CH-15-16 Designing and Managing Marketing Channels and Value Networks – Marketing Management: A South Asian Perspective : Chapter Notes

This Document Contains Chapters 15 to 16 Chapter 15 Designing and Managing Marketing Channels and Value Networks LEARNING OBJECTIVES In this chapter, we will address the following questions: What is a marketing channel system and value network? What work do marketing channels perform? How should channels be designed? What decisions do companies face in managing their channels? How should companies integrate channels and manage channel conflict? What are the key issues with e-commerce and m-commerce? SUMMARY Most producers do not sell their goods directly to final users. Between producers and final users stands one or more marketing channels, a host of marketing intermediaries performing a variety of functions. Marketing-channel decisions are among the most critical decisions facing management. The company’s chosen channel(s) profoundly affect all other marketing decisions. Companies use intermediaries when they lack the financial resources to carry out direct marketing, when direct marketing is not feasible, and when they can earn more by doing so. The most important functions performed by intermediaries are information, promotion, negotiation, ordering, financing, risk taking, physical possession, payment, and title. Manufacturers have many alternatives for reaching a market. They can sell direct or use one-, two-, or three-level channels. Deciding which type(s) of channel to use calls for analyzing customer needs, establishing channel objectives, and identifying and evaluating the major alternatives, including the types and numbers of intermediaries involved in the channel. Effective channel management calls for selecting intermediaries and training and motivating them. The goal is to build a long-term partnership that will be profitable for all channel members. Marketing channels are characterized by continuous and sometimes dramatic change. Three of the most important trends are the growth of vertical marketing systems, horizontal marketing systems, and multichannel marketing systems. All marketing channels have the potential for conflict and competition resulting from such sources as goal incompatibility, poorly defined roles and rights, perceptual differences, and interdependent relationships. There are a number of different approaches companies can take to try to manage conflict. Channel arrangements are up to the company, but there are certain legal and ethical issues to be considered with regard to practices such as exclusive dealing or territories, tying agreements, and dealers’ rights. E-commerce has grown in importance as companies have adopted “brick-and-click” channel systems. Channel integration must recognize the distinctive strengths of online and offline selling and maximize their joint contributions. An emerging new area is m-commerce and marketing through cell phones. OPENING THOUGHT Most students are not familiar with channels of distribution, except, perhaps, from the retailer in which they have bought products. Therefore, the instructor has to ensure that they clarify the various channels of distribution during this chapter lecture. Examples of the various channels for products familiar to the students can help illustrate the complexity of the process. Second, because marketing channel decisions are mostly hidden from the final consumer, the instructor should make every effort to diagram the decision-making process for each level of channel distribution. Starting with the retail price of the product, then subtracting each distribution level margins or markups shows the effects of distribution to or for the product. Managing channels of distribution will be new to most students, as will the definitions of channel conflict and channel support. The instructor can best serve the student by fully diagramming a particular product from a channel of distribution perspective and talking about channel roles, conflicts, training, and motivation. The students will probably be most interested in, or knowledgeable about, e-commerce and see e-commerce as the future of business. The instructor should caution the students about assuming that all business transactions (or a great majority of them) will flow to e-commerce by describing to the students the various consumer demographic groups, buying habits, and comfortableness with technology. An in-class discussion on the merits and demerits of e-commerce should provide for a lively cross-section of opinions. TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS At this point in the semester-long project, students should present their channel decisions for getting their product or service to the consumer. In evaluating this section, the instructor should evaluate the completeness of the projects to the material contained in this chapter. Progressive companies have begun developing a value network system to get products in the hands of consumers. A value network includes a firm’s suppliers, its suppliers’ suppliers, its immediate customers, and their end customers. Students should identify a company that has successfully set up a value network, then compare and contrast the components of the value system to a competitor that does not have one. Students should be able to identify the components of the value network that produced the augmented offering. Marketing Plan: Manufacturers need to pay close attention to their marketing channels. By planning the design, management, evaluation, and modification of their marketing channels, manufacturers can ensure their products are available when and where customers want to buy. Get students to develop a channel strategy for their product or service. Based on information gathered so far and the decisions they have already made about the target market, product, and pricing, students should answer the following: What decisions must be made to develop the five marketing flows (physical product, title, payment, information, and promotion)? How many levels would be appropriate for the consumer and/or business markets targeted? Should there be a plan for exclusive, selective, or intensive distribution? What decisions must be made to develop the five service outputs (lot size, waiting time, spatial convenience, product variety, and service back up)? Get students to document their recommendations about marketing channels and strategy in a written marketing plan or type the recommendations into the Marketing Mix and Channels sections of Marketing Plan Pro. ASSIGNMENTS Top marketing companies are employing both a “push” and a “pull” strategy to deliver incremental sales. Top marketing companies such as Nike, Sony, and Coca-Cola skillfully employ both push and pull strategies. Have students find and explain one example each of a “push” and a “pull” strategy used by a favorite brand. Ask the students to comment on the hybrid channel of distribution. The hybrid channel as defined in the chapter poses an interesting channel for future marketers. As students grow into consumers will they or won’t they rely on purchasing products exclusively through the Internet? Or will they demand hybrid distribution choices like free shipment to store sites or pick up at the store? Today, some of the countries more successful companies are using a hybrid channel system to increase its effectiveness of reaching the consumer. The text uses the examples of Hewlett-Packard and Lotte and notes that channel integration and its features are what the consumer prefers. Students should choose or find one additional example of a firm using the hybrid system, and comment on how they see this system delivering value to the consumer. Student answers should be directed toward the three features of channel integration found in the textbook. Channel members add value to the consumer’s purchase of certain products and services. Table 15.1 details key channel member functions. Yet some firms have abandoned channel partners and tried to reach the consumer on a one-to-one basis. Selecting a product or firm that (a) is maintaining its channel members, and (b) a firm that has decided to sell directly to the consumer thus bypassing channel intermediaries. Comment on these two systems in terms of the information contained in the chapter. END-OF-CHAPTER SUPPORT MARKETING DEBATE—Does It Matter Where You Sell? Some marketers feel that the image of the particular channel in which they sell their products does not matter—all that matters is that the right customers shop there and the product is displayed in the right way. Others maintain that channel images—such as a retail store—can be critical and must be consistent with the image of the product. Take a position: ‘Channel images do not really affect the brand images of the products they sell that much’ versus ‘Channel images must be consistent with the brand image’. Pro: Buyers buy products or use services to meet a particular need or want. In the marketing decision making process, a consumer has a preformed image of the product or service based upon the company’s reputation or marketing messages. Therefore, where the consumer finally purchases the product is immaterial to the consumer, as long as, the product performs to expectations and that the process of purchasing the product is as simplified as possible. Strongly advertised products, or those products, with strong brand names will have consumers seeking out their products regardless of which channel of distribution the company uses. Some marketers benefit from extensive distribution channels, as their products are impulse items, last minute decision items, or cater to consumer habits. For marketers of these items, it is important for them to be available when the consumers’ desires strike. Con: The consumer buying process, the consumer “value proposition,” changes and reflects shifting priorities based on the individual needs and wants of the consumer at the time of purchase. For key products or services, consumers require, and even demand, different levels of service, attention, or “exclusivity” in the purchase. These consumers’ needs can and are met by different channels of distribution and are influenced by what channel or channels of distribution the producer uses; how well trained and motivated the channel is; and how the channel services the customer. There is no “correct” or “optimum” channel of distribution for all products. As products flow through a life cycle, older channels will evaporate and newer ones will develop. As consumer attitudes, positions, and usages of the products change, the consumers will navigate to differing channels. A product sold at one time through exclusive dealerships, at the beginning of its life cycle, may now be sold through mass-merchants or discounters at the end of its product life cycle. MARKETING DISCUSSION Think of your favorite retailers. How have they integrated their channel system? How would you like their channels to be integrated? Do you use multiple channels from them? Why? Student