Marketing Channel Strategy International Edition PDF

PART III Channel Structures and Strategies CHAPTER 6 Retailing Structures and Strategies LEARNING OBJECTIVES After reading this chapter, you will be able to: M 1...

PART III Channel Structures and Strategies CHAPTER 6 Retailing Structures and Strategies LEARNING OBJECTIVES After reading this chapter, you will be able to: M 1 163 164 RETAIL STRUCTURES Retailing retail sale wholesale sale buying motive globalization  TABLE 6-1 The World’s top 100 retailers (2011) 5-Year Retail Sales 2010 Retail Compound Number of Retailer by Rank (home Sales (US$ Annual Countries country and rank in 2003) Retail Formats million) Growth Rate (Continentsi) 1. Wal-Mart Stores, Inc. (United Apparel/footwear specialty, cash and carry/warehouse 418,952 6.0% 16 (N. Am., S. States) (1) club, discount department, discount, hypermarket, Am., Asia, Eur.) supercenter, superstore, supermarket 2. Carrefour S.A (France) (2) Cash and carry/warehouse club, convenience/ 119,642 3.9% 33 (Af., S. Am., forecourt, discount, hypermarket, supercenter, Asia, Eur.) superstore, supermarket 3. Tesco PLC (United Cash and carry/warehouse club, convenience/ 92,171 9.3% 13 (N. Am., Kingdom) (6) forecourt, department, discount department, discount, Asia, Eur.) hypermarket, supercenter, superstore, supermarket 4. Metro AG (Germany) (4) Cash and carry/warehouse club, department, 88,931 3.8% 33 (Af., Asia, electronics specialty, hypermarket, supercenter, Eur.) superstore, supermarket, other specialty 5. The Kroger Co. (United Convenience/forecourt, hypermarket, supercenter, 82,189 6.3% 1 (N. Am.) States) (5) superstore, supermarket, other specialty 6. Schwarz Unternehmens Discount, hypermarket, supercenter, superstore 79,119e 9.8% 26 (Eur.) Treuhand (Germany) (16) 7. Costco Wholesale Cash and carry/warehouse club 76,255 8.0% 9 (N. Am., C. Corporation Am., Asia, Eur., (United States) (9) Pac.) 8. The Home Depot, Inc. Home improvement 67,997 –2.5% 5 (N. Am., C. (United States) (3) Am. Asia.) 9. Walgreen Co. Drug/pharmacy 67,420 9.8% 2 (N. Am., C. (United States) (17) Am.) 10. Aldi Einkauf GmbH & Co. Discount, supermarket 67,112e 5.9% 18 (N. Am., oHG (Germany) (10) Eur., Pac.) 165 (continued) 166 TABLE 6-1 (continued) 5-Year Retail Sales 2010 Retail Compound Number of Retailer by Rank (home Sales (US$ Annual Countries country and rank in 2003) Retail Formats million) Growth Rate (Continentsi) 11. Target Corp. Discount department, hypermarket, supercenter, 65,786 5.1% 1 (N. Am.) (United States) (7) superstore 12. Rewe Group (Germany) (11 ) Apparel/footwear specialty, cash and carry/warehouse 61,134 5.4% 13 (Eur.) club, convenience/forecourt, discount, drug/pharmacy, electronics specialty, home improvement, hypermarket, supercenter, superstore, supermarket, other specialty 13. CVS Caremark Corp. (United Drug/pharmacy 57,345 11.0% 1 (N. Am.) States) (26) 14. Seven & i Holdings Co., Ltd. Apparel/footwear specialty, convenience/forecourt, 57,055 5.9% 18 (N. Am., C. (Japan) (n.l.) department, hypermarket, supercenter, superstore, Am., Asia, Eur., supermarket, other specialty Pac.) 15. Groupe Auchan SA Discount, electronics specialty, hypermarket, 55,212 4.7% 13 (Af., Asia, (France) (18) supercenter, superstore, supermarket, other specialty Eur.) 16. Edeka Zentrale AG & Co. Cash and carry/warehouse club, convenience/ 54,072 5.5% 1 (Eur.) (Germany) (24) forecourt, discount, electronics specialty, home improvement, hypermarket, supercenter, superstore, supermarket, other specialty 17. Aeon Co., Ltd. (Japan) (22) Apparel/footwear specialty, convenience/forecourt, 53,458 2.2% 8 (Asia) department, discount department, discount, drug/ pharmacy, home improvement, hypermarket, supercenter, superstore, supermarket, other specialty 18. Woolworths Limited Convenience/forecourt, discount department, 51,771 7.3% 2 (Pac.) (Australia) (31) electronics specialty, home improvement, supermarket, other specialty 19. Best Buy Co., Inc. (United Electronics specialty, home improvement, nonstore 50,272 10.3% 15 (N. Am., States) (28) Asia, Eur.)  20. Lowe’s Companies, Inc. Home improvement 48,815 2.5% 3 (N. Am., C. (United States) (19) Am,) 21. Wesfarmers Limited Convenience/forecourt, discount department, home 47,631 62.3% 2 (Pac.) (Australia) (n.l.) improvement, hypermarket, supercenter, superstore, supermarket, other specialty 22. Sears Holdings Corp. (United Apparel/footwear specialty, department, discount 43,326 –2.4% 3 (N. Am. C. States) (13) department, home improvement, hypermarket, Am.) supercenter, superstore, nonstore, other specialty 23. Centres Distributeurs E. Convenience/forecourt, discount, drug/pharmacy, 41,165e 3.2% 7 (Eur.) Leclerc (France) (25) hypermarket, supercenter, superstore, supermarket, other specialty 24. Safeway Inc. Supermarket 40,229 1.3% 3 (N. Am., C. (United States) (41) Am.) 25. Koninklijke Ahold N.V Convenience/forecourt, discount, drug/pharmacy, 39,213 –0.1% 10 (N. Am., (The Netherlands) (8) hypermarket, supercenter, superstore, supermarket, Eur.) other specialty 26. Casino Guichard-Perrachon Cash and carry/warehouse club, convenience/ 37,875 5.0% 27 (Af., S. Am., S.A. (France) (27) forecourt, discount department, discount, electronics Asia, Eur. ) specialty, home improvement, hypermarket, supercenter, superstore, supermarket, other specialty 27. ITM D (France) (n.l.) Apparel/footwear specialty, convenience/forecourt, 33,994e 5.1% 8 (Eur.) discount, home improvement, hypermarket, supercenter, superstore, supermarket, other specialty 28. Amazon.com, Inc. Nonstore 