Assignment 1: International Trade Unions
Use the  University online library and the Internet to research trade unions in any one country, for example, China or India. You may also select trade unions in particular sectors, for example, shipping or manufacturing industries.
Examine the impact of the trade unions on the efficiency of export operations and resolution of employee grievances. Write a reflective article on the topic. Cite all sources of information you use.
Write your article in a 3-page Word document formatted in APA style. All written assignments and responses should follow APA rules for attributing sources.
| Assignment 1Â Grading Criteria |
| Described objectives and activities of selected trade unions in a selected country and sector. |
| Examined impact of trade unions on the efficiency of export operations. |
| Examined impact of trade unions on resolution of employee grievances. |
| Selected reliable sources of information and cited sources. |
Assignment 2: Course Project Task 4
You created a draft outline for your final paper in Module 4 and received facilitator feedback on it. You will have revised the outline by now and conducted further research. Now, write a draft of your final paper.
You may choose not to write the introduction and the conclusion at this stage.
You must develop the body of the paper as completely as you can. Make sure your arguments are logically valid and are supported by information from authoritative sources. Present your arguments and ideas in a persuasive form. Be sure to indicate all quoted material and cite sources.
Create and refine any tables, graphs, charts, or other visual elements you want to include. Create any appendices you may want to use.
List all sources of information you use in the “References” section. References must be cited in the body of the text. References should be from peer-reviewed journals, preferably from the Argosy University online library. Web-based references should be used minimally.
Write the draft paper in a 10-page Word document formatted in APA style. All written assignments and responses should follow APA rules for attributing sources.
14:Â International Marketing Channels
Global Perspective: A SINGLE STICK OF DOUBLEMINT TODAY—18 BILLION TOMORROW
Outside a corner candy stand in Shanghai, 10-year-old Zhang Xiaomei folds a piece of Wrigley’s Doublemint gum into her mouth—one of the more than 20 billion sticks the Wm. Wrigley Jr. Company will sell in China this year. To reach the flimsy blue plywood stand that serves this customer in pigtails, the minty stick traveled a thousand miles by truck, rusting freighter, tricycle cart, and bicycle—and it is still freshly soft and sugar-dusted at the time it is sold. That’s something of a wonder, given the daunting scale and obstacles in the world’s largest developing country.
Finding reliable distributors, usually by word of mouth, is the first challenge, but seldom the last. Distributors are often state owned and have little incentive to position a brand, let alone an understanding of how to do so. Market coverage, maintaining product quality, and effective presentation at the point of sale are Wrigley’s goals. Wrigley wants its gum consumed within eight months of manufacture; otherwise, the gum dries out or sugar bleeds through the packaging.
Let’s follow the route taken by Zhang Xiaomei’s stick of Doublemint from a factory in Guangzhou on the southern coast of China to a corner stand in Shanghai. The gum is shipped to Shanghai from Guangzhou on a coastal freighter. But off the coast of Zhejiang province, a marine patrol seizes the ship; along with 960,000 packs of gum, the ship is loaded with smuggled cars. The gum and other cargo are seized by customs, while Wrigley waits and frets the whole time about aging. Finally, the gum is released and loaded onto a truck at the Shanghai port, only to face a complicated, bribe-strewn journey through the distribution system on its way to market. Wrigley-hired trucks are often stopped not only by bandits but also by provincial gendarmes demanding exorbitant fees before they let the vehicles pass.
Once the gum gets into Shanghai, Wrigley loses control. Distribution now depends on one of the firms spun off from China’s once-mighty state-owned trading companies. Wholesalers in China do not do much delivering; instead, like Wrigley wholesaler Chen Tuping, they wait in their warehouses for buyers to arrive.
So how does that stick of gum get to Zhang Xiaomei? Wrigley’s legwork, that’s how. Teams of Wrigley representatives walk the streets, talking to shop owners, handing out free Wrigley posters and plastic display stands. Among the targets is Xu Meili, who runs a booth at the Beautiful & Rich Wholesale Market. After a successful sales call, she begins to stock Wrigley’s gum, which she fetches with a tricycle cart from Mr. Chen, the wholesaler, or one of his competitors.
Wrigley salespeople continue visiting small kiosks, like the blue plywood stand in Shanghai. When stocks run low, she rides her bike the few blocks to Ms. Xu’s booth to buy more gum or candy. All of this just to get Zhang Xiaomei a stick of gum.
“The margin isn’t great,” says Wrigley’s international business chief. But for now, he says, the company is content to build market share. He adds: “We’re a very patient company.” To quote a statement on distribution from Wrigley’s Web site, “The modest price of chewing gum means almost everybody can afford to buy it.” The global market for gum is vast, and Wrigley seeks markets in every country it can enter, even where consumers don’t yet chew gum. For example, Wrigley recently invested in new plants in India, where only a very small number of Indians chew gum. But with a population almost as large as China’s, it means big growth if only a small percentage of the 1 billion people buy the product. Wrigley’s global distribution strategy is to ensure that everyone in the world can get gum wherever and whenever he or she wants.
