Final Paper due Midnight Tuesday 8 pages/Send handshakes and will review profiles
cap479
Learning Objectives
After studying this chapter, you should be able to:
• Recognize the goal of Place strategy in terms of the customer value equation.
• Describe the strategic issues facing retailers that affect Place strategy.
• List three challenges for marketers in developing a distribution channel strategy.
• Recall two concerns of manufacturers affected by Place strategy.
• Summarize the challenges facing marketers who pursue global Place strategies.
age fotostock/SuperStock4
The Marketing Mix: Place
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CHAPTER 4Section 4.1 Why Place Matters
Introduction
The topic of how goods and services reach customers makes up one of the four p’s of marketing management, the “marketing mix” of Product, Place, Price, and Promo-tion. This chapter covers the issues related to Place, including physical logistics and distribution channel strategy.
While Place is a nice mnemonic, this “P” has evolved considerably since the four p’s structure was first introduced in the 1960s. Today, any organization’s success depends not just on its performance, but on that of a complex web of business partners that make up the company’s supply chain, each delivering value that (hopefully) improves the per- formance of the entire system. When we say “Place strategy” we’re really talking about a set of mutually supporting organizations, each with a part to play in making goods or services available to an end user—a consumer or business. Scratch the Place concept and just below the surface you’ll find distribution issues.
4.1 Why Place Matters
Place strategy answers the question “How do I get what I sell to people who will buy it?” Marketers must concern themselves with Place issues to make strategic deci-sions. Place strategy is also important to marketers because the promises made in advertising and promotions must be supported. If advertising claims that “You’ll receive your order in 48 hours,” a system must be in place that can get the order to the customer in 48 hours. That system is part of the firm’s Place strategy.
Today, goods originate in loca- tions all around the world, travel through distribution channels that may be physical or virtual, and arrive where customers can take possession of them physi- cally or virtually. Place strategy has evolved from a simple mat- ter of “where shall we put the business?” to an interdependent system that involves trade-offs between cost-efficiency and cus- tomer satisfaction.
In a simpler time, when goods originated, were purchased, and were consumed or used within the same community, the Place element of the marketing mix really was mostly a loca- tion question. A grain mill on Main Street America circa 1900
In the past, when goods were produced and consumed within a community, the Place element depended primarily on location. Today, Place covers all decisions about delivering value from producer to end user.
Bettmann/Corbis
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CHAPTER 4Section 4.1 Why Place Matters
occupied a location close to farmers, their crops, and a stream. This put the business in a location close to its customers, the raw materials of production, and a power supply. The mill owner opened his doors and farmers rolled up with their horse-drawn wagons full of grain. He applied a specific industrial process to it (grinding between millstones), and down the chute came flour. The farmer paid for the service and drove off with sacks of flour he could use or sell. In this little scenario, the mill business delivered customer value through a simple specialized service, available at a time and place convenient to customers.
As you have learned, marketing involves developing an offering and pricing it in such a way that its value attracts customers and makes a profit for the company. When customers perceive a suitable balance between the price and the goods or services they receive, they consider the purchase a good value. That balance is what we have termed the customer value equation.
Place strategy is one of the ways a company delivers value to customers. Most firms can- not create and deliver that value all by themselves. Instead, they must work closely with other firms to create a system that delivers the value. That collaboration is what gets goods and services into the hands of those customers who deem them a good value. Getting the partners in place to make that sale—profitably—is why Place matters.
The Changing Language of Place Place makes up one of the four p’s of the marketing mix. Place strategy consists of deci- sions about physical distribution (logistics) and about channel partners—the organiza- tions involved in making a product or service available to its end users. Definitions of Place as part of the marketing mix often include the proposition that the company must “get the right goods in the right quantity to the right place for the lowest possible cost without sacrificing customer service” (White, 2003). This definition includes aspects of Product and Price, revealing the interdependence of the four elements of the marketing mix. Place is integrally connected with the other marketing mix decisions; it cannot be considered in isolation.
Place is a fundamental component of marketing strategy, but that term has fallen out of favor among marketers. Replacing it is the word “distribution” and a suite of related concepts.
Channel partners add value through their role as part of the distribution channel. The American Marketing Association defines a distribution channel as “an organized network (system) of agencies and institutions which, in combination, perform all the functions required to link producers with end customers to accomplish the marketing task” (Mar- ketingpower.com, 2011). The distribution channel (also referred to as a marketing chan- nel), covers “the who and the how” of getting value from producers to consumers.
The various channel partners—manufacturers, intermediaries, and retailers—are the “organized network of agencies and institutions” the American Marketing Association definition refers to. Many marketers, and marketing textbooks, refer to this group of busi- nesses as a supply chain. An effective supply chain integrates marketing, sourcing, logis- tics, operations, and customer service. An entire field of specialization exists around sup- ply chain management.
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CHAPTER 4Section 4.1 Why Place Matters
While considering the language of Place strategy, it is helpful to look at the distribution channel from the customer’s perspective.
Consider, instead of a supply chain, a demand chain: a person in need of a solution to a problem, which creates demand for retailers, which in turn creates demand for suppliers, and so on up the channel toward raw materials. In Chapter 1 the example of Betty’s need to repair a broken chair was used to illustrate how people seek solutions to problems. Betty had a need for a 3/8 in. drill bit because she needed a 3/8 in. hole in order to insert a dowel that would repair the chair. Betty sought out a retailer of drill bits—her local hardware store—and thus initiated a demand chain. The retailer has assembled an array of related products to solve problems like Betty’s, perhaps through several distributors. Up the channel from the hardware store are merchandise distributors responding to the demand of their customers, hardware store buyers. And up the channel from distributors are the manufacturers, located all over the world, responding to demand by making all kinds of drills and bits. Upstream from manufacturers are the providers of raw materials, component parts, manufacturing equipment, and business support services, just so that manufacturers can make those drills and bits.
Looking at distribution strategy from the demand perspective keeps the focus on the cus- tomers, to whose needs the distribution channel must respond. The supply chain seen from this vantage point becomes a demand-driven (or customer-driven) supply chain, in which all decisions are guided by the service-dominant logic that says all offerings derive their value from the service they give to their end-users. End-users (customers) require a specific service utility, which drives product development and distribution to fill that demand, creating a demand-driven supply chain populated with intermediaries focused on meeting customers’ requirements.
For this introduction to strategic issues concerning Place, we will stick with the phrase “distribution channel” to emphasize the river-like flow that delivers goods and services from their source (raw materials) downstream toward their end-users, rather than the phrase “supply chain” with its emphasis on the individual links. To emphasize the cen- trality of customers in this flow, we’ll organize our approach to this broad subject by beginning with the various ways offerings meet potential buyers, and then follow the distribution channel upstream to where the goods originate.
Logistics “Logistics” concerns the physical flow of products from the point of origin to the point of consumption. Physical distribution strategy (logistics) involves how many and what types of storage and transportation resources are needed, and where the storage should be located. While advances in Internet technology have made possible exchange of informa- tion across the globe—in many cases instantaneously—most companies still face physical distribution challenges to get products to their customers at the right time, in the right place, in the right assortment.
Three types of businesses come together to create physical distribution channels:
1. Manufacturers, who take delivery of raw materials and other purchases to make products;
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CHAPTER 4Section 4.1 Why Place Matters
Strategies concerning logistics have two main goals: to maximize customer service and to minimize distribution cost. If, for example, Sandra is looking for a new refrigerator, or an artist-made carrying case for her iPhone, she’ll create a demand to balance customer service with cost-efficiency in the companies she buys from. As a customer she might want Sears to bring her new refrigerator now, before everything in her failed fridge spoils. However, a significant rush charge might convince her to accept some spoilage in return for free delivery on Sears’ schedule. As the iPhone-toting customer of an artist on Etsy, she might want her new bead-embroidered case as fast as a musical download. But when she finds that her artist has orders backed up and won’t be able to create and ship her custom- ized case until next month, she has a decision to make. If she likes the artist’s work well enough, she’ll wait—and if she’s really impatient, she may even be willing to pay a rush fee to bump her order to the head of the line.