33,251 32.1% 8 (N. Am., Asia, (United States) (n.l.) Eur.) 29. J Sainsbury plc Convenience/forecourt, hypermarket, supercenter, 32,837 6.1% 1 (Eur.) (United Kingdom) (23) superstore, supermarket 30. The IKEA Group (INGKA Other specialty 31,642 9.3% 39 (N. Am., Holding B.V.) (Sweden) (50) Asia, Eur., Pac.) 31. SuperValu Inc. Discount, supermarket 28,911 22.1% 1 (N. Am.) (United States) (60) (continued) 167 168 TABLE 6-1 (continued) 5-Year Retail Sales 2010 Retail Compound Number of Retailer by Rank (home Sales (US$ Annual Countries country and rank in 2003) Retail Formats million) Growth Rate (Continentsi) 32. WM Morrison Supermarkets Supermarket 25,248 6.4% 1 (Eur.) PLC (United Kingdom) (76) 33. Rite Aid Corporation Drug/pharmacy 25,215 7.9% 1 (N. Am.) (United States) (36) 34. Yamada Denki Co., Ltd. Discount department, electronics specialty 25,193 10.9% 2 (Asia) (Japan) (73) 35. Publix Super Markets, Inc. Convenience/forecourt, supermarket, other specialty 25,134 4.1% 1 (N. Am.) (United States) (35) 36. Macy’s, Inc. Apparel/footwear specialty, department, nonstore, 25,003 2.2% 3 (N. Am., Asia) (United States) (n.l.) other specialty 37. Delhaize Group SA Cash and carry/warehouse club, convenience/ 24,918 1.8% 7 (N. Am., Asia, (Belgium) (30) forecourt, discount, supermarket, other specialty Eur.) 38. The TJX Companies, Inc. Apparel/footwear specialty, discount 21,942 6.4% 7 (N. Am., Eur.) (United States) (48) 39. Loblaw Companies Limited Apparel/footwear specialty, cash and carry/warehouse 21,782 1.2% 1 (N. Am.) (Canada) (46) club, discount, hypermarket, supercenter, superstore, supermarket 40. Migros-Genossenschafts- Apparel/footwear specialty, department, discount, 20,937 8.8% 3 (Eur.) Bund (Switzerland) (55) electronics specialty, home improvement, hypermarket, supercenter, superstore, supermarket, other specialty 41. Systeme U Centrale Convenience/forecourt, hypermarket, supercenter, 20,423 5.1% 3 (Af., Eur., Nationale SA (France) (74) superstore, supermarket Pac.) 42. Mercadona, S.A. (Spain) (82) Supermarket 20,241 9.7% 1 (Eur.) 43. Alimentation Couche-Tard Convenience/forecourt 18,966 13.3% 9 (N. Am., Inc. (Canada) (n.l.) Asia.)  44. Kohl’s Corporation (United Department 18,391 6.5% 1 (N. Am.) States) (61) 45. Grupo P (Brazil) (n.l.) Cash and carry/warehouse club, convenience/ 18,318 19.1% 1 (S. Am.) forecourt, electronics specialty, hypermarket, supercenter, superstore, supermarket, nonstore 46. J.C. Penney Company, Inc. Department, nonstore 17,759 –1.1% 2 (N. Am.) (United States) (32 ) 47. El Corte Ingles (Spain) (44) Apparel/footwear specialty, convenience/forecourt, 17,336 0.4% 5 (C. Am., Eur.) department, electronics specialty, home improvement, hypermarket, supercenter, superstore, supermarket, other specialty 48. Coop Group (Switzerland) (66) Cash and carry/warehouse club, convenience/ 16,684 6.1% 5 (Eur.) forecourt, department, drug/pharmacy, electronics specialty, home improvement, hypermarket, supercenter, superstore, supermarket, other specialty 49. Inditex S.A. (Spain) (n.l.) Apparel/footwear specialty, other specialty 16,343 13.2% 79 (Af., N. Am., C. Am., S. Am., Asia, Eur.) 50. H.E. Butt Grocery Company Hypermarket, supercenter, superstore, supermarket 16,100e 5.2% 2 (N. Am., C. (United States) (57) Am.) 51. AS Watson & Company, Inc. Convenience/forecourt, discount, drug/pharmacy, 15,857 6.8% 37 (Asia, Eur.) (Hong Kong SAR) (94) electronics specialty, hypermarket, supercenter, superstore, supermarket, other specialty 52. Coop Italia (Italy) (51) Discount, hypermarket, supercenter, superstore, 15,845e 2.4% 1 (Eur.) supermarket 53. Empire Company Limited/ Convenience/forecourt, drug/pharmacy, hypermarket, 15,575 4.2% 1 (N. Am.) Sobeys (Canada) (75) supercenter, superstore, supermarket, other specialty 54. Meijer, Inc. (United States) Convenience/forecourt, hypermarket, supercenter, 15,323e 3.6% 1 (N. Am.) (54) superstore 55. Marks & Spencer Group Plc Apparel/footwear specialty, convenience/forecourt, 15,157 4.6% 39 (Af., Asia, (United Kingdom) (45) department, supermarket, other specialty, nonstore Eur.) (continued) 169 170 TABLE 6-1 (continued) 5-Year Retail Sales 2010 Retail Compound Number of Retailer by Rank (home Sales (US$ Annual Countries country and rank in 2003) Retail Formats million) Growth Rate (Continentsi) 56. LVMH Mo (France) (n.l.) Apparel/footwear specialty, department, other 15,085 7.5% 84 (Af., C. Am., specialty N. Am., S. Am., Asia, Eur., Pac.) 57. H & M Hennes & Mauritz AB Apparel/footwear specialty, other specialty 15,051 12.1% 38 (Af., N. Am., (Sweden) (n.l.) Asia, Eur.) 58. Groupe Adeo SA (France) Home improvement 15,005e 11.4% 11 (S. Am., (n.l.) Asia, Eur.) 59. Kingfisher plc (United Home improvement 14,846 4.5% 8 (Asia, Eur.) Kingdom) (43) 60. PPR SA (France) (n.l.) Apparel/footwear specialty, other specialty, nonstore 14,803 –4.9% 91 (Af., C. Am., N. Am., S. Am., Asia, Eur., Pac.) 61. Staples, Inc. Nonstore, other specialty 14,696 5.7% 14 (N. Am., S. (United States) (68) Am., Asia, Eur., Pac.) 62. The Gap, Inc. Apparel/footwear specialty, nonstore 14,664 –1.8% 32 (N. Am., C. (United States) (38) Am., S. Am., Asia, Eur.) 63. Louis Delhaize S.A. Cash and carry/warehouse club, convenience/ 14,100e 1.7% 8 (C. Am., Eur.) (Belgium) (62) forecourt, discount, hypermarket, supercenter, superstore, supermarket, other specialty 64. Isetan Mitsukoshi Holdings Apparel/footwear specialty, department, supermarket, 13,933 ne 11 (N. Am., Ltd. (Japan) (88) other specialty Asia, Eur.) 65. Toys “R” Us, Inc. Other specialty 