Sources: Craig S. Smith, “Doublemint in China: Distribution Isn’t Double the Fun,” The Wall Street Journal, December 5, 1995, p. B1; James Murphy, “Wrigley Takes Local Tack,” Media, June 1, 2007; http://www.wrigley.com, 2008.
If marketing goals are to be achieved, a product must be made accessible to the target market at an affordable price. Getting the product to the target market can be a costly process if inadequacies within the distribution structure cannot be overcome. Forging an aggressive and reliable channel of distribution may be the most critical and challenging task facing the international marketer. Moreover, some argue that meeting such challenges is a key catalyst to economic development.1
Each market contains a distribution network with many channel choices whose structures are unique and, in the short run, fixed. In some markets, the distribution structure is multilayered, complex, inefficient, even strange, and often difficult for new marketers to penetrate; in others, there are few specialized middlemen except in major urban areas; and in yet others, there is a dynamic mixture of traditional and new, evolving distribution systems available on a global scale. Regardless of the predominating distribution structure, competitive advantage will reside with the marketer best able to build the most efficient channels from among the alternatives available. And as global trade continues to burgeon and physical distribution infrastructures lag, the challenges will be even greater in the 21st century.2
This chapter discusses the basic points involved in making channel decisions: channel structures; distribution patterns; available alternative middlemen; factors affecting choice of channels; and locating, selecting, motivating, and terminating middlemen.
Channel-of-Distribution Structures
In every country and in every market, urban or rural, rich or poor, all consumer and industrial products eventually go through a distribution process. The distribution process includes the physical handling and distribution of goods, the passage of ownership (title), and—most important from the standpoint of marketing strategy—the buying and selling negotiations between producers and middlemen and between middlemen and customers.
A host of policy and strategic channel selection issues confronts the international marketing manager. These issues are not in themselves very different from those encountered in domestic distribution, but the resolution of the issues differs because of different channel alternatives and market patterns.
Each country market has a distribution structure through which goods pass from producer to user. Within this structure are a variety of middlemen whose customary functions, activities, and services reflect existing competition, market characteristics, tradition, and economic development.
In short, the behavior of channel members is the result of the interactions between the cultural environment and the marketing process. Channel structures range from those with little developed marketing infrastructure, such as those found in many emerging markets, to the highly complex, multilayered system found in Japan.
Import-Oriented Distribution Structure
Traditional channels in developing countries evolved from economies with a strong dependence on imported manufactured goods. In an import-oriented or traditional distribution structure, an importer controls a fixed supply of goods, and the marketing system develops around the philosophy of selling a limited supply of goods at high prices to a small number of affluent customers. In the resulting seller’s market, market penetration and mass distribution are not necessary because demand exceeds supply, and in most cases, the customer seeks the supply from a limited number of middlemen.
This configuration affects the development of intermediaries and their functions. Distribution systems are local rather than national in scope, and the relationship between the importer and any middleman in the marketplace is considerably different from that found in a mass-marketing system. The idea of a channel as a chain of intermediaries performing specific activities and each selling to a smaller unit beneath it until the chain reaches the ultimate consumer is not common in an import-oriented system.
They’re in China, but they aren’t Peking ducks. The birds are for sale in Guangzhou’s free market, the first farmers’ market to be opened in China after the Cultural Revolution. This market was the place where free enterprise found its rebirth after the cultural revolution. Every kind of food is for sale here—from ducks to dogs, from scorpions to dried lizards on sticks.
Because the importer–wholesaler traditionally performs most marketing functions, independent agencies that provide advertising, marketing research, warehousing and storage, transportation, financing, and other facilitating functions found in a developed, mature marketing infrastructure are nonexistent or underdeveloped. Thus few independent agencies to support a fully integrated distribution system develop.
Contrast this situation with the distribution philosophy of mass consumption that prevails in the United States and other industrialized nations. In these markets, one supplier does not dominate supply, supply can be increased or decreased within a given range, and profit maximization occurs at or near production capacity. Generally a buyer’s market exists, and the producer strives to penetrate the market and push goods out to the consumer, resulting in a highly developed channel structure that includes a variety of intermediaries, many of which are unknown in developing markets.
Obviously, few countries fit the import-oriented model today, though the channel structure for chewing gum illustrated in the Global Perspective comes closest to describing a traditional import-oriented structure. As China develops economically, its market system and distribution structure will evolve as well.3Â As already discussed, economic development is uneven, and various parts of an economy may be at different stages of development. Channel structures in countries that have historically evolved from an import-oriented base will usually have vestiges of their beginnings reflected in a less than fully integrated system. At the other extreme is the Japanese distribution system with multiple layers of specialized middlemen.