answers will differ depending upon their favorite retailers. However, all answers should include the definition of channel integration. Suggested Answer: Customers expect channel integration characterized by the following features: The ability to order a product online and pick it up at a convenient retail location. The ability to return an online ordered product to a nearby store of the retailer. The right to receive discounts based on total online and off-line purchases My favorite retailers, such as Apple and Amazon, have integrated their channel systems by offering a seamless experience across online platforms, physical stores, and mobile apps. They ensure consistency in product information, pricing, and customer service. I would like their channels to be further integrated by enhancing real-time inventory visibility and providing more personalized experiences across all touchpoints. I use multiple channels, such as online shopping and in-store pickups, for convenience and to take advantage of both digital tools and physical product interactions. Marketing Lesson: SASA 1) Why do you think Sasa’s business model did not work as well in China as it did in Hong Kong? Suggested Answer: Competition from domestic and international brands was stiff. There are over 3,500 domestic cosmetics companies in China. Most of these are small-scale retailers, dominating lower-tier cities that are characterized by fragmented distribution networks. As a foreign brand, Sasa has to pay a 17 percent value-added tax and a 30 percent consumption tax, making the same product 20 percent more expensive than in Hong Kong. Sasa also faces competition from international companies. While these foreign brands also face the same value-added tax and consumption tax that Sasa does, their large volume of sales and strong financial backing allow them to cover the import duties. Sasa's business model likely faced challenges in China due to fierce competition from local beauty brands, differing consumer preferences, and regulatory complexities, which impacted its success compared to its smoother operations in Hong Kong. 2) What should Sasa do next if it wants to remain in China? Suggested Answer: Sasa should engage in aggressive expansion by opening more stores in China to generate volume sales to counter the high taxes. It could also perhaps build an extensive and solid sales network that will attract more well-known brands to its stores and invest in e-commerce technologies to better reach online shoppers. To succeed in China, Sasa should focus on adapting its product offerings to local preferences, strengthening its online presence, leveraging social media for marketing, and navigating regulatory challenges effectively. Marketing Lesson: TAOBAO Why has Taobao succeeded online when eBay has failed? Suggested Answer: The case study makes few comparisons between Taobao and eBay but what students should pick out is Taobao’s understanding of consumer preferences and buying behaviors e.g Taobao’s role in introducing Chinese to online shopping and educating consumers about e-commerce by inviting them to try the service free of charge. Taobao succeeded online primarily due to its deep understanding of the Chinese market, effective localization strategies, and fostering a robust ecosystem What is unique about Taobao’s channel management process? What components can other online shopping sites borrow or implement? Suggested Answer: Taobao charges retailers based on their transaction volume. Companies have to pay five percent of their transaction value to Taobao if their outlet fails to sell more than $133,333 a year. Discounted commission is provided for bigger sellers. In addition, companies must pay a one-time deposit of 5,000 to 15,000 yuan ($793 to $2380) to compensate shoppers in case of complaints. The companies may have their stores shut down if they rank last by sales in their product category. Taobao also offers its users a safe and satisfying shopping experience. It teams up with Beijing Rising, China’s top anti-virus software company, to provide a more reliable and secure trading platform. Rising and Taobao launched a quick response channel to deal with viruses and online threats by sharing information with each other. Taobao also employs Alipay, Alibaba’s payment method in partnership with leading banks in China. It also has consumer protection programs which have helped allay fears of fraud among a population unaccustomed to making purchases in cyberspace. To guarantee the quality of products and services for consumers, Taobao requires cooperating merchants to meet rigorous customer satisfaction and consumer protection measures such as a seven-day, no-questions-asked refund policy. For its corporate clients, Taobao offers the infrastructure for complete management of their own brand and online retail channel. Based on the aforementioned, get students to identify and justify components that other online shopping sites can borrow or implement. Taobao's channel management process is unique in its emphasis on creating a dynamic and engaging marketplace where sellers have autonomy in pricing and promotion, fostering competition and consumer choice. Other online shopping sites could borrow its integrated payment system, user-friendly interface, and robust seller support tools to enhance user experience and marketplace efficiency. What is next for Taobao? Should it go into cloud computing? Where else can it grow? Suggested Answer: Students answers will vary. Taobao could go into cloud computing for data/document management, business software etc. and expand its global reach as an online platform for shopping, socializing, and information sharing. Next for Taobao could involve expanding into cloud computing to capitalize on its vast data infrastructure and support Alibaba's broader ecosystem. Additionally, growth opportunities lie in enhancing AI-driven personalized shopping experiences, expanding internationally, and innovating in areas like fintech and logistics to maintain its competitive edge. DETAILED CHAPTER OUTLINE Successful value creation needs successful value delivery. Holistic marketers are increasingly taking a value network view of their businesses. Instead of limiting their focus to their immediate suppliers, distributors, and customers, they are examining the whole supply chain that links raw materials, components, and manufactured goods and shows how they move toward the final consumers. Companies are looking at the suppliers’ suppliers upstream and at the distributors’ customers downstream. They are looking at customer segments and considering a wide range of different possible means to sell, distribute, and service their offerings. Companies today must build and manage a continuously evolving and increasingly complex channel system and value network. MARKETING CHANNELS AND VALUE NETWORKS Most producers do not sell their goods directly to the final users; between them stands a set of intermediaries performing a variety of functions. These intermediaries constitute a marketing channel (also called a trade channel or distribution channel). Marketing channels are sets of interdependent organizations involved in the process of making a product or service available for use or consumption. Some intermediaries buy, take title to, and resell the merchandise; they are called merchants. Others—brokers, manufacturers’ representatives, sales agents—search for customers and may negotiate on the producer’s behalf but do not take title to the goods; they are called agents. Still others—transportation companies, independent warehouses, banks, advertising agencies—assist in the distribution process but neither take title to goods nor negotiate purchases or sales; they are called facilitators. THE IMPORTANCE OF CHANNELS A marketing channel system is the particular set of marketing channels employed by a firm. Decisions about the marketing channel system are among the most critical facing management. In the United States, channel members collectively earn margins that account for 30 to 50 percent of the ultimate selling price. Marketing channels also represent a substantial opportunity cost. Converting potential buyers into profitable orders is one of the chief roles of marketing channels. Marketing channels must not just serve markets, they must also make markets. D) The channels chosen affect all other marketing decisions: The company’s pricing depends on whether it uses mass-merchandisers or highquality boutiques. The firm’s sales force and advertising decisions depend on how much training and motivation dealers need. In addition, channel decisions involve relatively long-term commitments to other firms as well as a set of policies and procedures. In managing its intermediaries, the firm must decide how much effort to devote to push versus pull marketing. A push strategy involves the manufacturer using its sales force and trade promotion money to induce intermediaries to carry, promote, and sell the product to end user. Push strategy is appropriate where there is low brand loyalty in a category, brand choice is made in the stores, the product is an impulse item, and product benefits are well understood. A pull strategy involves the manufacturer using advertising and promotion to induce consumers to ask intermediaries for the product, thus inducing the intermediaries to order it. Pull strategy is appropriate when there is high brand loyalty and high involvement in the category, when people perceive differences between brands, and when people choose the brand before they go to the store. HYBRID CHANNELS AND MULTICHANNEL MARKETING Today’s successful companies are also multiplying the number of “go-to-market” or hybrid channels in any one market area. Hybrid channels or multichannel marketing occurs when a single firm uses two or more marketing channels to reach customer segments. Companies that manage hybrid channels must make sure these channels work well together and match each target customer’s preferred ways of doing business. Customers expect channel integration, characterized by the following features: Ordering a product online and picking it up at a convenient retail location Returning an online-ordered product to a nearby store of the retailer 3) Receiving discounts based on total online and offline purchases VALUE NETWORKS A supply chain view of a firm sees markets as destination points and amounts to a linear view of the flow. The company should first think of the target market, and then design the supply chain backward from that point. This view has been called demand chain planning. A broader view sees a company at the center of a value network—a system of partnerships and alliances that a firm creates to source, augment, and deliver its offerings. A value network includes a firm’s suppliers, its suppliers’ suppliers, its immediate customers, and their end customers. A company needs to orchestrate these parties to enable it to deliver superior value to the target market. Demand chain planning yields several insights: The company can estimate