13,864 4.2% 35 (Af., N. Am., (United States) (52) Asia, Eur., Pac.)  66. Bailian (Brilliance) Convenience/forecourt, department, home 13,344e 7.5% 1 (Asia) Group(China) (n.l.) improvement, hypermarket, supercenter, superstore, supermarket 67. Otto (GmbH & Co KG) Apparel/footwear specialty, nonstore, other specialty 13,203 1.4% 32 (N. Am., (formerly Otto Versand) Asia, Eur., Pac.) (Germany) (53) 68. Dollar General Corp. Discount 13,035 8.7% 1 (N. Am.) (United States) (89) 69. Co-operative Group Ltd. Convenience/forecourt, drug/pharmacy, supermarket 12,957 20.1% 1 (Eur.) (United Kingdom) (n.l.) 70. ICA AB (Sweden) (n.l.) Convenience/forecourt, discount, hypermarket, 12,818 7.1% 5 (Eur.) supercenter, superstore, supermarket 71. Dixons Retail plc (formerly Electronics specialty, nonstore 12,738 4.3% 28 (Eur.) DSG International plc)(United Kingdom) (56) 72. UNY Co., Ltd. (Japan) (63) Apparel/footwear specialty, convenience/forecourt, 12,635 –1.7% 2 (Asia) department, discount, home improvement, hypermarket, supercenter, superstore, supermarket 73. Dell Inc.(United States) (65) Nonstore 12,357 0.3% 180 (Global) 74. Conad Consorzio Nazionale, Cash and carry/warehouse, hypermarket, supercenter, 12,170 5.8% 2 (Eur.) Dettaglianti Soc. Coop. a.r.l superstore, supermarket (Italy) (n.l.) 75. Gome Home Appliance Electronics specialty, other specialty 12,042e 21.8% 2 (Asia) Group (China) (n.l.) 76. SPAR (Austria) (n.l.) Convenience/forecourt, hypermarket, supercenter, 12,011e 6.7% 7 (Eur.) superstore, supermarket, other specialty 77. Alliance Boots GmbH Drug/pharmacy, other specialty 11,859 9.0% 17 (Asia, Eur.) (Switzerland) (n.l.) 78. Cencosud S.A. (Chile) (n.l.) Cash and carry/warehouse, department, drug/ 11,791 20.2% 5 (S. Am.) pharmacy, electronics specialty, home improvement, hypermarket, supercenter, superstore, supermarket (continued) 171 172 TABLE 6-1 (continued) 5-Year Retail Sales 2010 Retail Compound Number of Retailer by Rank (home Sales (US$ Annual Countries country and rank in 2003) Retail Formats million) Growth Rate (Continentsi) 79. Lotte Shopping Co., Ltd. Apparel/footwear specialty, department, hypermarket, 11,487 9.2% 5 (Asia, Eur.) (S. Korea) (80) supercenter, superstore, supermarket 80. John Lewis Partnership plc Convenience/forecourt, department, hypermarket, 11,359 7.4% 2 (Asia, Eur.) (United Kingdom) (85) supercenter, superstore, supermarket, nonstore 81. Jer (Portugal) (n.l.) Cash and carry/warehouse club, discount, drug/ 11,317 19.0% 2 (Eur.) pharmacy, hypermarket, supercenter, superstore, supermarket, other specialty 82. Shinsegae Co., Ltd. Cash and carry/warehouse club, department, 11,314 9.8% 2 (Asia) (S. Korea) (n.l.) hypermarket, supercenter, superstore, supermarket 83. X5 Retail Group N.V.(Russia) Convenience/forecourt, discount, hypermarket, 11,264 ne 2 (Eur.) (n.l.) supercenter, superstore, supermarket 84. Suning Appliance Co. Ltd. Electronics specialty, other specialty 11,170 36.5% 3 (Asia) (China) (n.l.) 85. S Group (Finland) (92.) Apparel/footwear specialty, convenience/forecourt, 11,007 9.9% 5 (Eur.) department, discount, home improvement, hypermarket, supercenter, superstore, supermarket, other specialty 86. Metro Inc. (Canada) (n.l.) Convenience/forecourt, drug/pharmacy, hypermarket, 10,896 11.1% 1 (N. Am.) supercenter, superstore, supermarket 87. BJ’s Wholesale Club, Inc. Cash and carry/warehouse club 10,633 6.4% 1 (N. Am.) (United States) (n.l.) 88. Tengelmann Apparel/footwear specialty, discount, home 10,599e –18.1% 14 (Eur.) Warenhandelsgesellschaft improvement, supermarket KG (Germany) (21) 89. Dansk Supermarked A/S Apparel/footwear specialty, department, discount, 10,563 3.2% 5 (Eur.) (Denmark) (n.l.) hypermarket, supercenter, superstore, supermarket  90. The Daiei, Inc. (Japan) (n.l.) Apparel/footwear specialty, department, discount, 10,415 –7.9% 1 (Asia) hypermarket, supercenter, superstore, supermarket, other specialty 91. Kesko Corporation Apparel/footwear specialty, department, electronics 10,356 4.0% 8 (Eur.) (Finland) (90) specialty, home improvement, hypermarket, supercenter, superstore, supermarket, other specialty 92. Shoprite Holdings Ltd. Cash and carry/warehouse club, convenience/ 10,279 16.7% 16 (Af.) (S. Africa) (84) forecourt, discount, electronics specialty, hypermarket, supercenter, superstore, supermarket, other specialty 93. Shoppers Drug Mart Drug/pharmacy, other specialty 10,075 7.1% 1 (N. Am.) Corporation (Canada) (n.l.) 94. J. Front Retailing Co., Ltd. Department, supermarket 9,866 ne 1 (Asia) (Japan) (n.l.) 95. Apple Inc./Retail (Apple Electronics specialty 9,798 33.1% 11 (N. Am., Stores) (United States) (n.l.) Asia, Eur., Pac.) 96. Limited Brands, Inc. Apparel/footwear specialty, nonstore, other specialty 9,613 –0.2% 45 (Af., N. Am., (United States) (69) C. Am., S. Am., Eur., Asia) 97. GameStop Corp. Other specialty 9,474 25.1% 18 (N. Am., (United States) (n.l.) Eur., Pac.) 98. Grupo Eroski (Spain) (n.l.) Cash and carry/warehouse club, convenience/ 9,437e 6.6% 3 (Eur.) forecourt, discount, hypermarket, supercenter, superstore, supermarket, other specialty 99. Reitan Group (Norway) (n.l.) Convenience/forecourt, discount, electronics 9,420 16.2% 4 (Eur.) 100. Takashimaya Company, Department 9,398 –3.6% 3 (Asia) Limited (Japan) (72) Source: Stores Notes: 173 174 RETAIL POSITIONING STRATEGIES Cost-Side Positioning Strategies margins turnover transfer all  175 Sidebar 6-1 Zara: A European retailer using the low-margin, high-turnover model of retailing Zara was founded in Spain in 1975, and in the three - decades of its existence, it has built and fine-tuned a ing styles it has already shipped once and has particular model of retailing that appears to balance invested in an extremely flexible manufactur- the need to control costs with the need to meet ing operation to permit this approach. the demands of its fashion-forward, trendy target These policies actually contradict many market. practices throughout retailing today—from the highly Zara’s target consumer in Europe is a vertically integrated set of operations Zara pursues, fashion-conscious, young, female buyer of clothing to the rigid controls it exerts throughout its logistics who values novelty and exclusivity but is also quite and ordering systems, to its small-batch production price sensitive. The most important service output practices, to the constant revamping of product lines demands of this consumer are therefore assort- in the stores. So how can Zara possibly make money ment and variety (which should be extensive and with such a topsy-turvy retailing system? novel) and quick delivery (i.e., extremely fashion The answer lies in its apparently high-cost forward and available to buy). Providing a quickly methods of operation, which actually maximize changing, market-responsive assortment of reason- turnover and save costs in other parts of its business. ably priced, fashion-forward clothing has long been Because Zara has invested in significant amounts of one of the thorniest challenges for retailers. Zara communication at all levels of its business (which has met this challenge through a combination of is also possible because of its investments in ver- strategies: tical integration), designers at headquarters learn about new “hot” styles mid-season, before any of owns its own dyeing company, which per- Zara’s competitors are able to see the trends and mits it to buy undyed fabric from outsiders respond to them. With its flexible manufacturing and postpone coloring fabric until it knows operations, its well-integrated clothing designers what colors are really popular in a given can work closely with manufacturing operations to season. create cutting-edge designs and feed them to man- ufacturing with no delay. It also is more feasible to percent of its clothes, thus retaining control respond to this information, because Zara has cho- over production from start to finish. sen not to make large batch volumes of any styles it innovates; thus, it has the space in the stores to and warehousing in one area, in Galicia in accommodate new styles. Furthermore, it does not northern Spain. suffer from large overstocks and thus does not need to mark down merchandise as heavily as its at a time, rather than large batch volumes. competitors do. That is, it never produces large vol- - umes of any style, and it only produces styles for tions, which in some cases may mean send- which it has market-level indications of demand. ing a half-empty truck through Europe. Because Zara actually cultivates slack (i.e., unused) capacity in its factories and warehouse, it capabilities, from the store manager level can accommodate rush jobs that would cause bottle- back to the designers, from designers to pro- necks in standard retail systems. And because Zara’s duction, from production to warehousing, consumers know that Zara is constantly coming out and from the warehouse back to retail stores. with new styles (as well as exactly when the stores are restocked), they shop more often (particularly right and shipping schedule that makes restock- after a new shipment comes in), to keep up with the ing stores extremely predictable to everyone new styles. For example, a shopper in London visits a in the system, including consumers. standard clothing store (where she shops routinely) 176 Continued about 4 times per year; the same shopper visits a 5. Zara maintains net profit margins of about Zara store 17 times per year! The Zara shopper feels 10 percent annually, as good as the best retail- a certain urgency to buy a garment when she sees it ers in the business, even though its prices are at the store, because she may not be able to find it fairly low. again if she waits to get it. This increases sales rates 6. It does little advertising, spending only 0.3 and merchandise turnover. percent of sales on ads, versus the more So what are the results of Zara’s retailing typical 3–4 percent of sales for its competi- strategy? tors. It does not need to spend on advertis- ing, because its shoppers are in the stores so 1. Zara has almost no inventories in its system: many times a year that there is no need for advertising to remind them to come. hours on average (not days or weeks!). 7. On average, Zara collects 85 percent of list price on its clothing items, versus an indus- per week to each store in the system, try average of only 60–70 percent (includ- worldwide. ing markdowns). This rate leads to higher net margins; in one year, Zara’s net margin week (significantly less than its competi- was 10.5 percent, H&M’s was 9.5 percent, tors’ inventory turn rates). Benetton’s was 7 percent, and The Gap’s was 2. Zara can create a new design, manufacture 0 percent. it, and have it on its stores’ shelves in just two weeks, versus 9–12 months for other In short, Zara’s formula for success rests on its retailers (e.g., The Gap, VF Corporation). highly centralized control, all the way from its input 3. Zara’s shipments are 98.9 percent accurate, sourcing (dyes, fabrics), to design, to logistics and and it enjoys a very low shrinkage rate of