Ebook Marketing an introduction (13th edition): Part 2

(BQ) Part 2 book Marketing an introduction has contents: Marketing channels - delivering customer value; engaging customers and communicating customer value - advertising and public relations; personal selling and sales promotion; the global marketplace,...and other contents.

Part 2: UnDerstanDing the MarketPlace anD cUstoMer ValUe (chaPters 3–5)

Part 3: Designing a cUstoMer ValUe-DriVen strategy anD Mix (chaPters 6–14)

Part 4: extenDing Marketing (chaPters 15–16)

10

objectiVe 10-1 explain why companies use marketing

channels and discuss the functions these channels perform

Supply Chains and the Value Delivery Network (328–329); The

Nature and Importance of Marketing Channels (329–331)

objectiVe 10-2 Discuss how channel members interact

and how they organize to perform the work of the channel

Channel Behavior and Organization (332–339)

objectiVe 10-3 identify the major channel alternatives

open to a company Channel Design Decisions (339–343)

Marketing channels Delivering customer Value

objectiVe 10-4 explain how companies select, motivate, and evaluate channel members Channel

Management Decisions (343–346); Public Policy and Distribution Decisions (347)

objectiVe 10-5 Discuss the nature and importance of marketing logistics and integrated supply chain manage- ment Marketing Logistics and Supply Chain Management

(347–354)

Previewing the concepts

We now look at the third marketing mix tool—distribution companies 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 marketing channel as such, a firm’s

success depends not only on how well it performs but also on how well its entire

market-ing channel competes with competitors’ channels the first part of this chapter explores the nature of marketing channels and the marketer’s channel design and management decisions

We then examine physical distribution—or logistics—an area that has grown dramatically

in importance and sophistication in the next chapter, we’ll look more closely at two major channel intermediaries: retailers and wholesalers.

We start by looking at Uber, the fast-growing, app-based car-hailing service that has recently sprouted up in cities around the world Uber has radically reinvented urban transpor- tation channels, posing a serious threat to conventional taxi cab and car service companies

as Uber grows, traditional competitors must innovate or risk being pushed aside.

first stop

Uber: Radically Reshaping Urban

Transportation Channels

It’s rare But every now and then a company comes along

that completely disrupts the traditional ways of distributing a

product or service FedEx revolutionized small package

deliv-ery channels; Amazon.com radically transformed online

sell-ing; and Apple’s iTunes and iPod turned music distribution on

its ear Now comes Uber, the app-based ride service that is

revolutionizing urban transportation Fast-growing Uber is

giv-ing conventional taxi cab and car services a real ride for their

money In just five short years, Uber has revved up operations

in 270 major cities in 55 countries, already booking more than

$1 billion in rides annually

Why are so many customers around the world bypassing

good old taxi cabs in favor of newcomer Uber? It’s all about

convenience, ease of use, and peace of mind No more

step-ping out into busy city streets to wave down a passing cab Instead,

Uber’s smartphone app lets passengers hail the nearest cab or limo

from any location with the touch of a button, then track the vehicle

on a map as it approaches The Uber app gives riders an accurate

estimate in advance of the fare to their destinations (usually less

than that charged by a regular cab), eliminating guesswork and

un-certainty After the ride, passengers simply exit and walk away Uber

automatically pays the driver (including tip) from the passenger’s

pre-paid Uber account, eliminating the often inconvenient and awkward

moment of payment And it’s the same process all over the world,

from San Francisco, London, Paris, or Abu Dhabi to Ashville, North

Carolina, or Athens, Georgia

Compare the Uber experience to the uncertain and often

unset-tling experience of using a standard taxi cab One business reporter

describes waiting in line at a taxi stand while a driver tried to convince

another would-be passenger—a total stranger—to share the cab,

thereby increasing his fare The cab itself was ancient and filthy, with

ripped and worn seats During the entire ride, the cabbie carried on

a phone conversation in a foreign language via his headset, causing

safety concerns while distractedly navigating busy city streets The

driver spoke only poor, hard-to-understand English “That turned out

to be a good thing,” says the reporter, “because I couldn’t understand

what he was trying to say when he insulted me for not tipping him

enough.” The reporter’s conclusion: “I stepped out of the taxi in front

of my house and realized I just don’t have to put up with this

gar-bage anymore Uber has changed my life, and as God is my witness,

[wherever Uber is available] I will never take a taxi again.”

Uber actually began as a ride-sharing service Current Uber

drivers range from professional drivers who’ve switched over from

conventional cab and transportation companies to regular people

looking for a little adventure and some extra income in their spare

time All Uber drivers go through an orientation that requires

profi-ciency in a market area’s dominant language, ensuring that they can

communicate effectively with customers Uber vehicles must be at

least 2007-year models or newer, and customers can often choose

the type of car they want, from an entry-level Prius to a stretch

Mercedes S-Class A two-way rating system—by which riders rate

drivers and drivers rate riders in return—helps keep both sides on

Uber—the fast-growing app-based ride service—is revolutionizing urban transportation channels in cities around the globe

as Uber grows, traditional taxi cab services must innovate or risk extinction.

their best behavior Poorly rated drivers risk being rejected by future passengers; poorly rated passengers risk rejection by drivers, who can choose which fares they accept

Uber’s disruptive innovation has brought a breath of fresh air to

an industry begging for change Urban transportation channels have long been characterized by cartel-like relationships between cab companies and local governments, high fixed fares, poor service, and little accountability As one economics professor points out, the taxi cab industry “was ripe for entry [by startups] because everybody hates it.” The business reporter puts it more plainly: “If service at Starbucks was as routinely disappointing as service from taxis, Star-bucks would have gone out of business long ago.”

Like any innovator, upstart Uber faces some significant challenges For exam-ple, Uber has been criticized for exercising too little control over driver quality and security So far, the company has rid-den beneath the radar of industry regulators by not directly employing drivers (all Uber drivers are inde-pendent contractors) and not owning any vehicles (all vehicles are driver-owned)

However, although some cipalities have passed ordinances favorable to Uber’s operations, others are imposing new regulatory restrictions and licensing requirements

muni-Uber has also been criticized for its “surge pricing” practices—a dynamic pricing mechanism that kicks in to raise prices when demand exceeds supply, sometimes resulting in shockingly high fares and accusations of price gouging Uber justifies surge pricing by pointing to the very foundation of its business model—allowing the forces of sup-ply and demand to work Surge pricing provides an incentive for more drivers to be available during periods when passengers need them most According to Uber, if a passenger faces a higher-than-normal

Uber lets passengers hail the nearest cab from any location using its smartphone app, then track the vehicle on a map as it approaches.

PAUL J RICHARDS/AFP/Getty Images

fare because of surge pricing, the alternative without Uber would more

than likely be no taxi at all Moreover, Uber informs passengers in

ad-vance what the fares will be If they don’t like the fare, they can find

another cab, take public transportation, or walk

As Uber expands within a given market, Uber founder and CEO

Travis Kalanick envisions the increased likelihood of what he calls

“a perfect day”—a day when there is a ride available for everyone

who needs one and no surge pricing results Such a scenario is no

pipe dream In New York City recently, Uber riders experienced seven

such “perfect days” in a row

Uber’s huge success has attracted a garage full of competitors,

such as Lyft, Sidecar, Gett, Carma, and Curb Even Google (itself a

major Uber investor) is rumored to be readying the launch of its own

ride-sharing service, one that would eventually utilize the driverless

vehicles Google is developing Uber still has a huge first-to-market

advantage It has an estimated seven times the riders and 12 times

the revenues of nearest competitor Lyft, and it’s adding new

custom-ers at an estimated five times faster

Beyond the numbers, however, for now, Uber has little to fear from like-minded competitors In fact, the more competitors adopt the new model, the more the revolutionary channel will grow and thrive ver-sus traditional channels, creating opportunities for all new entrants Instead, the new distribution model poses the biggest threat to tradi-tional taxi cab and car-for-hire companies, who are now losing both customers and drivers to Uber and its competitors

Uber-mania is even catching on in other industries It seems like there’s an app-based on-demand “Uber” for almost anything these days—laundry and dry cleaning (Washio), in-home massage (Zeel), 24/7 delivery services (Postmates), and even booze (Minibar) In fact, CEO Kalanick sees no end of future applications for Uber’s services, well beyond just delivering people to their destinations Once Uber has established a dense network of cars in every city, he predicts using the network to deliver everything from packages from retailers to takeout food As Kalanick puts it, “Once you’re delivering cars in five minutes, there are a lot of other things you can deliver in five minutes.”1

s the Uber story shows, good distribution strategies can contribute strongly to customer value and create competitive advantage for a firm But 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 ships not only with customers but also with key suppliers and resellers in the company’s

relation-supply chain This relation-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 Marketers, however, have traditionally focused on the downstream side of the supply chain—the

marketing channels (or distribution channels) that look toward the customer Downstream

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

The term supply chain may be too limited, as it takes a

make-and-sell view of the business It suggests that raw

mate-rials, 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 by ing the needs of target customers, to which the company re-sponds by organizing a chain of resources and activities with the goal of creating customer value

identify-Yet, even a demand chain view of a business may be too limited because it takes a step-by-step, linear view of pur-chase-production-consumption activities Instead, most large companies today are engaged in building and managing a complex, continuously evolving value delivery network As

defined in Chapter 2, a value delivery network is made up of

the company, suppliers, distributors, and, ultimately, ers who “partner” with each other to improve the performance

custom-of the entire system For example, Pepsi makes great ages But to make and market just one of its many lines—say, its classic colas—Pepsi manages a huge network of people

bever-author comment

These are pretty hefty terms for a really

simple concept: A company can’t go it alone

in creating customer value It must work

within a broader network of partners to

accomplish this task Individual companies

and brands don’t compete; their entire

value delivery networks do

a

Value delivery network: in making and marketing even just its classic

colas, Pepsi manages a huge network of people within the company plus

thousands of outside suppliers, bottlers, retailers, and marketing service

firms that must work together to create customer value and establish the

brand’s “Pepsi: live for now” positioning.

Vasiliy Baziuk/AP Images

within the company, from marketing and sales people to folks in finance and operations

It also coordinates the efforts of thousands of suppliers, bottlers, retailers ranging from Kroger and Walmart to Papa John’s Pizza, and advertising agencies and other marketing service firms The entire network must function together to create customer value and es-tablish the brand’s “Pepsi: Live for Now” positioning

This chapter focuses on marketing channels—on the downstream side of the value delivery network We examine four major questions concerning marketing channels: What

is the nature of marketing channels, and why are they important? How do channel firms interact and organize 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 management play in attracting and satisfying customers? In the next chapter, we will look at marketing channel issues from the viewpoints of retailers and wholesalers

the nature and importance

of Marketing channels

Few producers sell their goods directly to 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 organizations 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 specialty stores, or sells directly to consumers online The firm’s sales force and communications 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 distribu-tion systems to gain a competitive advantage Enterprise Rent-A-Car revolutionized the car-rental business by setting up off-airport rental offices Apple turned the retail music business on its head by selling music for the iPod via the Internet on iTunes FedEx’s cre-ative and imposing distribution system made it a leader in express package delivery And Amazon.com forever changed the face of retailing and became the Walmart of the Internet

by selling anything and everything without using physical stores

Distribution channel decisions often involve long-term commitments to other firms For example, companies such as Ford, McDonald’s, or Nike can easily change their advertising, pricing, or promotion programs They can scrap old products and introduce 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 re-place these channels with company-owned stores or Internet sites if the conditions change Therefore, management must design its channels carefully, with an eye on both today’s likely selling environment and tomorrow’s as well

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 prod-ucts Producers use intermediaries because they create greater efficiency in making goods available to target markets Through their contacts, experience, specialization, 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 work-ing through one distributor, which contacts the three customers This system requires only

Value delivery network

A network composed of the company,

suppliers, distributors, and, ultimately,

customers who partner with each other

to improve the performance of the entire

system in delivering customer value.

author comment

In this section, we look at the

downstream side of the value delivery

network—the marketing channel

organizations that connect the company

and its customers To understand their

value, imagine life without retailers—

say, without grocery stores

or department stores

Marketing channel (distribution

channel)

A set of interdependent organizations

that help make a product or service

available for use or consumption by the

consumer or business user.

six contacts In this way, intermediaries reduce the amount of work that must be done by both producers and consumers.

From the economic system’s 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 desired by consumers

For example, Unilever makes millions of bars of Lever 2000 hand soap each week However, you most likely only want to buy a few bars at a time Therefore, big food, drug, and discount retailers, such as Safeway, Walgreens, and Target, buy Lever 2000 by the truckload and stock it on their stores’ shelves In turn, you can buy a single bar of Lever 2000 along with

a shopping cart full of small quantities of toothpaste, shampoo, and other related products as you need them Thus, intermediaries play an important role in matching supply and demand

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 use them Members of the marketing channel perform many key func-tions Some help to complete transactions:

●

● Information Gathering and distributing information about consumers, producers,

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

● Matching Shaping offers to meet the buyer’s needs, including activities such as

manufacturing, grading, assembling, and packaging

●

● Negotiation Reaching an agreement on price and other terms so that ownership

or possession can be transferred

Others help to fulfill the completed transactions:

● 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

functions, its costs go up; therefore, its prices must be higher When some of these tions are shifted to intermediaries, the producer’s costs and prices may be lower, but the

func-A Number of contacts without a distributor

think about life without

grocery retailers How

would you go about

buying that 12-pack of

Coke or any of the

hundreds of other items

that you now routinely

drop into your shopping

cart?

figure 10.1 how a Distributor reduces the number of channel transactions

intermediaries 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 that 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 both the producer and the final consumer perform some work, they are part of every channel

The number of intermediary levels indicates the length of a channel figure 10.2

shows both consumer and business channels of different lengths Figure 10.2A shows

several common consumer distribution channels Channel 1, called a direct

market-ing channel, has no intermediary levels—the company sells directly to consumers For

example, Mary Kay Cosmetics and Amway sell their products through home and office sales parties and online Web sites and social media; companies ranging from GEICO in-surance to Omaha Steaks sell directly to customers via the Internet, mobile, and telephone

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, which in turn sell to these customers Although consumer and business marketing channels with even more levels can sometimes be found, these are less common From the producer’s point of view, a greater number

of levels means less control and greater channel complexity Moreover, all the

institu-tions 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 level

A layer of intermediaries that performs

some work in bringing the product and

its ownership closer to the final buyer.