Japanese Distribution Structure
Distribution in Japan has long been considered the most effective nontariff barrier to the Japanese market.4 Even though the market is becoming more open as many traditional modes of operation are eroding in the face of competition from foreign marketers, it still serves as an excellent case study for the pervasive impact culture plays on economic institutions such as national distribution systems. The Japanese distribution structure is different enough from its U.S. or European counterparts that it should be carefully studied by anyone contemplating entry. The Japanese system has four distinguishing features: (1) a structure dominated by many small middlemen dealing with many small retailers, (2) channel control by manufacturers, (3) a business philosophy shaped by a unique culture,5 and (4) laws that protect the foundation of the system—the small retailer.
High Density of Middlemen.
The density of middlemen, retailers, and wholesalers in the Japanese market is unparalleled in any Western industrialized country.6 The traditional Japanese structure serves consumers who make small, frequent purchases at small, conveniently located stores. An equal density of wholesalers supports the high density of small stores with small inventories. It is not unusual for consumer goods to go through three or four intermediaries before reaching the consumer—producer to primary, secondary, regional, and local wholesaler, and finally to retailer to consumer. Exhibits 14.1 and 14.2 illustrate the contrast between shorter U.S. channels and the long Japanese channels.
Exhibit 14.1:Â Comparison of Distribution Channels between the United States and Japan
While other countries have large numbers of small retail stores, the major difference between small stores (nine or fewer employees) in Japan and the United States is the percentage of total retail sales accounted for by small retailers. In Japan, small stores (94.7 percent of all retail food stores) account for 59.1 percent of retail food sales; in the United States, small stores (90.0 percent of all retail food stores) generate 35.7 percent of food sales. A disproportionate percentage of nonfood sales are made in small stores in Japan as well. Such differences are also reflected in Exhibit 14.2. Notice the American emphasis on supermarkets, discount food stores, and department stores versus the Japanese prevalence of independent groceries and bakers.
Exhibit 14.2:Â Retail Structure in Three Countries
As we shall see in a subsequent section, profound changes in retailing are occurring in Japan. Although it is still accurate to describe the Japanese market as having a high density of middlemen, the number of small stores is declining as they are being replaced by larger discount and specialty stores. The number of retail stores is down more 9 percent since 2002, and the number of retail stores with a staff of four or fewer dropped more than 15 percent. These small stores serve an important role for Japanese consumers. High population density; the tradition of frequent trips to the store; an emphasis on service, freshness, and quality; and wholesalers who provide financial assistance, frequent deliveries of small lots, and other benefits combine to support the high number of small stores.
Channel Control.
Manufacturers depend on wholesalers for a multitude of services to other members of the distribution network. Financing, physical distribution, warehousing, inventory, promotion, and payment collection are provided to other channel members by wholesalers. The system works because wholesalers and all other middlemen downstream are tied to manufacturers by a set of practices and incentives designed to ensure strong marketing support for their products and to exclude rival competitors from the channel. Wholesalers typically act as agent middlemen and extend the manufacturer’s control through the channel to the retail level.
Control is maintained through the following elements:
1. Inventory financing. Sales are made on consignment with credits extending for several months.
2. Cumulative rebates. Rebates are given annually for any number of reasons, including quantity purchases, early payments, achieving sales targets, performing services, maintaining specific inventory levels, participating in sales promotions, remaining loyal to suppliers, maintaining manufacturer’s price policies, cooperating, and contributing to overall success.
3. Merchandise returns. All unsold merchandise may be returned to the manufacturer.
4. Promotional support. Intermediaries receive a host of displays, advertising layouts, management education programs, in-store demonstrations, and other dealer aids that strengthen the relationship between the middleman and the manufacturer.
Business Philosophy.
Coupled with the close economic ties and dependency created by trade customs and the long structure of Japanese distribution channels is a relationship-oriented business philosophy that emphasizes loyalty, harmony, and friendship. The value system supports long-term dealer–supplier relationships that are difficult to change as long as each party perceives economic advantage. The traditional partner, the insider, generally has the advantage.
A general lack of price competition, the provision of costly services, and other inefficiencies render the cost of Japanese consumer goods among the highest in the world. Indeed, when you just compare paychecks at current exchange rates (that is, GDP per capita), Japanese at $40,000 outearn Americans at $38,165. However, if you take into consideration what those paychecks will buy [that is, GDP per capita at purchase price parity (PPP)], then Americans do better than Japanese at $27,992.7Â Such prices create a perfect climate for discounting, which is beginning to be a major factor. The Japanese consumer contributes to the continuation of the traditional nature of the distribution system through frequent buying trips, small purchases, favoring personal service over price, and a proclivity for loyalty to brands perceived to be of high quality. Additionally, Japanese law gives the small retailer enormous advantage over the development of larger stores and competition. All these factors have supported the continued viability of small stores and the established system, though changing attitudes among many Japanese consumers are beginning to weaken the hold traditional retailing has on the market.