whether more money is made upstream or downstream. The company is more aware of disturbances anywhere in the supply chain that might cause costs, prices, or supplies to change suddenly. Companies can go online with their business partners to carry on faster and more accurate communications, transactions, and payments to reduce costs, speed up information, and increase accuracy. Managing this value network has required companies to make increasing investments in information technology (IT) and software. Marketers have traditionally focused on the side of the value network that looks toward the customer. In the future, they will increasingly participate in, influence their companies’ upstream activities, and become network managers. THE ROLE OF MARKETING CHANNELS Why would a producer delegate some of the selling jobs to intermediaries, relinquishing control over how and to whom the products are sold? Through their contacts, experience, specialization, and scale of operation, intermediaries make goods widely available and accessible to target markets, usually offering the firm more effectiveness and efficiency than it can achieve on its own. Many producers lack the financial resources to carry out direct marketing. CHANNEL FUNCTIONS AND FLOWS A marketing channel performs the work of moving goods from producers to consumers. It overcomes the time, place, and possession gaps that separate goods and services from those who need and want them. Members of the marketing channel perform a number of key functions (See Table 15.1). Lazy Consumers—Many Chinese are lazy to go shopping. Hence, they rely on deliveries of groceries and meals, and outsourcing tasks like paying bills or collecting bills to professional errand boys. Called lan ren jing ji (懒人经济) or economy of the lazy, this phenomenon helped to fuel e-commerce, which in turn has spurred the growth of courier and delivery companies. Some functions constitute a forward flow of activity from the company to the customer. Other functions constitute a backward flow from customers to the company. Still others occur in both directions. A manufacturer selling a physical product and services might require three channels: 1) A sales channel A delivery channel A service channel The question is not whether various channel functions need to be performed but rather, who is to perform them. All channel functions have three things in common: They use up scarce resources. They can often be performed better though specialization. 3) They can be shifted among channel members. CHANNEL LEVELS The producer and the final consumer are part of every channel. Figure 15.2(a) illustrates several consumer-goods marketing channels of different lengths. A zero-level channel (also called a direct-marketing channel) consists of a manufacturer selling directly to the final consumer. A one-level channel contains one selling intermediary such as a retailer. A two-level channel contains two intermediaries—a wholesaler and a retailer. A three-level channel contains wholesalers, jobbers, and retailers. Figure 15.2(b) shows channels commonly used in industrial marketing. Channels normally describe a forward movement of products from source to user. A) One can also talk about reverse-flow channels. Reverse-flow channels are important in the following cases: To reuse products or containers To refurbish products for resale To recycle products To dispose of products and packaging Several intermediaries play a role in reverse-flow channels including manufacturers’ redemption centers, community groups, traditional intermediaries such as soft-drink intermediaries, trash-collection specialists, recycling centers, trash-recycling brokers, and central-processing warehousing SERVICE SECTOR CHANNELS As Internet and other technologies advance, service industries are operating through new channels. Marketing channels also keep changing in “person” marketing. CHANNEL-DESIGN DECISIONS To design a marketing channel system, marketers analyze customer needs, establishing channel objectives, identifying major channel alternatives, and evaluating major channel alternatives. ANALYZING CUSTOMERS’ DESIRED SERVICE OUTPUT LEVELS Consumers may choose the channels they prefer based on price, product assortment, and convenience, as well as their own shopping goals (economic, social, or experiential). At the same time a consumer may choose different channels for different functions in a purchase. Some consumers are willing to “trade up” or “trade down.” Channels produce five service outputs: 1) Lot size Waiting and delivery time Spatial convenience Product variety Service backup The marketing-channel designer knows that providing greater service outputs means increased channel costs and higher prices for customers. Hence, some are cognizant of cost constraints: Malaysia People’s Store (refer to p. 463). ESTABLISHING OBJECTIVES AND CONSTRAINTS Marketers should state their channel objectives in terms of targeted service output levels and associated cost and support levels. Under competitive conditions, channel institutions should arrange their functional tasks to minimize total channel costs and still provide desired levels of service outputs. Channel objectives vary with product characteristics. Non-standard products, such as custom-built machinery and specialized business forms, are sold directly by company sales representatives. Products requiring installation or maintenance services, such as heating and cooling systems, are usually sold and maintained by the company or by franchised dealers. High-unit-value products such as generators and turbines are often sold through a company sales force rather than intermediaries. Channel design must adapt to the larger environment. When economic conditions are depressed, producers want to move goods to market user shorter channels and without services that add to the final price. Legal regulations and restrictions also affect channel design. Four environmental issues bear channel consideration in Asia: The underdevelopment of infrastructure in Asia’s larger emerging markets Economic factors Legal regulations and restrictions Consumer lifestyle and population density IDENTIFYING AND EVALUATING MAJOR CHANNEL ALTERNATIVES Each channel has unique strengths as well as weaknesses. A channel alternative is described by three elements. Channel alternatives differ in three ways: the types of intermediaries, the number needed, and the terms and responsibilities of each. Types of Intermediaries Sometimes a company chooses an unconventional channel because of the difficulty or cost of working with the dominant channel. The advantage is that the company will encounter less competition during the initial move into this channel. Unconventional channels are also used to stay ahead of intense competition. Number of Intermediaries Three strategies based on the number of intermediaries are exclusive distribution, selective distribution, and intensive distribution. Exclusive distribution means severely limiting the number of intermediaries. It is used when the producer wants to maintain control over the service level and outputs offered by the resellers. Often it involves exclusive dealing arrangements. Selective distribution relies on only some of the intermediaries willing to carry a particular product. Intensive distribution consists of the manufacturer placing goods or services in as many outlets as possible. Manufacturers are constantly tempted to move from exclusive or selective distribution to intensive distribution to increase coverage and sales. Terms and Responsibilities of Channel Members Each channel member must be treated respectfully and given the opportunity to be profitable. A) The main elements in the “trade-relations mix” are: Price policy Conditions of sale Distributors’ territorial rights Mutual services and responsibilities EVALUATING THE MAJOR ALTERNATIVES Each channel alternative needs to be evaluated against economic, control, and adaptive criteria. Economic Criteria Each channel will produce a different level of sales and costs. Figure 15.3 shows how six different sales channels stack up in terms of the value added per sale and the cost per transaction. Firms will try to align customers and channels to maximize demand at the lowest overall cost. Sellers try to replace high-cost channels with low-cost channels as long as the value added per sale is sufficient. Control and Adaptive Criteria Using a sales agency poses a control problem. To develop a channel, members must make some degree of commitment to each other for a specified period of time. Yet these commitments invariably lead to a decrease in the producer’s ability to respond to a changing marketplace. In rapidly, changing, volatile, or uncertain product markets, the producer needs channel structures and policies that provide high adaptability. CHANNEL-MANAGEMENT DECISIONS After a company has chosen a channel system, it must select, train, motivate, and evaluate individual intermediaries for each channel. It must also modify channel design and arrangements over time. SELECTING CHANNEL MEMBERS To customers, the channels are the company. A) To facilitate channel member selection, producers should determine what characteristics distinguish better intermediaries. B) They should evaluate the: Number of years in business Other lines carried Growth and profit records Financial strength Cooperativeness Service reputation If the intermediaries are sales agents, producers should evaluate the: Number and character of other lines carried. 