Direct marketing channel

A marketing channel that has no

intermediary levels.

indirect marketing channel

A marketing channel containing one or

more intermediary levels.

Retailer

A Consumer marketing channels

Wholesaler

Channel 3 Channel 2

or sales branch

Channel 3 Channel 2

Channel 1

Producer

Business distributor distributorBusiness

Business customer customerBusiness

Producer Producer

Business customer

Using indirect channels, the company uses one or more levels of intermediaries to help bring its products

to final buyers Examples: most of the things you buy—everything from toothpaste to cameras to cars.

Using direct channels, a company sells directly to consumers (no surprise there!)

Examples: GEICO and Amway.

figure 10.2 consumer and

business Marketing channels

channel behavior and organization

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

at channel behavior and how members organize to do the work of the channel

channel behavior

A marketing channel consists of firms that have partnered for their common good Each nel member depends on the others For example, a Ford dealer depends on Ford to design cars that meet customer needs In turn, Ford depends on the dealer to engage customers, persuade them to buy Ford cars, and service the cars after the sale Each Ford dealer also depends on other dealers to provide good sales and service that will uphold the brand’s reputation In fact, the success of individual Ford dealers depends on how well the entire Ford marketing channel competes with the channels of Toyota, GM, and other auto manufacturers

chan-Each channel member plays a specialized role in the channel For example, Samsung’s role is to produce electronics products that consumers will covet and create demand through national advertising Best Buy’s role is to display these Samsung products in con-venient locations, answer buyers’ questions, and complete sales The channel will be most effective when each member assumes the tasks it can do best

Ideally, because the success of individual channel members depends on the overall channel’s success, all channel firms should work together smoothly They should under-stand and accept their roles, coordinate their activities, and cooperate to attain overall chan-nel 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 channel members depend on one another, they often act alone in their own short-run best interests 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 Ford dealers in Chicago might complain that other dealers in the city steal sales from them by pricing too low or advertising outside their assigned territories Or Holiday Inn franchi-sees might complain about other Holiday Inn operators overcharging guests or giving poor service, hurting the overall Holiday Inn image

Vertical conflict, conflict between different levels of

the same channel, is even more common For example, McDonald’s has recently faced growing conflict with its corps of almost 3,000 independent franchisees:2

In a recent company Webcast, based on rising customer complaints that service isn’t fast or friendly enough, McDonald’s told its franchisees that their cashiers need

to smile more At the same time, it seems, the franchisees weren’t very happy with McDonald’s, either A recent survey of franchise owners reflected growing franchisee discontent with the corporation Much of the conflict stems from a recent slowdown in systemwide sales that has both sides on edge The most basic conflicts are financial McDonald’s makes its money from franchi- see royalties based on total system sales In contrast, franchisees make money on margins—what’s left over after their costs.

author comment

Channels are made up of more than

just boxes and arrows on paper They

are behavioral systems consisting of real

companies and people who interact

to accomplish their individual and

collective goals Like groups of people,

sometimes they work well together

and sometimes they don’t

channel conflict

Disagreements among marketing

channel members on goals, roles, and

rewards—who should do what and for

what rewards.

channel conflict: growing McDonald’s franchisee discontent may explain

the increasing lack of smiles on the faces of both McDonald’s cashiers and

customers “there’s a huge connection” between franchisee satisfaction and

customer service.

Seth Perlman/AP Images

To reverse the sales slump, McDonald’s has increased emphasis on Dollar Menu items,

a strategy that increases corporate sales but squeezes franchisee margins Franchisees are also grumbling about adding popular but more complex menu items, such as Snack Wraps, that increase the top line for McDonald’s but add preparation and staffing costs for franchisees while slowing down service McDonald’s is also asking franchisees to make costly restaurant upgrades and overhauls As one survey respondent summarized, there’s “too much reliance on price-pointing and discounting to drive top-line sales, which is where the corporate cow feeds.”

In all, the survey rates McDonald’s current franchisee relations at a decade-low 1.93 out of a possible 5, in the “fair” to “poor” range That fact might explain both the lack of smiles and the increasing customer complaints According to one restaurant consultant, “there’s a huge con- nection” between franchisee satisfaction and customer service.

Some conflict in the channel takes the form of healthy competition Such tion can be good for the channel; without it, the channel could become passive and non-innovative For example, the McDonald’s conflict with its franchisees might represent normal give-and-take over the respective rights of the channel partners However, severe

competi-or prolonged conflict can disrupt channel effectiveness and cause lasting harm to channel relationships McDonald’s should manage the channel conflict carefully to keep it from getting out of hand

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

chan-nel 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 maximize 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,

wholesal-ers, and retailers acting as a unified system One channel member owns the othwholesal-ers, has

conventional distribution channel

A channel consisting of one or more

independent producers, wholesalers,

and retailers, each a separate business

seeking to maximize its own profits,

perhaps even at the expense of profits

for the system as a whole.

Vertical marketing system (VMs)

A channel structure in which producers,

wholesalers, and retailers act as a

unified system One channel member

owns the others, has contracts with

them, or has so much power that they

all cooperate.

Wholesaler Retailer

Conventional marketing channel

Consumer

Producer

Vertical marketing system—here’s another fancy term for a simple concept It’s simply a channel in which members at different levels (hence, vertical) work together in

a unified way (hence, system) to accomplish the work of the channel.

figure 10.3 comparison of

conventional Distribution channel

with Vertical Marketing system

contracts with them, or wields so much power that they must all cooperate The VMS can

be dominated by the producer, the wholesaler, or the 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 tional channels For example, Sherwin-Williams, the largest U.S coatings manufacturer, sells its Sherwin-Williams-branded products exclusively through more than 4,000 company-owned retail paint stores And grocery giant Kroger owns and operates 38 manufacturing plants—17 dairies, 6 bakery plants, 5 grocery plants, 2 frozen dough plants, 2 beverage plants, 2 cheese plants, 2 ice cream plants, and 2 meat plants—that give it factory-to-store channel control over 40 percent of the more than 11,000 private-label items found on its shelves.3

organiza-Integrating the entire distribution chain—from its own design and manufacturing operations to distribution through its own managed stores—has turned Spanish clothing chain Zara into the world’s fastest-growing fast-fashion retailer:4

In recent years, fashion retailer Zara has attracted an army of loyal shoppers swarming to buy its “cheap chic”—stylish designs that resemble those of big-name fashion houses but at moder-

ate prices However, Zara’s amazing success comes not just from what it sells but from how fast its cutting-edge distribution system delivers what it sells Zara delivers fast fashion—really fast

fashion Thanks to vertical integration, Zara can take a new fashion concept through design, manufacturing, and store-shelf placement in as little as three weeks, whereas competitors such

as H&M, Gap, or Benetton often take six months or more And the resulting low costs let Zara offer the very latest midmarket chic at downmarket prices.

Speedy design and distribution allow Zara to introduce a copious supply of new fashions—at three times the rate of competitor introductions Then Zara’s distribution system supplies its stores with small shipments of new merchandise twice a week, compared with competing chains’ outlets, which get large shipments seasonally, usu- ally just four to six times per year The combination of a large number of timely new fashions delivered in frequent small batches gives Zara stores a continually updated merchandise mix that brings customers back more often Fast turnover also results

in less outdated and discounted merchandise Rather than guessing about tomorrow’s fashions, Zara can wait to see what customers are actually buying and then make that.

contractual VMs

A contractual VMS consists of independent firms at different levels of

produc-tion and distribuproduc-tion that join together through contracts to obtain more economies

or sales impact than each could achieve alone Channel members coordinate their activities and manage conflict through contractual agreements

The franchise organization is the most common type of contractual

relation-ship In this system, a channel member called a franchisor links several stages

in the production-distribution process In the United States alone, some 780,000 franchise outlets account for more than $889 billion of economic output Industry analysts estimate that a new franchise outlet opens somewhere in the United States every eight minutes and that about one out of every 12 retail business outlets is a franchised business.5

Almost every kind of business has been franchised—from motels and food restaurants to dental centers and dating services, from wedding consultants and handyman services to funeral homes, fitness centers, and moving services For example, through franchising, Two Men and a Truck moving services—

fast-“Movers Who Care”—grew quickly from two high school students looking to make extra money with a pickup truck to an international network of 330 franchise locations that’s experienced record growth over the past six years and completed more than 5.5 million moves.6

There are three types of franchises The first type is the manufacturer-

sponsored retailer franchise system—for example, Ford and its network of

corporate VMs

A vertical marketing system that

combines successive stages of

production and distribution under

single ownership—channel leadership

is established through common

ownership.

contractual VMs

A vertical marketing system in which

independent firms at different levels

of production and distribution join

together through contracts.

franchise organization

A contractual vertical marketing system

in which a channel member, called a

franchisor, links several stages in the

production-distribution process.

franchising systems: through franchising,

two Men and a truck—“Movers Who care”—grew

quickly from two high school students with a

pickup truck to an international network of

330 franchise locations that’s experienced record

growth over the past six years.

Two Men and a Truck International

independent franchised dealers The second type is the manufacturer-sponsored

whole-saler franchise system—Coca-Cola licenses bottlers (wholewhole-salers) in various world

mar-kets that buy Coca-Cola syrup concentrate and then bottle and sell the finished product to

retailers locally The third type is the service-firm-sponsored retailer franchise system—

for example, Burger King and its nearly 12,100 franchisee-operated restaurants around the world Other examples can be found in everything from auto rentals (Hertz, Avis), apparel retailers (The Athlete’s Foot, Plato’s Closet), and motels (Holiday Inn, Hampton Inn) to supplemental education (Huntington Learning Center, Mathnasium) and personal services (Great Clips, Mr Handyman, Anytime Fitness)

The fact that most consumers cannot tell the difference between contractual and porate VMSs shows how successfully the contractual organizations compete with corpo-rate chains The next chapter presents a fuller discussion of the various contractual VMSs

cor-administered VMs

In an administered VMS, leadership is assumed not through common ownership or

con-tractual ties but through the size and power of one or a few dominant channel members Manufacturers of a top brand can obtain strong trade cooperation and support from resell-ers For example, GE, P&G, and Apple can command unusual cooperation from many resellers regarding displays, shelf space, promotions, and price policies In turn, large retailers such as Walmart, Home Depot, Kroger, and Walgreens can exert strong influence

on the many manufacturers that supply the products they sell

For example, in the normal push and pull between Walmart and its consumer goods suppliers, giant Walmart—the biggest grocer in the United States with nearly 30 percent share of all U.S grocery sales—usually gets its way Take supplier Clorox, for instance

Although The Clorox Company’s strong consumer brand preference gives

it significant negotiating power, Walmart simply holds more cards Sales

to Walmart make up 26 percent of Clorox’s sales, whereas Clorox ucts account for only one-third of 1 percent of Walmart’s purchases, mak-ing Walmart by far the dominant partner Things get even worse for Cal-Maine Foods and its Eggland’s Best brand, which relies on Walmart for nearly one-third of its sales but tallies only about one-tenth of 1 percent

prod-of Walmart’s volume For such brands, maintaining a strong relationship with the giant retailer is crucial.7

horizontal Marketing systemsAnother 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 noncompetitors They might work with each other on a temporary or permanent basis,

or they may create a separate company For example, competing big media companies Fox Broadcasting, Disney-ABC, and NBCUniversal (Comcast) jointly own and market Hulu, the successful online subscrip-tion service that provides on-demand streaming of TV shows, movies, and other video content Together, they compete more effectively against digital streaming competitors such as Netflix Walmart partners with noncompetitor McDonald’s to place “express” versions of McDonald’s restaurants in Walmart stores McDonald’s benefits from Walmart’s heavy store traffic, and Walmart keeps hungry shoppers from needing to go else-where to eat

Such channel arrangements also work well globally For example, competitors General Mills and Nestlé operate a joint venture—Cereal Partners Worldwide—to market General Mills Big G cereal brands in

130 countries outside North America General Mills supplies a kitchen

administered VMs

A vertical marketing system that

coordinates successive stages of

production and distribution through the

size and power of one of the parties.

horizontal marketing system

A channel arrangement in which two

or more companies at one level join

together to follow a new marketing

opportunity.

horizontal marketing systems: general Mills and nestlé

operate a joint venture—cereal Partners Worldwide—that

markets general Mills big g cereal brands outside north

america.

Sonny Meddle/Rex Features/Presselect/Alamy

cabinet full of quality cereal brands, whereas Nestlé contributes its extensive international distribution channels and local market knowledge The 25-year-old alliance produces $1.1 billion in revenues for General Mills.8

Multichannel 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

seg-and more companies have adopted multichannel distribution systems Such

multichan-nel marketing occurs when a single firm sets up two or more marketing chanmultichan-nels to reach one or more customer segments

figure 10.4 shows a multichannel marketing system In the figure, the producer

sells directly to consumer segment 1 using catalogs, online, and mobile channels and reaches 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 multiple channels For example, John Deere sells its familiar green-and-yellow lawn and garden tractors, mowers, and outdoor power products to consumers and commercial us-ers through several channels, including John Deere retailers, Lowe’s home improvement stores, and online It sells and services its tractors, combines, planters, and other agricul-tural equipment through its premium John Deere dealer network And it sells large con-struction and forestry equipment through selected large, full-service John Deere dealers and their sales forces

Multichannel distribution systems offer many advantages to companies facing large and complex markets With each new channel, the company expands its sales and market coverage 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 can generate conflict as more channels compete for customers and sales For example, when John Deere first began selling selected consumer products through Lowe’s home improvement stores, many of its independent dealers complained loudly To avoid such conflicts in its online marketing channels, the company routes all of its online sales to John Deere dealers

changing channel organization

Changes in technology and the explosive growth of direct and online marketing are ing a profound impact on the nature and design of marketing channels One major trend is

hav-toward disintermediation—a big term with a clear message and important consequences

Multichannel distribution system

A distribution system in which a single

firm sets up two or more marketing

channels to reach one or more customer

segments.