Large-Scale Retail Store Law and Its Successor.
Competition from large retail stores had been almost totally controlled by Daitenho—the Large-Scale Retail Store Law (and its more recent incarnations). Designed to protect small retailers from large intruders into their markets, the law required that any store larger than 5,382 square feet (500 square meters) must have approval from the prefecture government to be “built, expanded, stay open later in the evening, or change the days of the month they must remain closed.” All proposals for new “large” stores were first judged by the Ministry of International Trade and Industry (MITI). Then, if all local retailers unanimously agreed to the plan, it was swiftly approved. However, without approval at the prefecture level, the plan was returned for clarification and modification, a process that could take several years (10 years was not unheard of) for approval. Designed to protect small retailers against competition from large stores, the law had been imposed against both domestic and foreign companies. One of Japan’s largest supermarket chains needed 10 years to get clearance for a new site. Toys “R” Us8 fought rules and regulations for over three years before it gained approval for a store. In addition to the Daitenho, there were myriad licensing rules. One investigation of retail stores uncovered many different laws, each requiring a separate license that had to be met to open a full-service store.
Businesspeople in Japan and the United States see the Japanese distribution system as a major nontariff barrier, and Japanese see it as a major roadblock to improvement of the Japanese standard of living. However, pressure from the United States and the Structural Impediments Initiative (SII) negotiations to pry open new markets for American companies have resulted in relaxation of many of the more onerous restrictions on large retailers, both Japanese and foreign.
Changes in the Japanese Distribution System.
The Structural Impediments Initiative, deregulation, and most recently Wal-Mart9 are causing changes in Japanese distribution practices. Ultimately, however, only local merchants challenging the traditional ways by giving the consumer quality products at competitive, fair prices can bring about the demise of the traditional distribution system. Specialty discounters are sprouting up everywhere, and entrepreneurs are slashing prices by buying direct and avoiding the distribution system altogether. For example, Kojima, a consumer electronics discounter, practices what it calls “global purchasing” and buys merchandise anywhere in the world as cheaply as possible. Kojima’s tie with General Electric enables it to offer a 410-liter GE refrigerator for $640, down from the typical price of $1,925, and to reduce the 550-liter model from $3,462 to $1,585.
The “new” retailers are relatively few and account for no more than 5 percent of retail sales, compared with 14 percent for all specialty discounters in the United States. But the impact extends beyond their share of market because they are forcing the system to change.10 Traditional retailers are modifying marketing and sales strategies in response to the new competition as well so as to take advantage of changing Japanese lifestyles. There are also indications that some wholesalers are modernizing and consolidating operations as more retailers demand to buy direct from the manufacturer or from the largest wholesalers. The process is slow because the characteristics of the distribution system are deeply rooted in the cultural history of Japan. However, the long supply chain consisting of many layers of middlemen in Japan is vulnerable to the efficiencies that business-to-business (B2B) commerce provides. Because the Internet allows suppliers and retailers to seek the cheapest price in the global market, it will be harder for the many Japanese middlemen to maintain the control they have had.
Similarly, traditional Japanese retailing is slowly giving ground to specialty stores, supermarkets, discounters, and convenience stores. Fast Retailing, a casual-clothing retailer, features good clothes at bargain prices. The store can sell cheaply without lowering quality because it shuns the traditional middlemen and designs its own clothes and sources them directly from factories in China. In 12 months, Fast Retailing’s sales jumped by one-third to $927 million, just as Japanese retail sales showed their 36th consecutive monthly drop.
Konbini, as convenience stores are called in Japan, are among those retailers bringing about a revolution in Japanese retailing. Besides the traditional array of convenience goods, konbini are adding an Internet feature whereby customers can pay bills, bank, or purchase travel packages, music, and merchandise on in-store terminals or over the Internet at home. With its 8,000 outlets, 7-Eleven Japan has a joint venture with www.7dream.com. Instead of offering door-to-door delivery, 7dream wants to lure customers to the nearest 7-Eleven store to pay and pick up purchases. What seemed to be an impenetrable tradition-bound distribution system just a few years ago now appears to be on the verge of radical change. Japanese retailing seems to be following a direction similar to that of the United States decades earlier and may not be recognizable in a decade or two.