2) Size and quality of the sales force. If the intermediaries are department stores that want exclusive distribution, the producer should evaluate: 1) Locations Future growth potential Type of clientele TRAINING AND MOTIVATING CHANNEL MEMBERS A company needs to determine intermediaries’ needs and construct a channel positioning such that its channel offering is tailored to provide superior value to these intermediaries. The company should provide training programs and market research programs to improve intermediaries’ performance. The company must constantly communicate its view that the intermediaries are partners in a joint effort to satisfy end users of the product. Channel Power Producers vary greatly in skill in managing distributors. Channel power can be defined as the ability to alter channel member’s behavior. Manufacturers can draw on the following types of power to elicit cooperation: 1) Coercive power Reward power Legitimate power Expert power Referent power Coercive and reward power are objectively observable. Legitimate, expert, and referent power are more subjective and dependent on the ability and willingness of parties to recognize them. Most producers see gaining intermediaries cooperation as a huge challenge. Channel Partnerships More sophisticated companies try to forge a long-term partnership with distributors. The manufacturer clearly communicates what it wants from its distributors in the way of market coverage, inventory levels, marketing development, account solicitation, technical advice and services, and marketing information and may introduce a compensation plan for adhering to the policies. To streamline the supply chain and cut costs, many manufacturers and retailers have adopted efficient consumer response practices (ECR) to organize their relationships in three areas: Demand side management or collaborative practices Supply side management to optimize supply Enablers and integrators, to support joint activities that reduce operational problems EVALUATING CHANNEL MEMBERS Producers must periodically evaluate intermediaries’ performance against such standards as sales quota attainment, average inventory levels, customer delivery times, treatment of damaged and lost goods, and cooperation in promotional and training programs. Under performers need to be counseled, retrained, motivated, or terminated. MODIFYING CHANNEL DESIGN AND ARRANGEMENTS No channel strategy remains effective over the whole product life cycle. In competitive markets with low entry barriers the optimal structure will inevitably change over time. The change could mean adding or dropping individual market channels or channel members or developing a totally new way to sell goods. Channel Evolution A new firm typically starts as a local operation selling in a fairly circumscribed market, using a few existing intermediaries. Identifying the best channels might not be a problem; the problem is often to convince the available intermediaries to handle the firm’s line. If the firm is successful, it might branch into new markets with different channels. In smaller markets, the firm might sell directly to retailers; in larger markets, through distributors. In rural areas, it might work with general-goods merchants; in urban areas, with limited-line merchants. It might grant exclusive franchises or sell through all willing outlets. In one country, it might use international sales agents; in another, it might partner with a local firm. Channel Modification Decisions A producer must periodically review and modify its channel design and arrangements. The distribution channel may not work as planned, consumer buying patterns change, the market expands, new competition arises, innovative distribution channels emerge, and the product moves into later stages in the product life cycle. Adding or dropping individual channel members requires an incremental analysis. Increasingly detailed customer databases and sophisticated analysis tools can provide guidance into those decisions. GLOBAL CHANNEL CONSIDERATIONS International markets pose distinct challenges, including variations in customers’ shopping habits, but create opportunities at the same time. The first step in global channel planning, as is often the case in marketing, is to get close to customers. A good retail strategy that offers customers a positive shopping experience and unique value, if properly adapted, is likely to find success in more than one market. CHANNEL INTEGRATION AND SYSTEMS Distribution channels do not stand still. We will look at the growth of vertical, horizontal, and multichannel marketing systems; the next section examines how these systems cooperate, conflict, and compete. Vertical Marketing Systems A conventional marketing system comprises an independent producer, wholesaler(s), and retailer(s). A) A vertical marketing system (VMS), by contrast, comprises the producer, wholesaler(s), and retailer(s) acting as a unified system. One channel member, the channel captain, owns the others, franchises them, or has so much power that they all cooperate. Marketing Insight: The Importance of Channel Stewards Provides some perspective on how channel stewards, a closely related concept, can work. VMSs arose as a result of strong channel members’ attempts to control channel behavior and eliminate the conflict that results when independent members pursue their own objectives. VMSs achieve economies through: Size Bargaining power The elimination of duplicated services E) There are three types of VMS: Corporate Administered Contractual Corporate VMS A) A corporate VMS combines successive stages of production and distribution under single ownership. Administered VMS An administered VMS coordinates successive stages of production and distribution through the size and power of one of the members. Manufacturers of a dominant brand are able to secure strong trade cooperation and support from resellers. The most advanced supply-distributor arrangement for administered VMS involves distribution programming that can be defined as building a planned, professionally managed, vertical marketing system that meets the needs of both manufacturer and distributors. Contractual VMS A contractual VMS consists of independent firms at different levels of production and distribution integrating their programs on a contractual basis to obtain more economies or sales impact than they could achieve alone. Contractual VMSs now constitute one of the most significant developments in the economy. A) There are three types: Wholesaler-sponsored voluntary chains Retailer cooperatives Franchise organizations The traditional system is the manufacturer-sponsored retailer franchise. Another is the manufacturer-sponsored wholesaler franchise. A new system is the service-firm-sponsored retailer franchise. The New Competition in Retailing The new competition in retailing is no longer between independent business units but between whole systems of centrally programmed networks (corporate, administered, and contractual) competing against one another to achieve the best cost economies and customer response. HORIZONTAL MARKETING SYSTEMS Another channel development is the horizontal marketing system, in which two or more unrelated companies put together resources or programs to exploit an emerging marketing opportunity. INTEGRATING MULTI-CHANNEL MARKETING SYSTEMS Most companies have adopted multichannel marketing. Multi-channel marketing occurs when a single firm uses two or more marketing channels to reach one or more customer segments. An integrated marketing channel system is one in which the strategies and tactics of selling through one channel reflect the strategies and tactics of selling through other channels. By adding more channels, companies can gain three important benefits: Increased market coverage Lower channel cost More customized selling The gains from adding new channels come at a price: New channels typically introduce conflict and control problems. Two or more channels may end up competing for the same customers. The new channel may be more independent and make cooperation more difficult. Companies need to think through their channel architecture. They must determine which channels should perform which functions. Figure 15.5 shows a simple grid to help make channel architecture decisions. Companies should use different sales channels for different-sized business customers. CONFLICT, COOPERATION, AND COMPETITION Channel conflict is generated when one channel member’s actions prevents the channel from achieving its goal. Channel coordination occurs when channel members are brought together to advance the goals of the channel, as opposed to their own potentially incompatible goals. TYPES OF CONFLICT AND COMPETITION Vertical channel conflict means conflict between different levels within the same channel. Horizontal channel conflict involves conflict between members at the same level within the channel. Multi-channel conflict exists when the manufacturer has established two or more channels that sell to the same market. 1) Multi-channel conflict is likely to be especially intense when the members of one channel get a lower price (based on larger volume purchases) or work with a lower margin. CAUSES OF CHANNEL CONFLICT Goal incompatibility Unclear roles and rights Differences in perception Intermediary’s dependence on the manufacturer MANAGING CHANNEL CONFLICT Some channel conflict can be constructive and lead to better adaptation to a changing environment, but too much is dysfunctional. The challenge is not to eliminate conflict but to manage it better. There are several mechanisms for effective conflict management (see Table 15.2). Strategic justification Dual compensation Superordinate goals Employee exchange Joint membership Co-option Diplomacy, mediation, and arbitration Legal recourse DILUTION AND CANNIBALIZATION Marketers must also be careful not to dilute their brands through inappropriate channels, particularly luxury brands whose images often rest on exclusivity and personalized service. LEGAL AND ETHICAL ISSUES IN CHANNEL RELATIONS Companies are generally free to develop whatever channel arrangements suit them. In fact, the law seeks to prevent companies from using exclusionary tactics that might keep competitors from using a channel. Manufacturers of a strong brand sometimes sell it to dealers only if they will take some or all of the rest of the line. This practice is called full-line forcing. Such tying agreements are not necessarily illegal, but may violate laws in certain countries if they tend to lessen competition substantially. Manufacturers are free to select their dealers, but their right to terminate dealers can be somewhat restricted in some countries. Asian dealers are particularly perturbed at principals who terminate distribution agreements after the dealers have developed the market, and who then want to reap the benefits for themselves. Many manufacturers like to develop exclusive channels for their products. A strategy in which the seller allows only certain outlets to carry its products is called exclusive distribution, and when the seller requires that these dealers not handle competitors’ products, this is called exclusive dealing. Both parties benefit from exclusive arrangements: The seller obtains more loyal and dependable outlets, and the dealers obtain a steady source of supply of special products and stronger seller support. 