Disintermediation

The cutting out of marketing channel

intermediaries by product or service

producers or the displacement of

traditional resellers by radical new

types of intermediaries.

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figure 10.4 Multichannel

Distribution system

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, as is the case with online marketers taking business from traditional brick-and-mortar retailers

For example, online music download services such as iTunes and Amazon MP3 have pretty much put traditional music-store retailers out of business In turn, streaming music services such as Spotify and Vevo are now disintermediating digital download services—digital downloads peaked last year while music streaming increased 32 percent

Disintermediation presents both opportunities and lems for producers and resellers Channel innovators who find new ways to add value in the channel can displace traditional resellers and reap the rewards In turn, traditional intermediaries must continue to innovate to avoid being swept aside For example, when Netflix pioneered online DVD-by-mail video rentals, it sent traditional brick-and-mortar video stores such as Blockbuster into ruin Then Netflix itself faced disintermediation threats from an even hotter channel—video streaming But instead of simply watching developments, Netflix has led them

prob-Similarly, superstore booksellers Borders and Barnes & Noble pioneered huge book selections and low prices, shut-ting down most small independent bookstores Then along came Amazon.com, which threatened even the largest brick-and-mortar bookstores Amazon.com almost single-handedly bankrupted Borders in less than 10 years Now, both offline and online sellers of physical books are being threatened by digital book downloads and e-readers Rather than yielding to digital developments, however, Amazon.com is leading them with its highly successful Kindle e-readers and tablets By contrast, Barnes & Noble—the giant that put

so many independent bookstores out of business—was a latecomer with its struggling Nook e-reader and now finds itself locked in a battle for survival.9

Like resellers, to remain competitive, product and service producers must develop new channel opportunities, such as the Internet and other direct channels However, devel-oping these new channels often brings them into direct competition with their established channels, resulting in conflict To ease this problem, companies often look for ways to make going direct a plus for the entire channel (see Marketing at Work 10.1)

For example, Volvo Car Group (now owned by Chinese car maker Geeley) recently announced plans to start selling Volvo vehicles online in all of its markets Some 80 per-cent of Volvo buyers already shop online for other goods, so cars seem like a natural exten-sion Few auto makers have tried selling directly, with the exception of Tesla, which sells its all-electric cars online, bypassing dealers altogether Other car companies worry that selling directly would alienate their independent dealer networks “If you say e-commerce, initially dealers get nervous,” says Volvo’s head of marketing So, to avoid channel con-flicts, Volvo will pass all online sales through established dealers for delivery In that way, boosting sales through direct marketing will benefit both Volvo and its channel partners.10

Disintermediation: streaming music services such as spotify are

rapidly disintermediating both traditional music-store retailers and even

music download services such as itunes.

Dado Ruvic/Reuters/Corbis

linking the concePts

Stop here for a moment and apply the distribution channel concepts we’ve discussed so far

chan-Unlike their competitors Gap, Beneton, and H&M, Spanish

clothing and accessories retailer Zara controls most of the steps

in the supply-chain, designing, manufacturing, and distributing

its products So while some competitors outsource all

produc-tion to developing countries, particularly in Asia, Zara makes

its most fashionable items—half of all its merchandise—at a

dozen company-owned factories in Spain and Portugal Zara,

which was founded in 1975 and is the flagship brand of the

Inditex group, has over 2,000 stores strategically located in

leading cities, such as New York, Paris, Tokyo, and Buenos

Aires, and operates in 88 countries in Europe, South America,

Oceania, and Africa In the fiscal year 2014, Inditex had sales

of $19.7 billion, which is an 8 percent increase, far stronger

than its competitors, making Zara the world’s largest apparel

retailer—not despite but because of its production and

manu-facturing strategy

The secret to its success stems from Zara’s vertically

inte-grated marketing system (VMS), which combines successive

stages of production and distribution under single ownership

Controlling the entire distribution chain from design and

pro-duction to its own worldwide distribution network has turned

Zara into the world’s fastest growing retailer Zara resisted

the temptation of locating its production in Asian countries

like China, where labor cost is low By going against the

trend, Zara was able to hold control over its supply chain

As a vertically integrated retailer, Zara pursues a

disinter-mediation strategy, which as the name suggests involves the

removal of intermediaries in a supply chain Instead of going

through traditional distribution channels (which has

distribu-tors, wholesalers, brokers, or agents), Zara deals with every

customer directly The company designs, produces, and

dis-tributes the products itself

Disintermediation means that Zara has to monitor

all its processes clearly in order to be efficient and fast

Effective disintermediation and vertical integration makes

Zara faster, more flexible, and more efficient than

interna-tional competitors such as Gap and H&M Zara can make

a new line from start to finish in less than 15 days and a

look seen on MTV can be in Zara stores within a month,

versus an industry average of 6 months This is a

stagger-ing pace, helped by the fact that between 51 to 55 percent

of its clothing is manufactured in what the company

de-scribes as “proximity” markets—Spain, Portugal, Turkey

and Morocco—instead of Asia Zara’s key competitive

advantage lies in its ability to match fashion trends that

change quickly It is no wonder that versions of latest

designs by fashion designers in Paris, London, New York,

or Tokyo are in Zara stores within a very short time of

ap-pearing on the runway One of the most fascinating things

about Zara is that it became popular not in spite of but

because of its lack of originality, as shoppers around the world are thrilled to buy Zara’s catwalk copycat designs at affordable prices

Zara stores are located in city center streets, are owned

by the company, and thereby have total control of its image and sales data Zara uses its stores to find out what consum-ers want, what styles are selling best, what colors are in demand, and which items are hot sellers The data are fed back to Zara headquarters in Spain through a sophisticated marketing information system At the end of each day, Zara sales assistants report inventory levels to the respective store manager, who immediately informs Zara’s central design and distribution departments about what consumers are buying, asking for, and avoiding, all of which have to be recorded accordingly Top-selling items are requested by the store managers and reach the store within one to two days At the same time, the commercial team liaises with the designers and sales trends are identified, either from evidence in stores

or the catwalk, to develop new products to follow them New fashions are produced in relatively small batches so failures can be disregarded after their first appearance and hits can be followed quickly By producing smaller batches of clothing, Zara adds an air of exclusivity that encourages customers to shop more often As garments are made in small production runs and no item stays in the shops for more than four weeks, Zara shoppers are encouraged to make repeat visits Whereas the average high-street store in Spain expects shoppers to visit three times a year on average, Zara shoppers visit up to

17 times

Zara: though Disintermediation to the top of World fashion

Zara’s key competitive advantage lies in its ability to match fashion trends that change quickly.

VannPhotography/Shutterstock

As fresh inventory is key to Zara’s sales strategy, its stores

are stocked with new designs twice a week faster than most of

its competitors The result of this structure is that the product

range in Zara stores evolves quickly Rather than relying on

one product range per season, Zara promotes four or five waves

of new products after the initial seasonal launch In the stores,

around 60 percent of Zara’s products are lasting and the

re-maining 40 percent vary continually Thus, the retailer can

of-fer considerably more products than its rivals It launches about

30,000 model items annually compared with 10,000 items for

its main competitors Consequently, the chain does not have to

slash prices, as rivals often do, to move mass quantities of

out-of-season stock

Zara has grown with little to no advertising, and it has

been observed that it hardly even has a marketing department

Instead of spending money on TV spots or print ads, the

com-pany invests heavily in the design, appeal, and location of its

shops, which are the best display and advertisement for Zara

and its brand image Zara’s flexibility and speed has helped

the fashion retailer to expand and grow steadily In the last few

years, like-for-like sales have grown by 17 percent and Zara

wants to expand its shop space by 8 to 10 percent every year

for the next three to five years

Zara continues to enhance its amazing channel

manage-ment system and disintermediation strategy, which has left

thousands of fashion retailers worldwide pop-eyed It is the

prototype of a “fast-fashion” retailer Daniel Piette, the

chair-man of LVMH Investment Funds and the former fashion

director for the luxury house that owns brands like Louis

Vuitton, Givenchy, Marc Jacobs, and Hublot has hailed Zara

as possibly the most innovative and devastating retailer Stacey Cartwright, former CFO of Burberry Group plc, stated that Zara is a fantastic case study of how to get products to the stores at amazing speeds; indeed, Burberry has an eye

on their techniques The so-called Spanish success story has reset the boundaries for what shoppers expect from a high-street clothing store and promises to continue to thrive as one

of the world’s biggest fashion retailers

Sources: “Zara,” Intidex, http://www.inditex.com/en/brands/zara; Rupal Parekh,

“How Zara Ballooned into a Multi-Billion Dollar Brand without Advertising,”

Advertising Age, August 19, 2013, http://adage.com/article/cmo-strategy/

zara-grew-a-multi-billion-dollar-brand-sans-ads/243730/; “ZARA and Its

Awesome Supply Chain Management,” Internationalas, August 17, 2014,

supply-chain-management-2/; “Zara on the World’s Most Valuable Brands,”

https://internationalas.wordpress.com/2012/04/17/zara-and-its-awesome-Forbes, May 2015, http://www.forbes.com/companies/zara/; Walter Loeb,

“Zara Leads in Fast Fashion,” Forbes, March 30, 2015, http://www.forbes.com/

sites/walterloeb/2015/03/30/zara-leads-in-fast-fashion/; Svend Hollensen and

Marc Opresnik, Marketing: A Relationship Perspective, 2nd ed (Vahlen 2015);

“The Best 100 Brands,” Interbrand, http://www.bestglobalbrands.com/2014/

zara/; Graham Ruddick, “How Zara Became the World’s Biggest Fashion

Retailer,” The Telegraph, October 20, 2014, http://www.telegraph.co.uk/

worlds-biggest-fashion-retailer.html; “Zara: Managing Chain of Value and

finance/newsbysector/retailandconsumer/11172562/How-Inditex-became-the-Driving CSR with Consumers,” JL Nueno, http://www.jlnueno.com/wordpress/

index.php/2011/07/29/gestionando-la-cadena-de-valor-y-accionando-la-rsc-con-los-consumidores/?lang=en; The Economist, Chain Reaction, February

2, 2002, pp 1–3; C Roux, “The Reign of Spain,” The Guardian, October 28,

2002, pp 6–7; “Store Wars: Fast Fashion, The Monet”, The Money Programme,

BBC, February19, 2003, television; A Mitthell, “When Push Comes to Shove,

It’s All About Pull,” Marketing Week, January 9, 2003, pp. 26–27; K Capell,

“Zara Thrives By Breaking All the Rules,” Business Week, October 20, 2008,

p 66; M Johnson and A Falstead, “Inditex Breaks New Ground for Season in

the South,” Financial Times, May 2011, p. 17.

channel Design Decisions

We now look at several channel design decisions manufacturers face In designing ing 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 In this case, deciding on the best channels might not be a problem: The problem might simply be how

market-to convince one or a few good intermediaries market-to handle the line

If successful, the new firm can branch out to new markets through existing diaries In smaller markets, the firm might sell directly to retailers; in larger markets, it might sell through distributors In one part of the country, it might grant exclusive fran-chises; in another, it might sell through all available outlets Then it might add an online store that sells directly to hard-to-reach customers In this way, channel systems often evolve to meet market opportunities and conditions

interme-For maximum effectiveness, however, channel analysis and decision making should be

more purposeful Marketing channel design calls for analyzing consumer needs, setting

channel objectives, identifying major channel alternatives, and evaluating those alternatives

analyzing consumer needs

As noted previously, marketing channels are part of the overall customer value delivery

network Each channel member and level adds value for the customer Thus, designing the

author comment

Like everything else in marketing, good

channel design begins with analyzing

customer needs Remember, marketing

channels are really customer value

delivery networks.

Marketing channel design

Designing effective marketing channels

by analyzing customer needs, setting

channel objectives, identifying major

channel alternatives, and evaluating

those alternatives.

marketing channel starts with finding out what target consumers want from the channel

Do consumers want to buy nearby, or are they willing to travel to more centralized tions? Would customers rather buy in person, by phone, or online? Do they value breadth

loca-of assortment, or do they prefer specialization? Do consumers want many add-on services (delivery, installation, repairs), or will they obtain these services elsewhere? The faster the delivery, the greater the assortment provided, and the more add-on services supplied, the greater the channel’s service level

Providing the fastest delivery, the greatest assortment, and the most services, however, may not be possible, practical, or desired The company and its channel members may not have the resources or skills needed to provide all the desired services Also, higher levels

of service result in higher costs for the channel and higher prices for consumers The cess of modern discount retailing shows that consumers often accept lower service levels

suc-in exchange for lower prices

Many companies, however, position themselves on higher service levels, and customers willingly pay the higher prices For example, your local independently owned Ace Hardware store probably provides more personalized service, a more convenient location, and less shopping hassle than the nearest huge Home Depot

or Lowe’s store As a result, it also charges somewhat higher prices To loyal Ace customers, the convenience and higher service levels are well worth the price Ace positions itself as “The helpful place.” Says the com-pany: “While others have become large and impersonal,

at Ace, we’ve remained small and very personal That’s why we say a visit to Ace is like a visit to your neighbor.”

