Chapter 15 Global Distribution Mc Graw-Hill Irwin 2006

Outline Rationalizing Local Distribution Channels Global Wholesaling Global Retailing Channel Actions against Gray Trade Global Channel Design Takeaways.

Rationalizing Local Channels Changing Distributors The distribution channel configuration for entry into a foreign markets is rarely optimal once the product is established on the market The traditional reason for termination of a distributor is The exporting firm finds that the distributor is not doing a good enough job in the market Multiple Channels (Parallel Distribution) Channel changes do not necessarily involve termination of contracts In some cases multiple channels emerge or are created

Exclusive and Dual Distribution EXCLUSIVE DISTRIBUTION DUAL DISTRIBUTION EXPORTER INDEPENDENT LOCAL DISTRIBUTOR RETAILERS EXPORTER INDEPENDENT LOCAL DISTRIBUTOR OEM BUYER RETAILERS

The PLC Effect: How Local Channels Evolve INTRODUCTORY MARKET GROWTH RATE HIGH --PC’s: HOBBYIST STORES --PC’s: MAIL ORDER --DESIGNER APPAREL: BOUTIQUES LOW DECLINING --DESIGNER APPAREL: OFF-PRICE STORES GROWING MATURE --PC’s: SPECIALITY RETAILERS --PC’s: MASS MERCHANDISERS --DESIGNER APPAREL: BETTER DEPARTMENT STORES --DESIGNER APPAREL: MASS MERCHANDISERS

Determinants of Channel Choice 1. Product Requirements (Perishable lettuce, sensitive apples, fine china, scratched cars, beer without freshness, moldy cakes, . . . ) 2. Logistic Feasibility (Equipment by DHL, autos by air, faxes of newsletters, freezer railroad cars, shock-absorbent packaging, vacuum-packed, . . . ) 3. Demand Factors (Importance of speed for repairs, timing of raw materials for inventory, customers’ need for immediate gratification, quality standards of middleman and final user, . . . )

Determinants of Channel Choice 4. Competitive Factors (How fast is fast? How good is good? What are the alternatives for the buyer? Strategic importance of the market? ) 5. Middlemen Resources (Storage capability? Credit or consignment or cash? Motivating with fast delivery? Just-in-time system? Promised supplies? Ability to support the marketing effort? ) 6. Own Resources (Financial, manpower, production capacity)

Wholesaling Functions Primary functions of wholesaling Making contact Negotiating Buying Selling Warehousing Wholesaling is a major component of a country’s infrastructure and its structure reveals important clues as to the country’s stage of development

Wholesaling in Selected Countries

Rationalizing distribution: Italian Pasta in Japan Producer Import agent Conventional Route Processing and packing plant Primary wholesaler Small wholesaler Intermediary wholesaler Retail price: 170 yen/300 g package Retailer Restructured Route Producer Savings: 25% Importing company A/C Processing and packing plant Retail price: 128 yen/300 g package Depots Distribution Wholesalers Distribution centers Retailer

Wholesaling Full-service wholesalers can usually be counted on in most countries However, because of their size and tie-ins with existing brands and chains they might not be willing to distribute the firm’s products The full-service concept should be carefully assessed for each country entered, since a full-service wholesaler will retain market knowledge and control the marketing. For the experienced entrant, limited services wholesalers might be more beneficial, because of increased control and more management learning.

Wholesalers and Power and Competition The size distribution of wholesalers in many countries approximates the well-known “ 80 -20” rule 80 percent of the transactions are handled by 20 percent of the firms Efficiency The trend toward integration is based on the technological developments that have make large-scale economies and technical coordination feasible These vertically and horizontally integrated firms become gate-keepers to the local market – entry barriers.

Retailing • Retailers are the middlemen who buy from wholesalers and manufacturers and sell directly to the ultimate consumer. • The retailing structure involves stores (supermarkets, department stores, specialty stores) as well as banks, restaurants, mail-order, etc. • Different economies have different retail structures (e. g. Gillette blades are sold through drugstores in the US, tobacco shops in Italy, department stores in Germany, on the street in Moscow, at movie counters in Thailand, & from traveling vans in India)

Retail Outlets in Selected Countries

Retailing and Lifestyles The retailing structure has to adapt to the varying living conditions (the lifestyles) of individual households Creating New Channels As economic growth takes place and global trade expands, new alternatives emerge Global Retailing The logistical and operational know-how of leading retailers is helping to increase the trend of retailing being globalized at a fast rate The rapid deployment of point-of-purchase information technology has shifted the power in the channel toward large retailers

World’s Largest Retailers

Global Retailing? • Global expansion of retailing is still difficult. Most large retailers are still pre-dominantly domestic. • The Body Shop is one success story. The factors that helped its global expansion include: • 1. STANDARDIZED PRODUCTS, GLOBAL BRAND • 2. GLOBAL SEGMENTS • 3. A STRONG STORE “CONCEPT” • 4. CONCEPT MOBILITY • 5. SIMILAR INFRASTRUCTURE (REPLICABILITY)

Global Logistics GLOBAL LOGISTICS – the transportation & storage activities necessary to transfer the physical product from the manufacturing plants & warehouses in different countries to various local market countries Nowadays, global distribution has been consolidated such that fully integrated transportation from point to point across the world is possible at low cost.