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. Specifically, the issue relates to the practice of gray marketing or parallel importing. This involves the sale of authorized, branded products through unauthorized channels. While counterfeiting (or black marketing) is illegal, gray marketing is in many cases legal and occurs frequently in Asia. Four factors motivate the growth of gray marketing: Differential pricing to different channel members may lead to a distributor overordering to obtain a discount and then selling off the excess to unauthorized channels. Manufacturers may price differently to different geographic markets due to differences in tax, exchange rates, or price sensitivity. Products may be sold through high-service, high-price channels, providing an opportunity to introduce gray markets through discount retailers. The development of emerging markets and worldwide trade liberalization create incentives for firms to capitalize on their brand equity and volume potential. E-COMMERCE MARKETING PRACTICES E-commerce uses a Web site to transact or facilitate the selling of products and services online. E-commerce has given rise in turn to e-purchasing and e-marketing. We can distinguish between pure-click companies and brick-and-click companies. PURE-CLICK COMPANIES There are several kinds of pure-click companies: 1) Search engines Internet Service Providers (ISPs) Commerce sites Transaction sites Content sites Enabler sites B2B E-COMMERCE Although business-to-consumer (B2C) Web sites have attracted much attention in the media, even more activity is being conducted on business-to-business (B2B) sites, which are changing the supplier-customer relationship in profound ways. In the past, buyers exerted a lot of effort to gather information about worldwide suppliers. B2B sites make markets more efficient, giving buyers easy access to a great deal of information from: supplier Web sites; infomediaries, third parties that add value by aggregating information about alternatives; market makers, third parties that link buyers and sellers; and customer communities, where buyers can swap stories about suppliers’ products and services. BRICK-AND-CLICK COMPANIES Although many brick-and-mortar companies may have initially debated whether to add an online e-commerce channel for fear of channel conflict with their off-line retailers, agents, or their own stores, most eventually added the Internet as a distribution channel after seeing how much business was generated online. Adding an e-commerce channel creates the threat of a backlash from retailers, brokers, agents, or other intermediaries. The question is how to sell both through intermediaries and online. There are at least three strategies for trying to gain acceptance from intermediaries: 1) Offer different brands or products on the Internet. Offer the off-line partners higher commissions to cushion the negative impact on sales. Take orders on the Web site but have retailers deliver and collect payment. M-COMMERCE The widespread penetration of cell phones and smart phones—there are currently more mobile phones than personal computers in the world—allows people to connect to the Internet and place online orders on the move. Many see a big future in what is now called m-commerce (m for mobile). The existence of mobile channels and media can keep consumers connected and interacting with a brand throughout their day-to-day lives. GPS-type features can help identify shopping or purchase opportunities for consumers for their favorite brands. In some countries, m-commerce already has a strong foothold. Millions of Japanese teenagers carry DoCoMo phones available from NTT (Nippon Telephone and Telegraph). They can also use their phones to order goods. Each month, the subscriber receives a bill from NTT listing the monthly subscriber fee, the usage fee, and the cost of all the transactions. Bills can be paid at the nearest 7-11 store. Chapter 16 Managing Retailing, Wholesaling, and Logistics LEARNING OBJECTIVES In this chapter, we will address the following questions: What major types of marketing intermediaries occupy this sector? What marketing decisions do these marketing intermediaries make? What are the major trends with marketing intermediaries? What does the future hold for private label brands? CHAPTER SUMMARY Retailing includes all the activities involved in selling goods or services directly to final consumers for personal, nonbusiness use. Retailers can be understood in terms of store retailing, nonstore retailing, and retail organizations. Like products, retail-store types pass through stages of growth and decline. As existing stores offer more services to remain competitive, costs and prices go up, which opens the door to new retail forms that offer a mix of merchandise and services at lower prices. The major types of retail stores are specialty stores; department stores; supermarkets; convenience stores; discount stores; off-price retailers (factory outlets, independent offprice retailers, and warehouse clubs); superstores (combination stores and supermarkets), and catalog showrooms. Although most goods and services are sold through stores, nonstore retailing has been growing. The major types of nonstore retailing are direct selling (one-to-one selling, oneto-many-party selling, and multilevel network marketing); direct marketing (which includes e-commerce and Internet retailing); automatic vending; and buying services. Although many retail stores are independently owned, an increasing number are falling under some form of corporate retailing. Retail organizations achieve many economies of scale, such as greater purchasing power, wider brand recognition, and better-trained employees. The major types of corporate retailing are corporate chain stores, voluntary chains, retailer cooperatives, consumer cooperatives, franchise organizations, and merchandising conglomerates. The retail environment has changed considerably in recent years, as new retail forms have emerged, intertype and store-based vs. non-store-based competition has increased, the rise of giant retailers has been matched by the decline of middle-market retailers, investment in technology and global expansion has grown, and shopper marketing inside stores has become a priority. Like all marketers, retailers must prepare marketing plans that include decisions on target markets, product assortment and procurement, services and store atmosphere, store activities and experiences, communications, and location. Wholesaling includes all the activities involved in selling goods or services to those who buy for resale or business use. Wholesalers can perform functions better and more cost-effectively than the manufacturer can. These functions include selling and promoting, buying and assortment building, bulk breaking, warehousing, transportation, financing, risk bearing, dissemination of market information, and provision of management services and consulting. There are four types of wholesalers: merchant wholesalers; brokers and agents; manufacturers’ and retailers’ sales branches, sales offices, and purchasing offices; and miscellaneous wholesalers such as agricultural assemblers and auction companies. Like retailers, wholesalers must decide on target markets, product assortment and services, price, promotion, and place. The most successful wholesalers are those who adapt their services to meet suppliers’ and target customers’ needs. Producers of physical products and services must decide on market logistics—the best way to store and move goods and services to market destinations; to coordinate the activities of suppliers, purchasing agents, manufacturers, marketers, channel members, and customers. Major gains in logistical efficiency have come from advances in information technology. OPENING THOUGHT Most students are familiar with the retailer in which they have bought products. What is not so obvious to the students is that retailers, wholesalers, and distributors pass through stages of growth and decline. Students, for the most part, will be familiar with some of the retailer concepts described in the chapter, but not all. Second, non-store retailing may not be a familiar concept to some students. Others might have some familiarity with nonstore retailing in terms of summer or part-time jobs at a mall. The increasing “power” of retailers, especially mega-retailers, on their manufacturers and channels of distribution will not be evident to the students. Wholesalers and distributors are generally “unseen” and thus the students will probably not have any previous information about how these channels work or even that they existed. Guest speakers from the wholesaling or distribution industry can give insights to the students about the services they perform and the “value” that they add to the end consumer. Students will be familiar with such industries as trucking and logistics firms but not about inventory management or control. The instructor is encouraged to spend some additional class time on the concepts of the market-logistic formula, order costs, set-up costs, processing costs, and inventory carrying costs. Accounting and financial textbooks would be a good source of additional information and explanations of how these costs affect the overall corporation. TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS At this point in the semester-long project for the “fictional” product or service, students should be directed to turn in their retailing, wholesaling, and logistical marketing plans. Those students who are acting in the role of providing a new “service” should include here their plans for locations, hours of operations, and how their “service” plans on managing demand and capacity issues. This chapter is an appropriate one for out-of-class assignments because many students will not have to be encouraged to “go shopping.” The chapter identifies four levels of service in retailing—self-service, self-selection, limited service, and fullservice. Students are to visit at least one of each type of the described retailers and are to comment on each retailer’s positioning. In their shopping trips, did students experience a dissonance between the service they received and their initial characterization of the store? In other words, did the student receive “better” service than they initially expected to receive from a self or limited service retailer? Did the students experience a “lack” of service from the store they perceived as “full service”? If either of these conditions occurred, ask the students to postulate a causal relationship for the occurrence. Marketing Plan: Retailers and wholesalers play a critical role in marketing strategy because of their relationships with the final consumer. Manufacturers need to manage their connections with these channel intermediaries. Based on their previous strategic choices, get students to respond to the following questions about wholesaling and retailing strategy: What types of retailers will be most appropriate for their product or service? What are advantages and disadvantages of selling through these types of retailers? What role should wholesalers play in the distribution strategy? Why? What market logistics issues must be considered? Get students to summarize their answers in a written marketing plan or type them into the Marketing Mix and Channels sections of Marketing Plan Pro. ASSIGNMENTS Two models for department store success seem to be emerging—one with a strong retail brand approach and one as a showcase store. In small groups, students are to investigate these two differing approaches to department store retailing and comment on the future of these concepts using the concepts defined in this chapter (target market selection, product assortment decisions, etc. and Table 16.3 Retail Category Management). Atmospherics is an important component of store attractiveness. Every store has its own unique look, feel, and smell. Yet each consumer may react differently to each of these elements. In groups composed of male and female students, ask the students to visit three retailers of their own choosing and comment on how the store atmospherics affected them personally and then group