International Marketing Channels Chapter 14 International Marketing Channels McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Learning Objectives 1. The variety of distribution channels and how they affect cost and efficiency in marketing 2. The Japanese distribution structure and what it means to Japanese customers and to competing importers of goods 3. How distribution patterns affect the various aspects of international marketing

Chapter Learning Objectives 4. The growing importance of e-commerce as a distribution alternative 5. The functions, advantages, and disadvantages of various kinds of middlemen 6. The importance of middlemen to a product’s success and the importance of selecting and maintaining middlemen

Global Perspective Global Perspective: “500 Million Sticks of Doublemint Today – Billions Tomorrow” Most challenging aspect of selling the gum for Doublemint is how to get the gum through China’s distribution channels: “Mastering the distribution system is the single most important challenge of China’s economic revolution” Finding reliable distributors is a challenge Many are state owned and have little incentive to push one brand over another Doublemint gum found a way to distribute their products effectively thru China Note: Doublemint has a 91% market share in China

International Channels Important Points involved in making channel decisions I. Channel Structure II. Distribution Patterns III. Alternative Middlemen Choices IV. Factors that affect Choice of Channel V. Locating, Selecting, Motivating and Terminating Middlemen

I. Channel Structure Types of Channel Structures: 1. Import-oriented (traditional) distribution structure Strong dependence on imported manufactured goods Demand exceeds supply Chewing gum example in China

I. Channel Structure High density of middlemen Business Philosophy 2. Japanese distribution structure Features: High density of middlemen Channel control Everyone in channel is tied to manufacturers thru such things as: inventory financing; cumulative rebates, merchandising returns and promotional support Business Philosophy “Large-scale retail store law” and the “Large-scale Retail Store Location Acts” Most in Japan and in the U.S. see the Japanese distribution as a “major non-tariff barrier” Note: the Japanese distribution system is changing because of the globalization of markets (more competition, more access, lower prices, etc)

Japanese Distribution Structure Distribution in Japan has long been considered the most effective non-tariff barrier to the Japanese market The Japanese distribution structure is different enough from its U.S. or European counterparts It has four distinguishing features: a structure dominated by many small middlemen dealing with many small retailers—high density of middlemen, channel control by manufacturers, a business philosophy shaped by a unique culture, and laws that protect the foundation of the system—the small retailer

I. Channel Structure Trends: Crossing Borders 14.2 pg. 410 Impact of the internet: 7-11 Japan has a joint venture with www.7dream.com When order is placed on the web, customer then uses 7-11 convenient stores for pick-up points for their orders. E-commerce retailers (eBay, e-Toys, Amazon.com) Ford, Daimler-Chrysler and GM created a website that allows purchase of automotive parts from suppliers: www.covisint.com Sears and Carrefour of France created a retail exchange for retailers and supplier transactions: www.gnx.com

II. Distribution Patterns Understanding these general patterns is important: Middlemen services Line Breadth Costs and margins Channel length Non-existent channels Blocked channels Stocking Power and Competition Retail Patterns Size patterns Direct Marketing Resistance to Change

II. Distribution Patterns Retail Patterns Size patterns Exhibit 14.3 pg. 415 Direct Marketing Amway Resistance to Change

International Channel-of-Distribution Alternatives Home Country Foreign Country The foreign marketer or producer sells to or through Foreign consumer Domestic producer or marketer sells to or through 14-10 Open distribution via domestic wholesale middlemen Foreign agent or merchant wholesalers Foreign retailers Exporter Importer Export management company or company sales force Irwin/McGraw-Hill

III. Alternative Middlemen Choices Classification of Middlemen Agent Middlemen Do not take title to the goods distributed Less risk (manufacturer assumes risk) Merchant Middlemen Take title of goods being distributed (manufactures have less control) Motivated by profit, tend to be less loyal to one brand 3 Alternative Types of Middlemen: 1. Home-Country Middlemen Types & characteristics see exhibit 14.6 2. Foreign-Country Middlemen See exhibit 14.7 3. Government Affiliated Middlemen

IV. Factors that affect choice of Channels The “6 C’s” need to be considered: 1. Cost Investment cost of developing channel; and cost of maintaining channel 2. Capital requirements How much capital is required 3. Control How much control is desired Example: company’s own sales force exerts most control vs. using middlemen

IV. Factors that affect choice of Channels (Cont.) The “6 C’s” need to be considered (cont): 4. Coverage Full market coverage, or targeted coverage to densely populated areas… 5. Character Channel of the distributions system must meet the “character of the company” seeking to do business 6. Continuity Will there be longevity issues How to build loyalty with middlemen is much more difficult than a company’s own sales force

V. Locating, Selecting, Motivating and Terminating Middlemen Factors affecting locating middlemen: Things to look for: Financial stability, managerial stability, productivity, reputation, etc. Sources to use: U.S. Dept. of Commerce, foreign consulates, commercially published directories Selecting Middlemen Two steps 1. Screening 2. Developing the “Agreement”

V. Locating, Selecting, Motivating and Terminating Middlemen (Cont.) Motivating Middlemen Common methods used to motivate middlemen: Financial rewards, psychological rewards, communications, company support and corporate rapport Terminating Middlemen Must consider things such as: Legal protection Control over middlemen Controlling Middlemen Control over the system (distribution network) Control over the middlemen Volume of sales, market coverage, services offered, pricing, advertisement, payment of bills and profitability.

The Internet How the internet affects distribution of products and services E-commerce, B2B (most prevalent in the U.S. oldest companies) Lowers distribution costs (middlemen often eliminated) Example: Crossing Borders 14.4 pg. 429 “No More Roses for my Miami Broker

Cost Cutting Using B2B Internet It reduces procurement costs, making it easier to find the cheapest supplies. It cuts the cost of processing the transactions. It makes possible tighter inventory control.

E-Vendor’s Issues of Concern 1. Culture 2. Adaptation (Translation) 3. Local contact (Buying server space and create mirror sites creating virtual offices in foreign countries.) 4. Payment (Credit cards) 5. Delivery 6. Promotion (Promoting on the web means creating a “retail store” on-line with the same promotional activities (press releases, search engine registration, local news groups and forums))