Transportation as a Trade Barrier Transportation was traditionally one of the strongest trade barriers. Not so any more, because of increased efficiency: 1. SEAMLESS: FROM TRUCK TO TRAIN TO SHIP 2. CONSOLIDATION OF TRANSPORTATION AND WAREHOUSING 3. EXPRESS SERVICES (Fed. Ex, UPS, DHL) 4. RESULT: LOGISTICS ARE OFTEN OUTSOURCED AND NOT A GREAT TRADE BARRIER ANYMORE.

Global Logistics Air Express Technical innovations in computerized inventory systems and numerically controlled machines for good handling made possible the growth of air express systems Ocean Carriers For shipments of bulky and low-value-per-unit products Ocean vessels are still the most economical carrier alternative overseas There have been a number of global carrier alliances in the shipping industry due to the savings involved in sharing resources and the advantage in providing integrated one-stop services to the shipper

Global Logistics Overland Transportation The increasing volume of international trade has put the inland distribution system under pressure One North American solution has been the roll-on-roll-off system in which a loaded container is simply rolled onto a railcar and shipped by rail for part of the way, avoiding congested freeways Warehousing The competitive need on the part of global companies to be “close to the customer” and provide fast and efficient service This places increased demand on warehousing and inventory management

Parallel Distribution & Gray Trade GRAY TRADE - parallel distribution on genuine goods by intermediaries other than authorized channel members Three main factors motivate entrepreneurs to engage in gray trade: 1. Wide price discrepancies between national markets 1. 2. Limited availability of certain models or versions in one market 2. 3. Inexpensive logistics means that transportation can be accomplished with relative ease

The Gray Trade Arbitrage USA home ($) Germany (DM) Japan (Yen) If DM/$ = 1. 8, and Yen/$ = 120, then buy at home If DM/$ > 1. 8, and Yen/$ = 120, then buy in Germany If DM/$ < 1. 8, and Yen/$ > 120, buy in Japan

Seiko’s Channels of Distribution Europe Hong Kong Japan North America Importer Distributors Retailers Broken arrows denote the flow of Seiko watches through unauthorized channels of distribution. Solid arrows denote the flow of Seiko watches through authorized channels of distribution.

Effects of Gray Trade EROSION OF BRAND EQUITY can happen if the gray goods do not perform to the level expected STRAINED RELATIONSHIPS WITH AUTHORIZED CHANNEL MEMBERS arises when channel members face intra-brand competition LEGAL LIABILITIES usually involves warranties that can’t be honored COMPLICATION OF GLOBAL MARKETING STRATEGIES forecasted sales in a market may not be realized when there is a sudden influx of gray goods

Channel Actions against Gray Trade Supply Interference Engaging in relationship building with distributors and requesting the careful screening of orders and careful disposal of surplus inventory Dealer Interference Searching for gray imports at the gray traders’ outlets in the importing country, then asking the dealer to help dispose of the inventory Demand Interference Using advertising to educate customers about the drawbacks of gray goods Strategic Attack Creating stronger reasons for customers to patronize authorized dealers

Global Channel Design Two major considerations: What type of channel/middlemen should be used to ensure that the strategic marketing objectives are met in that country? What are the important functions in the channel network for that country?

Designing Global Channels REVISIT YOUR FSA’S Key success factors and FSA’s vary across countries and across channels WHAT CHANNELS ARE AVAILABLE? Once you identify the critical features of your channel network, find out if the country market possesses these channels CHANNEL TIE-UP Channel members might be difficult to enlist due to entry barriers, competition, and special trade allowances COORDINATION & CONTROL Once a distribution network is established, coordination & control from a centralized headquarters should be feasible

Takeaway The wholesale & retail structure of a local market reflects the country’s culture & economic progress & the way business is done in that country, but new channel modes may be successful if timing & conditions are right.

Takeaway Channel management is a matter of local execution. Local subsidiary managers need to play important roles in implementing any global distribution strategy.

Takeaway Global logistics & transportation are important determinants of financial performance, and their efficiency has been improving dramatically.

Takeaway Parallel distribution & gray trade create control problems for the global firm & resellers, and they can be managed through close cooperation with local distributors in key markets.

Takeaway The creation of globally coordinated channels has to start with a clear understanding of how the firm-specific advantages depend on distribution channel design.