the findings by sex. Why are there such differences? What can a store do to appeal to both sexes? In his 1999 book entitled, “How we Buy,” Simon & Schuster, New York, 1999, Paco Underhill examines the shopping phenomena that consumers and retailers alike need to know. Students should be assigned to read this book and determine if the lessons learned are relevant today for marketers. New retail forms and combinations is one of the trends in retailing today. Examples include supermarkets with banks and bookstores featuring coffee shops. After reading the material in this chapter, ask the students to “speculate” on potential new retail forms or retail combinations yet undeveloped. In their selection of a “new” form of retailing or combination of retailers, ask the students to defend their choices using the ideas and concepts presented in this chapter. Shop—that is, have students visit as many differing types of retailers (and non-store retailers) as they can over the course of a week. For each shopping occasion, ask the students to record their impressions of the store’s atmosphere, location, service levels, product selections, and others. Then rank their preferences from best to least and be able to explain why they assigned the ranking to each store in terms of the material covered in this chapter. Store brands, or private label brands are popular in Asia. Students should purchase differing store brands/private label items (ice cream is a favorite choice for this experiment and can be conducted in class), the national branded product, and do a taste test comparing the store brand and the national brand. Does the store or private label item meet or exceed the taste and quality of the national brand? What are the implications for national branded products if store/private label items meet or exceed the national brand? What should or could marketers’ do to differentiate these products? END-OF-CHAPTER SUPPORT MARKETING DEBATE—Should National Brand Manufacturers Also Supply Private Label Brands? One controversial move by some marketers of major brands is to supply private label makers. For example, Ralston-Purina and Heinz have admitted to supplying products—sometimes lower in quality—to be used for private labels. However, other marketers criticize this “if you can’t beat them, join them” strategy, maintaining that these actions, if revealed, may create confusion or even reinforce a perception by consumers that all brands in a category are essentially the same. Take a position: ‘Manufacturers should feel free to sell private labels as a source of revenue’ versus ‘National manufacturers should never get involved with private labels’. Pro: Let us begin by defining buyers: Buyers buy products or use services to meet a particular need or want. Buyers of or for private label products do not act any differently than consumers of individual products in their buying processes. Manufacturers negatively impacted by the surge of private label products, actually made changes in consumer buying patterns ignored or missed by the national brands, have the fiduciary responsibility to their firms to maximize sales wherever possible. The opportunities to produce private label products may be and often is the salvation of the branded firm in offset production capacity and cash flow. The major issue here is that the national branded firm did not anticipate the changes in consumers buying patterns in time to produce a national “flanker” brand to meet these consumer buying pattern changes. In the production and distribution of private labeled products, there is enough differentiation available to distinguish national brands from private label brands in quality, variety, size, packaging costs, and others that the consumer should not be confused or perceive that all brands in a category are essentially the same. Con: Branded products are the lifeblood of the firm. In fact, branded products contribute to the company’s overall financial health by commanding a premium to stock prices due to consumer loyalty and familiarity with the brands. When a manufacturer partakes on the path of producing private labeled products, for short-term gains, they begin the degradation of their branded products. If manufacturers feel the pressures of lost sales—lost market shares to the private labeled products—the solution would be to undergo the development of “superior branded products” offering the consumer increased value, convenience, convenient packaging, and more to increase the loyalty and value of their branded products to the consumer. The manufacturer always has the “option” of introducing “flanker” brands to compete against private labels thereby maintaining production capacities and cash flows. MARKETING DISCUSSION Think of your favorite stores. What do they do that encourages your loyalty? What do you like about the in-store experience? Suggested Response: Student answers will differ depending upon their favorite stores. However, all answers should be explained in terms of loyalty status: Hard-core loyals, Split loyals or Shifting loyals; and each store’s atmosphere, location, service levels, product selections etc. My favorite stores, like Apple and Trader Joe’s, encourage loyalty through excellent customer service, personalized experiences, and consistent product quality. I appreciate the in-store experience for its friendly atmosphere, knowledgeable staff, and well-organized, inviting layouts that enhance my shopping experience. Marketing Lesson: UNIQLO Would Uniqlo’s model work for other retailers? Suggested Answer: Uniqlo’s model is its Specialty Store Retailer of Private Label Apparel (SPA) that encompasses all stages of the business from design and production to final sale. This model benefits from economies of scale which in turn is a result of production at a massive scale. This model would therefore only work if a late entry retailer has the necessary financial backing. Uniqlo's model, which emphasizes simplicity, quality, and affordability with a focus on basic apparel, could be successful for other retailers if they adapt it to fit their target market and product offerings. Emphasizing efficient supply chain management, innovative product development, and customer-centric strategies are key elements that could be replicated across different retail sectors. Do you think Uniqlo’s all-encompassing target group cutting across age, economic, and culture too general? Why or why not? Suggested Answer: Students answers may vary. But some at least will highlight how Uniqlo designs, manufactures, markets, and sells casual wear that can be worn by anyone, any day. Uniqlo provides customers with the apparel piece that they need to create their own style. The whole from the multiple parts enables the user regardless of age, gender, occupation etc. to generate some form of personal expression, much like the personal expression that is achieved through the purchase of an outfit from a single collection. Uniqlo's all-encompassing target group cutting across age, economic status, and culture has proven effective because it allows the brand to reach a broad customer base with its versatile and affordable clothing. This approach appeals to consumers seeking value and quality, fostering a diverse customer demographic that appreciates Uniqlo's accessible and inclusive brand ethos. However, refining targeting strategies for specific segments within this broad audience could further optimize marketing efforts and customer engagement. Is Uniqlo a direct competitor to Zara? How are they similar or different? Suggested Answer: Yes. Uniqlo’s biggest rival in Asia is clearly Zara. Both brands target the middle class seeking variety, both are priced affordably but this really depends on how customers choose to piece their outfits together. As mentioned earlier, Uniqlo provides customers with the apparel piece that they need to create their own style while Zara also sells ensembles for various occasions. Get students to research and create a list of the brands’ similarities and differences. Uniqlo and Zara are both global fashion retailers but differ in their approach: Uniqlo focuses on basics and functionality with affordable pricing, while Zara emphasizes fast fashion with trend-driven designs and rapid product turnover, catering to different consumer preferences despite some overlap in market segments. Marketing Lesson: ZARA Would Zara’s model work for other retailers? Why or why not? Suggested Answer: As the article says, the key to the company’s success comes from having complete control over all the parts of its business—design, production, distribution, and retailing. No other retailer can claim to have total control over all aspects of its business, unless they start a business from scratch. Zara's model, centered on fast fashion with quick design-to-store turnaround, may not work universally due to its high operational complexity and reliance on efficient supply chain and inventory management. However, aspects like trend responsiveness and agile production could be adapted by retailers willing to invest in similar capabilities. How is Zara going to expand successfully all over the world with the same level of speed and instant fashion? Can this model work in Asia where there are many alternative cheaper substitutes? Suggested Answer: The key to their success as they expand has to be in logistics, manufacturing, and distribution efficiencies and effectiveness. As the article states, “50% of its production facilities nearby is key to the success.” So as Zara expands, it must locate its production facilities “nearby” its stores for the model to succeed. In Asia, the threat of counterfeiting and piracy are ever present. If Zara continues to target the middle class, quality control and brand positioning will be the keys to success since counterfeiting and piracy spread as quickly as Zara’s “fast fashion”. Zara's global expansion success hinges on adapting its fast fashion model to local tastes, enhancing supply chain efficiency, and leveraging digital platforms. While facing cheaper alternatives in Asia, its focus on quality, trendiness, and customer experience may still resonate, bolstered by localized strategies and competitive pricing adjustments. DETAILED CHAPTER OUTLINE In the previous chapter, we examined marketing intermediaries from the viewpoint of manufacturers who wanted to build and manage marketing channels. In this chapter, we view these intermediaries—retailers, wholesalers, and logistical organizations—as requiring and forging their own marketing strategies. Intermediaries also strive for marketing excellence and can reap the benefits like any other company. The more successful intermediaries use strategic planning, advance information systems, and sophisticated marketing tools. They segment their markets, improve their market targeting and positioning, and aggressively pursue market expansion and diversification strategies. RETAILING Retailing includes all the activities involved in selling goods or services directly to final consumers for