Consider the same purchases from the sellers’ side instead of the buyers’. Sears handles the logistics of refrigerator distribution through grouping orders headed to the same side of town, charging a fee to customers unwilling to accommodate their cost-efficient strat- egy. The Etsy artist has chosen hand production over mechanization, accepting that the logistics of balancing supply and demand may occasionally cause an order backlog.
Consumers are seldom aware of all the aspects of logistics affecting the availability of goods at the right time, in the right place. Similarly, many companies are less aware than they should be of the aspects of the customer value equation affected by logistics factors— willingness to pay more for overnight shipping or to switch brands to avoid out-of-stock delays, for example. Successful firms evaluate all logistics with customers’ perspectives as well as internal operational goals in mind.
Every logistics strategy is, in the end, a compromise. Both maximizing customer service and minimizing distribution cost are central concerns of marketers, charged with find- ing and maintaining a competitive advantage for their company’s offerings. But these goals of distribution are essentially mutually exclusive; no perfect balance is possible, only compromise.
2. Distributors, who provide storage and transportation functions, among other services; and
3. Retailers, who sell to consumers for personal, usually non-business use. A retailer may choose a store or a non-store strategy such as in-home sales, direct sales, or online retailing.
For a musical tour of the topic of logistics, follow the link in Field Trip 4.1 to a popular UPS television commercial that aired in 2010.
Field Trip 4.1: Logistics
“Logistics makes the world work better,” begins this commercial created by UPS in 2010. Follow this
link to view the TV spot.
https://www.youtube.com/watch?v=VCh6HnXHKRc
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CHAPTER 4Section 4.1 Why Place Matters
Adding Value Through Logistics The logistics strategy a company chooses can enhance its customer value equation. Con- sider two potential strategies: hub-and-spoke (used by FedEx) and distributed manufac- turing (used by the New York Times).
FedEx created considerable value when it pioneered overnight delivery—a promise the company could meet consistently due to its development of a hub-and-spoke logis-
tics strategy in the 1970s. Even packages destined for relatively close cities, such as Boston and New York, travel first to the FedEx hub in Memphis. While this might seem inefficient, in fact the airplane headed from Boston to Memphis carries packages for many destinations, and the plane heading from Memphis to New York carries packages from many points of origin. Use of a hub-and-spoke logistics strategy gives FedEx a competitive edge in package delivery.
The New York Times uses a dis- tributed manufacturing logis- tics strategy to get printed cop- ies of its paper across the nation
every morning. A resident of Chicago receives a paper that was printed in a Chicago plant, from files shipped electronically when the day’s edition closed in New York. The newspa- pers travel the last leg of their journey by truck to distribution points where delivery driv- ers collect and bag them, soon to fling them at doorsteps in a several-hundred-mile radius of the printing plant. Use of a distributed logistics strategy allows the New York Times to compete with local papers across the United States.
Goods are rarely needed at precisely the moment they’re manufactured, in precisely the location where they are made. Companies develop Place strategies to manage how items will be stored and transported to achieve a balance of supply and demand. Marketers get involved (consulting with operations managers and other key decision-makers) to ensure the balance of cost and customer service delivers an acceptable customer value equation.
Reverse Logistics Physical distribution is not a one-way street. Logistics must accommodate flows in both directions.
On the surface it would appear that a distribution channel flows only one direction, from producers toward end-users, but that is not always the case. Not only do goods have to reach customers; sometimes they have to move from the customer to the manufacturer.
The logistics strategy a company chooses, such as FedEx’s hub- and-spoke strategy, can give it a competitive advantage.
Associated Press
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CHAPTER 4Section 4.2 Retail: Where Customers Meet Sellers
4.2 Retail: Where Customers Meet Sellers
Retailing has been with us since peddlers roved among our ancestors, hawking their wares. Today retailing takes highly diverse forms, including bricks-and-mortar stores ranging from specialty shops to discount houses, and non-store retailers sell- ing online, in homes, and through various forms of direct marketing. What all retailers have in common—what makes them retailers by definition—is that these businesses sell their wares directly to the consumer. Retailing can be extremely competitive. Wise strate- gic marketing mix decisions are essential to survival.
All retailers, regardless of their sales approach, face three strategic issues that affect Place strategy:
1. Market niche; 2. Location; and 3. Merchandise assortment.
Location is the essence of Place strategy for bricks-and-mortar retailers, sitting as they do at the mouth of the distribution channel where the goods pour out. But the market niche a retailer targets influences what makes a good location. The distribution channels’
Sometimes a service requires goods to move from the customer to the provider for pro- cessing or repair. Sometimes distributors, retailers, or customers need to return broken, unwanted, or excess products to the manufacturer. In some cases, companies accept dis- carded products for recycling as a customer service. A logistics strategy is not complete until there is a plan in place accommodating the flow of goods in both directions. The return trip, or reverse logistics (defined as all activity associated with a product or service after the point of sale), seeks to optimize post-sale activity to save money and environ- mental resources.
Many retailers treat merchandise returns as individual transactions with few implica- tions for operating efficiency or marketing impact. Companies that can shorten the link from return to the time of resale, by following best practices in returns management, can achieve gains in both operations and customer retention.
The fundamental goal of Place strategy is to add value without increasing the price cus- tomers must pay. Finding a distribution strategy that reduces cost or adds to customer service is one way to achieve that goal.
Questions to Consider
UPS claimed “logistics makes the world work better” in its 2010 commercial (see Field Trip 4.1). UPS identifies logistics as a relevant business idea to firms of every size; all must get their products from here to there. UPS is hoping companies will make UPS’ services part of their distribution channel. However, the examples of FedEx and the New York Times show that logistics can be accomplished without outsourcing to channel partners like UPS. Describe how owning versus buying physical dis- tribution affects the aims of physical distribution strategy: greater customer service and/or reduced distribution cost.
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CHAPTER 4Section 4.2 Retail: Where Customers Meet Sellers
ability to deliver the merchandise assortment the market niche wants influences location as well. These interdependent strategic issues of niche, location, and merchandise assort- ment are driven by the precise nature of the retail business—that is, how the business delivers value to customers.
Market Niche as Part of Place Strategy Businesses choose to target a market niche to avoid trying to be all things to all peo- ple, a strategy too costly to maintain because of its lack of focus or a compelling value proposition.
A useful way of categorizing the world of retailing is to assess the amount of service a retailer provides in support of the sale. As shown in Figure 4.1, retailers fall somewhere on the axes of cost and service. As service increases, costs almost always go up; few busi- nesses can manage to offer both low cost and high service. Likewise, few businesses oper- ate with low service and high cost; it’s too hard to deliver customer value in that equation.
Figure 4.1: Retail characteristics
Retailers fill a market niche somewhere on a continuum from low cost/low service to high cost/high service. There are not a lot of outliers exhibiting low cost/high service or low service/high cost characteristics.
Service: High
Service: Low
Cost: Low Cost: High
Eyewear store
Housewares store
High-fashion dress shop
Online computer store
Online bookseller
Dollar store
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CHAPTER 4Section 4.2 Retail: Where Customers Meet Sellers
Other ways of classifying retailers include:
• Consumer purchasing behavior (convenience, shopping, specialty, or unsought); • Organizational format (for example, wholly owned or franchised); • Merchandise line(s) carried by the store (for example, specialty stores versus
general-line stores); • Capital requirements in terms of displaying merchandise (stores selling perish-
ables have equipment requirements not found in other retail settings); and • Human resource requirements in terms of expertise (for example, the staff of an
automobile dealer needs knowledge about financing, registering, and licensing issues not relevant in other retail industries).
Systems of classification like these are important to retail marketers because different kinds of retailing require different marketing strategies. Decisions about market niche, location, and merchandise assortment, as well as branding and advertising promises, will all be based on the class in which a retailer fits. Each type of retail business will have spe- cific requirements for its location, which brings us to the next strategic issue.