In his review on Yelp, one loyal Ace customer agrees:11

I have become a convert from Lowe’s/Home Depot to Ace for two reasons For one, it’s much easier to get in and out

of and it’s closer to my house Second, and most tantly, upon entering the store a knowledgeable employee will greet me and ask how they may help Then they will lead me to where I need to go and boom, I’m done At Lowe’s I end up wandering around the caverns of that building—back and forth, is it here? down there? did I pass it?—until I’m exhausted At Ace, the time and energy saved more than makes up for an increase in cost Plus, they’re very friendly.

impor-Thus, companies must balance consumer needs not only against the feasibility and costs of meeting these needs but also against customer price preferences

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 lev-els 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 minimize the total channel cost

of meeting customer service requirements

The company’s channel objectives are also influenced by the nature of the pany, 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 handle itself and which it must give to intermediaries Companies sell-ing perishable products, for example, may require more direct marketing to avoid delays and too much handling

com-In some cases, a company may want to compete in or near the same outlets that carry competitors’ products For example, Maytag and other appliance makers want their prod-ucts displayed alongside competing brands to facilitate comparison shopping In other

Meeting customers’ channel service needs: ace hardware positions itself as

“the helpful place.” to loyal ace customers, the convenience of smaller stores and

the personal service they receive are well worth ace’s somewhat higher prices.

ZUMA Press, Inc/Alamy

cases, companies may avoid the channels used by competitors The Pampered Chef, for instance, sells high-quality kitchen tools directly to consumers through its corps of more than 60,000 consultants worldwide rather than going head-to-head with other kitchen tool makers for scarce positions in retail stores And Stella & Dot sells quality jewelry through more than 30,000 independent reps—called stylists—who hold Tupperware-like in-home

“trunk shows.”12 GEICO and USAA primarily market insurance and banking products to consumers via phone and Internet channels 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 will 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

channel alternatives in terms of the 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, until recently, Dell sold directly to final consumers and business buyers only through its sophisticated phone and online marketing channel It also sold directly to large corporate, institutional, and government buyers using its direct sales force However, to reach more consumers and match competitors such as Samsung and Apple, Dell now sells indirectly through retail-

ers such as Best Buy, Staples, and Walmart It also sells indirectly through value-added

resellers, independent distributors and dealers that develop computer systems and

applica-tions tailored to the special needs of small and medium-sized business customers

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 can reach more and different kinds of buyers However, these are more dif-ficult to manage and control In addition, the direct and indirect channels compete with each other for many of the same customers, causing potential conflict In fact, Dell often finds itself “stuck in the middle,” with its direct sales reps complaining about competition from retail stores, whereas its value-added resellers complain that the direct sales reps are undercutting their business

number of Marketing intermediaries

Companies 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 ample, toothpaste, candy, and other similar items are sold in millions of outlets to provide maximum brand exposure and consumer convenience Kraft, Coca-Cola, Kimberly-Clark, and other consumer goods companies distribute their products in this way

ex-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 ucts in their territories Exclusive distribution is often found in the distribution of luxury brands Breitling watches—positioned as “Instruments for Professionals” and selling at prices from $5,000 to more than $100,000—are sold by only a few authorized dealers in any given market area For example, the brand sells through only one jeweler in Chicago and only six jewelers in the entire state of Illinois Exclusive distribution enhances Breitling’s distinctive positioning and earns greater dealer support and customer service

prod-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

intensive distribution

Stocking the product in as many outlets

as possible.

exclusive distribution

Giving a limited number of dealers

the exclusive right to distribute the

company’s products in their territories.

selective distribution

The use of more than one but fewer

than all of the intermediaries that

are willing to carry the company’s

products.

company’s products Most consumer electronics, furniture, and home appliance brands are distributed in this manner For example, outdoor power equipment maker STIHL doesn’t sell its chain saws, blowers, hedge trimmers, and other products through mass merchandisers such as Lowe’s, Home Depot, or Sears Instead, it sells through a select corps of independent hardware and lawn and garden dealers By using selective distribution, STIHL can develop good work-ing relationships with dealers and expect a better-than-average selling effort Exclusive distribution also enhances the STIHL brand’s image and allows for higher markups resulting from greater value-added dealer service “We count on our select dealers every day and so can you,” says one STIHL ad.

responsibilities of channel Members

The producer and intermediaries need to agree on the terms and ties of each channel member They should agree on price policies, conditions

responsibili-of sale, territory rights, and the specific services to be performed by each party The producer should establish a list price and a fair set of discounts for the in-termediaries 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 pro-vides franchisees with promotional support, a record-keeping system, training at Hamburger University, and general management assistance In turn, franchisees must meet company standards for physical facilities and food quality, cooperate with new promotion programs, provide requested information, and buy speci-fied 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-run objectives Each alternative should be evaluated against economic, control, and adaptability 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

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

wants to keep the channel flexible so that it can adapt to environmental changes Thus, to

be considered, a channel involving long-term commitments should be greatly superior on economic and control grounds

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 marketers must usually adapt their channel strategies to the existing struc-tures within each country

In some markets, the distribution system is complex, competitive, and hard to penetrate For example, many Western companies find India’s distribution system difficult to navigate Large discount, department store, and supermarket retailers still account for only a small portion of the huge Indian market Instead, most shop-

ping is done in small neighborhood stores called kirana shops, run by their owners

and popular because they offer personal service and credit In addition, large Western retailers have difficulty dealing with India’s complex government regulations and poor infrastructure

selective distribution: stihl sells its chain

saws, blowers, hedge trimmers, and other products

through a select corps of independent hardware

and lawn and garden retailers “We count on

them every day and so can you.”

STIHL Incorporated

Distribution systems in developing countries may be scattered, inefficient, or altogether lacking For example, China’s rural markets are highly decentralized, made of many distinct submarkets, each with its own subculture And, because of inadequate distribution systems, most companies can profitably access only the small portion of China’s mas-sive population located in affluent cities China’s distribution system is so fragmented that logistics costs to wrap, bundle, load, unload, sort, reload, and transport goods amount to 18 percent of the nation’s GDP, far higher than in most other countries (In comparison, U.S logistics costs account for about 8.5 percent of the nation’s GDP.) After years of effort, even Walmart executives admit that they have been unable to assemble an efficient supply chain in China.13

Sometimes local conditions can greatly influence how a company distributes products in global markets For example, in low-income neighborhoods in Brazil where consumers have limited access to supermarkets, Nestlé sup-plements its distribution with thousands of self-employed salespeople who sell Nestlé products from refrigerated carts door to door And in big cities in Asia and Africa, where crowded streets and high real estate costs make drive-thrus impractical, fast-food restaurants such as McDonald’s and KFC offer delivery Legions of motorbike delivery drivers in colorful uniforms dispense Big Macs and buckets of chicken to customers who call in More than 30 percent of McDonald’s total sales in Egypt and 12 percent of its Singapore sales come from deliv-ery Similarly, for KFC, delivery accounts for nearly half of all sales in Kuwait and a third

of sales in Egypt.14Thus, international marketers face a wide range of channel alternatives Designing efficient and effective channel systems between and within various country markets poses a difficult challenge We discuss international distribution decisions further in Chapter 15

channel Management Decisions

Once the company has reviewed its channel alternatives and determined the best channel

design, it must implement and manage the chosen channel Marketing channel

man-agement 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 ers have no trouble signing up channel members For example, when Toyota first intro-duced its Lexus line in the United States, it had no trouble attracting new dealers In fact, it had to turn down many would-be resellers

produc-At the other extreme are producers that have to work hard to line up enough qualified intermediaries For example, when Timex first tried to sell its inexpensive watches through regular jewelry stores, most jewelry stores refused to carry them The company then man-aged to get its watches into mass-merchandise outlets This turned out to be a wise deci-sion because of the rapid growth of mass merchandising

Even established brands may have difficulty gaining and keeping their desired tribution, especially when dealing with powerful resellers For example, you won’t find Marlboro, Winston, Camel, or any other cigarette brand at your local CVS pharmacy store CVS Caremark recently announced that it will no longer sell cigarettes in its stores, despite the resulting loss of more than $2 billion in annual sales “This is the right thing to do,” says the company “We came to the decision that cigarettes and providing healthcare

dis-author comment

Now it’s time to implement the chosen

channel design and work with selected

channel members to manage and

motivate them

Marketing channel management

Selecting, managing, and motivating

individual channel members and

evaluating their performance over time.

international distribution: in the huge indian market, most shopping is

done in small neighborhood stores call kirana shops, run by their owners

and popular because they offer personal service and credit.

Frank Bienewald/imageBROKER/Alamy

just don’t go together in the same setting.” Target dropped rettes nearly 20 years ago, and public advocates are pressuring Walmart to do the same If the major discount stores and other drugstore chains such as Walgreens and Rite Aid follow suit, Philip Morris, R.J Reynolds, and other tobacco companies will have to seek new channels for selling their brands.15

ciga-When selecting intermediaries, the company should termine what characteristics distinguish the better ones It will want to evaluate each channel member’s years in business, other lines carried, location, growth and profit record, cooperative-ness, and reputation

de-Managing and Motivating channel Members

Once selected, channel members must be continuously aged and motivated to do their best The company must sell not

man-only through the intermediaries but also to and with them Most

companies see their intermediaries as first-line customers and

partners They practice strong partner relationship management

to forge long-term partnerships with channel members This creates a value delivery system that meets the needs of both the

company and its marketing partners.

In managing its channels, a company must convince suppliers and distributors that they can succeed better by working together

as a part of a cohesive value delivery system Companies must work in close harmony with others in the channel to find better ways to bring value to customers Thus, Amazon and P&G work closely to accomplish their joint goal of selling consumer package goods profitably online Through its Vendor Flex program, Amazon operates within P&G warehouses to reduce distribution costs and speed up delivery, benefiting both the partnering companies and the customers they jointly serve (see Marketing at Work 10.2)

Similarly, heavy-equipment manufacturer Caterpillar works hand-in-hand with its superb dealer network—together they dominate the world’s construction, mining, and log-ging equipment business:

Heavy-equipment manufacturer Caterpillar produces innovative, high-quality industrial equipment products But ask anyone at Caterpillar, and they’ll tell you that the most im- portant reason for Caterpillar’s dominance is its outstanding distribution network of 189 independent dealers in more than 180 countries Dealers are the ones on the front line Once the product leaves the factory, the dealers take over They’re the ones that custom- ers see So rather than selling to or through its dealers, Caterpillar treats dealers as inside partners When a big piece of Caterpillar equipment breaks down, customers know that they can count on both Caterpillar and its dealer network for support A strong dealer network makes for a strong Caterpillar, and the other way around On a deeper level, dealers play a vital role in almost every aspect of Caterpillar’s operations, from product design and de- livery to service and support As a result of its close partnership with dealers, the big Cat

is purring Caterpillar dominates the world’s markets for heavy construction, mining, and logging equipment Its familiar yellow tractors, crawlers, loaders, bulldozers, and trucks capture well over a third of the worldwide heavy-equipment business, more than twice that

This is the right thing to do.

selecting channels: even established brands may have difficulty

keeping desired channels cVs caremark’s decision to stop selling

cigarettes leaves tobacco companies seeking new sales channels.

CVS Caremark Corporation

Partnering in the distribution channel: Under amazon’s Vendor flex program, P&g and amazon share warehouse facilities, creating distribution cost and delivery advantages for both partners.

Raywoo/Fotolia; Grzegorz Knec/Alamy; Grzegorz Knec/Alamy

Until recently, if you ordered Bounty paper towels, Pampers

diapers, Charmin toilet paper, or any of the dozens of other

P&G consumer products from Amazon.com, they probably

came to your doorstep by a circuitous distribution route The

paper towels, for example, might well have been produced in

P&G’s large northeastern Pennsylvania factory and shipped

by the trailer-truck load to its nearby Tunkhannock

ware-house, where they were unloaded and repacked with other

P&G goods and shipped to Amazon’s Dinwiddie, Virginia,

fulfillment center At the fulfillment center, they were

unloaded and shelved and then finally picked and packed by

Amazon employees for shipment to you via UPS, FedEx, or

the USPS

But these days, in a move that could turn consumer

pack-age goods distribution upside down, Amazon and P&G

are quietly blazing a new, simpler, lower-cost distribution

trail for such goods Now, for example, at the Pennsylvania

warehouse, rather than reloading truckloads of P&G

prod-ucts and shipping them to Amazon fulfillment centers, P&G

employees simply cart the goods to a fenced-off area inside

their own warehouse The fenced-in area is run by Amazon

From there, Amazon employees pack, label, and ship items

directly to customers who’ve ordered them online Amazon

calls this venture Vendor Flex—and it’s revolutionizing how

people buy low-priced, low-margin everyday household

products

Amazon’s Vendor Flex program offers big potential for

both Amazon and supplier–partners like P&G Americans

currently buy only about 2 percent of their nonfood consumer

package goods online Boosting online sales of these staples

to 6 percent—the percentage that the Internet now captures of

overall retail sales—would give Amazon

an additional $10 billion a year in

rev-enues, up from the current $2 billion

But there’s a reason why household

staples have lagged behind other kinds of

products in online sales Such goods have

long been deemed too bulky or too cheap

to justify the high shipping costs involved

with Internet selling To sell household

staples profitably online, companies like

Amazon and P&G must work together

to streamline the distribution process and

reduce costs That’s where Vendor Flex

comes in

Vendor Flex takes channel partnering

to an entirely new level Co-locating “in

the same tent” creates advantages for

both partners For Amazon, Vendor Flex

reduces the costs of storing bulky items, such as diapers and toilet paper, in its own distribution centers, and it frees up space in Amazon’s centers for more higher-margin goods The sharing arrangement lets Amazon extend its consumer package goods selection without building more distribution center space For example, the P&G warehouse also stocks other popular P&G household brands, from Gillette razors

to Pantene shampoo to Tide laundry detergent Finally, locating at the source guarantees Amazon immediate avail-ability and facilitates quick delivery of P&G products to customers

P&G also benefits from the Vendor Flex partnership It saves money by cutting out the costs of transporting goods

to Amazon’s fulfillment centers, which in turn lets it charge more competitive prices to the e-commerce giant And al-though P&G is a superb in-store brand marketer, it is still a relative newcomer to online selling, one of the company’s top priorities By partnering more closely with Amazon, P&G gets Amazon’s expert help in moving its brands online