personal, non-business use. A retailer or retail store is any business enterprise whose sales volume comes primarily from retailing. Any organization selling to final consumers — whether it is a manufacturer, wholesaler, or retailer — is doing retailing. TYPES OF RETAILERS Consumers today can shop for goods and services at store retailers, non-store retailers, and retail organizations. The most important retail-store types are described in Table 16.1. Retailers can position themselves as offering one of four levels of service: Self-service Self-selection Limited service Full service Non-Store Retailing Although the overwhelming bulk of goods and services—97%—is sold through stores, non-store retailing has been growing much faster than store retailing. Non-store retailing falls into four major categories: Direct selling (also called multilevel selling and network marketing) 2. Direct Marketing (includes telemarketing, television direct-response marketing, and electronic shopping) Automatic vending Buying service Corporate Retailing and Franchising Although many retail stores are independently owned, an increasing number are part of some form of corporate retailing. These organizations achieve economies of scale, greater purchasing power, wider brand recognition, and better-trained employees than independent stores can usually gain alone. The major types of corporate retailing: corporate chain stores, voluntary chains, retailer and consumer cooperatives, franchises, and merchandising conglomerates. Table 16.2 Major Types of Corporate Retail Organizations Marketing Insight: Enhancing Online Shopping in Asia Customers continue to validate the concept of e-commerce with their wallets in the more developed Asian countries. Marketing Insight: Franchise Fever in Asia Franchising is the most common route to becoming an entrepreneur. It is nearly impossible to drive down the streets of major Asian capitals without seeing a McDonald’s, a Starbucks, or a Hard Rock Café. How does a franchising system work? THE NEW RETAIL ENVIRONMENT In the past, retailers secured customer loyalty by offering convenient locations, special or unique assortments of goods, greater or better services than competitors, and store credit cards. All these have changed. Here are some retail developments that are changing the way consumers buy and manufacturers and retailers sell: New retail forms and combinations—To better satisfy customers’ need for convenience, a variety of new retail forms have emerged. Bookstores feature coffee shops. Gas stations include food stores. Some retailers are experimenting with limited-time-only stores called “pop-ups” that let retailers promote brands, reach seasonal shoppers for a few weeks in busy areas, and create buzz. Growth of intertype competition—Department stores do not just compete with other department stores. They also compete with different types of stores— discount stores, catalog showrooms, department stores—for the same consumers by carrying the same type of merchandise. Competition between store-based and non-store-based retailing—Consumers now receive sales offers through direct mail letters and catalogs, television, mobile phones, and the Internet. These non-store-based retailers are taking business away from store-based retailers. Growth of giant retailers—Through their superior information systems, logistical systems, and buying power, giant retailers are able to deliver good service and immense volumes of products at appealing prices to masses of consumers. The traditional trade is alive and well—Despite the growth of modern retailing in Asia, traditional retail formats are still abundant in many parts of the region. India, the Philippines, Sri Lanka, and Indonesia have many grocery stores. Growing investment in technology—Modern retailers use technology to produce better forecasts, control inventory costs, and order electronically from suppliers. Global profile of major retailers—Retailers with unique formats and strong brand positioning are increasingly appearing in other countries. Upgrading of Asian retailers—Some Asian retailers are reacting strongly to the entry of foreign players. Larger Asian department stores have established their own hypermarkets and discount outlets as a defensive strategy against foreign chains. Growth of factory outlets—Factory outlets are booming business in China and Malaysia. Johor Premium Outlet, a joint venture between U.S.-based Simon Property Group and Malaysia’s Genting Group, attracted more than one million shoppers to its Armani, Burberry, and Calvin Klein outlets, among others, in the first three months of operation. MARKETING DECISIONS We will examine retailers’ marketing decisions in the areas of target market, product assortment and procurement, services and store atmosphere, price, communication, and location. Target Market Until the target market is defined and profiled, the retailer cannot make consistent decisions on product assortment, store décor, advertising messages and media, price, and service levels. Some retailers are slicing the market into finer and finer segments and introducing new lines of stores to provide a more relevant set of offerings to exploit niche markets. CHANNELS On the basis of a target market analysis and other considerations reviewed in Chapter 15, retailers must decide which channels to employ to reach their customers. Increasingly, the answer is multiple channels. Channels should be designed to work together effectively. Product Assortment The retailer’s product assortment must match the target market’s shopping expectations in breadth and depth. A restaurant can offer a narrow and shallow assortment (small lunch counters), a narrow and deep assortment (delicatessen), a broad and shallow assortment (coffeeshop), or a broad and deep assortment (food court). Table 16.3 Retail Category Management The real challenge begins after defining the store’s product assortment, and that is to develop a product-differentiation strategy. To better differentiate themselves and generate consumer interest, some luxury retailers are making their stores and merchandise more varied. Here are some possibilities: Feature exclusive national brands that are not available at competing retailers. Feature mostly private branded merchandise. Feature blockbuster distinctive merchandise events. Feature surprise or ever-changing merchandise. Feature the latest or newest merchandise first. Offer merchandise customizing services. Offer a highly targeted assortment. Procurement The retailer must establish merchandise sources, policies, and practices. In the corporate headquarters, specialist buyers (sometimes called merchandise managers) are responsible for developing brand assortments and listening to salespersons’ presentations. Retailers are rapidly improving their skills in demand forecasting, merchandising selection, stock control, space allocation, and display. Some stores are experimenting with radio frequency identification (RFID) systems made up of “smart” tags—microchips attached to tiny radio antennas—and electronic readers. The smart tags can be embedded on products or stuck on labels, and when the tag is near a reader, it transmits a unique identifying number to its computer database. When retailers study the economics of buying and selling individual products, they typically find that a third of their square footage is being tied up by products that do not make an economic profit (above the cost of capital) for the store. Another third of the space is typically allocated to product categories that have break-even economics. And the final third of space actually creates more than 100 percent of the economic profit. Yet, most retailers are unaware of which third of their products is generating the profit. Stores are using Direct Product Profitability (DPP) to measure a product’s handling costs (receiving, moving to storage, paperwork, selecting, checking, loading, and space cost) from the time it reaches the warehouse until a customer buys it in the retail store. Prices Prices are a key positioning factor and must be decided in relation to the target market. Most retailers fall into the high-markup, lower-volume group (fine specialty stores) or the low-markup, higher-volume group (mass merchandisers and discount stores). Services Retailers must decide on the services mix to offer customers: Pre-purchase services Post-purchase services Ancillary services Another differentiator is unerringly reliable customer service, whether face-to-face, across phone lines, or via online chat. Store Atmosphere Atmosphere is another element in the store arsenal. Store Activities and Experiences The growth of e-commerce has forced traditional brick-and-mortar retailers to respond. A) In addition to the natural advantages over e-commerce: Products that consumers can actually see, touch, and test Real-life customer service No delivery lag time B) They also provide a shopping experience as a strong differentiator Marketing Memo: Helping Stores to Sell In the pursuit of higher sales volume, retailers are studying their store environments for ways to improve the shopper experience. Paco Underhill is the managing director of the retail consultant Envirosell Inc. He offers seven pieces of advice for fine-tuning retail space to keep shoppers spending. Communications Retailers use a wide range of communication tools to generate traffic and purchases. Each retailer must use communications that support and reinforce its image positioning. Location Decisions Retailers are accustomed to saying that the three keys to success are “location, location, and location.” A) Retailers can locate their stores in the: Central business district Regional shopping centers Community shopping centers Shopping strips A location within a larger store Stand-alone stores Given the relationship between high traffic and high rents, retailers must decide on the most advantageous locations for their outlets, using traffic count, surveys of consumer shopping habits, and analysis of competitive locations. Marketing Insight: Feng Shui and its Application to Retailing and Marketing in the Far East Marketers in Asia have come to recognize that the supernatural attracts many Asians. Many folklores, taboos, and superstitious and religious connotations by colors, numbers, and symbols exist in Asia today. Marketers should thus capitalize on Asians’ beliefs in the supernatural strategically. PRIVATE LABELS A private label (also called reseller, store, house, or distributor brands) is one which both retailers and wholesalers develop. A) Some experts believe that 50 percent is the natural limit for carrying private brands because: Consumers prefer certain national brands. Many product categories are not feasible or attractive on a private-brand basis. ROLE OF PRIVATE LABELS Why do intermediaries sponsor their own brands? They are more profitable than national brands. Retailers develop exclusive store brands to differentiate themselves from competitors. Generics are unbranded, plainly packaged, less expensive