Chapter 17 Outline

Distribution Strategy

A critical element of a firm's marketing mix is its distribution strategy, the means it chooses for delivering the product to the consumer. The way the product is delivered is determined by the firm's entry strategy, which we discussed in Chapter 14. In this section, we examine a typical distribution system, discuss how its structure varies between countries, and look at how appropriate distribution strategies vary from country to country.

A Typical Distribution System

Figure 17.1 illustrates a typical distribution system consisting of a channel that includes a wholesale distributor and a retailer. If the firm manufactures its product in the particular country, it can sell directly to the consumer, to the retailer, or to the wholesaler. The same options are available to a firm that manufactures outside the country. Plus, this firm may decide to sell to an import agent, who then deals with the wholesale distributor, the retailer, or the consumer. The factors that determine the firm's choice of channel are considered later in this section.

Figure 17.1

A Typical Distribution System

The three main differences between distribution systems are retail concentration, channel length, and channel exclusivity.

Differences between Countries

Retail Concentration

In some countries, the retail system is very concentrated, but it is fragmented in others. In a concentrated system, a few retailers supply most of the market. A fragmented system is one in which there are many retailers, no one of which has a major share of the market. In Germany, for example, four retail chains control 65 percent of the market for food products. In neighboring Italy, retail distribution is fragmented, with no chain controlling more than 2 percent of the market.

Many of the differences in concentration are rooted in history and tradition. In the United States, the importance of the automobile and the relative youth of many urban areas have resulted in a retail system centered around large stores or shopping malls to which people can drive. This has facilitated system concentration. Japan's much greater population density together with the large number of urban centers that grew up before the automobile have yielded a more fragmented retail system of many small stores that serve local neighborhoods and to which people frequently walk. In addition, the Japanese legal system protects small retailers. Small retailers can block the establishment of a large retail outlet by petitioning their local government.

There is a tendency for greater retail concentration in developed countries. Three factors that contribute to this are the increases in car ownership, number of households with refrigerators and freezers, and number of two-income households. All of these factors have changed shopping habits and facilitated the growth of large retail establishments sited away from traditional shopping areas.

Channel Length

Channel length refers to the number of intermediaries between the producer (or manufacturer) and the consumer. If the producer sells directly to the consumer, the channel is very short. If the producer sells through an import agent, a wholesaler, and a retailer, a long channel exists. The choice of a short or long channel is primarily a strategic decision for the producing firm. However, some countries have longer distribution channels than others. The most important determinant of channel length is the degree to which the retail system is fragmented. Fragmented retail systems tend to promote the growth of wholesalers to serve retailers, which lengthens channels.

The more fragmented the retail system, the more expensive it is for a firm to make contact with each individual retailer. Imagine a firm that sells toothpaste in a country where there are 50,000 small retailers. To sell directly to the retailers, the firm would have to build a huge sales force. This would be very expensive, particularly since each sales call would yield a very small order. But suppose there are 50 wholesalers in the country who supply retailers not only with toothpaste but also with all other personal care and household products. Because these wholesalers carry a wide range of products, they get bigger orders with each sales call, making it worthwhile for them to deal directly with the retailers. Accordingly, it makes economic sense for the firm to sell to the wholesalers and the wholesalers to deal with the retailers.

Because of such factors, countries with fragmented retail systems also tend to have long channels of distribution. The classic example is Japan, where there are often two or three layers of wholesalers between the firm and retail outlets. In countries such as Great Britain, Germany, and the United States where the retail system is far more concentrated, channels are much shorter. When the retail sector is very concentrated, it makes sense for the firm to deal directly with retailers, cutting out wholesalers. A relatively small sales force is required to deal with a concentrated retail sector, and the orders generated from each sales call can be large. Such circumstances tend to prevail in the United States, where large food companies sell directly to supermarkets rather than going through wholesale distributors.

Channel Exclusivity

An exclusive distribution channel is one that is difficult for outsiders to access. For example, it is often difficult for a new firm to get access to shelf space in US supermarkets. This occurs because retailers tend to prefer to carry the products of long-established manufacturers of foodstuffs with national reputations rather than gamble on the products of unknown firms. The exclusivity of a distribution system varies between countries. Japan's system is often held up as an example of a very exclusive system. In Japan, relationships between manufacturers, wholesalers, and retailers often go back decades. Many of these relationships are based on the understanding that distributors will not carry the products of competing firms. In return, the distributors are guaranteed an attractive markup by the manufacturer. As many US and European manufacturers have learned, the close ties that result from this arrangement can make access to the Japanese market very difficult. But, as the opening case illustrates, it is possible to break into the Japanese market with a new consumer product, as Procter & Gamble did recently with its Joy brand of dish soap. P&G was able to overcome a tradition of exclusivity for two reasons. First, after a decade of lackluster economic performance, Japan is changing. In their search for profits, retailers are far more willing than they have been historically to violate the old norms of exclusivity. Second, P&G has been in Japan long enough and has a broad enough portfolio of consumer products to give it considerable leverage with distributors, enabling it to push new products out through the distribution channel.

Choosing a Distribution Strategy

A choice of distribution strategy determines which channel the firm will use to reach potential consumers. Should the firm try to sell directly to the consumer or should it go through retailers; should it go through a wholesaler; should it use an import agent? The optimal strategy is determined by the relative costs and benefits of each alternative. The relative costs and benefits of each alternative vary from country to country, depending on the three factors we have just discussed: retail concentration, channel length, and channel exclusivity.

Because each intermediary in a channel adds its own markup to the products, there is generally a critical link between channel length, the final selling price, and the firm's profit margin. The longer a channel, the greater is the aggregate markup, and the higher the price that consumers are charged for the final product. To ensure that prices do not get too high due to markups by multiple intermediaries, a firm might be forced to operate with lower profit margins. Thus, if price is an important competitive weapon, and if the firm does not want to see its profit margins squeezed, other things being equal, the firm would prefer to use a shorter channel.

However, the benefits of using a longer channel often outweigh these drawbacks. As we have seen, one benefit of a longer channel is that it cuts selling costs when the retail sector is very fragmented. Thus, it makes sense for an international business to use longer channels in countries where the retail sector is fragmented and shorter channels in countries where the retail sector is concentrated.

Another benefit of using a longer channel is market access--the ability to enter an exclusive channel. Import agents may have long-term relationships with wholesalers, retailers, and/or important consumers and thus be better able to win orders and get access to a distribution system. Similarly, wholesalers may have long - standing relationships with retailers and be better able to persuade them to carry the firm's product than the firm itself would.

Import agents are not limited to independent trading houses; any firm with a strong local reputation could serve as well. For example, to break down channel exclusivity and gain greater access to the Japanese market, in 1991 and 1992, Apple Computer signed distribution agreements with five large Japanese firms including business equipment giant Brother Industries, stationery leader Kokuyo, Mitsubishi, Sharp, and Minolta. These firms use their own long-established distribution relationships with consumers, retailers, and wholesalers to push Apple Macintosh computers through the Japanese distribution system. As a result, Apple's share of the Japanese market increased from less than 1 percent in 1988 to 6 percent in 1991, and 13 percent by 1994.¹²

If such an arrangement is not possible, the firm might want to consider other, less traditional alternatives to gaining market access. Frustrated by channel exclusivity in Japan, some foreign manufacturers of consumer goods have attempted to sell directly to Japanese consumers using direct mail and catalogs. REI, a retailer of outdoor clothing and equipment based in the northwestern United States, had trouble persuading Japanese wholesalers and retailers to carry its products. So instead it began a direct-mail campaign in Japan that is proving very successful.