Amazon considers household staples to be one of its next big frontiers for Internet sales Its presence inside the P&G Pennsylvania warehouse is just the tip of the iceberg for Vendor Flex Amazon and P&G quietly began sharing warehouse space three years ago, and the online merchant has set up shop inside at least seven other P&G distribu-tion centers worldwide, including facilities in Japan and Germany Amazon is also inside or talking with other ma-jor consumer  goods suppliers—from Kimberly Clark to Georgia Pacific to Seventh Generation—about co- locating distribution facilities Moreover, Amazon has invested heav-ily to build an infrastructure for profitably selling all kinds

amazon and P&g: taking channel Partnering to a new level

of everyday household items to consumers online For

ex-ample, in late 2010, Amazon acquired Quidsi, the owner of

Diapers.com and Soap.com, online retailers of baby

prod-ucts and household essentials Since the Amazon

acquisi-tion, Quidsi has added a half-dozen new sites selling, among

other things, toys (YoYo.com), pet supplies (Wag.com),

pre-mium beauty products (BeautyBar.com), and home products

(Casa.com)

Vendor Flex looks like a win-win for everyone involved—

Amazon, P&G, and final consumers However, the close

Amazon–P&G partnership has caused some grumbling

among other important channel participants For example,

what about Walmart, P&G’s largest customer by far? The

giant store retailer is locked in a fierce online battle with

Amazon, yet one of its largest suppliers appears to be

giving Amazon preferential treatment At the same time,

Amazon’s courtship of P&G may upset other important

suppliers that compete with P&G on Amazon’s site Both

P&G and Amazon must be careful that their close Vendor

Flex relationship doesn’t damage other important channel

partnerships

More broadly, some analysts assert that even with Vendor

Flex, Amazon won’t be able to sell products such as paper

towels, detergent, or shaving cream profitably online They

reason that the margins on such items are simply too low to

cover shipping costs Amazon is already losing an estimated

$1 billion to $2 billion annually on its Amazon Prime shipping

program And, they suggest, if there is money to be made by

shipping a heavy jug of Tide or a bulky three-pack of Bounty

paper towels from P&G’s warehouse to your front door, P&G would have been doing that long ago

However, such doom-and-gloom predictions seem to look recent rapid changes in the distribution landscape, espe-cially in online retailing Mega-shippers like UPS and FedEx are continuing to drive down small-package delivery times and costs And Amazon is moving aggressively toward same-day delivery in major market areas, including grocery and related items The Vendor Flex program seems to align well with such distribution trends

over-As for the Amazon–P&G Vendor Flex partnership, it looks like an ideal match for both companies If P&G wants to be more effective in selling its brands online, what better partner could it have than Amazon, the undisputed master of online retailing? If Amazon wants to be more effective in selling household staples, what better partner could it have than P&G, the acknowledged master of consumer package goods market-ing? Together, under Amazon’s Vendor Flex, these respective industry leaders can flex their distribution muscles to their own benefit—and to the benefit of the consumers they jointly serve

Sources: Serena Ng, “Soap Opera: Amazon Moves In with P&G,” Wall Street Journal, October 15, 2013, p A1; Andre Mouton, “Amazon Considers

‘Co-Creation’ with Procter & Gamble,” USA Today, October 21, 2013,

products/3143773/; David Streitfeld, “Amazon to Raise Fees as Revenue

www.usatoday.com/story/tech/2013/10/21/amazon-proctor-gamble-Disappoints,” New York Times, January 31, 2014, p B1; and Bridget

Bergin, “Amazon’s Involvement with Manufacturing: When Is It Too

Much?” Manufacturing.net, September 25, 2014, www.manufacturing.net/

when-is-it-too-much.

blogs/2014/09/amazon%E2%80%99s-involvement-with-manufacturing-evaluating channel Members

The company 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 programs, and services to the customer The company should recognize and reward intermediaries that are perform-ing well and adding good value for consumers Those that are performing poorly should

be assisted or, as a last resort, replaced

Finally, companies need to be sensitive to the needs of their channel partners Those that treat their partners poorly risk not only losing their support but also causing some le-gal problems The next section describes various rights and duties pertaining to companies and other channel members

linking the concePts

Time for another pause This time, compare the Caterpillar and KFC channel systems

●

● Diagram the Caterpillar and KFC channel systems How do they compare in terms of channel levels, types of intermediaries, channel member roles and responsibilities, and other characteris-tics? How well is each system designed?

●

● Assess how well Caterpillar and KFC have managed and supported their channels With what results?

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 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 not handle competitors’

products, its strategy is called exclusive dealing Both parties can benefit from exclusive

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 clude other producers from selling to these dealers This situation brings exclusive dealing contracts under the scope of the Clayton Act of 1914 They are legal as long as they do not substantially lessen competition or tend to create a monopoly and as long as both parties enter into the agreement voluntarily

ex-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 obliga-tion to sell through more outlets than it wishes The second practice, whereby the producer tries to keep a dealer from selling outside its territory, has become a major legal issue.Producers of a strong brand sometimes sell it to dealers only if the dealers will take

some or all of the rest of its line This is called full-line forcing Such tying agreements are

not necessarily illegal, but they violate the Clayton Act if they tend to lessen competition substantially 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 arrange-ment, 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 Logistics effectiveness has a major impact on both customer satisfaction and company costs Here we consider the nature and importance of logistics management in the supply chain, the goals of the logistics system, major logistics func-tions, 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 ern logistics is much more than this Marketing logistics—also called 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 profitably

In the past, physical distribution planners typically started with products at the plant and then tried to find low-cost solutions to get them to customers However, today’s

customer-centered logistics starts with the marketplace and works backward to the factory

author comment

Marketers used to call this plain-old

“physical distribution.” But as these titles

suggest, the topic has grown in importance,

complexity, and sophistication

Marketing logistics (physical

distribution)

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.

or even to sources of supply Marketing logistics

involves not only outbound logistics (moving

prod-ucts from the factory to resellers and ultimately

to customers) but also inbound logistics ing products and materials from suppliers to the factory) and reverse logistics (reusing,

recycling, refurbishing, or disposing of broken, unwanted, or excess products returned by

consumers or resellers) That is, it involves the entirety of 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 the activities of suppliers, purchasing agents, marketers, channel members, and customers These activities include forecasting, information systems, purchasing, production planning, order processing, inventory, ware-housing, 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 a company and its customers As much as 20 percent 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 American companies spend $1.39

tril-lion each year—about 8.2 percent of GDP—to wrap, bundle, load, unload, sort, reload, and transport goods That’s more than the total national GDPs of all but 12 countries worldwide.16Shaving off even a small fraction of logistics costs can mean substantial savings For example, Walmart is currently implementing a program of logistics improvements through more efficient sourcing, greater supply chain productivity, and better management of its more than $51 billion worth of owned inventory, and that will reduce supply chain costs by 5

to 15 percent over five years—that’s a whopping $4 billion to

$12 billion.17Third, the explosion in product variety has created a need for improved logistics management For example, in 1916 the typical Piggly Wiggly grocery store carried only 605 items Today, a Piggly Wiggly carries a bewildering stock of between 20,000 and 35,000 items, depending on store size A Walmart Supercenter store carries more than 140,000 products, 30,000 of which are grocery products.18 Ordering, shipping, stocking, and controlling such a variety of products presents a sizable logistics challenge

Improvements in information technology have also created opportunities for major gains in distribution efficiency Today’s companies are using sophisticated supply chain management software, Internet-based logistics systems, point-of-sale scan-ners, RFID tags, satellite tracking, and electronic transfer of order and payment data Such technology lets them quickly and efficiently manage the flow of goods, information, and finances through the supply chain

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.

Resellers Customers

Company Suppliers

Reverse logistics

Outbound logistics

Inbound logistics

Managing the supply chain calls for customer-centered thinking Remember, it’s also called the customer value delivery network.

figure 10.5 supply chain

Management

logistics: as this huge container ship suggests, american

companies spent $1.39 trillion last year—8.2 percent of U.s gDP—to

wrap, bundle, load, unload, sort, reload, and transport goods.

E.G.Pors/Shutterstock

Finally, more than almost any other marketing function, logistics affects the ronment and a firm’s environmental sustainability efforts Transportation, warehousing, packaging, and other logistics functions are typically the biggest supply chain contributors

envi-to the company’s environmental footprint So many companies are now developing green

supply chains.

sustainable supply chains

Companies have many reasons for reducing the environmental impact of their supply chains For one thing, if they don’t green up voluntarily, a host of sustainability regulations enacted around the world will soon require them to For another, many large customers—from Walmart and Nike to the federal government—are demanding it Environmental sustainability has become an important factor in supplier selection and performance evalu-

ation But perhaps even more important than having to do it, designing sustainable supply chains is simply the right thing to do It’s one more way that companies can contribute to

saving our world for future generations

But that’s all pretty heady stuff As it turns out, companies have a more immediate and practical reason for turning their supply chains green Not only are sustainable channels good for the world, they’re also good for a company’s bottom line The very logistics ac-tivities that create the biggest environmental footprint—such as transportation, warehous-ing, and packaging—also account for a lion’s share of logistics costs Companies green

up their supply chains through greater efficiency, and greater efficiency means lower costs and higher profits In other words, developing a sustainable supply chain is not only envi-ronmentally responsible, it can also be profitable Consider Nike:19

Nike, the iconic sports shoe and apparel company, has developed a sweeping strategy for greening every phase

of its supply chain For example, Nike recently teamed with Levi’s, REI, Target, and other members of the Sustainable Apparel Coalition to develop the Higg Index—a tool that measures how a single apparel product affects the environment across the entire supply chain Nike uses the Higg Index to work with suppliers and distributors to reduce its supply chain’s environmental footprint For instance, during just the past three years, the more than 900 contract factories that make Nike footwear worldwide have reduced their carbon emissions

by 6 percent, despite production increases of 20 percent That’s equivalent to an emissions savings equal to more than 1 billion car-miles.

Nike has found that even seemingly simple supply chain adjustments can produce big benefits For example, the company sources its shoes in Asia, but most are sold in North America Until about a decade ago, the shoes were shipped from factory to store by air freight After analyzing distribution costs more carefully, Nike shifted a sizable por- tion of its cargo to ocean freight That simple shoes-to-ships shift reduced emissions per product by 4 percent, making environmentalists smile But it also put a smile on the faces

of Nike’s accountants by saving the company some $8 lion a year in shipping costs.

mil-goals of the logistics system

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

the least cost Unfortunately, as nice as this sounds, no logistics system can both maximize customer service and minimize distribution costs Maximum customer service implies

rapid delivery, large inventories, flexible assortments, liberal returns policies, and other services—all of which raise distribution costs In contrast, minimum distribution costs

The Higg Index Sustainable Apparel Coalition

green supply chains: nike has developed a sweeping strategy for greening

its supply chain the higg index lets nike work with suppliers and distributors to

reduce the supply chain’s environmental footprint while at the same time reducing

its logistics costs.

Sergio Azenha/Alamy

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

ser-vice 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 maximize profits, not sales Therefore, the company must weigh the benefits of

pro-viding 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 designs a logistics system that will

mini-mize the cost of attaining these objectives The major logistics functions are warehousing,

inventory management, transportation, and logistics information management.

Warehousing

Production and consumption cycles rarely match, so most companies must store their goods while they wait to be sold For example, Snapper, Toro, and other lawn mower man-ufacturers 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-

ters Storage warehouses store goods for moderate to long periods In contrast, distribution

centers 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, Amazon operates more than 50 giant distribution centers, called fillment centers, which fill online orders and handle returns These centers are huge and highly automated For example, the Amazon fulfillment center in Tracy, California, covers 1.2 million square feet (equivalent to 27 football fields) At the center, 4,000 employees control an inventory of 21 million items and ship out up to 700,000 packages a day to Amazon customers in Northern California and parts of the Pacific Northwest During last year’s Cyber Monday, Amazon’s fulfillment center network filled customer orders at a rate

ful-of 426 items per second globally.20

Like almost everything else these days, warehousing has seen dramatic changes in technology in recent years Outdated materials-handling methods are steadily being replaced by newer, computer-controlled systems requiring fewer employees Computers and scanners read orders and direct lift trucks, electric hoists, or robots to gather goods, move them to loading docks, and issue invoices For example,

to improve efficiency in its massive fulfillment centers, Amazon recently purchased robot maker Kiva Systems:21

When you buy from Amazon, the chances are still good that your order will be plucked and packed by human hands However, the humans in Amazon’s fulfillment centers are increasingly being assisted by an army of squat, ottoman-size, day-glo orange robots The Tracy, California, fulfillment center has 3,000 of them, “let out of their cage to scurry hither and yon bearing 6-foot-high movable shelves.” The robots bring racks of merchandise to workers, who in turn fill boxes Dubbed the “magic shelf,” racks of items simply materialize in front of workers, with red lasers pointing to items to be picked The robots then drive off and new shelves appear The super- efficient robots work tirelessly 16 hours a day, seven days a week They

Distribution center

A large, highly automated warehouse

designed to receive goods from various

plants and suppliers, take orders, fill

them efficiently, and deliver goods to

customers as quickly as possible.

high-tech distribution centers: amazon employs teams of

super-retrievers—day-glo orange kiva robots—to keep its fulfillment

centers humming.

