Channel-Management Decisions

After a company has chosen a channel system, it must select, train, motivate, and evaluate intermediaries for each channel. It must also modify channel design and arrangements over time, including the possibility of expansion into international markets.

1. SELECTING CHANNEL MEMBERS

To customers, the channels are the company. Consider the negative impression customers would get of McDonald’s, Shell Oil, or Mercedes-Benz if one or more of their outlets or dealers consistently appeared dirty, inefficient, or unpleasant.

To facilitate channel member selection, producers should determine what characteristics distinguish the better intermediaries—number of years in business, other lines carried, growth and profit record, financial strength, cooperativeness, and service reputation. If the intermediaries are sales agents, producers should evaluate the number and character of other lines carried and the size and quality of the sales force. If the intermediaries are department stores that want exclusive distribution, their locations, future growth potential, and type of clientele will matter.

2. TRAINING AND MOTIVATING CHANNEL MEMBERS

A company needs to view its intermediaries the same way it views its end users. It should determine their needs and wants and tailor its channel offering to provide them with superior value.

Carefully implemented training, market research, and other capability-building programs can motivate and improve intermediaries’ performance. The company must constantly communicate that intermediaries are crucial partners in a joint effort to satisfy end users of the product. Microsoft requires its third-party service engineers to complete a set of courses and take certification exams. Those who pass are formally recognized as Microsoft Certified Professionals and can use this designation to promote their own business. Other firms use customer sur­veys rather than exams.

CHANNEL POWER Producers vary greatly in their skill in managing distributors. Channel power is the ability to alter channel members’ behavior so they take actions they would not have taken otherwise.⁴² Manufacturers can draw on the following types of power to elicit cooperation:

• Coercive power. A manufacturer threatens to withdraw a resource or terminate a relationship if interme­diaries fail to cooperate. This power can be effective, but its exercise produces resentment and can lead the intermediaries to organize countervailing power.
• Reward power. The manufacturer offers intermediaries an extra benefit for performing specific acts or functions. Reward power typically produces better results than coercive power, but intermediaries may come to expect a reward every time the manufacturer wants a certain behavior to occur.
• Legitimate power. The manufacturer requests a behavior that is warranted under the contract. As long as the intermediaries view the manufacturer as a legitimate leader, legitimate power works.
• Expert power. The manufacturer has special knowledge the intermediaries value. Once the intermediaries acquire this expertise, however, expert power weakens. The manufacturer must continue to develop new expertise so intermediaries will want to continue cooperating.
• Referent power. The manufacturer is so highly respected that intermediaries are proud to be associated with it. Companies such as IBM, Caterpillar, and Hewlett-Packard have high referent power.⁴³

Coercive and reward power are objectively observable; legitimate, expert, and referent power are more subjective and depend on the ability and willingness of parties to recognize them.

Most producers see gaining intermediaries’ cooperation as a huge challenge. They often use positive motivators, such as higher margins, special deals, premiums, cooperative advertising allowances, display allowances, and sales contests. At times they will apply negative sanctions, such as threatening to reduce margins, slow down delivery, or terminate the relationship. The weakness of this approach is that the producer is using crude, stimulus-response thinking.

In many cases, retailers hold the power. One estimate is that manufacturers offer the nation’s supermarkets between 150 and 250 new items each week, of which store buyers reject more than 70 percent. Manufacturers need to know the acceptance criteria buyers, buying committees, and store managers use. ACNielsen interviews found that store managers were most influenced by strong evidence of consumer acceptance, a well-designed advertising and sales promotion plan, and generous financial incentives.

CHANNEL PARTNERSHIPS More sophisticated companies try to forge a long-term partnership with distributors.⁴⁴ The manufacturer clearly communicates what it wants from its distributors in the way of market coverage, inventory levels, marketing development, account solicitation, technical advice and services, and marketing information and may introduce a compensation plan for adhering to the policies.

To streamline the supply chain and cut costs, many manufacturers and retailers have adopted efficient consumer response (ECR) practices to organize their relationships in three areas: (1) demand-side management, or collaborative practices to stimulate consumer demand by promoting joint marketing and sales activities, (2) supply-side management, or collaborative practices to optimize supply (with a focus on joint logistics and supply chain activities), and (3) enablers and integrators, or collaborative information technology and process improve­ment tools to support joint activities that reduce operational problems, allow greater standardization, and so on.