shipping, and finally to retailing. Given the high cost 0.5 percent (i.e., loss of inventory due to of owning all of these resources, Zara has to maxi- theft or damage). mize the value created from them—which it does 4. Its designers bring over 10,000 new designs very well, by excelling at meeting the core service to market (versus 2,000–4,000 items intro- output demands of its target market, namely, novel duced by The Gap or H&M) each year. and extensive variety and assortment, quickly.3 strategic profit model (SPM) × = × = × × =  177 Sidebar 6-2 H&M: Another low-margin, high-turnover European retailer, with a different channel strategy In contrast to Zara in Sidebar 6-1, consider the strat- design and get it into stores in as little as three weeks egy of H&M, an international retailer founded in (a bit longer than Zara, but still extremely impressive, 1947 in Sweden. Like Zara, it sells “cheap chic” cloth- given industry norms). It restocks stores on a daily ing, and its core consumer is similar to Zara’s (though basis, which is not always frequent enough; when it its stores also offer men’s, teens’, and children’s cloth- opened its flagship store in New York City, it had to ing). The average price of an item in H&M in 2002 restock on an hourly basis. Because its merchandise was just $18, and shoppers look there for current- turns very quickly, it can charge very low prices for it season fashions at bargain prices. yet maintain good profitability. H&M’s formula for offering this assortment to H&M has chosen a more aggressive store its consumers at aggressively low prices is somewhat growth strategy than Zara, which has caused it some different than Zara’s, however. H&M does not own problems in recent years. Its entry into the United any manufacturing capacity, relying on outsourcing States was plagued by poor location choices, as well relationships with a network of 900 suppliers located as leases for stores that were too big. It worked on in low-wage countries like Bangladesh, China, and these problems and reached a breakeven point in Turkey. It frequently shifts production from one sup- the United States in 2004. plier to another, depending on demand in the mar- Whether the H&M-style model—farming out ket for various fabrics, styles, and fashions. All of production to third parties and ruthlessly cut- H&M’s merchandise is designed in-house by a cadre ting costs everywhere in the system—or the Zara of 95 designers in Stockholm (Zara has about 300 model—purposely cultivating slack capacity and designers, all at its headquarters in Spain). The man- investing in highly flexible but vertically integrated agement style is extremely frugal; not only does the facilities—will dominate is not at all clear. It is entirely company control manufacturing costs, but its man- possible that both will flourish in the future, as both agers do not fly business class, and try not to take have well-integrated systems in place that meet the cabs when traveling. needs of the market, albeit in different ways.5 H&M focuses on minimizing inventory every- where in its system. It has the ability to create a new gross margin return on inventory investment (GMROI) 178 Gross Margin : Sales-to-Inventory Ratio = GMROI A 50% × 3 = 150% B 30% × 5 = 150% C 25% × 6 = 150% gross margin per full-time equivalent employee (GMROL) optimize gross margin per square foot (GMROS) fixed-cost understand  179 trust Demand-Side Positioning Strategies BULK BREAKING 180 SPATIAL CONVENIENCE The retail location decision, and the resulting service output of spatial convenience, thus is inextricable from the type of goods the retailer chooses to offer. WAITING AND DELIVERY TIME  181 11 unpredictable PRODUCT VARIETY Variety breadth Assortment depth store concepts specific Buyers 182 CUSTOMER SERVICE Sales, general, and administrative (SG&A) Taxonomy of Retail Positioning Strategies  183 TABLE 6-2 Sales, general, & administrative (SG&A) costs as a percentage of net sales for selected retailers Net Sales SG&A Expenses SG&A as % ($million) ($million) of Net Sales General Merchandise, Hypermarkets, Category Killers Wal-Mart 443,854 85,265 19.2 Costco 87,048 8,682 9.9 Home Depot 67,997 15,849 22.8 Target 68,466 14,106 20.1 Lowe’s 50,208 12,593 25.1 Drugs, Home Electronics Walgreen 71,633 16,878 23.6 Best Buy 50,705 10,242 20.2 Department Stores Kohl’s 18,804 4,243 22.6 JCPenney 17,260 5,109 29.6 Nordstrom 10,497 2,807 26.7 Dillard’s 6,264 1,630 26.0 Specialty Stores The Gap 14,549 3,836 26.4 Ann Taylor 2,212 1,062 48.0 Chico’s 2,196 999 45.5 Source: 184 TABLE 6-3 A taxonomy of retailer types Main Focus on Bulk Spatial Waiting and Variety Assortment Retailer Type Margin or Turnover? Breaking Convenience Delivery Time (Breadth) (Depth) Department store Margin Yes Moderate Low wait time Broad Moderate/Shallow (e.g., May Co.) Specialty store Margin Yes Moderate Low wait time Narrow Deep (e.g., The Gap) Mail order/catalog Margin Yes Extremely high Moderate/high wait time Narrow Moderate (e.g., Lands’ End) Convenience store Both Yes Very high Low wait time Broad Shallow (e.g., 7-Eleven) Category killer Turnover Yes Moderate Low wait time Narrow Deep (e.g., Best Buy) Mass merchandiser Turnover Yes Low Moderate wait time (may Broad Shallow (e.g., Wal-Mart) be out of stock) Hypermarket Turnover Yes Low Moderate wait time Broad Moderate (e.g., Carrefour) Warehouse club Turnover No Low Moderate/high wait time Broad Shallow (e.g., Sam’s Club) (may be out of stock)  185 specialty store category killer MULTICHANNEL RETAIL STRATEGIES