Trends: From Traditional to Modern Channel Structures
Today, few countries are sufficiently isolated to be unaffected by global economic and political changes. These currents of change are altering all levels of the economic fabric, including the distribution structure. Traditional channel structures are giving way to new forms, new alliances, and new processes—some more slowly than others, but all are changing.11 Pressures for change in a country come from within and without. Multinational marketers are seeking ways to profitably tap market segments that are served by costly, traditional distribution systems. In India the familiar clutter12 of traditional retailers is fast giving way to the wide aisles13 of new local and foreign super markets. Direct marketing, door-to-door selling, hypermarkets, discount houses, shopping malls, catalog selling, the Internet, and other distribution methods are being introduced in an attempt to provide efficient distribution channels. Importers and retailers also are becoming more involved in new product development;14 for example, the Mexican appliance and electronics giant Grupo Elektra has formed an alliance with Beijing Automobile Works Group to develop and build low-cost cars for Mexico and export markets.15
CROSSING BORDERS 14.1: Big-Box Cookie-Cutter Stores Don’t Always Work
Wal-Mart, JCPenney, Office Depot, and Starbucks are all going global with their successful U.S. operating strategies. However, adaptation is still important, and many have had to adapt their operating strategy to accommodate cultural and business differences. Growth strategies must be supported by three foundations: (1) The retailer must offer a competitively superior assortment of products as defined by local customers, (2) the retailer must be able to develop superior economies across the value chain that delivers the product to the local consumer, and (3) global retailers must be able to execute in the local environment.
Consider, for example, some of the problems U.S. retailers have had when building their global strategies on these three pillars.
• In fashion and clothing markets, personal taste is critical in the buying decision. Distinctions in culture, climate, and even physiology demand that products be tailored to each market. Tight skirts, blouses, and any other article that tightly hugs the female silhouette are sure sellers in southern Europe and are sure losers in the north. Dutch women bicycle to work, so tight skirts are out. French men insist that trousers be suitable for cuffs; German men cannot be bothered with cuffs. Rayon and other artificial fabrics are impossible to sell in Germany, but next door in Holland, artificial fabrics are popular because they are much cheaper.
• The best-selling children’s lines in northern Europe don’t have a significant following in France; the French dress their children as little adults, not as kids. One of the best sellers is a downsized version of a women’s clothing line for girls.
• Operational costs vary too. Costs in the United States, where the minimum wage is $7.75 per hour, are dramatically different than in France, where the minimum wage is over $10.00, including employer social charges. As a consequence, Toys “R” Us has been forced to adapt its operating structure in France, where it uses one-third fewer employees per store than it does in the United States.
• The image of Sam Walton’s English setter on packages of its private-label dog food, Ol’ Roy, was replaced with a terrier after Wal-Mart’s German executives explained that terriers are popular in Germany, while setters aren’t familiar.
• Office Depot closed its U.S.-style cookie-cutter stores in Japan and reopened stores one-third the size of the larger ones. Customers were put off by the warehouselike atmosphere and confused by the English-language signs. The new stores have signs in Japanese and are stocked with office products more familiar to Japanese and purchased locally, such as two-ring loose-leaf binders rather than the typical three-ring binders sold in the United States.
Sources: Ernest Beck and Emily Nelson, “As Wal-Mart Invades Europe, Rivals Rush to Match Its Formula,” The Wall Street Journal, October 6, 1999; Amy Chozick, “Foof Revives Starbucks Japan,” The Wall Street Journal Asia, October 24, 2006, p. 19.
Some important trends in distribution will eventually lead to greater commonality than disparity among middlemen in different countries. Wal-Mart, for example, is expanding all over the world—from Mexico to Brazil and from Europe to Asia.16 The only major disappointment for the American juggernaut has been it lack of scale and profits in South Korea; in 2006 the firm sold its five stores there.17 Avon is expanding into eastern Europe; Mary Kay Cosmetics and Amway into China; and L.L. Bean and Lands’ End have successfully entered the Japanese market. The effect of all these intrusions into the traditional distribution systems is change that will make discounting, self-service, supermarkets, mass merchandising, and e-commerce concepts common all over the world, elevating the competitive climate to a level not known before.
As U.S. retailers have invaded Europe, staid, nationally based retailers have been merging with former competitors and companies from other countries to form Europewide enterprises.18 Carrefour, a French global marketer, merged with Promodes, one of its fierce French competitors, to create, in the words of its CEO, “a worldwide retail leader.” The U.K. supermarket giant Sainsbury has entered an alliance with Esselunga of Italy (supermarkets), Docks de France (hypermarkets, supermarkets, and discount stores), and Belgium’s Delhaize (supermarkets). The alliance provides the four companies the opportunity to pool their experience and buying power to better face growing competition and opportunity afforded by the single European market and the euro.
While European retailers see a unified Europe as an opportunity for pan-European expansion, foreign retailers are attracted by the high margins and prices. Costco, the U.S.-based warehouse retailer, saw the high gross margins that British supermarkets command (7 to 8 percent compared with 2.5 to 3 percent in the United States) as an opportunity. Costco prices will initially be 10 to 20 percent cheaper than rival local retailers.