Research has shown that although ECR has a positive impact on manufacturers’ economic performance and capability development, manufacturers may also feel they are inequitably sharing the burdens of adopting it and not getting as much as they deserve from retailers.⁴⁵

3. EVALUATING CHANNEL MEMBERS

Producers must periodically evaluate intermediaries’ performance against such standards as sales-quota attainment, average inventory levels, customer delivery time, treatment of damaged and lost goods, and cooperation in promotional and training programs. A producer will occasionally discover it is overpaying par­ticular intermediaries for what they are actually doing. One manufacturer compensating a distributor for holding inventories found its goods were being held in a public warehouse at its own expense. Producers should set up functional discounts in which they pay specified amounts for the trade channel’s performance of each agreed- upon service. Underperformers need to be counseled, retrained, motivated, or terminated.

4. MODIFYING CHANNEL DESIGN AND ARRANGEMENTS

No channel strategy remains effective over the whole product life cycle. In competitive markets with low entry barriers, the optimal channel structure will inevitably change over time. New technologies have created digital channels undreamed of years ago. The change could mean adding or dropping individual market channels or channel members or developing a totally new way to sell goods. When new competition from Best Buy and Costco forced one-third of Leica’s U.S. dealers to close, the high-end camera maker decided to open its own stylish stores to appeal to serious photographers.⁴⁶

CHANNEL EVOLUTION A new firm typically starts as a local operation selling in a fairly circumscribed market, using a few existing intermediaries. Identifying the best channels might not be a problem; the problem is often to convince the available intermediaries to handle the firm’s line.

If the firm is successful, it might branch into new markets with different channels. In smaller markets, it might sell directly to retailers; in larger markets, through distributors. In rural areas, it might work with general-goods merchants; in urban areas, with limited-line merchants. It may choose to create its own online store to sell directly to customers. It might grant exclusive franchises or sell through all willing outlets. In one country, the firm might use international sales agents; in another, it might partner with a local firm.

Early buyers might be willing to pay for high-value-added channels, but later buyers will switch to lower-cost channels. Small office copiers were first sold by manufacturers’ direct sales forces, later through office equipment dealers, still later through mass merchandisers, and now by mail-order firms and Internet marketers. In short, the channel system evolves as a function of local opportunities and conditions, emerging threats and opportunities, and company resources and capabilities.

5. CHANNEL MODIFICATION DECISIONS

A producer must periodically review and modify its channel design and arrangements.⁴⁷ The distribution channel may not work as planned, consumer buying patterns change, the market expands, new competi­tion arises, innovative distribution channels emerge, and the product moves into later stages in the product life cycle.⁴⁸

To add or drop individual channel members, the company needs to make an incremental analysis. Customer databases and sophisticated analysis tools can provide guidance.⁴⁹ A basic question is: What would the firm’s sales and profits look like with and without this intermediary? Perhaps the most difficult decision is whether to revise the overall channel strategy.⁵⁰ Avon’s door-to-door system for selling cosmetics was modified as more women left the house and entered the paid workforce.

6. GLOBAL CHANNEL CONSIDERATIONS

International markets pose distinct challenges, including variations in customers’ shopping habits and the need to gain social acceptance or legitimacy among others, but opportunities do exist.⁵¹ U.S. retailers such as The Limited and the Gap have become globally prominent. Dutch retailer Ahold and Belgian retailer Delhaize earn almost two-thirds and three-quarters of their sales, respectively, in nondomestic markets. Among foreign-based global retailers in the United States are Italy’s Benetton, Sweden’s IKEA home furnishings stores, and Japan’s UNIQLO casual apparel retailer.