Internet Retail Channel 186 55,000 6 50,000 5 45,000 4 Percent (%) 40,000 Million ($) 3 35,000 2 30,000 1 25,000 20,000 0 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 Quarter/Year E-Commerce retail sales ($m) E-Commerce as % of total U.S. sales FIGURE 6-1 U.S. e-commerce sales ($ million and percentage of total U.S. retail sales) Source: U.S. Census Bureau, Released August 16, 2012, available at http://www.census.gov/ retail/#ecommerce. Direct Selling Channel Direct selling  187 Other merchandise Books and magazines 13% 5% Clothing and Toys, hobby goods, clothing accessories and games (including footwear) 3% 19% Sporting goods 5% Office equipment and supplies 5% Music and videos Computer 5% hardware 11% Furniture and home furnishings 9% Computer software 3% Food, beer, and wine Drugs, health aids, 2% Electronics and appliances beauty aids 14% 6% FIGURE 6-2 Percentage distribution of e-commerce sales by merchandise line, 2009 (U.S. electronic shopping and mail-order houses), excluding nonmerchandise receipts Other merchandise Toys, hobby goods, and games Sporting goods Office equipment and supplies Music and videos Furniture and home furnishings Food, beer, and wine Electronics and appliances Drugs, health aids, beauty aids Computer software Computer hardware Clothing and clothing accessories (including footwear) Books and magazines 0 10 20 30 40 50 60 70 80 90 Percent FIGURE 6-3 E-commerce as a percentage of sales, 2009 (U.S. electronic shopping and mail-order houses) 188 distributors pyramid scheme  189 Hybrid Retail Channels. free riding own 190 three hybrid channel whether how ADAPTING TO THE INCREASING POWER OF MAJOR RETAILERS 191 192 1. Off invoice. The purpose of an off-invoice promotion is to discount the product to the dealer for a fixed period of time. It consists of a temporary price cut, and when the time period elapses, the price goes back to its normal level. The specific terms of the discount usually require performance, and the discount lasts for a specified period (e.g., one month). Sometimes the trade can buy multiple times and sometimes only once. 2. Bill-back. Bill-backs are similar to off-invoice except that the retailer computes the discount per unit for all units bought during the promotional period and then bills the manufacturer for the units sold and any other promotional allowances that are owed after the promotional period is complete. The advantage from the manu- facturer’s perspective is the control it gives, guaranteeing that the retailer performs as the contract indicates before payment is issued. Generally, retailers do not like bill-backs because of the time and effort required. 3. Free goods. Usually free goods take the form of extra cases at the same price. For example, “buy 3 get 1 free” is a free-goods offer. 4. Cooperative advertising allowances. Paying for part of the dealers’ advertising is called cooperative advertis- ing, which is often abbreviated as co-op advertising. The manufacturer either offers the dealer a fixed dollar amount per unit sold or offers to pay a percentage of the advertising costs. The percentage varies depending on the type of advertising run. If the dealer is prominent in the advertisement, then the manufacturer often pays less, but if the manufacturer is prominent, then it pays more. 5. Display allowances. A display allowance is similar to cooperative advertising allowances. The manufacturer wants the retailer to display a given item when a price promotion is being run. To induce the retailer to do this and help defray the costs, a display allowance is offered. Display allowances are usually a fixed amount per case, such as 50 cents. 6. Sales drives. For manufacturers selling through brokers or wholesalers, it is necessary to offer incentives. Sales drives are intended to offer the brokers and wholesalers incentives to push the trade deal to the retailer. For every unit sold during the promotional period, the broker and wholesaler receive a percentage or fixed payment per case sold to the retailer. It works as an additional commission for an independent sales organi- zation or additional margin for a wholesaler. 7. Terms or inventory financing. The manufacturer may not require payment for 90 days, thus increasing the profitability to the retailer that does not need to borrow to finance inventories. 8. Count-recount. Rather than paying retailers on the number of units ordered, the manufacturer does it on the number of units sold, by determining the number of units on hand at the beginning of the promotional period (count) and then determining the number of units on hand at the end of the period (recount). Then, by tracking orders, the manufacturer knows the quantity sold during the promotional period. (This differs from a bill-back because the manufacturer verifies the actual sales in count-recount.) 9. Slotting allowances. Manufacturers pay retailers funds known as slotting allowances to receive space for new products. When a new product is introduced the manufacturer pays the retailer X dollars for a “slot” for the new product. Slotting allowances offer a fixed payment to the retailer for accepting and testing a new product. 10. Street money. Manufacturers have begun to pay retailers lump sums to run promotions. The lump sum, not per case sold, is based on the amount of support (feature advertising, price reduction, and display space) offered by the retailer. The name comes from the manufacturer’s need to offer independent retailers a fixed fund to promote the product because the trade deal goes to the wholesaler. FIGURE 6-4 Trade deals for consumer nondurable goods Source: Robert C. Blattberg and Scott A. Neslin (1990), Sales Promotion: Concepts, Methods, and Strategies (Englewood Cliffs, NJ: Prentice-Hall), pp. 318–319.  