versions of common products. They offer standard or lower quality at a price that may be as much as 20 to 40 percent lower than nationally advertised brands. As well as 10 to 20 percent lower than private label brands. The lower price of generics is made possible by lower-quality ingredients, lowercost labeling and packaging, and minimal advertising. PRIVATE-LABEL SUCCESS FACTORS In the confrontation between manufacturers’ and private label brands, retailers have many advantages and increasing market power. Many consumers have become more price sensitive, a trend reinforced by the continuous price specials that have trained a generation to buy on price. Competing manufacturers and retailers copy and duplicate the quality and features of the best brands in a category, reducing physical product differentiation. Moreover, by cutting marketing communications budgets, some firms have made it harder to create any intangible differences in brand image. Marketing Insight: Manufacturer’s Response to the Private Label Threat Jan-Benedict E.M. Steenkamp and Nirmalya Kumar offer four strategic recommendations for manufacturers to compete against or collaborate with private labels. WHOLESALING Wholesaling includes all the activities involved in selling goods and services to those who buy for resale or business use. Wholesaling excludes manufacturers and farmers because they are engaged primarily in production, and it excludes retailers. In general, wholesalers are used when they are more efficient in performing one or more of the following functions: Selling and promoting Buying and assortment building Bulk breaking Warehousing Transportation Financing Risk bearing Market information Management services and counseling TRENDS IN WHOLESALING Wholesaler-distributors are facing pressures from new sources of competition, demanding customers, new technologies, and more direct-buying programs by large industrial, institutional, and retail buyers. James Narus and James Anderson interviewed leading industrial distributors and identified four ways they strengthened their relationships with manufacturers: They sought a clear agreement with their manufacturers about their expected functions in the marketing channel; They gained insight into the manufacturers’ requirements by visiting their plants and attending manufacturer association conventions and trade shows; They fulfilled their commitments to the manufacturer by meeting the volume targets, paying bills promptly, and feeding back customer information to their manufacturers; and They identified and offered value-added services to help their suppliers. Asian wholesalers are also beginning to reap the benefits of strengthened relationships with their principals. MARKET LOGISTICS Physical distribution starts at the factory. Managers choose a set of warehouses (stocking points) and transportation carriers that will deliver the goods to final destinations in the desired time or at the lowest total cost. Physical distribution has now been expanded into the broader concept of supply chain management (SCM). Supply chain management starts before the physical distribution: Procuring the right products Converting them efficiently into finished products Dispatching them to their final destinations The supply chain perspective can help a company identify superior suppliers and distributors and help them improve productivity. Market logistics involves planning the infrastructure to meet demand, then implementing and controlling the physical flows of materials and final goods from points of origin to points of use, to meet customer requirements at a profit. Market logistics represent a major challenge for distributors in Asia. Geographic distances, population density, and supporting infrastructure impact market access and logistics efficiency. Market logistic has four steps: Deciding on the company’s value proposition to its customers Deciding on the best channel design and network strategy for reaching the customers Developing operational excellence in sales forecasting, warehouse management, transportation management, and materials management Implementing the solution with the best information systems, equipment, policies, and procedures Market logistics leads to an examination of the most efficient way to deliver value. INTEGRATED LOGISTICS SYSTEMS The market logistics task calls for integrated logistics systems (ILS), involving: Materials management Material flow systems Physical distribution aided by information technology Information systems play a critical role in managing market logistics especially Market logistics involves several activities Sales forecasting The company schedules distribution, production, and inventory levels Production plans Finished goods inventory The total cost of market logistics can amount to 30 to 40 percent of the product’s cost. Lower market-logistics cost will permit lower prices. Many firms are embracing lean manufacturing, to produce goods with minimal waste of time, materials, and money. MARKET-LOGISTICS OBJECTIVES Many companies state their market-logistics objective as “getting the right goods to the right places at the right time for the least cost.” No system can simultaneously maximize customer service and minimize distribution cost. Maximum customer service implies large inventories, premium transportation, and multiple warehouses, all of which raise market-logistics costs. Given that market-logistics activities involve strong trade-offs, decisions must be made on a total system basis. The starting point is to study what customers require and what competitors are offering. Customers are interested in on-time delivery, supplier willingness to meet emergency needs, careful handling of merchandise, supplier willingness to take back defective goods and resupply them quickly. Given the market-logistic objectives, the company must design a system that will minimize the cost of achieving these objectives. Each possible market-logistics system will lead to the following costs: 1) M = T + FW + VW + S Where M = total market-logistic cost of proposed system. Where T = total freight cost of proposed system. Where FW = total fixed warehouse cost of proposed system. Where VW = total variable warehouse costs (including inventory). Where S = total cost of lost sales due to average delivery delay under proposed system. MARKET-LOGISTICS DECISIONS Four major decisions must be made with regard to market logistics: A) How should orders be handled (order processing)? Where should stocks be located (warehousing)? How much stock should be held (inventory)? How should goods be shipped (transportation)? Order Processing Most companies today are trying to shorten the order-to-payment cycle. That is the elapsed time between an order’s receipt, delivery, and payment. The longer this cycle takes the lower the customer’s satisfaction and the lower the company’s profits. Warehousing Every company has to store finished goods until they are sold, because production and consumption cycles rarely match. The storage function helps smooth discrepancies between production and quantities desired by the market. The company must decide on the number of inventory stocking locations: 1) More locations means that goods can be delivered to customers more quickly. 2) More locations also means higher warehousing and inventory costs. C) Storage warehouses store goods for moderate-to-long periods of time. Distribution warehouses receive goods from various company plants and suppliers and move them out as soon as possible. Automated warehouses employ advanced materials-handling systems under the control of a central computer. Some warehouses are now taking on activities formerly done in the plant. Inventory Salespeople would like their companies to carry enough stock to fill all customer orders immediately. However, this is not cost-effective. Inventory cost increases at an accelerating rate as the customer-service level approaches 100%. Management needs to know how much sales and profits would increase as a result of carrying larger inventories and promising faster order fulfillment times, and then make a decision. Inventory decision making involves knowing when to order and how much to order. As inventory draws down, management must know at what stock level to place a new order. This stock level is called the order (reorder) point. The order point should balance the risks of stockout against the costs of overstock. The company needs to balance order-processing costs and inventory-carrying costs. Order-processing costs for a manufacturer consist of setup costs and running costs (operating costs when production is running). Order-processing costs must be compared with inventory-carrying costs. The larger the average stock carried, the higher the inventory-carrying costs. 2) Carrying costs include: The optimal order quantity can be determined by observing how order-processing costs and inventory-carrying costs sum up at different order levels. Companies are reducing their inventory costs by treating inventory items differently. They are positioning inventory items according to risk and opportunity. They are also keeping slow-moving items in a central location while keeping faster moving items closer to customers. The ultimate answer to carrying near-zero inventory is to build for order, not for stock. Transportation Transportation choices will affect product pricing, on-time delivery performance, and the conditions of the goods upon arrival, all of which affects customer satisfaction. Shippers are increasingly combining two or more transportation modes, thanks to containerization. Containerization consists of putting the goods in boxes or trailers that are easy to transfer between two transportation modes. Piggyback—rail and trucks. Fishyback—water and trucks. Trainship—water and rail. 4) Airtruck—air and trucks. Shippers can choose from private, contract, and common carriers. If the shipper owns its own truck or air fleet, the shipper becomes a private carrier. A contract carrier is an independent organization selling transportation services to others on a contract basis. A common carrier provides services between predetermined points on a scheduled basis and is available to all shippers at standard rates. Organizational Lessons Market-logistics strategies must be derived from business strategies, rather than solely from cost considerations. The company should set its logistics goals to match or exceed competitors’ service standards and should involve members of all relevant teams in the planning process. Today’s stronger demands for logistical support from large customers will increase suppliers’ costs. Suppliers cannot reject many of these requests, but at least they can set up different logistical programs with different service levels and customer charges. Smart companies will adjust their offerings to each major customer’s requirements. Instructor Manual for Marketing Management: A South Asian Perspective Philip Kotler, Kevin Lane Keller, Abraham Koshy, Mithileshwar Jha 9789810687977, 9780132102926