David Paul Morris/Bloomberg/Getty Images

never complain about the workload or ask for pay raises, and they are pretty much nance free “When they run low on power, they head to battery-charging terminals,” notes one observer, “or, as warehouse personnel say, ‘They get themselves a drink of water.’”

mainte-inventory Management

Inventory 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 in-ventory results in higher-than-necessary 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

just-in-time logistics systems With such systems, producers and retailers carry only small

inventories of parts or merchandise, often enough for only a few days of operations 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 inventory-handling costs

Marketers are always looking for new ways to make inventory management more efficient In the not-too-distant future, handling inventory might even become fully au-tomated For example, in Chapter 3 we discussed RFID or “smart tag” technology, by which small transmitter chips are embedded in or placed on products and packaging for everything from flowers and razors to tires Such “smart” products could make the entire supply chain—which accounts for nearly 75 percent of a product’s cost—intelligent and automated

Companies using RFID know, at any time, exactly where a product is located cally within the supply chain “Smart shelves” would not only tell them when it’s time

physi-to reorder but also place the order auphysi-tomatically with their suppliers Such exciting new information technology is revolutionizing distribution as we know it Many large and resourceful marketing companies, such as Walmart, Macy’s, P&G, Kraft, and IBM, are investing heavily to make the full use of RFID technology a reality

transportation

The choice of transportation carriers affects the pricing of products, delivery performance, and the condition of goods when they arrive—all of which will affect customer satisfac-tion In shipping goods to its warehouses, dealers, and customers, the company can choose among five main transportation modes: truck, rail, water, pipeline, and air, along with an alternative mode for digital products—the Internet

Trucks have increased their share of transportation steadily and now account for

40 percent of total cargo ton-miles (a ton of freight moved one mile) transported in the United States U.S trucks travel more than 397 billion miles a year—more than double the distance traveled 25 years ago—carrying 9.2 billion tons of freight According to the U.S Department of Transportation, 70 percent of all the freight tonnage moved in the United States goes on trucks Trucks are highly flexible in their routing and time sched-ules, and they can usually offer faster service than railroads They are efficient for short hauls of high-value merchandise Trucking firms have evolved in recent years to become full- service providers of global transportation services For example, large trucking firms now offer everything from satellite tracking, Internet-based shipment management, and logistics planning software to cross-border shipping operations.22

Railroads account for 26 percent of the total cargo ton-miles moved They 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, railroads 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, which account for 7 percent of the cargo ton-miles, transport large

amounts of goods by ships and barges on U.S coastal and inland waterways Although the cost of water transportation is very low for shipping bulky, low-value, nonperishable products such as sand, coal, grain, oil, and metallic ores, water transportation is the slow-

est mode and may be affected by the weather Pipelines, which account for 17 percent

of the cargo ton-miles, are a specialized means of shipping petroleum, natural gas, and chemicals from sources to markets Most pipelines are used by their owners to ship their own products

Although air carriers transport less than 1 percent of the cargo ton-miles of the

na-tion’s goods, they are an important 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 (such as fresh fish, cut flowers) and high-value, low-bulk items (technical instruments, jewelry) Companies find that airfreight also reduces inventory levels, packaging costs, and the number of warehouses needed

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

phone wire, or wireless signal Software firms, the media, music and video companies, and education all make use of the Internet to transport digital products The Internet holds the potential for lower product distribution costs Whereas planes, trucks, and trains move freight and packages, digital technology moves information bits

Shippers also use multimodal transportation—

combining two or more modes of transportation Eight percent of the total cargo ton-miles are moved via multiple

modes Piggyback describes the use of rail and trucks;

fishyback, water and trucks; trainship, water and rail;

and airtruck, air and trucks Combining modes provides

advantages that no single mode can deliver Each nation offers advantages to the shipper For example, not only is piggyback cheaper than trucking alone, but it also provides flexibility and convenience Numerous logistics companies provide single-source multi-modal transporta-tion solutions

combi-Most logistics carriers now recognize the importance of multimodal transportation, regardless of their main line of activity For example, Union Pacific, primarily a rail carrier, offers “door-to-door shipping” coordination for its business customers According to one Union Pacific ad: “The end of the tracks is just the beginning of our capabilities Every day,

we coordinate rail, trucks, and ocean carriers for thousands of companies—many without tracks to their doors That would

be a challenge if we were just a railroad, but we’re not We’re logistics experts.”

logistics information Management

Companies manage their supply chains through information Channel partners often link

up to share information and make better joint logistics decisions From a logistics tive, flows of information, such as customer transactions, billing, shipment and inventory levels, and even customer data, are closely linked to channel performance Companies need simple, accessible, fast, and accurate processes for capturing, processing, and sharing channel information

perspec-Information can be shared and managed in many ways, but most sharing takes place

through electronic data interchange (EDI), the digital exchange of data between

organiza-tions, which primarily is transmitted via the Internet Walmart, for example, requires EDI links with its more than 100,000 suppliers through its Retail Link sales data system If new suppliers don’t have the required EDI capability, Walmart will work with them to find and implement the needed tools.23

Multimodal transportation

Combining two or more modes of

transportation.

transportation: in shipping goods to their warehouses, dealers, and

customers, companies can choose among many transportation modes,

including truck, rail, water, pipeline, and air Much of today’s shipping

requires multiple modes.

Thanapun/Shutterstock

In some cases, suppliers might actually be asked to generate orders and arrange eries for their customers Many large retailers—such as Walmart and Home Depot—work

deliv-closely with major suppliers such as P&G or Moen 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 ManagementToday, more and more companies are adopting the concept of integrated logistics

management This concept recognizes that providing better customer service and

trim-ming distribution costs require teamwork, both inside the company and among all the

marketing channel organizations Inside, the company’s various departments must work closely together to maximize its own logistics performance Outside, the company must integrate its logistics system with those of its suppliers and customers to maximize the performance of the entire distribution network

cross-functional teamwork inside the company

Most companies assign responsibility for various logistics activities to many ent departments—marketing, sales, finance, operations, and purchasing Too often, each function tries to optimize its own logistics performance without regard for the activities of the other functions However, transportation, inventory, warehousing, and information management activities interact, often in an inverse way Lower inventory levels reduce inventory-carrying costs But they may also reduce customer service and increase costs from stockouts, backorders, special production runs, and costly fast-freight shipments Because distribution activities involve strong trade-offs, deci-sions by different functions must be coordinated to achieve better overall logistics performance

differ-The goal of integrated supply chain management is to harmonize all of the company’s logistics decisions Close working relationships among departments can be achieved

in several ways Some companies have created permanent logistics committees composed 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, P&G has created product supply managers who manage all the supply chain activities for each product category Many companies have

a vice president of logistics or a supply chain VP with functional authority

cross-Finally, companies can employ sophisticated, 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 For example, Oracle’s supply chain management software solutions help companies to “gain sustainable advantage and drive inno-vation by transforming their traditional supply chains into integrated value chains.” It coordinates every aspect of the supply chain, from value chain collaboration to inventory optimization to transportation and logistics management The important thing is that the company must coordinate its logistics, inventory investments, demand forecasting, and marketing activities to create high market satisfaction at a reasonable cost

system-integrated logistics management

The logistics concept that emphasizes

teamwork—both inside the company

and among all the marketing channel

organizations—to maximize the

performance of the entire distribution

system.

integrated logistics management: oracle’s supply chain management

software solutions help companies to “gain sustainable advantage and

drive innovation by transforming their traditional supply chains into

integrated value chains.”

Oracle Corporation

building logistics Partnerships

Companies 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 mar-keting 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 sup-ply chain For example, furniture retailer IKEA can create its stylish but affordable furniture and deliver the “IKEA lifestyle” only if its entire supply chain—consisting of thousands of merchandise designers and suppliers, transport companies, warehouses, and service providers—operates at maximum efficiency and with customer-focused effectiveness

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 For example,

Nestlé’s Purina pet food unit has a team of dozens of people working in Bentonville, Arkansas, the home base of Walmart The Purina Walmart team members work jointly with their counterparts at Walmart to find ways to squeeze costs out of their distribution system Working together benefits not only Purina and Walmart but also their shared, final consumers

Other companies partner through shared projects For example, many large

retail-ers conduct joint in-store programs with suppliretail-ers Home Depot allows key suppliretail-ers to use its stores as a testing ground for new merchandising programs The suppliers spend time at Home Depot stores watching how their product sells and how customers relate

to it They then create programs specially tailored to Home Depot and its customers 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 bringing value to final consumers

third-Party logistics

Although most big companies love to make and sell their products, many loathe the associated logistics “grunt work.” They detest the bundling, loading, unloading, sort-ing, storing, reloading, transporting, customs clearing, and tracking required to supply their factories and get products to their customers They hate it so much that many firms

outsource some or all of their logistics to third-party logistics (3PL) providers such

as Ryder, Penske Logistics, BAX Global, DHL Logistics, FedEx Logistics, and UPS Business Solutions

For example, UPS knows that, for many companies, logistics can be a real nightmare But logistics is exactly what UPS does best To UPS, logistics is today’s most powerful force for creating competitive advantage “We ♥ logistics,” proclaims UPS “It makes running your business easier It can make your customers happier It’s a whole new way

of thinking.” As one UPS ad concludes: “We love logistics Put UPS to work for you and you’ll love logistics too.”

At one level, UPS can simply handle a company’s package shipments But on a deeper level, UPS can help businesses sharpen their own logistics systems to cut costs and serve customers better At a still deeper level, companies can let UPS take over and manage part or all of their logistics operations For example, consumer electronics maker Toshiba lets UPS handle its entire laptop PC repair process—lock, stock, and barrel And UPS not only delivers packages for online shoe and accessories marketer Zappos, it also manages Zappos’s important and complex order returns process in an efficient, customer-pleasing way.24

3PL providers like UPS can help clients tighten up sluggish, overstuffed ply chains; slash inventories; and get products to customers more quickly and reliably

sup-According to one report, 86 percent of Fortune 500 companies use 3PL (also called

out-sourced logistics or contract logistics) services General Motors, P&G, and Walmart each

use 50 or more 3PLs.25

third-party logistics (3Pl) provider

An independent logistics provider that

performs any or all of the functions

required to get a client’s product to

market.

My Marketing Lab

If assigned by your instructor, complete the questions marked with the from the EOC Discussion Questions section in the MyLab To complete the Marketing by the Numbers problems found in this section, go to your Assignments in the MyLab

Some companies pay too little attention to their distribution

channels; others, however, have used imaginative

distribu-tion systems to gain a competitive advantage A company’s

channel decisions directly affect every other marketing

deci-sion Management must make channel decisions carefully,

incorporating today’s needs with tomorrow’s likely selling

environment

objectiVe 10-1 explain why companies use

market-ing channels and discuss the functions these channels

perform (pp 328–331)

In creating customer value, a company can’t go it alone It must

work within an entire network of partners—a value delivery

network—to accomplish this task Individual companies and

brands don’t compete; their entire value delivery networks do

Most producers use intermediaries to bring their products

to market They forge a marketing channel (or distribution

channel)—a set of interdependent organizations involved in

the process of making a product or service available for use or

consumption by the consumer or business user Through their

contacts, experience, specialization, 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 distributing

information needed for planning and aiding exchange,

devel-oping and spreading persuasive communications about an

offer, performing contact work (finding and communicating

reVieWing anD extenDing the concePts

objectives review

with prospective buyers), matching (shaping and fitting the offer to the buyer’s needs), and 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 fulfill the completed transactions by offering physical distribution (trans- porting and storing goods), financing (acquiring and using funds to cover the costs of the channel work), and risk taking

(assuming the risks of carrying out the channel work

objectiVe 10-2 Discuss how channel members interact and how they organize to perform the work of the

channel (pp 332–339)

The channel will be most effective when each member assumes the tasks it can do best Ideally, because the success of indi-vidual 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 cooperating, they can more effectively sense, serve, and satisfy the target market

In a large company, the formal organization structure assigns roles and provides needed leadership But in a distribu-tion channel composed of independent firms, leadership and power are not formally set Traditionally, distribution channels have lacked the leadership needed to assign roles and manage conflict In recent years, however, new types of channel orga-nizations have appeared that provide stronger leadership and improved performance

Companies use third-party logistics providers for several reasons First, because ting the product to market is their main focus, using these providers makes the most sense,

get-as they can often do it more efficiently and at lower cost Outsourcing typically results in

a 10 to 25 percent cost savings.26 Second, outsourcing logistics frees a company to focus more intensely on its core business Finally, integrated logistics companies understand increasingly complex logistics environments

objectiVe 10-3 identify the major channel alternatives

open to a company (pp 339–343)

Channel alternatives 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 marketing systems These trends affect

chan-nel 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

intermedi-aries, 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 motivating them Individual

chan-nel members must be evaluated regularly

objectiVe 10-4 explain how companies select,

motivate, and evaluate channel members (pp 343–347)

Producers vary in their ability to attract qualified marketing

intermediaries Some producers have no trouble signing up

channel members, whereas others have to work hard to line up

enough qualified intermediaries When selecting

intermediar-ies, the company should evaluate each channel member’s

quali-fications and select those that best fit its channel objectives

Once selected, channel members must be continuously

motivated to do their best The company must sell not only

through the intermediaries but also with them It should

forge strong partnerships with channel members to create a

marketing system that meets the needs of both the

manufac-turer and the partners.

objectiVe 10-5 Discuss the nature and importance

of marketing logistics and integrated supply chain

management (pp 347–354)

Marketing logistics (or physical distribution) is an area of

potentially high cost savings and improved customer

satisfac-tion Marketing logistics addresses not only outbound logistics but also inbound logistics and reverse logistics That is, it in- volves the entire supply chain management—managing value-

added flows between suppliers, the company, resellers, and final users No logistics system can both maximize customer service and minimize distribution costs Instead, the goal of

logistics management is to provide a targeted level of service

at the least cost The major logistics functions are warehousing,

inventory management, transportation, and logistics information management.