193 Effects of Forward Buying forward buying con- tinuous replenishment programs (CRP) diverting gray marketing Effects of Slotting Allowances Slotting allowances 194 Effects of Failure Fees Failure fees Effects of Private Branding Private labels store brands  195 in general Effects of Globalization of Retailing 196 BRIC nations virtuous cycle  197 SUMMARY: RETAILING STRUCTURES AND STRATEGIES TA K E - A W AY S high margin high merchandise turnover 198 retail position Endnotes Journal of Law and Economics Retailing Management BusinessWeek The Wall Street Journal Stores The Wall Street Journal BusinessWeek The Michaels Craft Wall Street Journal Stores: Integrated Channel Management and Vendor-Retailer Relations Case  199 Consumer Insight Journal of Retailing Journal of Retailing St. Louis Post- Dispatch The San Diego Union-Tribune Supermarket News International Journal of Research in Marketing The New York Times Chicago Tribune Product Development and Branding Case Mary Kay Corporation: Direct Selling Journal of Marketing and the Challenge of Online Channels Case Ivey Business Journal Los Angeles Times The Wall Street Journal MMR/Business and Industry The New Food Marketing Institute York Times Backgrounder  APPENDIX 6-1 A Glossary of Pricing and Buying Terms Commonly Used by Retailers Original Retail Sale Retail Merchandise Cost Markup Initial Markup or Mark-on Maintained Markup or Margin gross Gross Margin of Profit total Gross Margin Return on Inventory (GMROI) Gross Margin Percentage Sales-to-Inventory Ratio GMROI × = Total Cost Markdown markdown percentage Off-Retail = - 200  201 = + FOB Delivered Sale Freight Allowances Trade Discount functional discounts Quantity Discounts Seasonal Discounts Cash Discount 202 Cash Datings Future Datings 1. 2. 3. 4. 5.  APPENDIX 6-2 Merchandise Planning and Control stockturn MERCHANDISE BUDGETING Planned Sales and Stock Levels sales forecast beginning-of-the-month 203 204 inventory Planned Reductions Planned Purchases planning of purchases Total: Less retail prices cost = + + + open-to-buy  205 Planned Gross Margin and Operating Profit gross margin net operating profit  CHAPTER 7 Wholesaling Structures and Strategies LEARNING OBJECTIVES After reading this chapter, you will be able to: wholesaling sector. this sector is growing. and a dealer cooperative, and relate this distinction to the value they provide members. possible responses to a consolidation wave. manufacturer. WHOLESALING STRUCTURES Wholesaling (wholesale trade, wholesale distribution) refers to business establish- ments that do not sell many products to ultimate households or end-users. Instead, they sell products primarily to other businesses: retailers, merchants, contractors, industrial users, institutional users, and commercial users. Wholesale businesses sell physical inputs and products to other businesses. Thus, wholesaling is closely asso- ciated with tangible goods, yet the value created by wholesale entities stems from the value they add by providing services—or in the terms we use in this book, by 206  207 performing channel functions. Although that value added is quite real, very little about wholesaling is tangible. In this sense, it is the epitome of a service industry. In a chan- nel stretching from the manufacturer to the end-user, wholesaling is an intermediate step. This chapter pertains to the institutions that wholesale, that is, that provide phys- institutions but also the strategies they employ.1 Wholesaler-Distributors Many different institutions perform channel functions in business-to-business (B2B) these institutions. Wholesaler-distributors are independently owned and operated firms that buy and sell products over which they claim ownership. Generally, they operate through one or more warehouses, in which they receive their purchased goods, which they individual firms, totaling more than 40,000 companies; www.naw.org/ ): There is a distinction between wholesalers and distributors. But we ignore it for the purposes of this chapter. Instead, we simply note that the terms have different roots and at one time represented distinct sectors. Traditionally, the term “wholesaler” referred to a company that resold products to another intermediary, whereas a “distributor” implied that the company resold products to a customer that would use the product. Formally then, a pharmaceutical wholesaler resells prescription drugs to a retail pharmacy, which resells the product to a household consumer. An industrial maintenance distributor instead sells cutting tools to an industrial customer that uses those tools in its manufacturing facilities. - tors of printing paper are called “merchants,” and distributors of automotive aftermarket an industry. Because our critical point is that wholesaler-distributors have the title to the goods they resell—that is, they have the authority to set prices—we override these terminology distinctions. This chapter instead highlights the key functions and traits of they may or may not share with the manufacturer. They are defined primarily by their performance of an ownership channel function.2 The importance of wholesaler-distributors also is striking in two main ways: in itself and because it is not particularly evident in the business press. Yet the latest reports seemingly