Retail Location as Part of Place Strategy The location a retailer chooses can make or break a business. The cost of a good retail loca- tion will be one of the business’s highest expenses. A wholesaler or distributor can save money by locating where rents are cheap, but a retailer can’t.
Bricks-and-mortar retailers require a location close to a sufficiently dense population cen- ter to provide a steady stream of customers. But not just any population will do. The demographics of the people around the location must present a good fit between the retailer and the chosen market niche. Traffic patterns in the area are a concern; something as basic as a difficult left turn can spoil a retail location. Time of day matters: a breakfast restaurant will want to locate on the side of the road that most people take to work.
The physical building a retailer occupies becomes part of its brand image. A location in a shopping mall projects one kind of image. Locations on urban “Main Streets” or in revital- ized warehouse districts present different images.
A location decision is not just about where the store should be, but what types of retail activity are going on nearby. Shopping malls have the advantage of strong central man- agement, combined marketing muscle, and typically a major retailer that attracts high traffic—a benefit to smaller stores in the mall. Downtowns, once the center of American retailing, offer some of the same advantages of a mall location if businesses cooperate on issues like parking and store hours. Old industrial areas often find new life when creative people repurpose them for artists’ studios, dance clubs, and the like, chiefly because of inexpensive rents. Each type of location—mall, downtown, or industrial district—con- veys a specific impression, a branding decision that must be part of marketers’ location strategy.
A final factor of retail location, in addition to market demographics, traffic patterns, com- plementary businesses, and brand image, is what goes on inside the store. Layout of the facility, from the display windows to the traffic flow to the way merchandise is displayed, must support the company’s positioning and facilitate sales. The appearance of “Men’s
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CHAPTER 4Section 4.2 Retail: Where Customers Meet Sellers
Zones” in CVS and H-E-B stores—aisles stocked solely with men’s grooming products— resulted from encouragement from manufacturer P&G, reflecting research evidence about men’s shopping habits and rising interest in their appearance (Walden, 2011).
Because all these brick-and-mortar location factors affect businesses’ ability to sell their wares to consumers, they are of concern to marketers and must be considered as part of the Place strategy.
Location in Action: The Brownstone Woman The Brownstone Woman (www .thebrownstonewoman.com) is a “bricks-and-clicks” business— owner Princess Jenkins retails both online and in a store in Harlem, New York. Jenkins has built a local shopping destina- tion with a national following by focusing on elegant women’s wear for an older customer base (40–75 years old). Jenkins’ choice to locate in Harlem reflects her inspiration to create a boutique of ethnically inspired fashions. “I lived in Harlem many years but there were no places I could shop. I realized that Harlem would be an incredible place to start a retail business,” said Jenkins.
Her boutique is situated on a typical urban “Main Street” block in one of Harlem’s dense retail neighborhoods. The narrow storefront provides adequate but not abundant display space. Inside, Jenkins has created an upscale environment for display of clothing, accesso- ries, cosmetics, and gifts. Outside, a courtyard garden provides space for customer events and fashion shows.
Jenkins could choose to pay a higher rent and locate in a larger space or among more upscale, complementary stores. Jenkins has chosen instead a location that meets her stra- tegic need to balance providing an appealing customer experience with control of cost. A second store opened about a mile away in late 2011.
Jenkins also conducts business through an online store and a printed catalog that she mails twice a year. “It’s been a great vehicle for us,” Jenkins said, but expressed surprise that people often mention viewing her products in the catalog or online when they come into the store to purchase (Jenkins, 2011).
The Brownstone Woman blends a bricks-and-mortar strategy with online selling and direct marketing.
The Brownstone Woman
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CHAPTER 4Section 4.2 Retail: Where Customers Meet Sellers
Like The Brownstone Woman, many retailers now blend a bricks-and-mortar strategy with an online strategy, a model marketers refer to as bricks-and-clicks. For retailers an online “location” functions like a storefront. It must attract traffic from the right demo- graphic groups, it must project a consistent and appealing brand image, and it must be laid out in a way that makes it easy for shoppers to find what they’re looking for and talk themselves into buying. Online retailing has many similarities to direct marketing, the next topic coming up. But first, we must consider the third strategic issue facing retailers: merchandise assortment.
Retail Merchandise Assortment as Part of Place Strategy Selection of the retail merchandise assortment is where the “P” of Place connects to the marketing mix “P” of Products, discussed in Chapter 3. Retailers decide which items (indi- vidual products) and lines (closely related products) will become part of the merchandise assortment in their stores or on their websites.
If a business carries too much inventory at any one time, it has paid for more than it needs, raising operating costs. This is bad for the bottom line, but good for business—customer satisfaction is the result when people find what they’re looking for in stock. If a business cuts back on inventory, it enjoys lower costs but runs the risk of disappointed customers who find products unavailable. Many companies turn to just-in-time logistics, developing a distribution channel that can fill orders on short notice. Balancing supply and demand is an important aspect of a retailer’s merchandise strategy. Retailers must also manage shelf space allotment to maximize sales, juggling the number of item facings as well as vertical and horizontal location. In some industries (primarily groceries and chain stores), manufacturers pay slotting fees for placement of their product on retailers’ shelves. The fees vary greatly depending on the market conditions, the product, and the manufacturer.
Another part of that merchandise strategy relates to the company’s brand image. The use of private label products can attract consumers’ attention and stimulate demand. Retailers who carry their own private label product line gain an edge in differentiating their prod- ucts from competitors by extending consumers’ good feelings about the store’s brand to the products on its shelves. Trader Joe’s specialty-grocery chain has made a core market- ing strategy out of producing private label products—such as the Candy-Cane Joe Joe’s discussed in Chapter 3—contracting for a large assortment of products that it can pur- chase cost-effectively, and thus sell for much lower prices than comparable name brands. According to an article published by the Sustainable Industries media company, “Prod- ucts carrying the Trader Joe’s private label have helped differentiate Trader Joe’s from other grocers in its price bracket” (SustainableIndustries.com, 2010).
Field Trip 4.2: Retailers’ Strategic Issues
Call to mind a retail store where you’ve shopped recently. Does that store also have an online retail store? Visit its website; look for evidence of its market niche, location, and merchandise assortment strategies. Does it offer private label products?
If your own recent experience fails to produce a store to visit, go to the website of Trader Joe’s.
http://www.traderjoes.com/
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CHAPTER 4Section 4.2 Retail: Where Customers Meet Sellers
Retail Challenges and Opportunities Retail is a challenging business model. Specialty superstores, non-store alternatives, and middlemen increasingly compete with traditional retailers.
Specialty superstores offering a vast inventory of a specialized product assortment are challeng- ing traditional retailers, with a “buy it cheap and stack it deep” strategy that’s hard to compete with. When home center chains like Lowe’s and Home Depot enter a market, smaller hardware stores find it difficult to compete on price (Sinder- man, 1997).
Non-store alternatives compete with almost every product category found on bricks-and- mortar store shelves. The bookselling indus- try experienced a drastic reorganization from non-store competition in the 2000s as the online retailer Amazon (which opened for business in 1995) drew sales away from bricks-and-mortar retailers. Independently owned bookstores were first to feel the pain. A decade later even the large chains were forced to find new ways to compete or face closure.
Wholesalers and distributors represent other non- store alternatives that compete with retailers in the bricks-and-mortar world. When these compa-
nies sell direct to consumers, online or through mail order, retailers who had previously counted on performing that role are cut out of the picture.
One way traditional retailers have responded to these challenges is through increasing use of technology. The right technology can give a retailer a competitive advantage, through better sales forecasts, inventory control, and improved communication with customers. An example? Retailers are now offering promotional discounts to customers in or near their stores through coupons sent to shoppers’ smartphones.