Expansion outside the home country, as well as new types of retailing, is occurring throughout Europe. El Corte Inglés, Spain’s largest department store chain, not only is moving into Portugal and other European countries but also was one of the first retailers to offer a virtual supermarket on the Internet (www.elcorteingles.es) and to sponsor two 24-hour home shopping channels in Spain. Increasingly smaller retailers are also expanding overseas.19 Another Spanish retailer, Mango, has opened a store in New York City and, along with other European competitors, is taking advantage of low costs of operation in the United States associated with the sinking dollar.20
One of Wal-Mart’s strengths is its internal Internet-based system, which makes its transactions with suppliers highly efficient and lowers its cost of operations. Indeed, it is buying ailing retailers around the world with the intention of “saving them” with its distribution technologies. This same type of system is available on the Internet for both business-to-business and business-to-consumer transactions. For example, General Motors, Ford Motor Company, and DaimlerChrysler have created a single online site called Covisint (www.covisint.com) for purchasing automotive parts from suppliers, which is expected to save the companies millions of dollars. A typical purchase order costs Ford $150, whereas a real-time order via Covisint will cost about $15. Sears, Roebuck and Carrefour of France have created GlobalNetXchange (www.gnx.com), a retail exchange that allows retailers and their suppliers to conduct transactions online. Any company with a Web browser can access the exchange to buy, sell, trade, or auction goods and services. Described as “one of the most dramatic changes in consumer-products distribution of the decade,” the exchange is expected to lower costs for both buyer and supplier. As more such exchanges evolve, one can only speculate about the impact on traditional channel middlemen.
We have already seen the impact on traditional retailing within the last few years caused by e-commerce retailers such as Amazon.com, Dell Computer, eBay, and others—all of which are expanding globally. Most brick-and-mortar retailers are experimenting with or have fully developed Web sites, some of which are merely extensions of their regular stores, allowing them to extend their reach globally. L.L. Bean, Eddie Bauer, and Lands’ End are examples.
One of the most challenging aspects of Web sales is delivery of goods. As discussed previously, one of the innovative features of the 7dream program at 7-Eleven stores in Japan is the use of convenience stores for pick-up points for Web orders. It has worked so well in Japan that Ito-Yokado Corporation, owner of 7-Eleven Japan and 72 percent of the U.S. chain, is exporting the idea to U.S. stores. In the Dallas–Fort Worth area, 250 stores have installed ATM-like machines tied into a delivery and payment system that promises to make 7-Eleven stores a depot for e-commerce. FedEx, UPS, and other package delivery services that have been the backbone of e-commerce delivery in the United States are offering similar services for foreign customers of U.S. e-commerce companies, as well as for foreign-based e-commerce companies. When goods cross borders, UPS and others offer seamless shipments, including customs and brokerage. Most of these service companies are established in Europe and Japan and are building networks in Latin America and China.
Now that Russians can own their homes, they’re spending fast in home improvement stores like this one in St. Petersburg. In English it would be called “Super Home.”
The impact of these and other trends will change traditional distribution and marketing systems.21 While this latest retailing revolution remains in flux, new retailing and middlemen systems will be invented, and established companies will experiment, seeking ways to maintain their competitive edge. Moreover, it is becoming more dangerous to think of competitors in terms of individual companies—in international business generally, and distribution systems particularly, a networks perspective is increasingly required. That is, firms must be understood in the context of the commercial networks of which they are a part.22 These changes will resonate throughout the distribution chain before new concepts are established and the system stabilizes. Not since the upheaval that occurred in U.S. distribution after World War II that ultimately led to the Big-Box type of retailer has there been such potential for change in distribution systems. This time, however, such change will not be limited mostly to the United States—it will be worldwide.
Distribution Patterns
Even though patterns of distribution are in a state of change and new patterns are developing, international marketers need a general awareness of the traditional distribution base. The “traditional” system will not change overnight, and vestiges of it will remain for years to come. Nearly every international firm is forced by the structure of the market to use at least some middlemen in the distribution arrangement. It is all too easy to conclude that, because the structural arrangements of foreign and domestic distribution seem alike, foreign channels are the same as or similar to domestic channels of the same name. Only when the varied intricacies of actual distribution patterns are understood can the complexity of the distribution task be appreciated. The following description of differences in retailing should convey a sense of the variety of distribution patterns in general including wholesalers.
PEMEX (PetrĂłleos Mexicanos), the Mexican national oil company, will not let foreign firms distribute there. However, in Malaysia, a Mobil station sits right across the boulevard from a government-owned PETRONAS (Petroliam Nasional) station.
Retail Patterns
Retailing shows even greater diversity in its structure than does wholesaling.23 In Italy and Morocco, retailing is composed largely of specialty houses that carry narrow lines, whereas in Finland, most retailers carry a more general line of merchandise. Retail size is represented at one end by Japan’s giant department store Mitsukoshi, which reportedly enjoys the patronage of more than 100,000 customers every day, and at the other extreme by the market of Ibadan, Nigeria, where some 3,000 one- or two-person stalls serve not many more customers. Some manufacturers sell directly to consumers through company-owned stores such as Cartier and Disney,24 and some sell through a half-dozen layers of middlemen.
