about adverts seen and

Steam-powered marketing: disintermediation in the

AT WORK 10.1

demos and media files downloaded Steam

generates a picture – detailed down to the

atomic level of who their customers are and

the how, why and what of the technology

they are using to enjoy their games.

Steam also allows Valve Corporation

to partner with other game publishers In

negotiations with these other companies,

Valve can make the enticing offer of being

able to supply to end users more quickly,

and far more cheaply than traditional

distri-bution networks – with Valve taking a

per-unit fee for incorporating the title into the

sales and management functions of Steam

Currently, more than 3,000 titles from

more than 100 publishers are available for

download.

So, customers are getting access,

con-venience and value Valve is able to gain

significant insight and construct a highly

effective marketing communications programme while

simultaneously increasing the proportion of the end-user

price the company realises and taking fees from other

developers Everyone (excepting the retailers) must be

happy, yes?

Alas, no Switching to Steam as a method of

distribu-tion has caused problems for consumers, Valve and other

publishers Let’s consider consumer issues first Even with

today’s technology the downloading process can

repre-sent a serious bottleneck Even if you have signed up to

superfast broadband, when a hot new title is released

the demand for download bandwidth can be such that

speeds slow to a trickle If the Internet connection goes

down during download then the game may not be able to

validate itself against Steam’s anti-piracy systems,

mean-ing it won’t work If a new patch to repair or improve a

game is released, the auto-install function within Steam

may mean that that game is not playable until

down-loading and installation of the patch is complete, and

that wait could be several hours Economic issues also

exist If a consumer buys a game on the high street on

physical media, that copy can be sold on or used in part

exchange against another title With only an electronic

copy, no such potential exists Furthermore, the flexibility

of the online store allies itself with information held on

that customer to present a price in his or her local

cur-rency, and many consumers are aware of and resent the

fact that different prices are charged in different markets

Finally, the very fact that such a quantity of information

is passed back through Steam is a concern to users

wor-ried about privacy – and such concerns may result in

further regulation, limitation and control of such ties generally.

activi-For Valve, the situation is not black and white either

Steam requires considerable investment and support in respect of time and money – that global network of serv- ers is expensive Word of mouth about new releases can

be enormously beneficial to sales if positive, but if a title garners negative comments in the Steam forums then that can depress sales significantly.

For other publishers – like Sega and Activision – Steam offers an attractive alternative to traditional distribution and retailing strategies But they have to face the concern that Valve is a competitor as well as a distribution chan- nel Valve operates Steam as a game delivery channel, but

it also develops and markets its own games.

Unquestionably, disintermediation has worked liantly as a strategy for Valve Corporation Is there any chance that this strategy might eventually run out of steam?

bril-Sources: ‘What is iTunes?’, available from http://www.apple.com/itunes/what-is/,

accessed February 2010; ‘Stardock Reveals Impulse, Steam Market Share Estimates’, available from http://www.gamasutra.com/php-bin/news_index.php?story=26158, accessed February 2010; ‘Direct2Drive: Recent Digital Distribution Market Esti- mates “Misinformation At Best”’, available from http://www.gamasutra.com/view/

information_At_Best.php, accessed February 2010; ‘Our Products – Heinz Baked Beans’, available from http://www.heinz.co.uk/Products/Beans/Ranges/Beanz/

news/26292/Direct2Drive_Recent_Digital_Distribution_Market_Estimates_Mis-Heinz-Baked-Beanz, accessed February 2010; J.F Mills and V Camek, ‘The Risks,

Threats and Opportunities of Disintermediation: A Distributor’s View’, International

Journal of Physical Distribution and Logistics Management, 34(9), 2004, pp 714–27;

‘Valve Corporation History’, available from http://www.mobygames.com/company/

valve-corporation/history, accessed February 2010; ‘Steam Realises Extraordinary Growth in 2009’, available from http://store.steampowered.com/news/3390/, accessed February 2010; ‘Leading Platform for PC Games Now Serving Over 25 Mil- lion Accounts’, available from http://www.valvesoftware.com/news.php?id=3390, accessed February 2010.

Brands such as Steam enable the customer to buy and download games software without requiring physical media such as a DVD

Source: Alamy Images/Patriotic Alien.

power tools and outdoor power equipment online But selling directly through its website would create conflicts with important and powerful retail partners So, while Bosch’s web-site provides detailed information about the company’s products, you cannot buy a Bosch cordless screwdriver, rotary hammer, power saw or anything else there Instead, the Bosch site provides a ‘dealer locator’ tool that refers you to resellers’ websites and stores Thus, Bosch’s direct marketing helps both the company and its channel partners.

CHANNEL DESIGN DECISIONS

We now look at several channel decisions that manufacturers face In designing marketing channels, manufacturers struggle between what is ideal and what is practical A new firm with limited capital usually starts by selling in a limited market area Deciding on the best channels might not be a problem The problem might simply be how to convince one or a few good intermediaries to handle the line

If successful, the new firm can branch out to new markets through the existing aries In smaller markets, the firm might sell directly to retailers; in larger markets, it might sell through distributors In one region, it might grant exclusive franchises; in another, it might sell through all available outlets Then, it might add a web store that sells directly to hard-to-reach customers In this way, channel systems often evolve to meet market oppor-tunities and conditions

intermedi-For maximum effectiveness, however, channel analysis and decision making should be more purposeful Designing a channel system calls for analysing consumer needs, setting channel objectives, identifying major channel alternatives and evaluating them

Analysing consumer needs

As noted previously, marketing channels are part of the overall customer value-delivery network Each channel member adds value for the customer Thus, designing the marketing

channel starts with finding out what target consumers want from the channel Do consumers want to buy from nearby locations or are they willing to travel to more distant centralised locations? Would they rather buy in person, over the phone, through the mail or via the Internet? Do they value breadth of assortment or do they prefer specialisation? Do consum-ers want many add-on services (delivery, credit, repairs, installation) or will they obtain these elsewhere? The faster the delivery, the greater the assortment provided, and the more add-on services supplied, the greater the channel’s service level

Rather than selling directly from its own website, Bosch refer buyers to resellers’

websites or stores

Source: Alamy Images/

PhotoAlto.

Providing the fastest delivery, greatest assortment and most services may not be possible

or practical The company and its channel members may not have the resources or skills needed to provide all the desired services Also, providing higher levels of service results in higher costs for the channel and higher prices for consumers The company must balance consumer needs not only against the feasibility and costs of meeting these needs, but also against customer price preferences The success of discount retailing shows that consumers will often accept lower service levels in exchange for lower prices

Setting channel objectives

Companies should state their marketing-channel objectives in terms of targeted levels of customer service Usually, a company can identify several segments wanting different levels

of service The company should decide which segments to serve and the best channels to use in each case In each segment, the company wants to minimise the total channel cost of meeting customer service requirements

The company’s channel objectives are also influenced by the nature of the company, its products, its marketing intermediaries, its competitors and the environment For example, the company’s size and financial situation determine which marketing functions it can han-dle itself and which it must give to intermediaries Companies selling perishable products may require more direct marketing to avoid delays and too much handling

In some cases, a company may want to compete in or near the same outlets that carry competitors’ products In other cases, producers may avoid the channels used by competi-tors Mary Kay Cosmetics, for example, sells direct to consumers through its corps of more than 1.8 million independent beauty consultants in 35 markets worldwide, among them Finland, Moldova, Norway, Poland, Slovakia and Ukraine, rather than going head-to-head with other cosmetics makers for scarce positions in retail stores Directline markets insur-ance directly to consumers via the telephone and the Web rather than through agents

Finally, environmental factors such as economic conditions and legal constraints may affect channel objectives and design For example, in a depressed economy, producers want

to distribute their goods in the most economical way, using shorter channels and dropping unneeded services that add to the final price of the goods

Identifying major alternatives

When the company has defined its channel objectives, it should next identify its major

chan-nel alternatives in terms of types of intermediaries, the number of intermediaries and the responsibilities of each channel member.

Types of intermediaries

A firm should identify the types of channel members available to carry out its channel work

Most companies face many channel member choices For example, computer manufacturer Dell has used two distinct channel distribution strategies over the years One of those is to sell directly to final consumers and business buyers only through its sophisticated phone and Internet marketing channel, and directly to large corporate, institutional and govern-ment buyers using its direct sales force However, to reach more consumers and to match competitors such as HP, Dell has also employed an indirect distribution strategy of selling through retailers and ‘value-added resellers’, who are independent distributors and dealers who develop computer systems and applications tailored to the special needs of small and medium-sized business customers Dell has used both the direct and the indirect channel strategies in response to conditions in the marketplace and competitor action

Using many types of resellers in a channel provides both benefits and drawbacks For example, by selling through retailers and value-added resellers in addition to its own direct channels, Dell is able to reach more and different kinds of buyers However, those are more

difficult to manage and control And the direct and indirect channels will compete with each other for many of the same customers, causing potential conflict.