Developing markets have become a target for many retailers. Franchised companies such as Subway sandwich shops have experienced double-digit growth overseas, especially in Brazil and Central and Eastern Europe. In some cases, master franchisees pay a significant fee to acquire a territory or country where they operate as “mini­franchisers” in their own right. More knowledgeable about local laws, customs, and consumer needs than foreign companies, they sell and oversee franchises and collect royalties.⁵²

In India, sales from “organized retail”—hypermarkets, supermarkets, and department stores—make up only a small percentage of the huge market. As Chapter 8 noted, most shopping still takes place in millions of indepen­dent grocery stores or kirana shops, which are run by their owners and are popular because they extend credit and deliver even small orders. India’s complex regulations, poor infrastructure, and expensive real estate also make it a difficult market for retail chains to enter.⁵³

China has similar logistical challenges, though a growing middle class offers opportunity and firms such as Best Buy, Coach, and the Gap are meeting with some success.⁵⁴ But many pitfalls exist in global expansion. The world’s top three retailers—U.S.-based Walmart, UK-based Tesco, and France-based Carrefour—all have struggled to enter certain overseas markets. Consider the plight of Tesco.⁵⁵

TESCO Tesco introduced its Fresh & Easy gourmet mini-supermarkets into California after much research that included spending time with U.S. families and videotaping the contents of their refrigerators. Fresh & Easy’s 200 or so stores were roughly 10,000 square feet, about one-fifth the size of a standard U.S. supermarket but much bigger than a convenience store, with a focus on fresh-food offerings. Yet, after five unprofitable years and more than $1.6 billion in losses, Tesco decided to exit the market in 2013. A host of problems plagued the retailer. Its U.S. customers were unaccus­tomed to British-style ready meals, self-service cash registers, and unorthodox store layouts. Other complaints were that the product range was too narrow, there was no bakery and an underwhelming flower department, and the stores were physi­cally too cold. The United States was not the only trouble spot for Tesco. The company had exited Japan the preceding year and was finding trouble in Central and Eastern Europe. While it focused on geographical expansion, its core supermarket business in the United Kingdom was neglected. Stores weren’t properly staffed, fresh food was not properly maintained, and new private-label products were not introduced. The attempt to add non-grocery items like clothing and electronics proved difficult in a recession, and entry into new areas like banking and telephony was a distraction. After enduring six consecutive quarters of same-store sales declines in its home market, Tesco announced a $1.7 billion program to refresh its UK stores and a pull-back of its global ambitions.

The problems Tesco courted in the United Kingdom are a common downside of overly aggressive global expansion. Selling everything from food to televisions, Carrefour, the world’s second-biggest retailer, has also encountered stiff competition at home, from smaller supermarkets for groceries and from specialist retailers such as IKEA for other goods. Although strong in some parts of Europe and Asia, Carrefour (which means “cross­roads” in French) has been forced to cease operations in Japan, South Korea, Mexico, Czech Republic, Slovakia, Switzerland, and Portugal.⁵⁶

The first step in global channel planning, as so often in marketing, is to get close to customers. To adapt its clothing lines to European tastes, Philadelphia-based Urban Outfitters set up a separate design and merchandising unit in London before it opened its first store in Europe. Although it increased costs, the distinctive blend of U.S. and European looks helped the retailer stand out, and it was one of the few fashion retailers to build strength dur­ing the recent recession.⁵⁷

A good retail strategy that offers customers a positive shopping experience and unique value, if properly adapted, is likely to find success in more than one market. Take Topshop, for instance.⁵⁸

TOPSHOP Founded by Sir Richard Green in 1994, British clothing retailer Topshop is a chain of more than 300 UK stores and 130 franchise stores in 37 countries that commands intense loyalty from its trendy, style-obsessed customer base. Selling primarily women’s party clothes, accessories, and daywear, the chain blends English street fashion, reasonable prices, and fun services. A higher-end, quirkier version of fast-fashion chains H&M and Zara, it allows middle- market consumers to dress trendily and affordably, in punk-inspired pinafores or ladylike tweed. New products are flown in two to three times a week, and store selections are updated multiple times in a day. Partnering with style icons Kate Moss, Stella Vine, and Celia Birtwell to create the latest designs, Topshop offers style advisors, Topshop-to-Go (a Tupperware- type party that brings a style advisor to a customer’s home with outfits for as many as 10 people), and Topshop Express (an express delivery service via Vespa scooters for fashion “emergencies”). The company’s Topman chain caters to a male audience. It seeks prime locations for its stores and complements them with an online store. The 60,000-square-foot store on Broadway in New York City is Topshop’s second biggest and the first flagship store outside the United Kingdom. It has shop-in-shop locations in Nordstrom department stores throughout the United States and in the Karstadt department store chain in Germany.

Source: Kotler Philip T., Keller Kevin Lane (2015), Marketing Management, Pearson; 15th Edition.