Size Patterns.
The extremes in size in retailing are similar to those that predominate in wholesaling. Exhibit 14.3 dramatically illustrates some of the variations in size and number of retailers per person that exist in some countries. The retail structure and the problems it engenders cause real difficulties for the international marketing firm selling consumer goods. Large dominant retailers can be sold to directly, but there is no adequate way to reach small retailers who, in the aggregate, handle a great volume of sales. In Italy, official figures show there are 931,000 retail stores, or one store for every 63 Italians. Of the 269,000 food stores, fewer than 10,000 can be classified as large. Thus retailers are a critical factor in adequate distribution in Italy.
Exhibit 14.3:Â Retail Structure in Selected Countries
Underdeveloped countries present similar problems. Among the large supermarket chains in South Africa, there is considerable concentration. Of the country’s 31,000 stores, 1,000 control 60 percent of all grocery sales, leaving the remaining 40 percent of sales to be spread among 30,000 stores. To reach the 40 percent of the market served by those 30,000 stores may be difficult. In black communities in particular, retailing is on a small scale—cigarettes are often sold singly, and the entire fruit inventory may consist of four apples in a bowl.
Retailing around the world has been in a state of active ferment for several years. The rate of change appears to be directly related to the stage and speed of economic development, and even the least developed countries are experiencing dramatic changes. Supermarkets of one variety or another are blossoming in developed and underdeveloped countries alike. Discount houses that sell everything from powdered milk and canned chili to Korean TVs and DVD players are thriving and expanding worldwide.25
Direct Marketing.
Selling directly to the consumer through mail, by telephone, or door-to-door is often the approach of choice in markets with insufficient or underdeveloped distribution systems. The approach, of course, also works well in the most affluent markets. Amway, operating in 42 foreign countries, has successfully expanded into Latin America and Asia with its method of direct marketing. Companies that enlist individuals to sell their products are proving to be especially popular in eastern Europe and other countries where many people are looking for ways to become entrepreneurs. In the Czech Republic, for example, Amway Corporation signed up 25,000 Czechs as distributors and sold 40,000 starter kits at $83 each in its first two weeks of business. Avon is another American company that is expanding dramatically overseas.
Direct sales through catalogs have proved to be a successful way to enter foreign markets. In Japan, it has been an important way to break the trade barrier imposed by the Japanese distribution system. For example, a U.S. mail-order company, Shop America, teamed up with 7-Eleven Japan to distribute catalogs in its 4,000 stores. Shop America sells items such as compact discs, Canon cameras, and Rolex watches for 30 to 50 percent less than Tokyo stores; a Canon Autoboy camera sells for $260 in Tokyo and $180 in the Shop America catalog.
Many catalog companies are finding they need to open telephone service centers in a country to accommodate customers who have questions or problems. Hanna Andersson (the children’s clothing manufacturer), for example, received complaints that it was too difficult to get questions answered and to place orders by telephone, so it opened a service center with 24 telephone operators to assist customers who generate over $5 million in sales annually. Many catalog companies also have active Web sites that augment their catalog sales.
Resistance to Change.
Efforts to improve the efficiency of the distribution system, new types of middlemen, and other attempts to change traditional ways are typically viewed as threatening and are thus resisted.26Â A classic example is the restructuring of the film distribution business being caused by the fast changing technologies of digitization and piracy. Laws abound that protect the entrenched in their positions. In Italy, a new retail outlet must obtain a license from a municipal board composed of local tradespeople. In a two-year period, some 200 applications were made and only 10 new licenses granted. Opposition to retail innovation is everywhere, yet in the face of all the restrictions and hindrances, self-service, discount merchandising, liberal store hours, and large-scale merchandising continue to grow because they offer the consumer convenience and a broad range of quality product brands at advantageous prices. Ultimately the consumer does prevail.
CROSSING BORDERS 14.2: It Depends on What “Not Satisfied” Means
Amway’s policy is that dissatisfied customers can get a full refund at any time, no questions asked—even if the returned bottles are empty. This refund policy is a courtesy to customers and a testament that the company stands behind its products, and it is the same all over the world. But such capitalistic concepts are somewhat unfamiliar in China.
The best game in town for months among the rising ranks of Shanghai’s entrepreneurs was an $84 investment for a box of soaps and cosmetics that they could sell as Amway distributors. Word of this no-lose proposition quickly spread, with some people repackaging the soap, selling it, and then turning in the containers for a refund. Others dispensed with selling altogether and scoured garbage bins instead, showing up at Amway’s Shanghai offices with bags full of bottles to be redeemed.