Number of marketing intermediariesCompanies must also determine the number of channel members to use at each level Three strategies are available: intensive distribution, exclusive distribution and selective distribution Producers of convenience products and common raw materials typically seek intensive distribution – a strategy in which they stock their products in as many outlets

as possible These products must be available where and when consumers want them For example, toothpaste, confectionery and other similar items are sold in millions of outlets to provide maximum brand exposure and consumer convenience Nestlé, Danone, Cadbury and other consumer goods companies distribute their products in this way

By contrast, some producers purposely limit the number of intermediaries handling their products The extreme form of this practice is exclusive distribution, in which the producer gives only a limited number of dealers the exclusive right to distribute its products in their territories Exclusive distribution is often found in the distribution of luxury cars and exclu-sive women’s clothing For example, Bentley dealers are few and far between – even large cities may have only one dealer By granting exclusive distribution, Bentley gains stronger distributor selling support and more control over dealer prices, promotion, credit and ser-vices Exclusive distribution also enhances the car’s image and allows for higher mark-ups

Between intensive and exclusive distribution lies selective distribution – the use of more than one, but fewer than all, of the intermediaries who are willing to carry a company’s products Most TV, furniture and home appliance brands are distributed in this manner For example, Zanussi-Electrolux, Beko and Miele sell their major appliances through dealer networks and selected large retailers By using selective distribution, they can develop good working relationships with selected channel members and expect a better-than-average sell-ing effort Selective distribution gives producers good market coverage with more control and less cost than does intensive distribution

Responsibilities of channel membersThe producer and intermediaries need to agree on the terms and responsibilities of each channel member They should agree on price policies, conditions of sale, territorial rights and specific services to be performed by each party The producer should establish a list price and a fair set of discounts for intermediaries It must define each channel member’s territory, and it should be careful about where it places new resellers

Mutual services and duties need to be spelled out carefully, especially in franchise and exclusive distribution channels For example, McDonald’s provides franchisees with pro-motional support, a record-keeping system, training at Hamburger University and general management assistance In turn, franchisees must meet company standards for physical facilities, cooperate with new promotion programmes, provide requested information and buy specified food products

Evaluating the major alternatives

Suppose a company has identified several channel alternatives and wants to select the one that will best satisfy its long-term objectives Each alternative should be evaluated against economic, control and adaptive criteria

Using economic criteria, a company compares the likely sales, costs and profitability

of different channel alternatives What will be the investment required by each channel

alternative, and what returns will result? The company must also consider control issues

Using intermediaries usually means giving them some control over the marketing of the product, and some intermediaries take more control than others Other things being equal, the company prefers to keep as much control as possible Finally, the company must apply

adaptive criteria Channels often involve long-term commitments, yet the company wants

to keep the channel flexible so that it can adapt to environmental changes A channel that involves long-term commitments must deliver superior economic returns or better control

Designing international distribution channels

International marketers face many additional complexities in designing their channels Each country has its own unique distribution system that has evolved over time and changes very slowly These channel systems can vary widely from country to country Thus, global mar-keters usually adapt their channel strategies to the existing structures within each country

In some markets, the distribution system is complex and hard to penetrate, consisting of many layers and large numbers of intermediaries

For example, many Western companies find Japan’s distribution system difficult to navigate It is steeped in tradition and very complex, with many distributors touching one product before it makes it to the store shelf Many Western firms have had great difficulty breaking into the closely knit, tradition-bound Japanese distribution network

At the other extreme, distribution systems in developing countries may be scattered, inefficient or altogether lacking For example, China and India are huge markets, each with populations well over a billion people However, because of inadequate distribution systems, most companies can profitably access only a small portion of the population located in each country’s most affluent cities ‘China is a very decentralised market,’ notes a China trade expert ‘[It’s] made up of two dozen distinct markets sprawling across 2,000 cities Each has its own culture. . .  It’s like operating in an asteroid belt.’ China’s distribution system is so fragmented that logistics costs to wrap, bundle, load, unload, sort, reload and transport goods amount to more than 22 per cent of the nation’s GDP, far higher than in most other countries (In Europe logistics costs generally account for just over 10 per cent of a nation’s GDP.) After years of effort, even the best overseas companies admit that they have been unable to assemble an efficient supply chain in China.7

Thus, international marketers face a wide range of channel alternatives Designing cient and effective channel systems between and within various country markets poses a difficult challenge We discuss international distribution decisions later (see Chapter 15)

effi-CHANNEL MANAGEMENT DECISIONS

Once the company has reviewed its channel alternatives and decided on the best channel design, it must implement and manage the chosen channel Channel management calls for selecting, managing and motivating individual channel members and evaluating their performance over time

Selecting channel members

Producers vary in their ability to attract qualified marketing intermediaries Some producers have no trouble signing up channel members For example, with a globally prestigious motor car brand such as Lexus, there will never be any difficulty in attracting dealers in practically any part of Europe or the rest of the world But things are different for a less prestigious brand such as Skoda, particularly in the rich economies of Western Europe

When selecting intermediaries, the company should determine what characteristics tinguish the better ones It will want to evaluate each channel member’s years in business, other lines carried, growth and profit record, cooperativeness and reputation If the inter-mediaries are sales agents, the company will want to evaluate the number and character of other lines carried and the size and quality of the sales force If the intermediary is a retail store that wants exclusive or selective distribution, the company will want to evaluate the store’s customers, location and future growth potential

dis-Managing and motivating channel members

Once selected, channel members must be continuously managed and motivated to do their

best The company must sell not only through the intermediaries, but also to and with

them Most companies see their intermediaries as first-line customers and partners They

practise strong partner relationship management (PRM) to forge long-term partnerships

with channel members This creates a marketing system that meets the needs of both the

company and its marketing partners.

In managing its channels, a company must convince distributors that they can succeed better by working together as a part of a cohesive value-delivery system.8 Thus, Procter

& Gamble and Tesco work together to create superior value for final consumers They jointly plan merchandising goals and strategies, inventory levels, and advertising and pro-motion plans Similarly, heavy-equipment manufacturer Caterpillar and its worldwide network of independent dealers work in close harmony to find better ways to bring value

to customers

Caterpillar produces innovative, high-quality products Yet the most important reason for Caterpillar’s dominance is its distribution network of 181 outstanding independent dealers worldwide Caterpillar and its dealers work as partners According to a former Caterpillar CEO: ‘After the product leaves our door, the dealers take over They are the ones on the front line They’re the ones who live with the product for its lifetime They’re the ones customers see.’ When a big piece of Caterpillar equipment breaks down, customers know that they can count on Caterpillar and its outstanding dealer network for support Dealers play a vital role in almost every aspect of Caterpillar’s operations, from product design and delivery to product service and support

Caterpillar really knows its dealers and cares about their success It closely monitors each dealership’s sales, market position, service capability and financial situation When it sees

a problem, it jumps in to help In addition to more formal business ties, Caterpillar forms close personal ties with dealers in a kind of family relationship Caterpillar and its dealers feel a deep pride in what they are accomplishing together As the former CEO puts it, ‘There’s

a camaraderie among our dealers around the world that really makes it more than just a financial arrangement They feel that what they’re doing is good for the world because they are part of an organisation that makes, sells, and tends to the machines that make the world work.’9

As a result of its partnership with dealers, Caterpillar dominates the world’s markets for heavy construction, mining and logging equipment Its familiar yellow tractors, crawlers, loaders, bulldozers and trucks capture some 40 per cent of the worldwide heavy-equipment business, twice that of number 2, Komatsu

Many companies are now installing integrated high-tech PRM systems to coordinate their whole-channel marketing efforts Just as they use customer relationship manage-ment (CRM) software systems to help manage relationships with important custom-ers, companies can now use PRM and supply chain management (SCM) software to help recruit, train, organise, manage, motivate and evaluate relationships with channel partners

Evaluating channel members

The producer must regularly check channel member performance against standards such as sales quotas, average inventory levels, customer delivery time, treatment of damaged and lost goods, cooperation in company promotion and training programmes, and services to the customer The company should recognise and reward intermediaries who are perform-ing well and adding good value for consumers Those who are performing poorly should be assisted or, as a last resort, replaced A company may periodically ‘requalify’ its intermedi-aries and prune the weaker ones

PUBLIC POLICY AND DISTRIBUTION DECISIONS

For the most part, companies are legally free to develop whatever channel arrangements suit them In fact, the laws affecting channels seek to prevent the exclusionary tactics of some companies that might keep another company from using a desired channel Most channel law deals with the mutual rights and duties of the channel members once they have formed

a relationship

Many producers and wholesalers like to develop exclusive channels for their products