For the “mom and pop shops” that were once the mainstay of American retailing, empha- sizing their small size and personal touch has become a means of competitive differentia- tion. Many consumers still value face-to-face transactions and trust businesses with local roots for better support after the sale than impersonal mega-retailers or non-store alterna- tives. Many small retailers target a specialty niche to fill a customer need, as The Brown- stone Woman boutique has done. By emphasizing trustworthiness, specialization, and the personal touch, bricks-and-mortar retailers can turn consumers’ longing for meaningful dialogue and engagement (Marketing 3.0) into a competitive advantage.
To succeed, retailers must constantly search for superior marketing mix strategies, tinker- ing with decisions about each of the four p’s—Product, Place, Price, and Promotion.
When specialty superstores like Lowe’s enter a market, smaller stores find it hard to compete with the giants’ inventory depth, breadth, and pricing.
Associated Press
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CHAPTER 4Section 4.2 Retail: Where Customers Meet Sellers
Direct Marketing: A Retail Model Although retailers by definition sell directly to consumers, nothing in that definition states they must do so through a bricks-and-mortar store- front. Many retailers generate their sales through both a physical storefront and an online store. A third category of retailers generate sales without any kind of physical place for consumers to visit; this business model is known as direct market- ing. Direct marketers bypass intermediaries to sell directly to end-users. QVC, the direct mar- keter known for its television programs as well as its extensive online store, is one example.
The factor that differentiates direct marketers from other types of retailers is the absence of face-to-face interaction in the buying exchange. Customers of direct marketers shop through an impersonal medium, such as television, catalog, or website, and complete their purchase transac- tions without interacting with salespeople. Direct marketers face some of the same Place issues that bricks-and-mortar retailers do—they must still choose a market niche, a location, and a merchan- dise assortment—but these issues take on a differ- ent dimension. Direct marketers don’t depend on specific geographic area(s) to provide sufficient customers in their market niche. They can locate the business anywhere that’s practical in terms of the logistics of receiving and delivering goods. Their merchandise assortment can be as small as one item or as broad as Amazon’s.
Many direct marketing companies combine the functions of the entire distribution chan- nel into one business without the use of any intermediaries. Others choose to emphasize the distributors’ role of breaking bulk and assembling lots, buying from many manufac- turers to offer a broad merchandise assortment. Consider Harry and David, the mail- order company whose roots go back to its Oregon fruit orchards. The company has shifted over time from the no-intermediaries model, selling only the fruit it grew, to a broad line that includes chocolates, wine, baked goods, and giftware coming from many sources.
Direct marketers’ success depends on their ability to generate sales through impersonal media. They do so by focusing on strategic marketing mix decisions around the “P” of Pro- motions. In fact, the term “direct marketing” carries a second meaning—it is a promotional technique that seeks direct action from recipients, with a focus on measurable results.
A close cousin to direct marketing is non-store retailing. In this business model buyers and sellers have personal interactions (which distinguishes this model from direct marketing), but in locations other than stores. Telemarketers, multilevel marketers, and home-sales businesses such as Tupperware, Avon, or Creative Memories sell through independent agents who contact potential buyers personally. Because of the tight relationship between sales agent and parent company, non-store retailers have more in common with direct
In 2010, QVC was recognized as “E-Tailer of the Year” by the Accessories Council (QVC, 2011).
PR Newswire/Associated Press
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CHAPTER 4Section 4.3 Intermediaries: The Distribution Channel
marketers than they do with physical or online retail establishments. Non-store retailers and direct marketers get their goods from manufacturer to end-user with few to no inter- mediaries and no retail location.
The type of business model a retailer chooses—physical or online stores, non-store retail- ing, and/or direct marketing—matters to marketers. As mentioned earlier, most market- ing mix decisions reflect the classification into which a retailer fits.
In conclusion, fundamental to all retail Place decisions is the customer’s perspective, spe- cifically the customer segment targeted as part of marketing strategy. (Market segmen- tation and targeting are discussed in depth in Chapter 7.) The three strategic issues for retailers—market niche, location, and merchandise assortment—must be addressed with target customers’ needs foremost in mind. Classifying retail businesses by market niche and other attributes helps sellers select appropriate marketing strategies.
Bricks-and-mortar stores must make physical location decisions, balancing cost and other factors against customers’ perceptions of the fit of location to brand image. All retailers, regardless of whether they are location-based or not, must decide what items to make part of their product assortment and how they will be displayed to customers. Trends includ- ing the rise of specialty superstores, non-store alternatives, and competition from middle- men are increasing the pressure on retailers to respond with new strategies that convey competitive advantage, such as use of new technology.
Questions to Consider
Discuss the ways in which online retailers are like bricks-and-mortar retailers and the ways they resem- ble direct marketers.
4.3 Intermediaries: The Distribution Channel
You learned earlier about the storage and transportation functions distributors pro-vide—their contribution to the logistics strategy of other companies. It’s time to learn about the other services that businesses in the distribution channel provide. Between retailer and manufacturer are intermediaries that help their customers—busi- nesses up and down the distribution channel—bring value to the final consumer.
Intermediaries working together in a distribution channel constitute a supply chain—a network of interdependent entities linked by their roles in serving the same customers. In that chain are vendors who supply raw materials, producers who convert materials into products, storage centers that warehouse and transport products to retailers, and retailers who display and sell products to end users. Manufacturers choose the type of intermedi- aries they need depending on their channel strategy.
Other ways of looking at the supply chain include the concept of the distribution channel, with its emphasis on the flow of goods and services from source to consumer and the flow
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CHAPTER 4Section 4.3 Intermediaries: The Distribution Channel
of payments from consumer to source, and the value chain, focusing on value-adding activities that convert inputs into outputs, contribute to an organization’s bottom line, and help create competitive advantage.
A value chain, supply chain, or distribution channel—the term used depends on which aspect of the function is the focus of attention—typically consists of a logistics system to source and deliver inputs, a manufacturing operation, outbound distribution, retail mar- keting and selling, and finally, after-sales service.
Breaking Bulk, Assembling Lots, and More Intermediaries provide a solu- tion to retailers who need goods available in the right quantity, at the right time, and in the right place, to serve their customers. In terms of the four utilities of customer value discussed in Chapter 1, intermediaries add value by delivering ease of pos- session. To serve retailers, they break bulk, assemble lots, pro- vide financing, and/or assume risks of spoilage, storage, and uncertain demand.
Manufacturers typically make limited assortments of products in large numbers (e.g., Procter & Gamble factory making sham- poos). But consumers demand broad assortments of products and brands, each in small quan- tities (e.g., groceries). This creates the need for wholesalers to buy in bulk from manufac- turers and sell in smaller assortments to retailers or industrial buyers, thus providing the service of managing supply to meet demand.
Additional functions of various intermediaries (channel partners) include:
• Consulting: Providing services including sales forecasts, market research, indus- try information, and advice;
• Marketing: Communicating persuasive messages to generate demand for items; • Promoting: Using sales incentives, special pricing, and other techniques to stimu-
late greater demand; • Logistics: Shipping and transport, warehousing, and inventory control; • Materials handling: Packaging items for safe transport; • Order processing: Creating systems to track the order by generating a pick list,
packing slip, and invoice; • Financing: Using funds to cover the costs of intermediary functions; and
Wholesalers provide the service of breaking bulk and assembling smaller lots because manufacturers make a few products in large quantities but consumers buy many products in small quantities.
Associated Press
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CHAPTER 4Section 4.3 Intermediaries: The Distribution Channel
• Risk-taking: Assuming the risk of intermediary functions (for example, a fire in the warehouse).
A channel strategy may include a mix of these functions, depending on the demands of different product lines. For example, a medical device manufacturer may sell its weight loss products through a wholesaler to retail pharmacies, but sell its physical therapy prod- ucts through sales agents who can provide more support and training than a retail chan- nel partner could.
Intermediaries in the distribution channel create flows of information, of marketing mes- sages, and of goods. There may also be multiple changes of ownership, with an accompa- nying flow of transaction records—orders, invoices, account statements, and payments. All these intermediary functions are necessary.