The integrated supply chain management concept

recog-nizes that improved logistics requires teamwork in the form

of close working relationships across functional areas inside the company and across various organizations in the supply chain Companies can achieve logistics harmony among func-tions by creating cross-functional logistics teams, integrative supply manager positions, and senior-level logistics executive positions with cross-functional authority Channel partnerships can take the form of cross-company teams, shared projects, and information-sharing systems Today, some companies are out-sourcing their logistics functions to third-party logistics (3PL) providers to save costs, increase efficiency, and gain faster and more effective access to global markets

key terms

objective 10-1

Value delivery network (p 328)

Marketing channel (distribution channel)

(p 329)

Channel level (p 331)

Direct marketing channel (p 331)

Indirect marketing channel (p 331)

Disintermediation (p 336)

objective 10-3

Marketing channel design (p 339)Intensive distribution (p 341)Exclusive distribution (p 341)Selective distribution (p 341)

Third-party logistics (3PL) provider (p 354)

Discussion Questions

10-1 Compare and contrast upstream and downstream

part-ners in a company’s supply chain Explain why value

delivery network might be a better term to use than

sup-ply chain (AACSB: Communication)

10-2 Compare direct marketing channels and indirect

mar-keting channels Name the various types of resellers in

marketing channels (AACSB: Communication)

10-3 Name and describe the three strategies available when

determining the number of marketing intermediaries

(AACSB: Communication; Reflective Thinking)

10-4 List and briefly describe the major logistics functions

Provide an example of a decision a logistics manager

would make for each major function (AACSB:

Com-munication; Reflective Thinking)

10-5 What are third-party logistics providers, and why do

companies use them? (AACSB: Communication)

10-6 The most common type of contractual vertical

market-ing system is the franchise organization Visit the

In-ternational Franchise Association at www.franchise.org

and find a franchise that interests you Write a report describing the franchise Identify what type of franchise

it represents and research the market opportunities for that product or service (AACSB: Communication; Use

of IT; Reflective Thinking)

10-7 Form a small group and research the distribution

chal-lenges faced by companies expanding into emerging international markets such as China, Africa, and India Develop a multimedia presentation on how one com-pany overcame these challenges (AACSB: Communi-cation; Reflective Thinking; Use of IT)

10-8 Although most big companies love to make and sell their

products, many loathe the associated logistics They like the bundling, loading, unloading, sorting, storing, reloading, transporting, customs clearing, and tracking What advantages are there to businesses in using third-party logistics? Investigate how the growth of third- party logistics has affected distribution in your own country (AACSB: Communication; Reflective Thinking)

dis-Do you think that you have what it takes to write a

best-selling novel? In the past, authors had to go through

tradi-tional publishing houses to print and distribute their work,

but technology has turned the publishing industry on its head

Although aspiring authors could always self-publish a book,

selling it through the traditional channels—bookstores—was

only a pipe dream for most But that has all changed thanks

to the Internet and social media Amazon’s Kindle Direct

Publishing is a popular platform for self-publishers, but

oth-ers such as Smashwords, Author Solutions, and Fast-Pencil

offer similar services with hundreds of thousands of authors

and titles For example, Amanda Hocking’s self-published

e-book sales caught the attention of a publisher, and now the

former social worker is a millionaire Self-published books

have grown nearly 300 percent in less than 10 years, with

the majority being e-books Almost 40 percent of readers

now own e-readers, such as Kindles and iPads That creates

opportunities for anyone wanting to distribute their works to these avid readers For example, after being turned away by traditional publishers, author Christine Bronstein created her

own online social network to promote her book, Nothing but

the Truth, So Help Me God: 51 Women Reveal the Power of Positive Female Connection, which launched on Amazon and

Barnes & Noble sites

10-9 Visit a self-publishing site such as Amazon’s Kindle

Direct (https://kdp.amazon.com) and create a tion to give to aspiring authors about distributing their works this way (AACSB: Communication; Use of IT; Reflective Thinking)

10-10 What other industries’ channels of distribution have

been affected dramatically by online, mobile, and cial media? (AACSB: Communication; Reflective Thinking)

online, Mobile, and social Media Marketing self-Publishing

Marketing by the numbers tyson expanding Distribution

Tyson Foods is the largest U.S beef and chicken supplier,

processing more than 100,000 head of cattle and 40-plus

million chickens weekly Primary distribution channels are

supermarket meat departments However, the company is

now expanding distribution into convenience stores There

are almost 150,000 gas stations and convenience stores

where the company would like to sell hot Buffalo chicken

bites near the checkout This is a promising channel, as sales

are growing considerably at these retail outlets and profit

margins on prepared foods are higher than selling raw meat

to grocery stores Tyson will have to hire 10 more sales

rep-resentatives at a salary of $45,000 each to expand into this

distribution channel because many of these types of stores are

independently owned Each convenience store is expected to generate an average of $50,000 in revenue for Tyson Refer to Appendix 3: Marketing by the Numbers to answer the follow-ing questions

10-13 If Tyson’s contribution margin is 30 percent on this

product, what increase in sales will it need to break even

on the increase in fixed costs to hire the new sales reps? (AACSB: Communication; Analytical Reasoning)

10-14 How many new retail accounts must the company

acquire to break even on this tactic? What average ber of accounts must each new rep acquire? (AACSB: Communication; Analytical Reasoning)

num-Video case Progressive

Progressive has attained top-tier status in the insurance industry

by focusing on innovation Progressive was the first company to

offer drive-in claims service, installment payment of premiums,

and 24/7 customer service But perhaps Progressive’s most

in-novative moves involve its channels of distribution Whereas

most insurance companies distribute via intermediary agents

or direct-to-consumer methods, Progressive was one of the first

to see value in doing both In the late 1980s, it augmented its

agency distribution with a direct 800-number channel

Two decades ago, Progressive moved into the digital

fu-ture by becoming the first major insurer to launch a Web site

Soon after, it allowed customers to buy auto insurance policies

online in real time Today, customers can use Progressive’s

Web site to do everything from managing their own account formation to reporting claims directly Progressive even offers one-stop concierge claim service

in-After viewing the Progressive video segment, answer the following questions about marketing channels

10-15 Apply the concept of the supply chain to Progressive 10-16 Using the model of consumer and business channels

found in the chapter, sketch out as many channels for Progressive as you can How does each of these chan-nels meet distinct customer needs?

10-17 Discuss the various ways that Progressive has had an

impact on the insurance industry

Marketing ethics ethical sourcing

Lush, the fresh cosmetics company, was launched in 1995 The

team behind the new business had designed many of the most

successful body shop products In less than 20 years, Lush has

grown to over 850 stores in over 50 countries worldwide and

includes over 6,000 employees

From the outset, the company was concerned about

en-suring that they ethically sourced their product ingredients

This has become a key USP, and together with its anti-animal

testing stance and freshly made ethos, it sets the business apart

from most of its competitors It does mean that the prices for

products are marginally higher, but this is offset by the unique

minimalist packaging and general vibe of the brand

When Lush looks for suppliers, they consider the whole

picture To them, it is important that to take into account the

conditions under which any workers may operate, whether

pro-duction of the ingredient impacts on the environment, whether

the ingredients are vegetarian and have not been tested on

ani-mals, and whether the impact from transportation is minimal

Today, Lush indirectly supports 400 women in Ghana who supply fair trade shea butter and have stopped using palm oil from Indonesia in order to protect the natural habitat of the orang-utan They also buy directly from small farmers in Tunisia, Costa Rica, the Dominican Republic, and Laos

Source: Lush, https://www.lushsg.com; “Ethical Buying Policy,” https://www.

lush.co.uk/article/ethical-buying-policy.

10-11 Write a brief report on a business of your choice that

ex-clusively uses ethical sourcing What are the criteria that are being used to establish the ethical standards they op-erate? (AACSB: Communication; Reflective Thinking)

10-12 Should ethical sourcing be the default standard for

all businesses? (AACSB: Communication; Reflective Thinking; Ethical Reasoning)

company cases 10 apple Pay/15 7-eleven

See Appendix 1 for cases appropriate for this chapter Case

10, Apple Pay: Taking Moble Payments Mainstream In the

past, Apple has disrupted marketing channels with

revolution-ary products With Apple Pay, Apple is proving once again that

it can deliver Case 15, 7-Eleven: Adapting to The World’s

Many Cultures Just a convenience store in the U.S., 7-Eleven

has a strong global presence by catering to different distribution strategies throughout the world

My Marketing Lab

If assigned by your instructor, complete these writing sections from your Assignments

in the MyLab

10-18 Why does channel conflict occur? Name and describe the various types of

channel conflict (AACSB: Communication)

10-19 Should retailers be responsible for safety conditions in garment supplier

facto-ries in other countfacto-ries? Discuss (AACSB: Written and Oral Communication;

Reflective Thinking; Ethical Understanding and Reasoning)

Part 2: UnDerstanDing the MarketPlace anD cUstoMer ValUe (chaPters 3–5)

Part 3: Designing a cUstoMer ValUe-DriVen strategy anD Mix (chaPters 6–14)

Part 4: extenDing Marketing (chaPters 15–16)

11

objectiVe 11-1 explain the role of retailers in the

distribution channel and describe the major types of

retailers Retailing (362–368)

objectiVe 11-2 Describe the major retailer marketing

decisions Retailer Marketing Decisions (369–376)

retailing and Wholesaling

objectiVe 11-3 Discuss the major trends and developments in retailing Retailing Trends and Developments

(376–382)

objectiVe 11-4 explain the major types of wholesalers and their marketing decisions Wholesaling (383–388)

Previewing the concepts

We now look more deeply into the two major intermediary marketing channel functions: retailing and wholesaling you already know something about retailing—retailers of all shapes and sizes serve you every day, both in stores and online however, you probably know much less about the hoard of wholesalers working behind the scenes in this chapter,

we examine the characteristics of different kinds of retailers and wholesalers, the marketing decisions they make, and trends for the future.

fast retailing, asia’s top and the world’s fourth-largest apparel retailer, has ized the retail clothing industry by creating and fostering innovative retail experiences the company has turned UniQlo, its key brand, into a global one by living up to its “Made for all” credo the company has built long-term relationships with material manufacturers and cooperates with them to offer high-quality products at affordable prices UniQlo’s specific attention to customer service has further contributed to its global success.

first stop

UniQlo: The Innovative Route in Fashion Retailing

UNIQLO Co., Ltd is a Japanese casual wear designer, manufacturer,

and retailer Since 2005, the company has been a wholly owned

sub-sidiary of Fast Retailing Co., Ltd Uniqlo Japan is the nation’s largest

apparel retail chain, with a 6.5 percent market share of the Japanese

apparel market and a network of 841 stores at the end of August

2015 generating annual net sales in 2014 (the year ended August

31) of over $5.9 billion The company contributes more than 50

percent of the group’s net sales From there, UNIQLO International

has been driving group growth by opening new stores each year in

various countries outside Japan The company currently has more

than 1,600 stores across 17 countries worldwide, including

Austra-lia, Bangladesh, Canada, China, France, Germany, Russia, and the

United Kingdom With sales totaling $3.4 billion in 2014, UNIQLO

International has contributed about one-third to group sales This

makes Fast Retailing the latest global company from Japan and

Asia’s top—as well as the world’s fourth-largest—apparel retailer,

fol-lowing Inditex (Zara), Hennes & Mauritz (H&M), and Gap

Founded by President and CEO Tadashi Yanai, UNIQLO’s first store

opened as a “unique clothing warehouse” selling unisex casual clothing

in Hiroshima in 1984 and was later renamed Fast Retailing Co in 1991

At this time, the company was simply reselling garments that it bought

from other manufacturers, but a key turning point for the brand came

about when it decided in 1997 to take on more elements of the value

chain and begin producing its own clothes This transformed UNIQLO

from a suburban casual clothing store into a Japanese household

name, and the company became Japan’s first specialty store retailer of

private label apparel (known as an SPA) Ever since, the company has

refined this business model, allowing sophisticated control of the entire

business process, from planning and design to material procurement

and sales As a consequence, UNIQLO won the fiscal 2014 Retailer of

the Year Award from the World Retail Congress for exceptional,

world-class performance and has successfully developed into a global brand

Tadashi Yanai believes that this global development and growth is a

testament to UNIQLO’s unique position as the world’s only “lifewear”

brand, which means everyday clothes for a better life—high quality,

fashionable, affordable, and comfortable

How did Fast Retailing manage to turn UNIQLO into a global fashion

retail brand? Steered by the philosophy “Made for All,” UNIQLO offers

high-quality products at affordable prices; for example, a pair of jeans

may be priced as low as $9 The UNIQLO Material Development Team

is able to procure high-quality materials at low costs through direct

rela-tionships with and bulk purchases from material manufacturers globally

In addition, the company has a team of technical specialists known as

the Takumi Team, boasting many years of experience in the Japanese

textile industry These specialists are sent directly to UNIQLO’s partner

factories in China to offer technical instruction and share their

abun-dant experience At the same time, the supervisors from the production

department, based in the Shanghai office, make weekly visits to partner

factories to check the quality and progress of production

Moreover, UNIQLO has continuously innovated in functional

mate-rials through collaborations with manufacturers and suppliers as well

as customers For example, it developed a heat-generating material

known as HEATTECH with Toray Industries, Inc Launched in 2003,

HEATTECH is a unique, highly functional line of innerwear that serves body warmth and has won over a multitude of customers As customer opinions and needs play a vital role in UNIQLO’s product development strategy, its HEATTECH products have been continuously refined each year based on customer feedback The UNIQLO Cus-tomer Center receives approximately 100,000 comments from custom-ers annually and it is precisely this customer feedback that makes it possible for UNIQLO to produce the high-quality apparel that it does

pre-In addition to the affordable prices of UNIQLO products, their trendy designs help attract customers UNIQLO partners with renowned art-ists and designers from across the globe, such as German designer Jil Sander Following a five-year absence

from designing, she created a tion for UNIQLO named +J, which was launched globally and sold out in most countries

collec-in the first week In order

to position UNIQLO as a socially functional brand and not just another fash-ion brand, the company appoints influential brand ambassadors like chef David Chang, technology entrepreneur David Karp of Tumblr, jazz musician Esperanza Spalding, professional tennis player Novak Djokovic, and Australian golfer Adam Scott

Another positive characteristic that UNIQLO has integrated is the world-renowned Japanese characteristic of attentiveness in customer service At UNIQLO stores, there are “advisors” who help customers find what they need and keep the store neat and tidy at all times Advisors are trained to project the UNIQLO way of interacting with customers

Fast Retailing continues to revolutionize the retail clothing industry

by creating innovative retail experiences In 2013, UNIQLO’s joint ect with the New York’s Museum of Modern Art (MoMA) successfully

proj-Day in and day out, UniQlo lives up to its philosophy “Made for all.” in a growing global environment in which cheap can also mean chic and feeling good, UniQlo has definitely found the best cut in fabric.