When the seller allows only certain outlets to carry its products, this strategy is called

exclusive distribution When the seller requires that these dealers do not handle tors’ products, its strategy is called exclusive dealing Both parties can benefit from exclusive

competi-arrangements The seller obtains more loyal and dependable outlets, and the dealers obtain

a steady source of supply and stronger seller support But exclusive arrangements also exclude other producers from selling to these dealers This situation brings exclusive dealing contracts under the scope of Article 85(1) of the EU Treaty One of the principal objectives

of establishing the EU was to bring about conditions of free trade, so it is not surprising

to find that matters to do with free competition, which can include ‘vertical agreements’

between channel members, were addressed in the treaty upon which the EU was founded

Article 85(1) prohibits actions which ‘have as their object or effect the prevention, restriction

or distortion of competition’ In practice, many forms of vertical agreement are allowed under EU competition law, but this is a complex area in which advice from a lawyer with expertise in EU law is likely to be necessary

Exclusive dealing often includes exclusive territorial agreements The producer may agree

not to sell to other dealers in a given area, or the buyer may agree to sell only in its own territory The first practice is normal under franchise systems as a way to increase dealer enthusiasm and commitment It is also perfectly legal – a seller has no legal obligation to sell through more outlets than it wishes The second practice, whereby the producer tries to keep a dealer from selling outside its territory, is a much more contentious issue

Producers of a strong brand sometimes sell it to dealers only if the dealers will take some

or all of the rest of the line This is called full-line forcing Such tying agreements are not

nec-essarily illegal, but the legal situation will vary depending on the specific anti-competition laws in individual European countries The practice may prevent consumers from freely choosing among competing suppliers of these other brands

Finally, producers are free to select their dealers, but their right to terminate dealers is somewhat restricted In general, sellers can drop dealers ‘for cause’ However, they cannot drop dealers if, for example, the dealers refuse to cooperate in a doubtful legal arrangement, such as exclusive dealing or tying agreements

MARKETING LOGISTICS AND SUPPLY CHAIN MANAGEMENT

In today’s global marketplace, selling a product is sometimes easier than getting it to tomers Companies must decide on the best way to store, handle and move their products and services so that they are available to customers in the right assortments, at the right time and in the right place Physical distribution and logistics effectiveness have a major impact on both customer satisfaction and company costs Here we consider the nature and importance of logistics management in the supply chain, goals of the logistics system, major logistics functions and the need for integrated supply chain management

cus-Nature and importance of marketing logistics

To some managers, marketing logistics means only trucks and warehouses But modern logistics is much more than this Marketing logistics (or physical distribution) involves

planning, implementing and controlling the physical flow of goods, services and related information from points of origin to points of consumption to meet customer requirements

at a profit In short, it involves getting the right product to the right customer in the right place at the right time

In the past, physical distribution typically started with products at the plant and then tried to find low-cost solutions to get them to customers However, today’s marketers prefer customer-centred logistics thinking, which starts with the marketplace and works backwards

to the factory, or even to sources of supply Marketing logistics involves not only outbound distribution (moving products from the factory to resellers and ultimately to customers) but also inbound distribution (moving products and materials from suppliers to the factory) and reverse distribution (moving broken, unwanted or excess products returned by consumers

or resellers) That is, it involves the entire supply chain management – managing upstream and downstream value-added flows of materials, final goods and related information among suppliers, the company, resellers and final consumers, as shown in Figure 10.5

The logistics manager’s task is to coordinate activities of suppliers, purchasing agents, marketers, channel members and customers These activities include forecasting, informa-tion systems, purchasing, production planning, order processing, inventory, warehousing and transportation planning

Companies today are placing greater emphasis on logistics for several reasons First, companies can gain a powerful competitive advantage by using improved logistics to give customers better service or lower prices Second, improved logistics can yield tremendous cost savings to both the company and its customers As much as 20 per cent of an average product’s price is accounted for by shipping and transport alone This far exceeds the cost

of advertising and many other marketing costs Third, the explosion in product variety has created a need for improved logistics management For example, 100 years ago a typical gro-cery store carried only 270 items The store manager could keep track of this inventory on about 10 pages of notebook paper stuffed in a shirt pocket Today, the average supermarket carries a bewildering stock of more than 25,000 items A Carrefour Hypermarché carries more than 100,000 products, 30,000 of which are grocery products Ordering, shipping, stocking and controlling such a variety of products presents a sizeable logistics challenge

Finally, improvements in IT have created opportunities for major gains in distribution efficiency Today’s companies are using sophisticated supply chain management software, web-based logistics systems, point-of-sale scanners, uniform product codes, satellite track-ing, and electronic transfer of order and payment data Such technology lets them manage the flow of goods, information and finances quickly and efficiently through the supply chain

Goals of the logistics system

Some companies state their logistics objective as providing maximum customer service at

the least cost Unfortunately, no logistics system can both maximise customer service and

minimise distribution costs Maximum customer service implies rapid delivery, large tories, flexible assortments, liberal returns policies and other services – all of which raise

inven-FIGURE 10.5

Supply chain

management

distribution costs In contrast, minimum distribution costs imply slower delivery, smaller inventories and larger shipping lots – which represent a lower level of overall customer service.

The goal of marketing logistics should be to provide a targeted level of customer service

at the least cost A company must first research the importance of various distribution services to customers and then set desired service levels for each segment The objective is

to maximise profits, not sales Therefore, the company must weigh the benefits of

provid-ing higher levels of service against the costs Some companies offer less service than their competitors and charge a lower price Other companies offer more service and charge higher prices to cover higher costs

Major logistics functions

Given a set of logistics objectives, the company is ready to design a logistics system that will

minimise the cost of attaining these objectives The major logistics functions include housing, inventory management, transportation and logistics information management.

ware-WarehousingProduction and consumption cycles rarely match Most companies have to store their tan-gible goods while waiting to sell them For example, Flymo, Bosch, Honda and other lawn-mower manufacturers run their factories all year long and store up products for the heavy spring and summer buying seasons The storage function overcomes differences in needed quantities and timing, ensuring that products are available when customers are ready to buy them

A company must decide on how many and what types of warehouses it needs and where they will be located The company might use either storage warehouses or distribution cen- tres Storage warehouses store goods for moderate to long periods Distribution centres are designed to move goods rather than just store them They are large and highly automated warehouses designed to receive goods from various plants and suppliers, take orders, fill them efficiently and deliver goods to customers as quickly as possible

For example, Tesco operates a network of 20 distribution centres in the UK, serving the needs of over 1,250 UK stores As Tesco expands internationally it opens similar distribution centres in other countries For example, in addition to distribution centres in many parts of the UK, Tesco has distribution centres in Ireland, Slovakia, Poland, Hungary and the Czech Republic A typical Tesco distribution centre employs around 500 people and handles 100 million cases of products every year

Like almost everything else these days, warehousing has seen dramatic changes in nology in recent years Older, multi-storeyed warehouses with outdated materials-handling

tech-methods are steadily being replaced by newer, single-storeyed automated warehouses with

advanced, computer-controlled materials-handling systems requiring few employees puters and scanners read orders and direct lift trucks, electric hoists or robots to gather goods, move them to loading docks and issue invoices

Com-Inventory managementInventory management also affects customer satisfaction Here, managers must maintain the delicate balance between carrying too little inventory and carrying too much With too little stock, the firm risks not having products when customers want to buy To remedy this, the firm may need costly emergency shipments or production Carrying too much inven-tory results in unnecessarily high inventory carrying costs and stock obsolescence Thus,

in managing inventory, firms must balance the costs of carrying larger inventories against resulting sales and profits

Many companies have greatly reduced their inventories and related costs through in-time logistics systems With such systems, producers and retailers carry only small

just-inventories of parts or merchandise, often only enough for a few days of operations For example, computer manufacturer Dell is now Ireland’s largest exporter Dell is a master just-in-time producer and carries just 3–4 days of inventory, whereas competitors might carry

40 days or even 60.10 New stock arrives exactly when needed, rather than being stored in inventory until being used Just-in-time systems require accurate forecasting along with fast, frequent and flexible delivery so that new supplies will be available when needed However, these systems result in substantial savings in inventory carrying and handling costs

Marketers are always looking for new ways to make inventory management more cient In the not too distant future, handling inventory might even become fully automated For example, we have already discussed RFID or ‘smart tag’ technology (see Chapter 3),

effi-by which small transmitter chips are embedded in or placed on products and packaging on everything from flowers and razors to tyres ‘Smart’ products could make the entire supply chain – which accounts for nearly 75 per cent of a product’s cost – intelligent and auto-mated Companies using RFID would know, at any time, exactly where a product is located physically within the supply chain ‘Smart shelves’ would not only tell them when it is time

to reorder, but also place the order automatically with their suppliers Such exciting new