Wholesale distributors make their income on the difference between the price of goods purchased and the price of goods sold. Sales agents make their income from the percent- age points of a sales commission. Distributors’ customers pressure them to carry a full line, stocked deep enough to support immediate delivery when an order comes in. But purchas- ing inventory in advance of demand is expensive. Distributors’ customers also exert con- siderable pressure to keep prices low, affecting their Price strategy. Distributors can look to other marketing mix factors like Place and Promotion strategies to break the deadlock between customers’ pressures to carry deep product inventory but keep prices low.
Distribution Channel Strategy and Competitive Advantage All businesses—retailers, intermediaries, and manufacturers—must commit to some form of distribution channel strategy. They either need the services distributors offer, or they choose to provide those services as intermediary channel partners. Because relationships in the distribution channel tend to be long-term, each company’s choice of channel part- ners will be a crucial factor in overall business strategy. In this way, too, Place strategy has a significant impact on other aspects of the marketing mix.
One strategic response is to organize a vertical market system—a coordinated distribu- tion channel in which channel partners commit to working together. A vertical market system can achieve greater efficiency and economies of scale and eliminate conflict arising from competing business objectives among the partners. Three common types of vertical market systems are:
1. Administered: The size and influence of a dominant firm leads to coordination in the distribution channel, without a formal agreement or ownership;
2. Contractual: Independent channel partners formally agree to integrate their resources, as in the franchise business model; and
3. Corporate: A manufacturing firm owns and controls a retail chain (forward inte- gration) or a retail chain owns a manufacturer firm (backward integration).
The number of channel partners in a company’s distribution system affects cost and com- plexity of operations. So why would a business develop a channel strategy that involves many partners? To broaden its reach, serve more customers, and thus make more sales. However, increasing the number of businesses involved in the distribution channel cre- ates more difficulty in controlling those businesses. The flow of information, promotional
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CHAPTER 4Section 4.3 Intermediaries: The Distribution Channel
The relationship between number of channel partners and cost of operations is directly proportional, making it increasingly difficult to keep customer service high and prices low as the distribution channel becomes more complex.
messages, goods, and transaction records becomes more complex. A fumble in any part of the flow can directly affect customer service. Also, as the number of relationships multi- ply, it becomes harder to keep prices low, since each strives to operate at a profit. Increas- ing complexity in the distribution channel makes both management and cost containment more challenging.
These risks argue against complex distribution channel strategies. There will always be a need to make trade-offs between the mutually exclusive goals of customer service and cost containment. This is fundamental for marketers, since how the distribution channel functions affects a company’s ability to compete.
Figure 4.2 demonstrates the dynamic relationship of distribution channel characteristics. The ideal (great customer service at low cost) can be difficult to achieve.
Figure 4.2: Distribution channel characteristics
Distribution channelFewer levels More levels
C o
s t
H ig
h e r
co st
L o w
e r
co st
Increasingly difficult to deliver good customer service at reasonable price
In cr
ea si
ng c
om pl
ex ity
, l os
s of
c on
tro l
Relatively easy to deliver good customer service at reasonable price
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CHAPTER 4Section 4.3 Intermediaries: The Distribution Channel
Every business strives to find a way to use its distribution strategy to add value. The company that succeeds in doing so will find itself able to compete on more than just price.
Tracking Technology As the UPS “Logistics” commercial in Field Trip 4.1 emphasizes, tracking technology has become an integral part of physical distribution strategies and a potential source of com- petitive advantage.
The UPC (Universal Product Code) barcode, developed by a grocery industry committee in 1973 bent on automating inventory control to cut labor costs, standardized the repre- sentation of consumer product information (Fox, 2011). Use of bar codes achieved the goal of cutting labor costs, by reducing the time and effort needed to input tracking data manu- ally. It also improved data accuracy. The technology soon spread to almost every aspect of modern life, from product distribution to airline luggage handling.
Tracking technology took another step toward greater efficiency and cost-control with the development of RFID (radio frequency identification) tags, which rely on a microchip to broadcast information. While bar codes require a person to manually scan a label to capture data, RFID enables devices to capture data from tags and send it to a computer system without any manual labor. However, the cost of RFID technology has slowed its adoption (Bragg, 2011). Usage of RFID technology is spreading where the cost can be justi- fied, typically in situations where the amount of product being moved is large enough to absorb the expense.
A company’s approach to logistics can create competitive differentiation. In the case of iMemories, a digital film transfer and hosting company, differentiation in the crowded field of film transfer services is achieved through promoting the use of RFID tracking technology.
Customers for film transfer services must send their original home movies to a service for digitization, expecting to receive the end product on hard drive, DVD, or Blu-ray disks. However, the fear of losing the original movies in transit stops many customers from act- ing, or drives them to a competitor offering a local pick-up/delivery option. To compete, iMemories introduced a “SafeShip Kit + GPS” option. Customers order the kit, which arrives as a crush-proof box ready for packing with home movies, complete with shock- resistant padding and waterproof lining. Also included is a GPS tracking unit (essentially an RFID tag), which the customer activates before shipping. Customers can then log onto the iMemories website to see the location of their packages, in real time.
When iMemories ships a completed product back to the customer, along with the original home movies, the tracking unit is again activated. While technically not necessary—the customer could use any shipping service offering tracking, such as FedEx or UPS, for the same purpose—iMemories has created a value proposition that brands tracking technol- ogy as part of its superior service, thus standing out among competitors.
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CHAPTER 4Section 4.3 Intermediaries: The Distribution Channel
Distribution Channel Challenges and Opportunities Doing business in a Marketing 3.0 world has several effects on distribution channel strat- egies. Advances in technology facilitate communication, making it easier to manage the complexity of multiple channel partners. As a result, more companies are finding it feasi- ble to expand into more markets. Plus, the ability to conduct secure financial transactions online has enhanced the flow of transactional information. E-commerce and the Internet have had a profoundly positive impact on channel strategy.
Marketing 3.0 may be making channel expansion feasible, but another factor—the econ- omy—is working against expansion. Difficult economic times force consumers to resist price increases, which puts pressure on the entire distribution channel to contain or reduce costs. In search of lower prices, some retailers have adopted a membership format that removes middlemen. Members-only buying clubs perform the wholesale functions of breaking bulk and assembling lots. Sam’s Club and Costco are two examples of businesses that threaten traditional distribution channel strategies with new business models.
Decisions about distribution channels are among the most complex and challenging fac- ing marketers. Once set, they are difficult to change—and yet, in the 21st century, business evolves rapidly. Channel systems don’t stand still. Like river channels, they’re always under pressure to change due to influences around them—both upstream and down.
To summarize, intermediaries (channel partners) work together as a supply chain provid- ing functions (supplying, converting, storing, transporting, marketing, selling, and ser- vicing) within a distribution channel. Retailers benefit from intermediaries’ function of breaking bulk and assembling lots, so they can offer goods in the right quantity, at the right time, and in the right place. Businesses seek competitive advantages through distri- bution channel strategies such as vertical marketing systems, merchandise assortments, and tracking technology.
Field Trip 4.3: Distribution as Competitive Advantage
Compare the websites of iMemories and YesVideo, focusing on their promises concerning sending your home movies to be transferred and receiving the finished product. While iMemories uses RFID tracking to establish a competitive point of difference based on physical logistics, YesVideo partners with local retailers like drug stores, Walmart, and Costco to provide a location for customers drop-off and pick-up. As a consumer, which logistics strategy do you find more compelling? Now consider the two strategies from a marketing perspective. Which strategy do you think provides the most advan- tages? Explain your answers.
www.imemories.com www.yesvideo.com
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CHAPTER 4Section 4.4 Manufacturing: Where the Goods Originate
Developing a distribution channel strategy is a significant challenge for marketers for three major reasons:
1. The sheer number of intermediaries that may be involved, 2. The difficulty of assembling channel partners who extend a company’s reach
without increasing the complexity of managing them to an unsustainable degree, and
3. The need for a reasonably flexible channel strategy that adds value but constrains costs.
Channel design requires keeping the demand chain in mind—what do consumers need? It requires assessing distribution channel needs and identifying alternatives: Few or many intermediaries? In what roles? With what responsibilities? And finally, channel design requires evaluating alternatives to choose a strategy that can deliver value and adapt to changing conditions.