One salesman got nearly $10,000 for eight sacks full of all kinds of empty Amway containers. And at least one barbershop started using Amway shampoos for free and returning each empty bottle for a full refund. In a few weeks, refunds were totaling more than $100,000 a day. “Perhaps we were too lenient,” said Amway’s Shanghai chief. Amway changed the policy, only to have hundreds of angry Amway distributors descend on the company’s offices to complain that they were cheated out of their money. Amway had to call a press conference to explain that it wasn’t changing its refund policy, simply raising the standard for what is deemed dissatisfaction. If someone returns half a bottle, fine, but for empties, Amway announced it would check records to see if the person had a pattern of return.
But the company did not anticipate the unusual sense of entitlement it had engendered in China. The satisfaction-guaranteed policy did not spell out specifically what dissatisfaction meant, something people in the Western world understood. “We thought that it would be understood here, too.” The change in policy left some dissatisfied. One distributor protested, “Don’t open a company if you can’t afford losses.” Despite these initial problems, Amway apparently is learning the market—the company doubled its sales last year in China to $2 billion.
Sources: Craig S. Smith, “Distribution Remains the Key Problem for Market Makers,” Business China, May 13, 1996, p. 4; “In China, Some Distributors Have Really Cleaned Up with Amway,” The Wall Street Journal, August 4, 1997, p. B1; “Avon Forays into Healthcare Sector via Direct Sales,” SinoCast China Business Daily News, January 14, 2008, p. 1.
Alternative Middleman Choices
A marketer’s options range from assuming the entire distribution activity (by establishing its own subsidiaries and marketing directly to the end user) to depending on intermediaries for distribution of the product. Channel selection must be given considerable thought because once initiated, it is difficult to change, and if it proves inappropriate, future growth of market share may be affected.
The channel process includes all activities, beginning with the manufacturer and ending with the final consumer. This inclusion means the seller must exert influence over two sets of channels: one in the home country and one in the foreign-market country. Exhibit 14.4 shows some of the possible channel-of-distribution alternatives. The arrows show those to whom the producer and each of the middlemen might sell. In the home country, the seller must have an organization (generally the international marketing division of a company) to deal with channel members needed to move goods between countries. In the foreign market, the seller must supervise the channels that supply the product to the end user. Ideally, the company wants to control or be directly involved in the process through the various channel members to the final user. To do less may result in unsatisfactory distribution and the failure of marketing objectives. In practice, however, such involvement throughout the channel process is not always practical or cost effective. Consequently, selection of channel members and effective controls are high priorities in establishing the distribution process.
Exhibit 14.4:Â International Channel-of-Distribution Alternatives
Once the marketer has clarified company objectives and policies, the next step is the selection of specific intermediaries needed to develop a channel. External middlemen are differentiated according to whether or not they take title to the goods: Agent middlemen work on commission and arrange for sales in the foreign country but do not take title to the merchandise. By using agents, the manufacturer assumes trading risk but maintains the right to establish policy guidelines and prices and to require its agents to provide sales records and customer information. Merchant middlemen actually take title to manufacturers’ goods and assume the trading risks, so they tend to be less controllable than agent middlemen. Merchant middlemen provide a variety of import and export wholesaling functions involved in purchasing for their own account and selling in other countries. Because merchant middlemen primarily are concerned with sales and profit margins on their merchandise, they are frequently criticized for not representing the best interests of a manufacturer. Unless they have a franchise or a strong and profitable brand, merchant middlemen seek goods from any source and are likely to have low brand loyalty. Ease of contact, minimized credit risk, and elimination of all merchandise handling outside the United States are some of the advantages of using merchant middlemen.
Middlemen are not clear-cut, precise, easily defined entities. A firm that represents one of the pure types identified here is rare. Thus intimate knowledge of middlemen functions is especially important in international activity because misleading titles can fool a marketer unable to look beyond mere names. What are the functions of a British middleman called a stockist, or one called an exporter or importer? One exporter may, in fact, be an agent middleman, whereas another is a merchant. Many, if not most, international middlemen wear several hats and can be clearly identified only in the context of their relationship with a specific firm.
Only by analyzing middlemen functions in skeletal simplicity can the nature of the channels be determined. Three alternatives are presented: first, middlemen physically located in the manufacturer’s home country; next, middlemen located in foreign countries; and finally, government-affiliated middlemen.
Home-Country Middlemen
Home-country middlemen, or domestic middlemen, located in the producing firm’s country, provide marketing services from a domestic base. By selecting domestic middlemen as intermediaries in the distribution processes, companies relegate foreign-market distribution to others. Domestic middlemen offer many advantages for companies with small international sales volume, those inexperienced with foreign markets, those not wanting to become immediately involved with the complexities of international marketing, and those wanting to sell abroad with minimal financial and management commitment. A major trade-off when using home-country middlemen is limited control over the entire process. Domestic middlemen are most likely to be used when the marketer is uncertain or desires to minimize financial and management investment. A brief discussion of the more frequently used types of domestic middlemen follows.
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