IT applications will revolutionise distribution as we know it Many large and resourceful marketing companies, such as Procter & Gamble, IBM and Wal-Mart, are investing heavily

to make full use of RFID technology a reality.11

TransportationThe choice of transportation carriers affects the pricing of products, delivery performance and condition of the goods when they arrive – all of which will affect customer satisfaction

In shipping goods to its warehouses, dealers and customers, the company can choose among five main transportation modes, namely truck, rail, water, pipeline and air, along with an alternative mode for digital products: the Internet

Trucks have in recent years increased their share of transportation steadily and offer some

advantages that are hard to match Trucks are highly flexible in their routing and time ules, and they can usually offer faster service than railways They are efficient for short hauls of high-value merchandise Trucking firms have added many services in recent years For example, French trucking company Société Norbert Dentressangle SA and most other major carriers now offer everything from satellite tracking and 24-hour shipment information to logistics planning software and ‘border ambassadors’ who expedite cross-border shipping operations Norbert Dentressangle is a typical example of a large-scale European trucking operation Although the company is based in France, 65 per cent of its business serves destinations outside France, and on average the company clocks up 650 crossings of the English Channel every day

sched-Increasingly, transport operators like Norbert Dentressangle of France have to take account of environmental factors in their strategic planning

Source: Courtesy of Renault

Trucks Ltd.

However, Norbert Dentressangle and other European transport operators (such as Kühne und Nagel AG of Germany) are all having to face up to the issue of CO2 emissions; transport in general is a major contributor to Europe’s CO2 emissions, and road transport contributes much the largest share of overall transport emissions Trucking companies are striving to increase the efficiency of their operations, but with the current European focus on reducing CO2 emissions

in the struggle to avert climate change, they will no doubt come under ever-increasing pressure

to reduce the environmental impact of their business

Railways are one of the most cost-effective modes for shipping large amounts of bulk

products – coal, sand, minerals, and farm and forest products – over long distances In recent years, railways have increased their customer services by designing new equipment to handle special categories of goods, providing flatcars for carrying truck trailers by rail (piggyback), and providing in-transit services such as the diversion of shipped goods to other destinations

en route and the processing of goods en route

Water carriers transport large amounts of goods by ships and barges on European coastal

and inland waterways Although the cost of water transportation is very low for shipping bulky, low-value, non-perishable products such as sand, coal, grain, oil and metallic ores, water transportation is the slowest mode and may be affected by the weather Both rail transport and water transport produce less CO2 per kilometre than road transport, so that European policy makers prefer these transport modes to road transport wherever possible

Pipelines, which account for about 16 per cent of cargo tonne-kilometres, are a specialised

means of shipping oil, natural gas and chemicals from sources to markets Most pipelines are used by their owners to ship their own products

Although airfreight contributes only a small percentage of freight kilometres, this is still

an important freight transportation mode Airfreight rates are much higher than rail or truck rates, but airfreight is ideal when speed is needed or distant markets have to be reached Among the most frequently airfreighted products are perishables (fresh fish, cut flowers) and high-value, low-bulk items (technical instruments, jewellery) Companies find that airfreight also reduces inventory levels, packaging costs and the number of warehouses needed Of course, air transport performs relatively poorly on environmental grounds (e.g in terms of CO2 emis-sions) Some consumer activists are encouraging consumers to avoid products that have been transported by air, in order to discourage the use of airfreight other than for essential purposes

The Internet carries digital products from producer to customer via satellite, cable

modem or telephone wire Software firms, the media, music companies and education all make use of the Internet to transport digital products While these firms primarily use traditional transportation to distribute CDs, newspapers and more, the Internet holds the potential for lower product distribution costs Whereas aircraft, trucks and trains move freight and packages, digital technology moves information bits

Shippers also use intermodal transportation – combining two or more modes of

trans-portation Piggyback describes the use of rail and trucks; fishyback, water and trucks; ship, water and rail; and airtruck, air and trucks Combining modes provides advantages

train-that no single mode can deliver Each combination offers advantages to the shipper For example, not only is piggyback cheaper than trucking alone, but it also provides flexibility, convenience and potential environmental benefits

In choosing a transportation mode for a product, shippers must balance many tions: speed, dependability, availability, cost and others Thus, if a shipper needs speed, air and truck are the prime choices If the goal is low cost, then water or pipeline might be best

considera-Increasingly, shippers will also have to take account of the environmental impact of their operations, because of pressure from European policy makers and consumers

Logistics information managementCompanies manage their supply chains through information Channel partners often link up to share information and to make better joint logistics decisions From a logistics perspective, information flows such as customer orders, billing, inventory levels and even

customer data are closely linked to channel performance The company wants to design a simple, accessible, fast and accurate process for capturing, processing and sharing channel information.

Information can be shared and managed in many ways – by mail or telephone, through

salespeople, or through traditional or Internet-based electronic data interchange (EDI), the

computerised exchange of data between organisations EDI has existed since well before the emergence of the Internet, and has been advocated as a mechanism by which the less developed countries of Europe can improve their economic conditions For example, EDI was developed in Slovenia in the 1990s, with a focus on the automotive, trade, transporta-tion and financial sectors, in order to promote economic growth.12 Some car manufacturers make the use of EDI compulsory for any supplier that wants to do business with them.13

In some cases, suppliers might actually be asked to generate orders and arrange deliveries for their customers Many large retailers – such as Tesco and Homebase – work closely with

major suppliers such as Procter & Gamble or Black & Decker to set up vendor-managed inventory (VMI) systems or continuous inventory replenishment systems Using VMI, the

customer shares real-time data on sales and current inventory levels with the supplier The supplier then takes full responsibility for managing inventories and deliveries Some retailers even go so far as to shift inventory and delivery costs to the supplier Such systems require close cooperation between the buyer and seller

Integrated logistics management

Today, more and more companies are adopting the concept of integrated logistics ment This concept recognises that providing better customer service and trimming distribu-

manage-tion costs require teamwork, both inside the company and among all the marketing-channel

organisations Inside, the company’s various departments must work closely together to maximise the company’s own logistics performance Outside, the company must integrate its logistics system with those of its suppliers and customers to maximise the performance

of the entire distribution system

Cross-functional teamwork inside the company

In most companies, responsibility for various logistics activities is assigned to many ferent functional units – marketing, sales, finance, operations, purchasing Too often, each function tries to optimise its own logistics performance without regard for the activities of the other functions However, transportation, inventory, warehousing and order processing activities interact, often in unexpected ways Lower inventory levels reduce inventory car-rying costs But they may also reduce customer service and increase costs from stockouts, back orders, special production runs and costly fast-freight shipments Because distribution activities involve strong trade-offs, decisions by different functions must be coordinated to achieve better overall logistics performance

dif-The goal of integrated supply chain management is to harmonise all of the company’s logistics decisions Close working relationships among functions can be achieved in several ways Some companies have created permanent logistics committees, made up of managers responsible for different physical distribution activities Companies can also create supply chain manager positions that link the logistics activities of functional areas For example, Procter & Gamble has created supply managers who manage all of the supply chain activi-ties for each of its product categories Many companies have a vice president of logistics with cross-functional authority Finally, companies can employ sophisticated, system-wide supply chain management software, now available from a wide range of software enterprises large and small, from SAP and Oracle to Infor and Logility The worldwide market for sup-ply chain management software grew by 7.1 per cent to over $8.3bn in 2012 and continues

to grow fast.14 The important thing is that the company must coordinate its logistics and marketing activities to create high market satisfaction at a reasonable cost

Building logistics partnershipsCompanies must do more than improve their own logistics They must also work with other channel partners to improve whole-channel distribution The members of a distribution channel are linked closely in creating customer value and building customer relationships

One company’s distribution system is another company’s supply system The success of each channel member depends on the performance of the entire supply chain For example, Carrefour can charge the lowest retail prices only if its entire supply chain – consisting of thousands of merchandise suppliers, transport companies, warehouses and service provid-ers – operates at maximum efficiency

Smart companies coordinate their logistics strategies and forge strong partnerships with suppliers and customers to improve customer service and reduce channel costs Many

companies have created cross-functional, cross-company teams Other companies partner through shared projects For example, many large retailers are working closely with suppli-

ers on in-store programmes Clearly, both the supplier and the customer benefit from such partnerships The point is that all supply chain members must work together in the cause

of serving final consumers

Third-party logisticsMost big companies love to make and sell their products But many loathe the associated logistics ‘grunt work’ They detest the bundling, loading, unloading, sorting, storing, reload-ing, transporting, customs clearing and tracking required to supply their factories and to get products out to customers They hate it so much that a growing number of firms now outsource some or all of their logistics to third-party logistics (3PL) providers

These ‘3PLs’ – companies such as CEVA Logistics, UPS Supply Chain Services or FedEx Logistics – help clients to tighten up sluggish, overstuffed supply chains, slash inventories and get products to customers more quickly and reliably CEVA Logistics employs over 50,000 people and operates from over 1,000 locations in over 100 countries In 2008 CEVA Romania,

a subsidiary of CEVA Logistics, announced that it had taken over the planning and supply of Pirelli tyres from Pirelli’s warehouse in Slatina to all Romanian customers.15 According to a recent survey of chief logistics executives at Fortune 500 companies, 81 per cent of these com-

panies use third-party logistics (also called outsourced logistics or contract logistics) services.16

Fashion retailer Zara is growing fast It sells ‘cheap chic’ –

stylish designs that resemble those of big-name fashion

houses but at moderate prices Zara is the prototype for a

new breed of ‘fast-fashion’ retailers, companies that

rec-ognise and respond to the latest fashion trends quickly

and nimbly While competing retailers are still working

out their designs, Zara has already put the latest fashion

into its stores and is moving on to the next big thing.