Questions to Consider
Technology that facilitates communications and financial transactions has a positive impact on a com- pany’s distribution channel strategy. However, Marketing 3.0 tells us that the same technology that helps one company also reduces barriers to entry for competitors who may challenge that company. Think about Internet applications for distribution channel management. How might technology assist the functions of inventory management, consulting, marketing, promotions, logistics, order process- ing, and financing? Pick one to discuss.
4.4 Manufacturing: Where the Goods Originate
No retailer would exist, nor any intermediary, without manufacturers to produce the stuff that flows down the distribution channel toward consumers. In the industrial parks where manufacturers operate, a vast range of activity is taking place—not just making the goods that consumers buy, but making the machines and pro- cess materials required to make the goods that go downstream to consumers. For every can of dog food that appears in a pet-supply retailer’s merchandise assortment, there’s a group of companies providing goods and services to the dog food manufacturer. One company manufactures canning supplies, another sells meat by-products, another sells industrial food processing installations, and another provides the printed labels to apply to the cans. All that happens before the dog food gets shrink-wrapped onto pallets (requir- ing two or three more suppliers) and hits the truck that carries the product to the retailers.
All of that activity means that manufacturers face logistics issues, just as retailers and intermediaries do. For manufacturers, these issues center around the services required to take delivery of the products and services necessary for their industrial processes, as well
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CHAPTER 4Section 4.4 Manufacturing: Where the Goods Originate
as the services necessary to get goods from the factory floor to the end-user’s door.
Place strategy also puts manu- facturers face-to-face with the “P” of Product strategy (dis- cussed in Chapter 3) in that the demand for the products they manufacture flows from retailers’ strategic decisions about their merchandise assort- ments—another example of the interdependence of the elements of the marketing mix. Manufac- turers must either promote their output to channel partners or create relationships that guaran- tee buyers for what they sell.
Private Label Strategy Ensures Demand Private label products, also known as house brands, represent a relationship between manufacturers and retailers that guarantees demand. As private label products have improved in terms of their product quality and packaging, consumer acceptance has increased. This trend has been positive for retailers who contract with manufacturers for their own house brands.
Most manufacturers, with the exception of direct marketers, sell to channel partners—the intermediary businesses they’ve selected to be part of their distribution channel. Channel partners take ownership from manufacturers, add value through shipping and warehous- ing, and then sell to other channel partners or to the retailers at the mouth of the channel.
In some cases, manufacturers sell directly to retailers, who have contracted for specific products to be manufactured for sale under their own store brands. When retailers con- tract with manufacturers for private label products, they gain an edge. They can sell house brand products with a greater profit margin than other manufacturers’ brands. Several benefits also accrue for the manufacturer, including reduced costs and increased stability.
Costs are reduced because the distribution channel becomes shorter and more straight- forward; the contractual relationship between manufacturer and retailer reduces or elim- inates channel partners to buy, sell, or add value through other services. The primary distribution issue is the physical logistics of moving goods from the point of production to the point of sale. Manufacturers gain a steady customer base that can be more profit- able than relying on wholesale distribution, even with the lower price paid by the retailer taken into account.
For manufacturers, Place issues concern delivery of the products and services needed to make products and the services necessary to get products to market.
Creatas/Thinkstock
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CHAPTER 4Section 4.4 Manufacturing: Where the Goods Originate
There is some cause for concern that stores’ private label brands are a competitive threat to manufacturers’ brands, since many consumers perceive private label products to be a better value.
On the surface it would appear that manufacturing private label products on contract and producing manufacturer-brand products puts the producer in a position of conflict of interest. However, manufacturers who participate in private label supply chains are finding the relationship mutually beneficial. Most manufacturers have been able to sepa- rate how they manage their branded products from any private label products they pro- duce well enough to avoid the potential for competitive threat or conflict of interest. Pri- vate label products increased in popularity during the economic downturn of 2008–2010. “Consumers have come to feel less like they are ‘sacrificing’ quality for lower prices,” said Ken Sawka, managing partner for Outward Insights, a competitive intelligence firm, in an interview with Manufacturing.net in January 2011 (Sawka, 2011).
Industry analysts expect consumers to continue buying private label products in greater volume, even as the economy recovers. Meanwhile, manufacturers are responding by looking for new innovations that will provide competitive differentiation (Sawka, 2011).
Field Trip 4.4: The Private Label Trend
View an 11-minute video interview conducted in March 2011 by host Tim Simmons from the Private Label Manufacturers’ Association with “Supermarket Guru” Philip Lempert on trends concerning col- laboration between retailers and manufacturers.
http://www.plmalive.com/Mar11.html
Or see related articles and link to the video:
http://www.storebrandsdecisions.com/news/2011/03/01/plma-live-with-phil-lempert
Push or Pull? Strategy Affects Promotion Manufacturers’ Place strategy affects their promotional strategy decisions, more evidence of the interdependence of the four p’s of the marketing mix. To get products flowing down the distribution channel, manufacturers must make a choice whether to concentrate on convincing channel partners to buy their goods or focus on reaching potential consumers and persuading them to create demand for the goods by asking channel partners for them.
In a “push” strategy, manufacturers offer incentives that encourage intermediaries to carry the products. These can range from volume discounts to sales rewards like travel packages. Incentives can increase profits for both retailers and manufacturers. In a “pull” strategy, manufacturers use communication channels ranging from mass-market adver- tising to social media to reach end-consumers with messages about features and benefits of the product for sale. Once consumer demand has been stimulated—individuals are requesting that retailers stock the advertised goods—demand flows up the channel to the manufacturer. Manufacturers with sufficient budgets for promotion may combine the strategies, designing promotions for both channel partners and consumers.
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CHAPTER 4Section 4.5 Place Strategy: A Global Approach
4.5 Place Strategy: A Global Approach
The goal of Place strategy is, at its most fundamental, to balance customer service with cost—to find the greatest efficiency in physical logistics and channel partner relationships without sacrificing customer service and thus doing damage to the customer value equation.
It’s now more feasible than ever to do business across national borders. Two aspects of Marketing 3.0 make this so—consumers’ demand for meaningful engagement does not stop at borders, nor does technology’s ability to reduce barriers and expand reach. Doing business across borders can mean exporting products and services, importing them, or a mix of both.
Exporting Retailers with deep pockets can expand into new markets to escape intense competition in the home market. Intermediaries can grow their business by providing retailers with the distribution channel solutions needed to establish themselves in new markets. Manufac- turers can increase overall production by developing or adapting products for the needs of new customer groups in other countries.
Businesses are seeing opportunity everywhere the middle class is expanding, including countries in Europe, Asia, and South America. Starbucks realigned its top management in 2011 to prepare for a corporate growth strategy calling for greater presence worldwide.
For an example of “push versus pull” look no further than the television, where drug manufacturers advertise to potential consumers, hoping to persuade them of the benefits of various medicines and stimulate them to ask their doctors about them—a pull strategy. At the same time, but less visible to the consumer, drug manufacturers address market- ing strategies directly to doctors, hoping to convince them to prescribe their products—a push strategy.
Opting for a private label relationship transfers the responsibility for promotions from the manufacturer to the retailer, making push or pull strategies irrelevant.
As has been shown, two Place concerns affect manufacturers—physical logistics, and dis- tribution channel relationships that either guarantee a buyer or require a promotional strategy to create demand.
Questions to Consider
The manufacturer is considered the beginning of the distribution channel. But B2B companies produce goods and services that are sold to manufacturers. Where does the distribution channel really begin? Describe a distribution channel from the point of view of a baked-goods manufacturer and from the perspective of a flour manufacturer.
What marketing strategy would make sense for either the bakery or the flour manufacturer—a private label production contract, a push strategy, or a pull strategy?