UniQlo positions itself as the world’s only “lifewear” brand, which means everyday clothes that are high quality, fashionable, affordable, and comfortable.

Blend Images/Shutterstock

boosted the company’s visibility worldwide by enabling UNIQLO to

offer a range of sweatshirts and T-shirts with cutting-edge design from

both contemporary artists and established pop masters like Andy

Warhol For Fall 2015, UNIQLO announced Magic for All, a global

partnership with Disney Consumer Products In the future, the

com-pany aims at revolutionizing the retail business further by constructing

state-of-the-art distribution centers, starting in Tokyo, in order to

cre-ate an entirely new way of shopping: If a store runs out of a particular

product a customer wants, UNIQLO can order it from their virtual store and deliver it to that customer by the time they get home

Fast Retailing aims to achieve consolidated Group sales of $61.2 billion by 2020 with a continuous growth rate of 20 percent per year

in order to become the world’s biggest specialty retailer of private label apparel In a growing global environment in which cheap and chic also means looking and feeling good, UNIQLO has definitely found the best cut in fabric.1

he UNIQLO 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, the major types of store and store retailers, the decisions retailers make, and the future of retailing In the second sec-tion, we discuss these same topics as they apply to wholesalers

non-retailing

What is retailing? We all know that Costco, Home Depot, Macy’s, and Target are retailers,

but so are Amazon.com, the local Hampton Inn, and a doctor seeing patients Retailing

includes all the activities involved in selling products or services directly to final ers for their personal, nonbusiness use Many institutions—manufacturers, wholesalers,

consum-and retailers—do retailing But most retailing is done by retailers, businesses whose

sales come primarily from retailing Retailing plays a very important role in most

mar-keting channels Last year, retailers accounted for more than $5 trillion of sales to final consumers.2

retailing: connecting brands with consumers

Retailers connect brands with consumers in the final phases of the buying process and at

the point of purchase In fact, many marketers are now embracing the concept of shopper

marketing, focusing the entire marketing process—from product and brand development

to logistics, promotion, and merchandising—toward turning shoppers into buyers as they approach the point of sale Of course, every well-designed marketing effort focuses on

customer buying behavior What differentiates the concept of shopper marketing is the suggestion that these efforts should

be coordinated around the shopping process itself

Shopper marketing builds around what P&G calls the

“First Moment of Truth”—the critical three to seven onds that a shopper considers a product on a store shelf.3 However, the dramatic growth of online and mobile shop-ping has added new dimensions to shopper marketing The retailing “moment of truth” no longer takes place only in stores Instead, Google defines a “zero moment of truth,” when consumers begin the buying process by searching for and learning about products online

sec-Today’s consumers are increasingly omni-channel buyers,

who make little distinction between in-store and online ping and for whom the path to a retail purchase runs across multiple channels For these buyers, a particular purchase might consist of researching a product online and buying it from an online retailer, without ever setting foot in a retail store Alternatively, they might use a smartphone to research

shop-a purchshop-ase on the fly, or even while in retshop-ail store shop-aisles For example, it’s common to see a consumer examining an item

author comment

You already know a lot about retailers

You deal with them every day—store

retailers, service retailers, online and

mobile retailers, and others

retailing

All the activities involved in selling

products or services directly to

final consumers for their personal,

Focusing the entire marketing process

on turning shoppers into buyers as they

approach the point of sale, whether

during in-store, online, or mobile

shopping.

shopper marketing: the dramatic growth in online and mobile

shopping has added new dimensions to “point of purchase.” influencing

consumers’ buying decisions as they shop now involves omni-channel

efforts aimed at integrating in-store, online, and mobile shopping.

Betsie Van der Meer/Getty Images

t

on a shelf at Target while at the same time using a mobile app to look for coupons or check product reviews and prices at Amazon.com.

Thus, these days, shopper marketing and the “point of purchase” go well beyond in-store buying They involve consumers working across multiple channels as they shop

Influencing consumers’ buying decisions calls for omni-channel retailing, creating a

seam-less cross-channel buying experience that integrates in-store, online, and mobile shopping.4Although most retailing is still done in retail stores, in recent years direct and online retailing have been growing much faster than store retailing We discuss direct, online, and omni-channel retailing in detail later in this chapter and in Chapter 14 For now, we will focus on store retailing

types of retailers

Retail stores come in all shapes and sizes—from your local hairstyling salon or owned restaurant to national specialty chain retailers such as REI or Williams-Sonoma to megadiscounters such as Costco or Walmart The most important types of retail stores are described in table 11.1 and discussed in the following sections They can be classified in

family-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 organized.

amount of service

Different types of customers and products require different amounts of service To meet these varying service needs, retailers may offer one of three service levels: self-service, limited service, and full service

omni-channel retailing

Creating a seamless cross-channel

buying experience that integrates

in-store, online, and mobile shopping.

table 11.1 Major store retailer types

specialty store a store that carries a narrow product line with a deep assortment, such

as apparel stores, sporting-goods stores, furniture stores, florists, and bookstores.

rei, sunglass hut, sephora, Williams-sonoma

Department store a store that carries several product lines—typically clothing, home

furnishings, and household goods—with each line operated as a separate department managed by specialist buyers or merchandisers.

Macy’s, sears, neiman Marcus

supermarket 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.

kroger, safeway, superValu, Publix

convenience store a relatively small store located near residential areas, open 24/7, and

carrying a limited line of high-turnover convenience products at slightly higher prices.

7-eleven, circle k, speedway, sheetz

Discount store a store that carries standard merchandise sold at lower prices with

lower margins and higher volumes. Walmart, target, kohl’s off-price retailer a store that sells merchandise bought at less-than-regular wholesale

prices and sold at less than retail these include factory outlets owned and operated by manufacturers; independent off-price retailers owned

and run by entrepreneurs or by divisions of larger retail corporations; and

warehouse (or wholesale) clubs selling a limited selection of goods at deep

discounts to consumers who pay membership fees.

Mikasa (factory outlet); tj Maxx (independent off-price retailer); costco, sam’s club, bj’s (warehouse clubs)

superstore a very large store that meets consumers’ total needs for routinely

purchased food and nonfood items this includes supercenters, combined supermarket and discount stores, and category killers, which carry a deep

assortment in a particular category.

Walmart supercenter, supertarget, Meijer (discount stores); best buy, Petco, staples, bed bath & beyond (category killers)

Self-service retailers serve customers who are willing to perform their own compare-select process to save time or money Self-service is the basis of all discount

locate-operations and is typically used by retailers selling convenience goods (such as markets) and nationally branded, fast-moving shopping goods (such as Target or Kohl’s)

super-Limited-service retailers, such as Sears or JCPenney, provide more sales assistance

because they carry more shopping goods about which customers need information Their increased operating costs result in higher prices

Full-service retailers, such as high-end specialty stores (for example, Tiffany or

Williams-Sonoma) and first-class department stores (such as Nordstrom or Neiman Marcus) assist customers in every phase of the shopping process Full-service stores usu-ally carry more specialty goods for which customers need or want assistance or advice They provide more services, which results in much higher operating costs These higher costs are passed along to customers as higher prices

Product line

Retailers can also be classified by the length and breadth of their product assortments

Some retailers, such as specialty stores, carry narrow product lines with deep assortments

within those lines Today, specialty stores are flourishing The increasing use of market segmentation, market targeting, and product specialization has resulted in a greater need for stores that focus on specific products and segments

By contrast, department stores carry a wide variety of product lines In recent years,

middle-market department stores have been squeezed between more focused and flexible specialty 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 specialty stores Still others are trying direct and online selling Service remains the key differentiating factor Retailers such as Nordstrom, Saks, Neiman Marcus, and other high-end department stores are doing well by emphasizing exclusive merchandise and high-quality service

Supermarkets are the most frequently visited type of retail store Today, however,

they are facing slow sales growth because of slower population growth and an increase

in competition from discounters (Walmart, Costco, and Dollar General) on the one hand and specialty food stores (Whole Foods Market, Trader Joe’s, ALDI, Sprouts) on the other Supermarkets’ share of U.S packaged foods sales slipped from 53 percent in 1998 to 37 percent in 2012.5 Supermarkets also have been hit hard by the rapid growth of out-of-home eating over the past two decades

In the battle for “share of stomachs,” some supermarkets have moved upscale, providing improved store environments and higher-quality food offerings, such as from-scratch bakeries, gourmet deli counters, natural foods, and fresh seafood departments Others, however, are competing head-on with large discounters such as Costco and Walmart by cutting costs, establishing more-efficient operations, and lowering prices WinCo, a fast-growing regional discount-grocery chain in the western United States, has done this successfully:6

You probably haven’t heard of WinCo yet But you can bet that Walmart and Costco are keeping a close eye on the small discount-grocery chain In fact, according to one supermarket-retailing expert, WinCo is fast becoming “Walmart’s worst nightmare.” In its markets, WinCo (short for “Winning Company”) posi- tions itself directly against mighty Walmart as “The Supermarket Low Price Leader.” And that’s more than just a slogan—WinCo doesn’t just match Walmart’s prices; it often undercuts them WinCo keeps prices low through low-cost, effi- cient operations The chain often cuts out distributors and buys goods at lower costs directly from farms and factories Its large, efficient, no-frills stores carry a limited assortment of basic fast-moving merchandise WinCo’s customers help to keep costs down by bagging their own groceries and paying cash (no credit cards accepted) Finally, the employee-owned chain has a reputation for treating its

specialty store

A retail store that carries a narrow

product line with a deep assortment

within that line.

Department store

A retail store that carries a wide variety

of product lines, each operated as

a separate department managed by

specialist buyers or merchandisers.

supermarket

A large, low-cost, low-margin,

high-volume, self-service store that carries a

wide variety of grocery and household

products.

in the battle for “share of stomach,” regional

supermarket chain Winco successfully competes

head-on with large discounters such as costco and Walmart

it’s rapidly becoming “Walmart’s worst nightmare.”

WinCo Foods, Inc.

employees right in terms of pay, benefits, and pensions The result is a cheerful, highly vated, productive workforce that genuinely contributes to the company’s low-cost success Why should Walmart and Costco worry about WinCo? The rapidly growing chain expects to double

moti-in size every five to seven years Accordmoti-ing to the retailmoti-ing expert, “Wmoti-inCo is really unstoppable

at this point.”

Convenience stores are small stores that carry a limited line of high-turnover

con-venience goods After several years of stagnant sales, these stores are now experiencing growth Many convenience store chains have tried to expand beyond their primary market

of young, blue-collar men by redesigning their stores to attract female shoppers They are shedding the image of a “truck stop” where men go to buy gas, beer, cigarettes, or shriv-eled hotdogs on a roller grill and are instead offering freshly prepared foods and cleaner, safer, more-upscale environments

For example, consider 7-Eleven, long known as a haven for Slurpees, Big Gulps, hot dogs spinning on a roller, self-serve nachos, smokes, beer, and bags of chips The conve-nience chain now employs a team of culinary and food science experts who are stocking its shelves with an expanding menu of healthier snack and meal items under 400 calories, such as yogurt parfaits, salads, bags of carrots and celery, fresh subs, Smart turkey sand-wiches on whole wheat bread, and a Bistro Snack Protein Pack—carrots, hummus, pita rounds, cheddar cheese, and grapes in a meal-to-go box The chain is also resizing and single-sizing existing products Over the next three years, 7-Eleven plans to boost its sales

of high-margin fresh foods to 20 percent, twice the current level.7

Superstores are much larger than regular supermarkets and offer a large assortment

of routinely purchased food products, nonfood items, and services Walmart, Target,

Meijer, and other discount retailers offer supercenters, very large combination food and

discount stores Whereas a traditional grocery store brings in about $482,000 a week in sales, a supercenter brings in about $1.4 million a week Walmart, which opened its first supercenter in 1988, now has more than 3,400 supercenters in the United States and is opening new ones at a rate of about 120 per year.8

Recent years have also seen the rapid growth of superstores that are actually giant

specialty stores, the so-called category killers (for example, Best Buy, Home Depot,

Petco, and Bed Bath & Beyond) They feature stores the size of airplane hangars that carry

a very deep assortment of a particular line Category killers are found in a wide range of categories, including electronics, home-improvement products, books, baby gear, toys, home goods, party goods, sporting goods, and even pet supplies

Finally, for many retailers, the product line is actually a service Service retailers

include hotels and motels, banks, airlines, restaurants, colleges, hospitals, movie theaters, tennis clubs, bowling alleys, repair services, hair salons, and dry cleaners Service retailers

in the United States are growing faster than product retailers

relative Prices

Retailers can also be classified according to the prices they charge (see Table 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 Retailers that feature low prices are discount stores and “off-price” retailers

Discount stores A discount store (for example, Target, Kohl’s, or Walmart) sells standard

merchandise at lower prices by accepting lower margins and selling at higher volume The early discount stores cut expenses by offering few services and operating in warehouse-like facilities in low-rent, heavily traveled districts Today’s discounters have improved their store environments and increased their services while at the same time keeping prices low through lean, efficient operations

Leading “big-box” discounters, such as Walmart and Target, now dominate the retail scene However, even “small-box” discounters are thriving in the current economic envi-ronment For example, dollar stores are now today’s fastest-growing retail format Back in the day, dollar stores sold mostly odd-lot assortments of novelties, factory overruns, close-outs, and outdated merchandise—most priced at $1 Not anymore Dollar General, the

convenience store

A small store, located near a residential

area, that is open long hours seven days

a week and carries a limited line of

high-turnover convenience goods.

superstore

A store much larger than a regular

supermarket that offers a large

assortment of routinely purchased food

products, nonfood items, and services.

category killer

A giant specialty store that carries a

very deep assortment of a particular

line.

service retailer

A retailer whose product line is actually

a service; examples include hotels,

airlines, banks, colleges, and many

others.

Discount store

A retail operation that sells standard

merchandise at lower prices by

accepting lower margins and selling at

higher volume.