Zara has attracted a near cult-like clientele in recent

years Following the recent economic crisis, even affluent

shoppers are swarming to buy Zara’s stylish but affordable

offerings Thanks to Zara’s rapid growth, the sales, profits

and store presence of its parent company, Spain-based

Inditex, have more than quadrupled since 2000 That

makes Inditex the world’s largest clothing retailer with

nearly 6,000 stores.

Zara clearly sells the right goods for the present times

This success comes not just from what it sells Perhaps

more important, success comes from how and how fast

Zara’s cutting-edge distribution system delivers what it sells

to eagerly awaiting customers Zara delivers fast fashion –

really fast fashion Through vertical integration, Zara

con-trols all phases of the fashion process, from design and manufacturing to distribution through its own managed stores The company’s integrated supply system makes Zara faster, more flexible and more efficient than interna- tional competitors such as Gap, Benetton and H&M Zara can take a new fashion concept through design, manufac- turing and store-shelf placement in as little as two weeks, whereas competitors often take six months or more And the resulting low costs let Zara offer the very latest mid- market chic at downmarket prices.

Zara: fast fashions – really fast MARKETING

AT WORK 10.2

Companies use third-party logistics providers for several reasons First, because getting the product to market is their main focus, these providers can often do it more efficiently and at lower cost Outsourcing typically results in 15 per cent to 30 per cent cost savings Second, outsourcing logistics frees a company to focus more intensely on its core business Finally, integrated logistics companies understand increasingly complex logistics environments This can be especially helpful to companies attempting to expand their global market coverage For example, companies distributing their products across Europe face a bewildering array

of environmental restrictions that affect logistics, including packaging standards, truck size and weight limits, and noise and emissions pollution controls By outsourcing its logistics,

a company can gain a complete pan-European distribution system without incurring the costs, delays and risks associated with setting up its own system

The whole process starts with input about what sumers want Zara store managers act as trend spot-

con-ters They patrol store aisles using handheld computers,

reporting in real time what is selling and what is not They

talk with customers to learn what they are looking for but

not yet finding At the same time, Zara trend seekers roam

fashion shows in Paris and concerts in Tokyo, looking for

young people who might be wearing something new or

different Then, they are on the phone to company

head-quarters in tiny La Coruña, Spain, reporting on what they

have seen and heard Back home, based on this and other

feedback, the company’s team of 300 designers conjures

up a prolific flow of hot new fashions.

Once the designers have done their work, production begins But rather than relying on a hodgepodge of slow-

moving suppliers in Asia, as most competitors do, Zara

makes 40 per cent of its own fabrics and produces more

than half of its own clothes Even outsourced

manufactur-ing goes primarily to local contractors Almost all clothes

sold in Zara’s stores worldwide are made quickly and

effi-ciently at or near company headquarters in the remote

northwest corner of Spain.

Finished goods then feed into Zara’s modern tion centres, which ship finished products immediately

distribu-and directly to stores around the world, saving time,

elim-inating the need for warehouses and keeping inventories

low The highly automated centres can sort, pack, label

and allocate up to 80,000 items an hour.

Again, the key word describing Zara’s distribution

sys-tem is fast The time between receiving an order at the

distribution centre and the delivery of goods to a store

averages 24 hours for European stores and a maximum of

48 hours for American or Asian stores Zara stores receive

small shipments of new merchandise two to three times

each week, compared with competing chains’ outlets,

which get large shipments seasonally, usually just four to

six times per year.

Speedy design and distribution allow Zara to introduce

a lot of new fashions – far more than its competitors The

combination of a large number of new fashions delivered

in frequent small batches gives Zara stores a continually updated merchandise mix that brings customers back more often Zara customers visit the store an average of

17 times per year, compared with less than five customer visits at competing stores Fast turnover also results in less outdated and discounted merchandise Because Zara makes what consumers already want or are now wearing,

it does not have to guess what will be hot six months out.

In all, Zara’s carefully integrated design and tion process gives the fast-moving retailer a tremendous competitive advantage Its turbocharged system gets out the goods customers want, when they want them – maybe even before:

distribu-A couple of summers ago, Zara managed to latch onto one of the season’s hottest trends in just four weeks The process started when trend-spotters spread the word back to headquarters: white eye- let – cotton with tiny holes in it – was set to become white-hot A quick telephone survey of Zara store managers confirmed that the fabric could be a win- ner, so in-house designers got down to work They zapped patterns electronically to Zara’s factory across the street, and the fabric was cut Local subcontrac- tors stitched white-eyelet V-neck belted dresses and finished them in less than a week The €129 dresses were inspected, tagged, and transported through a tunnel under the street to a distribution centre From there, they were quickly dispatched to Zara stores from Berlin to Tokyo – where they were flying off the racks just two days later.

Sources: Cecilie Rohwedder, ‘Zara Grows as Retail Rivals Struggle’, The Wall Street Journal, 26 March 2009, p B1; ‘Inditex Outperforms with Growth in All Its Markets’, Retail Week, 27 March 2009, accessed at www.retail-week.com; Kerry Capell, ‘Fash-

ion Conquistador’, BusinessWeek, 4 September 2006, pp 38–9; Cecilie Rohwedder,

‘Turbocharged Supply Chain May Speed Zara Past Gap as Top Clothing Retailer’,

The Globe and Mail, 26 March 2009, p B12; information from the Inditex Press

Dossier, accessed at http://www.inditex.com/en/media/press_dossier, December

2014, and from Inditex FY2013 Results Presentation, December 2014, accessed

at http://www.inditex.com/en/investors/investors_relations/results_presentations

So, what have you learned about distribution channels and

integrated supply chain management? Marketing-channel

decisions are among the most important decisions that

man-agement faces A company’s channel decisions directly affect

every other marketing decision Management must make

channel decisions carefully, incorporating today’s needs with

tomorrow’s likely selling environment Some companies pay

too little attention to their distribution channels, but others

have used imaginative distribution systems to gain

competi-tive advantage.

1 Explain why companies use marketing channels and

discuss the functions these channels perform

Most producers use intermediaries to bring their

prod-ucts to market They try to forge a marketing channel (or

distribution channel) – a set of interdependent

organisa-tions involved in the process of making a product or

service available for use or consumption by the

con-sumer or business user Through their contacts,

experi-ence, specialisation and scale of operation, intermediaries

usually offer the firm more than it can achieve on

its own.

Marketing channels perform many key functions

Some help complete transactions by gathering and

dis-tributing information needed for planning and aiding

exchange; by developing and spreading persuasive

com-munications about an offer; by performing contact work

– finding and communicating with prospective buyers;

by matching – shaping and fitting the offer to the buyer’s

needs; and by entering into negotiation to reach an

agreement on price and other terms of the offer so that

ownership can be transferred Other functions help to

fulfil the completed transactions by offering physical

distribution – transporting and storing goods; financing

– acquiring and using funds to cover the costs of the

channel work; and risk taking – assuming the risks of

car-rying out the channel work.

2 Discuss how channel members interact and how they

organise to perform the work of the channel

The channel will be most effective when each member

is assigned the tasks it can do best Ideally, because the

success of individual channel members depends on

overall channel success, all channel firms should work

together smoothly They should understand and accept

their roles, coordinate their goals and activities, and

cooperate to attain overall channel goals By

cooperat-ing, they can more effectively sense, serve and satisfy the

target market In a large company, the formal tion structure assigns roles and provides needed leadership But in a distribution channel made up of independent firms, leadership and power are not for- mally set Traditionally, distribution channels have lacked the leadership needed to assign roles and manage con- flict In recent years, however, new types of channel organisations have appeared that provide stronger lead- ership and improved performance.

organisa-3 Identify the major channel alternatives open to a company

Each firm identifies alternative ways to reach its market

Available means vary from direct selling to using one,

two, three or more intermediary channel levels

Marketing channels face continuous and sometimes dramatic change Three of the most important trends are

the growth of vertical, horizontal and multichannel

mar-keting systems These trends affect channel cooperation,

conflict and competition Channel design begins with

assessing customer channel service needs and company channel objectives and constraints The company then identifies the major channel alternatives in terms of the

types of intermediaries, the number of intermediaries

and the channel responsibilities of each Each channel

alternative must be evaluated according to economic, control and adaptive criteria Channel management calls for selecting qualified intermediaries and motivat- ing them Individual channel members must be evalu- ated regularly.