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CHAPTER 4Section 4.5 Place Strategy: A Global Approach
At the time Starbucks, based in Seattle, had nearly 11,000 stores in North America and 6,000 else- where. According to founder Howard Schultz, the company intends to focus on opportuni- ties in markets including China, Brazil, and India (Associated Press, 2011).
Exporting a business model that brought success in the United States is one option to create a global company, like Starbucks taking its cafes stocked with pri- vate label consumer products into new markets. Purchasing a company in the target coun- try is another global business model. Nestlé, the Swiss food- products giant, purchased the Chinese manufacturer Hsu Fu Chi International, a maker of popular candy, chocolate, and pastries, to give it greater presence in China. Similarly, Yum Brands, corporate parent of the Kentucky Fried Chicken and Pizza Hut brands, raised its share of Little Sheep, an operator of hundreds of restaurants throughout China, to more than 90 percent in 2011 (Wassener, 2011).
British distiller Diageo, created in 1997 through the merger of Guinness and Grand Metro- politan, began to step up its distribution investments outside its British/Irish home mar- ket in 2004. In 2011 it reported net sales in North America totaled $5.3 billion; in Europe $4.4 billion; and in Latin America, Middle East, Africa, and other markets $4.2 billion, indicating the success of that global expansion strategy. In 2011 it achieved its next step in that strategy, purchasing China’s Shui Jing Fang distillery, the world’s largest liquor maker (Werdigier, 2011).
Access to new, less-saturated markets is definitely an attractive proposition, as these examples show. However, global distribution channels can be difficult to negotiate. Global marketers must navigate carefully to maximize opportunities and reduce risk from diffi- cult-to-foresee threats.
Global markets offer new opportunities. A successful U.S. company can become a global company by exporting its existing business model.
Tim Graham/Corbis
Field Trip 4.5: Expanding Middle Class
Wherever the middle class is expanding, so is the potential for marketers to develop Place strategies to increase sales. Follow this link to a Goldman Sachs Global Economics Paper published in July 2008 highlighting the shift of consumer spending power away from the richest countries toward a growing group of middle-income countries. On page 4 you’ll find charts showing current distribution of coun- tries with the largest economies in 2008 and projected for 2050.
http://www.ryanallis.com/wp-content/uploads/2008/07/expandingmiddle.pdf
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CHAPTER 4Section 4.5 Place Strategy: A Global Approach
Importing Just as retailers, distributors, and manufacturers can find opportunity by targeting new markets, they can also find new profits by bringing new products to the home market. And while entering new markets beyond U.S. borders typically requires deep pockets, importing offers potential for smaller entrepreneurs. Thousands of relatively small import businesses emerge from Marketing 3.0-style expectations for meaningful engagement, connecting producers and consumers in a business model known as Fair Trade. Fair Trade businesses in the U.S. import products from developing countries, offering assurance of fair trading conditions and higher environmental and social standards for producers as part of their customer value equation.
An example of a Fair Trade importer is Bali and Soul (http://baliandsoul.com), a Wis- consin-based distributor of indigenous crafts from Bali and other developing countries founded by a couple with family ties in both Indonesia and the Midwest. The company’s first product line offered their relatives’ traditional woodcarvings from Bali to retailers in the United States. As the company grew, it expanded into jewelry, metalwork, basketry, fabrics, and art objects sourced from artisans in Ghana, India, and beyond. The business model of Bali and Soul is to break bulk, assemble lots, and provide other services while making money on the margin between purchase price and sale price.
Licensing A potentially profitable business model for importers or exporters involves negotiating licensing arrangements that create a passive income stream. In this model a business arranges for exclusive rights to market a product in a specific territory, and then estab- lishes trade relationships with channel partners including manufacturers, distributors, and retailers. One licensing contract can result in ongoing profits for years, requiring little more than nurturing those partner relationships that keep the distribution channel flow- ing smoothly. Licensing functions well across borders, allowing U.S.-based firms to bring goods from around the world to their home market or take their products to new markets abroad. Either way—inbound or outbound licensing—this strategy gives firms new prod- ucts without investing resources in a full distribution channel strategy.
Global Supply Challenges As stated earlier, there is growing consumer spending power wherever the middle class is expanding around the globe, creating potential for manufacturers, intermediaries, and retailers who are willing to do business across borders.
However, the more complex the supply chain, the more vulnerable the businesses in it become. A business model that wraps around the world is by its nature complex and vul- nerable. Each country will have its own physical distribution system, and it may be dif- ficult for global marketers to adapt their channel strategy from the home market to work in each new country. In developed countries those systems may be hard to penetrate due to existing business relationships and cultural differences. In developing countries distri- bution systems may be weak, inefficient, or nonexistent. Designing a distribution channel strategy that works across borders can be challenging.
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CHAPTER 4Place Strategy Case Study: T-Shirt Distribution
In summer 2011 China’s biggest state-run media outlets set off a scandal when they reported the discovery that DaVinci, furniture stores specializing in imported luxury items, was selling furniture stamped Made in Italy but manufactured in a factory in south- ern China. The revelation exposes some of the supply chain challenges facing companies that manufacture in one market and retail in another (Barboza, 2011).
Day in and day out, the flow of goods adapts to hiccups and setbacks, from flooding of the Mississippi that halts interstate trucking, to volcanic eruptions that ground air travel, to disasters like the combination earthquake and tsunami in 2011 that significantly disrupted Japanese manufacturing of electronics, car parts, and other products (Whipp, 2011). What keeps marketers committed to global Place strategies, in spite of the challenges of adapt- ing to new markets and maintaining complex supply chains? The potential to reach less- saturated markets and increase profits.
Fan merchandise requires complex logistics strategies because consumer demand varies with the outcome of each game.
Associated Press
Questions to Consider
The examples in this section lean toward the experiences of large companies. Do you believe oppor- tunity exists for smaller business to follow a global approach profitably? Give an example of a small or medium-sized business you have recently purchased from that has a global strategy.
Place Strategy Case Study: T-Shirt Distribution
Each year, two teams face off to compete for the title of National Football League champion at the Super Bowl. Across the nation, distribution channel partners for fan merchandise stand at the ready, knowing that a tidal wave of consumer demand will soon erupt for t-shirts from the winning team. But which team will win?
The distribution of imprintable activewear—that’s t-shirts and sweats—requires getting the right goods to the right place at the right time in a business where demand changes daily with the fortunes of sports teams. The channel partners who can do so while controlling costs will deliver customer value successfully. Millions of dollars are in play along the distribution channel that flows from manu- facturers like North Carolina’s Pluma, Inc., to retailers who sell to sports teams’ fans.
Consider the supply chain for t-shirts destined for sale after
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CHAPTER 4Place Strategy Case Study: T-Shirt Distribution
the Super Bowl. Manufacturers like Pluma buy unprocessed cotton grown in Texas and apply manufacturing processes (spinning, knitting, cutting, stitching, and dyeing) until t-shirts come off the assembly line. Those shirts are purchased in bulk by wholesalers who provide the services (chiefly breaking bulk and assembling lots by size and color) that match supply with demand.
Other channel partners buy the t-shirts from the wholesalers. An imprint operation takes delivery, counting on raking in sales to retailers who, on the day of a big game, measure every minute between the win and receiving the goods in hundreds of dollars of lost sales. For the Super Bowl, the imprint shop invests in inventory of shirts in both the competing teams’ colors. It arranges to have workers standing by to silkscreen one or the other set of colored shirts with the winning team’s graphics the moment the big game ends. The wholesalers stand by, deeply stocked with shirts of both colors, knowing that imprinters would soon be placing orders to augment their supply of one or the other.
All up and down the supply chain, businesses strategize how to maximize this sales opportunity while minimizing the risks involved. Invest in both colors of shirts? How many? How would they liquidate the excess supply of shirts of the losing team’s color? As this example shows, the imprintable activewear business requires a tight distribution channel strategy.
