Chapter 13 Managing Global Distribution Channels

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 2 International Marketing Dilemma Distribution Standardization Distribution Adaptation versus

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 3 Factors Shaping Distribution Level of economic development Consumer disposable income Infrastructure quality Culture Physical environment Legal/political system

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 4 Analyzing National Channels Distribution Density –Amount of exposure or coverage desired for a product, particularly the number of sales outlets necessary to provide for adequate coverage of the entire market Retailers per 1,000 people –Japan = 13 retailers –Europe and U.S. = 6 retailers

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 5 Trend Towards Large-Scale Retailers Trend toward fewer but large-scale retailers –Three factors contributing to this trend: 1.Increase in car ownership – “Have car, will travel.” 2.Increase in households with refrigerators and freezers – not as much need for constant replenishments provided by “mom-and-pop” stores 3.Increase in number of working wives – want one-stop shop for all their needs

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 6 Regulatory and Cultural Factors Affect Retailing Greece bans non-Greek store names Italian supermarkets cannot have gas pumps Dressing rooms must be large enough for large family and many friends in Middle East and service demands are high

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 7 Case Study: Wal-Mart 3x the size of the #2 retailer, Carrefour Every week, 138 million shoppers visit Wal- Mart’s 4,750 stores worldwide 25% of the U.S. economy's productivity gains from 1995 to 1999 came from efficiencies at Wal-Mart $240 billion in sales, more than four times those of Home Depot

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 8 Wal-Mart (cont’d) 1991 Sam’s Club in Mexico City – Today 1600 units in 9 countries; 400,000 associates employed Developed economies = Acquisitions Developing economies = Greenfield or JV

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 9 Wal-Mart’s Internationalization Expertise in managing high-volume inventory and supply networks do not translate as well in Europe and Asia! “ “We realized that, as we continued to buy internationally, the need to leverage international and domestic buying power was key, and the only way to do it effectively was to do it ourselves.” – Ken Easton, head of Wal-Mart procurement division

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 10 Wal-Mart UK before global buying: –before global buying : $24 men’s jeans, 50,000 $14/yd, sold 174,000 jeans per year –after global buying : $12 men’s jeans, 6 million $4.77/yd, sold 1 million jeans per year 2002 –Wal-Mart ends relationship with outside buying organizations and hires hundreds of in-house buyers –Wal-Mart becomes a contractor, importer, and wholesaler in addition to a distributor and retailer. With global buying, Wal-Mart expects to cut procurement costs by 20% and increase gross profit margins by 9% Wal-Mart’s Internationalization (cont’d)

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 11 Wal-Mart - Culture Shock in Germany Wal-mart’s customer service friendliness and hominess not a big hit with German customers –They recoil when employees greet them –They resist employees bagging purchases German salespeople avoid being perceived as “synthetically friendly” –“They want to sell me something, that’s why they’re so friendly!”

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 12 Analyzing National Channels (cont’d) Channel length –The number of intermediaries involved in bringing a given product from the firm to the consumer –Influenced by three factors: Product’s distribution density – negative correlation Average order quantity – negative correlation Availability of channel members – negative or positive correlation

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 13 Analyzing National Channels (cont’d) Distribution logistics –The physical flow of products as they move through the channel Dominant modes of transportation vary by country and region Fuel factors may drive differences in desirability of transportation mode across countries Infrastructure differences (i.e. roads, delivery densities and formats, etc.)

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 14 Distribution Systems by Market Development Developed economies –Well-developed, shorter, efficient distribution systems (except for Japan!) –Advanced logistical systems (e.g. automated warehouses and handling) –But locked-up channels are common! Distributors may have exclusive agreements (contractual or informal) Distributors may be unwilling to take the risk of pioneering an unknown product

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 15 Distribution Systems by Market Development (cont’d) More advanced developing countries Distribution systems slowly become more efficient Improvements in infrastructure (India, China, Brazil) Integration and consolidation in distribution networks Modernization of retailing (Japan didn’t take credit cards “en masse” until about 2005)

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 16 Developing economies –Long, fractured, inefficient distribution systems –Marketer as channel educator Training programs for middlemen and store personnel Help middlemen develop facilities, inventory, shipment, shelving procedures and establish tracking and cost- accounting systems Distribution Systems by Market Development (cont’d)

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 17 Distribution in China Wholesalers capture 80% of revenues from distribution of consumer products, while retailers realize only 20% –In the U.S., numbers are reversed! Chinese government has protected wholesalers –Many are government-owned

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 18 WTO forcing change – Three trends expected: 1.Foreign companies will enter wholesaling, originally as joint ventures 2.Larger and more modernized retailers may increasingly bypass wholesalers 3.Manufacturers will increasingly use third- party logistics providers to cut out traditional wholesalers Distribution in China (cont’d)

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 19 Sources Useful for Locating Possible Distribution Partners U.S. Department of Commerce Banks Directories Trade shows Competitors’ distribution partners Consultants Associations Foreign consulates

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 20 Making the Selection Information to acquire from distributors before making selection Product lines currently carried Annual volume Number of salespeople Geographic territory covered Credit and bank references Physical facilities Relationship with local government Knowledge of English or other relevant languages Experience with foreign and domestic product lines

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 21 Controlling Channel Participants Firms want to ensure local intermediaries execute 4Ps properly Distribution rights can be made for limited time (“trial period”) –Subject to social norms and local laws Intermediaries can be terminated, but BEWARE… –May have to pay a multiple of agent’s gross annual profits –May not be able to terminate relationship at all! –May decide to establish own marketing and sales subsidiaries if local distributors aren’t ambitious enough

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 22 Direct Marketing U.S. is the global leader in direct marketing –Dominated by direct mail and specialty catalogs Direct marketing is increasing in Europe –Dominated by general-merchandise catalogs Despite challenges, direct marketing is becoming increasingly important in developing countries

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 23 Smuggling Smuggling – Illegal transport of products across national borders –Illicit products –Illegal distribution of products that are legal to sell and use Three main reasons for smuggling 1.Trade liberalization is not universal or complete 2.Tariffs and taxes smugglers can avoid 3.Get around consumption prohibition laws

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 24 Government Ambivalence to Smuggling Prior to Poland’s entry into EU, 25% of liquor and 15% of cigarettes consumed in Poland were smuggled Smugglers just sent back home Government recognized smuggling created jobs in depressed border communities EU shut this down, worried EU could be flooded by contraband coming from Poland

Copyright © Houghton Mifflin Company. All rights reserved.Chapter 13 | Slide 25 Cooperating with Smugglers “…where governments are not prepared to address the underlying causes of the smuggling problem (excessive tax on tobacco), businesses such as ours are faced with a dilemma. If the demand for our products is not met, consumers will either switch to our competitor brands or there will be the kind of dramatic growth in counterfeit products that we have seen in Asian markets…Where any government is unwilling to act or their efforts are unsuccessful, we act, completely within the law, on the basis that our brands will be available alongside those of our competitors in the smuggled as well as legitimate markets. – as quoted in Das Gupta, Surajeet, “Did BAT Organize Cigarette Smuggling into India?” Business Standard, December 4, 2000, p.1.