4 Explain how companies select, motivate and evaluate channel members

Producers vary in their ability to attract qualified keting intermediaries Some producers have no trouble signing up channel members Others have to work hard

mar-to line up enough qualified intermediaries When selecting intermediaries, the company should evaluate each channel member’s qualifications and select those who best fit its channel objectives Once selected, chan- nel members must be continuously motivated to do

their best The company must sell not only through the intermediaries, but to them It should work to forge

long-term partnerships with its channel partners to create a marketing system that meets the needs of both

the manufacturer and the partners The company must

also regularly check channel member performance against established performance standards, rewarding

THE JOURNEY YOU’VE TAKEN Reviewing the concepts

intermediaries who are performing well and assisting or

replacing weaker ones.

5 Discuss the nature and importance of marketing

logis-tics and integrated supply chain management

Just as firms are giving the marketing concept increased

recognition, more business firms are paying attention to

marketing logistics (or physical distribution) Logistics is an

area of potentially high cost savings and improved

cus-tomer satisfaction Marketing logistics addresses not

only outbound distribution, but also inbound distribution

and reverse distribution That is, it involves entire supply

chain management – managing value-added flows

between suppliers, the company, resellers and final

users No logistics system can both maximise customer

service and minimise distribution costs Instead, the goal

of logistics management is to provide a targeted level of

service at the least cost The major logistics functions

include order processing, warehousing, inventory

man-agement and transportation.

The integrated supply chain management concept

rec-ognises that improved logistics requires teamwork in the form of close working relationships across functional areas inside the company and across various organisa- tions in the supply chain Companies can achieve logis- tics harmony among functions by creating cross-functional logistics teams, integrative supply manager positions, and senior-level logistics executives with cross-functional authority Channel partnerships can take the form of cross-company teams, shared projects and information- sharing systems Today, some companies are outsourcing their logistics functions to third-party logistics (3PL) pro- viders to save costs, increase efficiency, and gain faster and more effective access to global markets.

NAVIGATING THE KEY TERMS

Horizontal marketing system 343

Indirect marketing channel 339

Integrated logistics management 357

Integrated supply chain management 357

Selective distribution 349

Supply chain management 353

Third-party logistics (3PL) provider 358

Vertical marketing system (VMS) 341

NOTES AND REFERENCES

1 See Kevin Kelleher, ‘Giving Dealers a Raw Deal’, Business 2.0, December 2004, pp 82–4; Jim MacKinnon, ‘Goodyear Boasts of Bright Future’, McClatchy-Tribune Business News,

9 April 2008; Andrea Doyle, ‘Forging Ahead’, Successful Meetings, May 2009, pp 36–42;

and information accessed at www.goodyear.com, September 2009

2 www.citroen.com, accessed June 2014

3 http://investor.games-workshop.com/our-business-model/, accessed June 2014

4 Information accessed at www.kroger.com and http://www.luxottica.com/en/company/

about-us/company-profile, June 2014

5 Information accessed at www.franchiseeurope.com, June 2014

6 Information accessed at http://www.nestle.com/Brands/Cereals/Pages/CerealsCatalogue.

aspx, June 2014

7 Quotes and information from Normandy Madden, ‘Two Chinas’, Advertising Age, 16 August 2004, pp 1, 22; Russell Flannery, ‘China: The Slow Boat’, Forbes, 12 April 2004,

p 76; Jeff Berman, ‘US Providers Say Logistics in China on the Right Track’, Logistics Management, March 2007, p 22; Jamie Bolton, ‘China: The Infrastructure Imperative’, Logistics Management, July 2007, p 63; and China trade facts from http://cscmp.org/

press/fastfacts.asp, March 2009

8 For more on channel relationships, see ‘Supply Chain Challenges’, Harvard Business Review, July 2003, pp 65–73; James C Anderson and James A Narus, Business Market Management, 2nd edn (Upper Saddle River, NJ: Prentice Hall, 2004), ch 9; Jeffery K

Liker and Thomas Y Choi, ‘Building Deep Supplier Relationships’, Harvard Business Review, December 2004, pp 104–13; and David Hannon, ‘Supplier Relationships Key to Future Success’, Purchasing, 2 June 2005, pp 25–9.

9 Quotes and other information from Alex Taylor III, ‘Caterpillar’, Fortune, 20 August

2007, pp 48–54; Donald V Fites, ‘Make Your Dealers Your Partner’, Harvard Business Review, March–April 1996, pp 84–95; and information accessed at www.caterpillar.com, June 2014

10 ‘Dell Computers: A Case Study in Low Inventory’, Inventory Management Review,

accessed at http://www.inventorymanagementreview.org, June 2014, ‘Adding a Day to

Dell’, Traffic World, 21 February 2005, p 1; and William Hoffman, ‘Dell Ramps Up RFID’, Traffic World, 18 April 2005, p 1.

11 See ‘Walmart Relaunches EPC RFID Effort Starting with Men’s Jeans and Basics’, RFID Journal, 23 July 2010, accessed at http://www.rfidjournal.com, June 2014; ‘A Worldwide

Look at RFID’, Supply Chain Management Review, April 2007, pp 48–55; ‘Wal-Mart Says Use RFID Tags or Pay Up’, Logistics Today, March 2008, p 4; and David Blanchard,

‘The Five Stages of RFID’, Industry Week, 1 January 2009, p 50.

12 Donald J McCubbrey and Joze Gricar, ‘The EDI Project in Slovenia: A Case Study

and Model for Developing Countries’, Information Technology and People, 8(2), 1995,

pp. 6–16

13 Thomas W Lauer, ‘Side-Effects of Mandatory EDI Order Processing in the Automotive

Supply Chain’, Business Process Management Journal, 6(5), 2000, pp 366–75.

14 See http://www.gartner.com/newsroom/id/2488715, accessed June 2014; Bob Trebilcock,

‘Top 20 Supply Chain Management Software Suppliers’, Modern Material Handling,

1 July 2008, accessed at www.mmh.com/article/CA6574264.html; and ‘The 2009 Supply

& Demand Chain Executive 100’, Supply & Demand Chain Executive, June–July 2009,

accessed at www.sdcexec.com

15 http://www.cevalogistics.com, accessed 22 July 2011

16 See ‘Add Value to Your Supply Chain – Hire a 3PL’, Materials Management and tion, January–February 2004, p A3; and Paul Stastny, ‘Outsourcing Global Supply Chain Management’, Canadian Transportation Logistics, March 2005, pp 32–4.

Distribu-CHAPTER 11

RETAILING AND WHOLESALING

AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO

● explain the roles of retailers and wholesalers in the distribution channel

● describe the major types of retailers and give examples of each

● identify the major types of wholesalers and give examples of each

● explain the marketing decisions facing retailers and wholesalers

THE WAY AHEAD

Previewing the concepts

In the previous chapter, you learned the basics of

distribution channel design and management Now,

we’ll look more deeply into the two major intermediary

channel functions, retailing and wholesaling You already

know something about retailing – you’re served every

day by retailers of all shapes and sizes and there is a

good chance you’ve had some experience of working

in a retail environment However, you probably know

much less about the horde of wholesalers that work

behind the scenes In this chapter, we’ll navigate through

the characteristics of different kinds of retailers and

wholesalers, the marketing decisions they make and

trends for the future

To start the tour, we’ll look at Aldi This German

supermarket chain is known as a hard discounter – a

retailer that sells goods without requiring customers to

pay for extras like strong brands or extra packaging

CHAPTER CONTENTS

Retailing 367

Types of retailers 368

Retailer marketing decisions 372

The future of retailing 376

Wholesaling 381

Types of wholesalers 384

Wholesaler marketing decisions 384

Trends in wholesaling 387

ALDI: DON’T DISCOUNT THEM

Albrecht Discount (Aldi) was established

by two brothers in Germany in the 1950s

It emerged in response to the economic

difficulties experienced by German

soci-ety after the Second World War The

two brothers had a major disagreement

in 1962 and the company was split into

two separate operations: Aldi Nord

(con-centrating mainly in Denmark, France,

the Benelux countries and Poland) and

Aldi Sud (focusing its efforts in the UK,

Ireland, Austria and Slovenia) Both

enti-ties now cooperate in a friendly manner

As a retailer, its underlying philosophy has

evolved from the basic principle of

offer-ing low prices, focusoffer-ing on own-branded

products, carrying a limited number of

items (1,000 as compared with 25,000

in the traditional supermarkets) and operating in a basic

no-frills store, with minimal staffing This approach

con-trasts strongly with other retailers in an environment

where most European consumers have come to expect a

wide choice of brands at varying price points.