Let’s review this chapter’s main points from the perspective of channel partners in this t-shirt distribution channel. The retailer targets the market niche of fans. The community in which they are located dictates which teams local fans follow; the merchandise assort- ment will need to reflect the sport teams that have recently won. This retailer needs a distribution channel strategy capable of extreme flexibility, delivering the colors needed within hours of the wins. Upstream, t-shirt manufacturers’ physical logistics must be up to the task of moving shirts around the United States from point of manufacture to point of sale. Manufacturers in the activewear industry use private label contracts with some brands. Pluma, for example, produces shirts for major branded sports companies like Adidas, Nike, and Starter. Others are sold under the Pluma brand name. To promote their brands, manufacturers typically use push promotional strategies. There is little need to use a pull strategy since there is plenty of consumer demand without it.
Challenge Question
What have you purchased recently? Describe the distribution channel that brought that object to the retailer where you purchased it (at a store, online, or through a direct marketer or non-store retailer). Use common sense to trace it back to its manufacturer—and even to the raw materials. Now identify alternatives to this distribution channel that could potentially add value without increasing cost.
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CHAPTER 4Post-Assessment
Post-Assessment
1. Three Place strategy issues are of greater concern to retailers than other types of businesses. Which of the following lists these three issues?
a. Merchandise assortment, distribution cost, and location b. Location, market niche, and logistics c. Market niche, merchandise assortment, and wholesale suppliers d. Merchandise assortment, location, and market niche
2. Non-store retailers are distinguished from direct marketers by the personal inter- actions that take place between buyer and seller. Which of the following models does NOT qualify as a non-store retail model?
a. Vending machines b. In-home demonstrations c. Telemarketers d. Multilevel marketing
3. Which term BEST characterizes the relationship between the number of chan- nel partners and the cost of operations in a distribution channel, which makes it more difficult to keep service high and prices low as the channel becomes more complex?
a. Inversely proportional b. Dynamically proportional c. Directly proportional d. Unrelated
4. Which of the following promotional strategies is NOT an example of a push strategy?
a. Social media b. Volume discount c. Sales reward d. Incentive
5. Given the challenges inherent in global Place strategies, what motivates market- ers to pursue global opportunities?
a. The prestige of serving a global marketplace using the latest technology b. The opportunity to increase social responsibility by removing middlemen c. The potential to reduce vulnerability and complexity in the supply chain d. The potential to increase profits by reaching less-saturated markets
Answers 1. d. Merchandise assortment, location, and market niche. The answer can be found in Section 4.2.
2. a. Vending machines. The answer can be found in Section 4.2.
3. c. Directly proportional. The answer can be found in Section 4.3.
4. a. Social media. The answer can be found in Section 4.4.
5. d. The potential to increase profits by reaching less-saturated markets. The answer can be found in Section 4.5.
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CHAPTER 4Critical Thinking Questions
Key Ideas to Remember
• The goal of Place strategy in terms of the customer value equation is to add value without increasing cost.
• Retailers face three strategic issues that affect Place strategy: target market niche, location, and merchandise assortment.
• Developing a distribution channel strategy is a significant challenge for market- ers for three major reasons: the number of intermediaries that may be involved, the difficulty of assembling channel partners who extend a company’s reach without increasing the complexity of managing them to an unsustainable degree, and the need for a channel strategy that adds value.
• Manufacturers deal with two concerns: physical logistics and distribution channel relationships that either guarantee demand or require promotion to stimulate it.
• Marketers are motivated to pursue global Place strategies by the potential to reach less-saturated markets and increase bottom-line profits, in spite of the chal- lenge of adapting to new markets and maintaining complex supply chains.
Critical Thinking Questions
1. Rainforest Café restaurants are designed to resemble a rainforest, mixing simula- tion with education to entertain and inform customers about imperiled ecosys- tems while delivering a fun, casual dining experience. In addition to the jungle- themed menu, the restaurants sell merchandise with a rainforest theme. What Place strategies could the gift shops (known as “retail villages”) undertake to add value without increasing cost, and thus enhance the customer value equation?
2. You have learned that exporting, importing, and licensing are business models for companies wanting to pursue a global Place strategy. Evaluate how these models could be applied to Rainforest Café to add value.
3. Barry’s Bootcamp is an exercise chain based in Los Angeles that opened its first location in New York City in 2011. Explain three strategic Place issues facing the business as it searches for a suitable space for its first gym in the new mar- ket area. Base your answer on the fact that Barry’s Bootcamp is a retail service business.
4. Apply what you have learned about distribution channels to the automotive industry. Describe the channel partners required to get a Volkswagen from the assembly line in Germany or Mexico to a showroom in your community. How might Volkswagen’s marketers respond to the three major challenges of distribu- tion channel strategy?
5. Distribution issues vary across geographies, especially international boundaries. What should a U.S. company consider regarding its location and supply chain when attempting to replicate its success in a European Union country overseas? How would your answer differ if the target location were in India instead of Europe?
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CHAPTER 4
bricks-and-clicks A location strategy that combines a physical retail location with an online catalog.
bricks-and-mortar A location strategy based on physical retail locations.
channel partners Businesses that help other businesses deliver value from the source of the goods, add value along the way, and bring value to the end-user.
demand chain The supply chain viewed from the perspective of consumers, who need solutions to problems, which cre- ates demand for retailers, intermediaries, manufacturers, and so on up the distribu- tion channel toward raw materials.
direct marketing A form of non-store retailing in which consumers shop through an impersonal medium and purchase their selections by telephone, mail, or online; a promotional technique that focuses on get- ting customers to take direct action, with measurable results.
distributed manufacturing logistics strategy A system in which manufactur- ing processes take place in multiple loca- tions to achieve time and/or cost efficiency by placing production close to customers.
distribution channel A system of organi- zations involved in the process of making a product or service available to its end users. Also known as a marketing channel.
distributors Providers of storage and transportation functions, including break- ing bulk, assembling lots, providing financing, and assuming risks of spoilage, storage, and uncertain demand.
Fair Trade A market-based approach focusing on exports from developing coun- tries to developed countries, working to improve trading conditions for producers by paying higher prices where the goods originate and holding producers to higher environmental and social standards.
hub-and-spoke logistics strategy A centralized, integrated logistics system in which distribution centers receive products from many origins, consolidate the products, and send them directly to destinations.
house brands Products or services manu- factured by one company for sale under another company’s brand. Also called private label products.
intermediary A businesses model designed to produce profits from helping other businesses to bring value to the final consumer; includes wholesalers, distribu- tors, sales agents, dealers, and others.
logistics Physical distribution of products from the point of origin to the point of consumption.
manufacturers Businesses that take deliv- ery of raw materials and other purchases to make products.
marketing channel Synonym for distri- bution channel; a system of organizations involved in the process of making a prod- uct or service available to its end users.
non-store Retail strategy not involving bricks-and-mortar locations, including in-home sales, direct sales, and online retailing.
Key Terms to Remember
Key Terms to Remember
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CHAPTER 4Key Terms to Remember
retailers Businesses that sell goods and services to consumers for personal, usually non-business use.
RFID (radio frequency identification) Technology that relies on microchips to broadcast information, used to increase efficiency.
reverse logistics All activity associated with a product or service after the point of sale.
slotting fees Fees charged for placement of a manufacturer’s product on retailers’ shelves.
supply chain Alternate term for distribu- tion channel; the network of businesses that move goods from a manufacturer to an end purchaser/consumer.
supply chain management Management of a network of strategically aligned busi- nesses with the goal of movement and storage of goods, including raw materials, inventory, and finished goods, from a man- ufacturer to an end purchaser/consumer.
value chain Interlinked value-adding activities of channel partners that convert inputs into outputs that, in turn, contribute to an organization’s bottom line and help create competitive advantage.
vertical market system A coordinated distribution channel in which channel part- ners commit to working together to achieve greater efficiency and economies of scale and eliminate conflict arising from compet- ing business objectives among the partners.
wholesalers Marketing intermediaries buying in bulk from manufacturers and selling in smaller assortments to retailers or industrial buyers.
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