In an interview the former Managing Director of Aldi

in the UK, Paul Foley, outlined the Aldi strategy by

offer-ing the followoffer-ing observations: ‘If you sell more versions

of a product, you need a bigger store – the customer will

still only buy one product Aldi stores are a cross between

a supermarket, a street market and a warehouse.’ 1

Some retailers try to cater for all segments – Aldi very

deliberately does not Foley went on to say:

the bottom end of the market is not that attractive to

us They don’t have much money, they don’t travel

very far and they are very brand conscious The very

top of the market – where the amount of money

spent on food is a very small amount of disposable

income – is not attractive either But everything in

the middle is fair game.

Certainly in the UK, Aldi would appear to be making

inroads into the ABC1 social category, where 50 per cent

of its customers fall As economic times get harder, Aldi

is becoming a more attractive proposition to the

middle-class shopper hoping to make savings Indeed, Aldi has

promised its customers a saving of £30 on a £100 weekly

shop when compared with the ‘Big Four’ supermarkets

(Tesco, Asda, Sainsbury’s and Morrisons) How can it deliver on this bold promise?

Because it carries so few items, it can purchase very large quantities from its suppliers and is therefore able

to offer lower prices It applies rigorous cost control procedures over all aspects of its operations The stores are spartan and facilitate ease of handling and display – another source for cost reduction Long queues at the checkouts and minimal staffing reinforce this image of low-cost, low-service operations Aldi does little or no advertising, apart from periodic newsletters that it cir- culates locally, and specialises in selling staple products such as food, beverages, sanitary articles and other inex- pensive household items Store managers use handheld devices to place their orders in the evening and the store

is replenished the next day This puts Aldi into the egory known as the ‘hard discounter’: an operation that pushes prices even lower than the traditional discounters – for cultural and historical reasons, this retailing category

cat-is strongly associated with Germany, Lidl being another prime example.

In terms of international expansion, Aldi finances its new store openings from its cash resources, avoiding potential exposure to high loans The company shuns publicity and moves quietly into new markets This quiet expansion has taken Aldi to 3.5 per cent of the total European market In comparison, the market leader – Carrefour – has captured 6.8 per cent.

Sean Ennis, Department of Marketing, University of Strathclyde, Scotland

Source: Alamy Images/Vario Images GmbH & Co KG.

The Aldi story sets the stage for examining the fast-changing world of today’s resellers This

chapter looks at retailing and wholesaling In the first section, we look at the nature and

importance of retailing, major types of store and non-store retailers, the decisions retailers make and the future of retailing In the second section, we discuss these same topics as they relate to wholesalers

RETAILING

What is retailing? We all know that Tesco, Carrefour and H&M are retailers, but so are Avon representatives, Amazon.com, the local Travelodge and a hair stylist in the beauty salon Retailing includes all the activities involved in selling products or services directly to final consumers for their personal, non-business use Many institutions – manufacturers, wholesalers and retailers – do retailing But most retailing is done by retailers: businesses

whose sales come primarily from retailing.

Although most retailing is done in retail stores, in recent years non-store retailing has

been growing much faster than has store retailing Non-store retailing includes selling to final consumers through direct mail, catalogues, telephone, the Internet, home-shopping TV, home and office parties, door-to-door contact, vending machines and other direct selling approaches We discuss such direct marketing approaches in detail later (see Chapter 13)

In this chapter, we focus on store retailing

Shopping culture significantly influences how well or badly Aldi performs in a given market Until recently, Aldi

and Lidl struggled to capture a significant slice of the UK

market, which is dominated by companies such as Tesco,

Sainsbury’s, Asda and Morrisons Almost 70 per cent of food

sales fall into the hands of these companies Traditionally,

UK shoppers have been more interested in purchasing

well-known branded products Many dislike the idea of buying

‘own brands’ or little known European brands By contrast,

in its home market of Germany – the third-biggest retail

market in the world, after the USA and Japan – Aldi is in

pole position and discounters hold sway No social stigma

is associated with shopping in such stores there and, as a

consequence, the focus on low price works very effectively.

Despite the low, low prices, Aldi has done its best to build

up a reputation for selling good-quality products Cabinet

displays at Aldi head office attest to this observation – where

over 50 awards and citations recognising the quality of

vari-ous products sit proudly on display Surveys consistently

show that, in the German market, Aldi is perceived as the

third most respected brand (after Siemens and BMW).

Aldi continues to refine various aspects of its retail strategy Until recently, of the 1,000 items carried, only 15

fell into the branded category: such brands as Marmite,

Tetley Teabags and Budweiser Then, Aldi started to stock

a limited number of premium brands such as the Italian

confectioner Ferrero, and consumer goods brands from

Procter & Gamble and Kimberley Clark.

The recession and credit crunch in many European markets meant that Aldi presented an even more attrac- tive option to shoppers on increasingly tight budgets The tough economic times from 2008 to 2013 mean that these shoppers have had to look for smarter and more innova- tive ways of maximising their value from declining dis- posable incomes Aldi provides an attractive alternative.

Certainly in the UK, Aldi has been expanding even faster than the ‘Big Four’ competitors Its target is to open one store a week until 1,200 stores are established Although only holding 3 per cent of the UK market share, the effec- tive management of its costs means that it is very profitable

It will be interesting to see whether Aldi continues to make inroads into the dominance of the traditional supermar- kets such as Tesco and Sainsbury’s Even if there is a sus- tained economic recovery, some analysts believe that Aldi will continue to thrive Not long ago retail industry experts believed that, once there were signs of an economic recov- ery, shoppers would return to the big-name supermarket chains such as Tesco However, a different analysis is now regarded as very plausible: shoppers have discovered that they can enjoy high-quality products at relatively modest prices and have overcome their suspicion of the hard dis- counting stores, so perhaps they will stick with Aldi even if they feel better off In any event, Aldi has clearly developed

a successful value proposition, making it one of the most profitable and successful retailers in Europe.

Source: See note 1 at the end of this chapter.

Types of retailers

Retail stores come in all shapes and sizes and new retail types keep emerging The most important types of retail stores are described in Exhibit 11.1 and discussed in the following

sections They can be classified in terms of several characteristics, including the amount

of service they offer, the breadth and depth of their product lines, the relative prices they charge and how they are organised.

Speciality stores

Carry a narrow product line with a deep assortment, such as clothing stores, sporting-goods stores like JD Sports,

furniture stores, florists and bookshops A clothing store would be a single-line store, a men’s clothing store would be

a limited-line store and a men’s custom-shirt store would be a super-speciality store Examples: Zara, Gap, JD Sports.

Department stores

Carry several product lines – typically clothing, home furnishings and household goods – with each line operated as

a separate department managed by a specialist buyer or merchandiser Examples: John Lewis, Macy’s, Le Printemps

and Gostiny Dvor.

Supermarkets

A relatively large, low-cost, low-margin, high-volume, self-service operation designed to serve the consumer’s total

needs for grocery and household products Examples: Carrefour, Aldi, Tesco.

Convenience stores

Relatively small stores located near residential areas, open long hours seven days a week, and carrying a limited line

of high-turnover convenience products at slightly higher prices Examples: 7-Eleven, Londis, Opencor.

Discount stores

Carry standard merchandise sold at lower prices with lower margins and higher volumes Examples: Wal-Mart, Target.

Off-price retailers

Sell merchandise bought at less than regular wholesale prices and sold at less than retail, often leftover goods,

over-runs and irregulars obtained at reduced prices from manufacturers or other retailers These include factory outlets

owned and operated by manufacturers (example: the collection at Serravalle); independent off-price retailers owned

and run by entrepreneurs or by divisions of larger retail corporations (example: TK Maxx – known as TJ Maxx outside

the UK, Ireland and Germany); and warehouse (or wholesale) clubs selling a limited selection of brand name groceries,

appliances, clothing and other goods at deep discounts to consumers who pay membership fees (example: Costco).

Superstores

Very large stores traditionally aimed at meeting consumers’ total needs for routinely purchased food and non-food

items Includes category killers, which carry a deep assortment in a particular category and have a knowledgeable staff

(examples: Tesco, Petsmart, Staples); supercentres, combined supermarket and discount stores (example: Wal-Mart

Supercenters); and hypermarkets with up to 220,000 square feet (20,400 square metres) of space combining

super-market, discount and warehouse retailing (examples: Carrefour, Pyrca).

EXHIBIT 11.1 Major store retailer types

Amount of serviceDifferent products require different amounts of service and customer service preferences vary Retailers may offer one of three levels of service: self-service, limited service and full service.

Self-service retailers serve customers who are willing to perform their own

‘locate–com-pare–select’ process to save money Self-service is the basis of all discount operations and

is typically used by sellers of convenience goods (such as supermarkets) and nationally branded, fast-moving shopping goods (such as Marks & Spencer and Debenhams)

Limited-service retailers, such as Carphone Warehouse, provide more sales assistance

because they carry more shopping goods about which customers need information – sive electronic items, for example Their increased operating costs result in higher prices In

expen-full-service retailers, such as speciality stores and first-class department stores, salespeople

assist customers in every phase of the shopping process – think Harrods Full-service stores usually carry more speciality goods for which customers like to be ‘waited on’ They provide more services resulting in much higher operating costs, which are passed along to customers

as higher prices

Product lineRetailers also can be classified by the length and breadth of their product assortments Some retailers, such as speciality stores, carry narrow product lines with deep assortments within those lines Today, speciality stores are flourishing The increasing use of market segmenta-tion, market targeting and product specialisation has resulted in a greater need for stores that focus on specific products and segments

In contrast, department stores carry a wide variety of product lines In recent years, department stores have been squeezed between more focused and flexible speciality stores on the one hand, and more efficient, lower-priced discounters on the other In response, many have added promotional pricing to meet the discount threat Others have stepped up the use of store brands and single-brand ‘designer shops’ to compete with speciality stores – as Marks & Spencer does with Per Una clothing for women Still others are trying mail order, telephone and web selling Service remains the key differentiating factor Retailers such as John Lewis in the UK, El Corte Inglés in Spain and Portugal, and other high-end department stores are doing well by emphasising high-quality service

Supermarkets are the most frequently shopped type of retail store In Europe they are facing slower sales growth because of slower population growth, saturation of the market and increasing restrictions on new shop development

Thus, most supermarkets are making improvements to attract more customers In the battle for ‘share of stomachs’, many large supermarket chains are moving upscale, providing improved store environments and higher quality food offerings, such as in-store bakeries, gourmet deli counters and fresh seafood departments – ‘It’s not just food, it’s M&S Food.’ Others are cutting costs, establishing more efficient operations and lowering prices in order

to compete more effectively against the discounters like Lidl and Aldi – Asda has taken this route Many of the major European supermarket chains offer home delivery for groceries bought online – the British Retail Consortium estimates that 9 per cent of all retail transac-tions are now conducted online.2 Many speculate on the current and future size of the online portion of retail markets, but Mintel, the market intelligence agency, has suggested it was about €114bn across the EU in 2010, representing about 5 per cent of all retail transactions, and Forrester Research predicts that EU online retailing will be worth €191bn by 2017.3

Convenience stores are small stores that carry a limited line of high-turnover convenience goods like newspapers, snacks and drinks There are chains of these all over Europe – Narve-san in Norway and Pressbyrån in Sweden were both founded in the nineteenth century (the lat-ter specialising in small outlets in railway stations), Londis (London and District Independent Shopkeepers) in the UK, the Spanish Opencor and, of course, Spar over much of the continent (originally Dutch in origin).4 These specialists are increasingly being joined by small-format versions of the leading grocers, such as the Tesco Express and Sainsbury Local chains

Superstores are much larger than regular supermarkets and offer a large assortment of routinely purchased food products, non-food items and services Wal-Mart acquired Asda in 1999, and has developed the chain to replicate the US format of very large combination food and discount stores in the EU – Wal-Mart has 2,500 of these in the USA alone.5

Recent years have also seen the explosive growth of stores that are actually giant speciality stores, the so-called category killers They feature stores the size of aircraft hang-ars that carry a very deep assortment of a particular line with

super-a knowledgesuper-able stsuper-aff Csuper-ategory killers super-are prevsuper-alent in super-a wide range of categories, including books, baby gear, toys, elec-tronics, home improvement products, linens and towels, party goods, sporting goods, even pet supplies Another superstore

variation, a hypermarket, is a huge superstore, perhaps as large as six football pitches This is a format that emerged in

Europe before the USA – Carrefour pioneered hypermarkets

in France, and now generates three-quarters of its sales from its four key EU markets in France, Italy, Spain and Belgium It

is also rapidly expanding in China and Eastern Europe.6Finally, for some retailers, the product line is actually a ser-vice Service retailers include hotels, banks, airlines, cinemas, restaurants, garages, hair salons and dry cleaners

Relative pricesRetailers can also be classified according to the prices they charge (see Exhibit 11.1) Most retailers charge regular prices and offer normal quality goods and customer service Others offer higher quality goods and service at higher prices The retailers that fea-ture low prices are discount stores and ‘off-price’ retailers

Discount stores

A discount store sells standard merchandise at lower prices by accepting lower margins and selling higher volume The early discount stores cut expenses by offering few services and operating in warehouse-like facilities in low-rent, heavily populated areas Today’s discount-ers have improved their store environments and increased their services, while at the same time keeping prices low through lean, efficient operations If France brought Europe and the world the hypermarket, then Germany can claim to be the home of the two most significant discounters in Europe – Aldi and Lidl Other significant players include the Danish Netto and the Spanish DIA These discounters are increasingly influencing the retail scene as a whole, as we saw in the opening case about Aldi

Off-price retailers

As the major discount stores traded up, a new wave of off-price retailers moved in to fill the ultra-low price, high-volume gap Ordinary discounters buy at regular wholesale prices and accept lower margins to keep prices down In contrast, off-price retailers buy at less than regular wholesale prices and charge consumers less than regular retail prices Off-price retailers can be found in all areas, from food, clothing and electronics to no-frills banking and discount brokerages

The three main types of off-price retailers are independents, factory outlets and house clubs Independent off-price retailers are either owned and run by entrepreneurs

ware-or divisions of larger retail cware-orpware-orations Although many off-price operations are run by smaller independents, most large off-price retailer operations are owned by bigger retail chains Well known off-price retailers in Europe include TK Maxx, Matalan and Makro

Convenience stores are becoming ever more

sophisticated retailing environments

Source: Alamy Images/TNT Magazine.

Factory outlets are producer-operated stores sometimes grouped together in factory outlet malls and value retail centres, where dozens of outlet stores offer prices as low as

50 per cent below retail on a wide range of items Factory outlet malls have become one of the hottest growth areas in retailing While common in the USA, these are still relatively scarce in Europe Serravalle Designer Outlet, near Piedmont in Italy, offers good deals on brands like Cerruti and Dolce and Gabbana In the UK, Bicester Village is one of a very few examples – owned and operated by a company called Value Retail which specialises in this type of retail environment.7

Brands such as Polo Ralph Lauren, Giorgio Armani, Gucci and Versace are increasingly appearing in these outlets, causing department stores to protest to the manufacturers of these brands Given their higher costs, the department stores have to charge more than the off-price outlets Manufacturers counter that they send last year’s merchandise and seconds

to the factory outlet malls, not the new merchandise that they supply to the department stores Still, the department stores are concerned about the growing number of shoppers willing to make weekend trips to stock up on branded merchandise at substantial savings

Organisational approachAlthough many retail stores are independently owned, others band together under some

form of corporate or contractual organisation The major types of retail organisations – corporate chains, voluntary chains, retailer cooperatives, franchise organisations and merchandising conglomerates – are described in Table 11.1.

Chain stores are two or more outlets that are commonly owned and controlled They have many advantages over independents Their size allows them to buy in large quantities

at lower prices and gain promotional economies They can hire specialists to deal with areas such as pricing, promotion, merchandising, inventory control and sales forecasting

The great success of corporate chains caused many independents to band together in

one of two forms of contractual associations One is the voluntary chain – a

wholesaler-sponsored group of independent retailers that engages in group buying and common chandising (see Chapter 10) In Germany, Edeka supermarkets operate like this The other

mer-form of contractual association is the retailer cooperative – a group of independent retailers

that bands together to set up a jointly owned, central wholesale operation and conducts

Corporate chain

stores

Two or more outlets that are commonly owned and controlled, employ central buying and merchandising, and sell similar lines of merchandise Corporate chains appear in all types of retailing, but they are strongest in department stores, food stores, chemists, shoe stores and women’s clothing stores

Zara, WHSmith

Voluntary chains Wholesaler-sponsored groups of independent retailers engaged in bulk buying

and common merchandising

McDonald’s, Subway, Pizza Hut, The Body Shop

Merchandising

conglomerate

A free-form corporation that combines several diversified conglomerates retailing lines and forms under central ownership, along with some integration of their distribution and management functions

Dixons Retail plc TABLE 11.1 Major types of retail organisation