always predict the doom and death of the sector. Oddly enough, this pessimism may prevail because the sector is generally well organized in active 208 trade associations. These effective bodies commission regular reports that suggest ways their members can improve operations and caution against complacency. But as signal the health of this channel function, not its demise. A more fundamental reason for the misplaced pessimism is that the wholesale consolidation, industry understandably, the disappearance of two-thirds of the companies in an industry (as has happened in some sectors) creates an atmosphere of panic and dread. But the not by going bankrupt or shutting down. The acquirers are large, healthy businesses their number—and some inefficiencies in the industry. - allow the distributors to participate in the supply chain management revolution (see briefly, supply chain management refers to the strategic coordination of traditional business functions systematically across the channel, with the goal of enhancing long-term performance for the channel, or supply chain, overall). Then wholesaler-distributors to consolidate so that they can achieve the scale economies con- centration low concentration reflects the geographically distinct markets that mark most com- petition among wholesaler-distributors. A single wholesaler-distributor might totally dominate one region of a country but account for a miniscule proportion of national sales. Thus, the apparent fragmentation of wholesale distribution does not reflect the true nature of concentration, as measured in any single region. This discussion sets up an issue : Power is a property of a relationship, not of a business. A very large and reputable manufacturer, such distributor, in a given market. This supplier even may be less powerful, if customer loyalty prevents the big supplier from bypassing a downstream channel member to not do business without going through their favored distributor. Master Distributors Observers often find themselves puzzled by master distributors, a sort of super  209 Multiple Manufacturers Master Distributor Wholesalers 1,250 (4,000 branches) Electrical Contractors FIGURE 7-1 Representative master distributor channel Source: Based on Das Narayandas and V. Kasturi Rangan (2004), “Building and Sustaining Buyer-Seller Relationships in Mature Industrial Markets,” Journal of Marketing, Vol. 68, no. 3, pp. 63–77. in this chapter, so we use these terms interchangeably.) The customer, such as an air conditioning contractor, makes purchases from one of its 4,000 conveniently located - ers). These wholesalers do not deal with the manufacturer though but with another, single point of contact, namely, the master distributor, which only distributes to other - tributor + - - tence), the master distributor actually creates a stable, prosperous system that suits all some other player in the channel if the master distributor were eliminated? - tributors also can provide those services, so they thrive when they can do so more the end-user in a B2B channel, demand enormous assortments (e.g., each specific replacement motor) and fast delivery (e.g., of refrigerated goods that spoil quickly). provide one of the thousands of parts demanded, making the goal of keeping ade- quate stock close to the customer totally infeasible. Instead, distributors want to buy products as needed, using the master distributor as their “invisible warehouse.” (Not 210 Master distributors also consolidate orders from all their manufacturers, so their these individual distributors can buy a variety of products from a multitude of vendors, master distributor. (see. They help their customers (i.e., other distributors) improve their business processes, demonstrate best practices, and shoulder some of their channel functions, such as advertising. driven their B2B customers to seek out such benefits, even as manufacturers rediscover that it often does not pay to provide individualized, direct services to all their distribu- often because manufacturers have adopted balanced scorecard methods to evaluate their performance.3 - ingly consider other performance criteria, such as marketing support, service levels, - - pensive products as a minor market. Thus, master distributors solve the problem by warehouse space to products that offer them low value per cubic meter. Many manufacturers in turn have grown far more sophisticated in their pricing for distributors, such that they offer functional discounts for: This fine-grained approach favors master distributors because it offers more ways for manufacturers increasingly focus on supply chain management and thus are interested in anything that can increase their coordination with downstream chan- nel members. Other Supply Chain Participants - vice providers, all of which seek to facilitate the movement of goods and services from their source to their consumption location. Thus, in a supply chain, the channel functions and activities that traditionally are the focus of wholesaler-distributors often manufacturers’ sales branches are captive wholesaling operations, owned and operated by manufacturers. Many  211 manufacturers also maintain sales offices to perform specific selling and marketing functions. These locations rarely take physical possession of inventory though, so they may continue to work with independent wholesaler-distributors. Customers, particu- larly large, multiestablishment retail firms, perform wholesale distribution functions, especially in vertically integrated channels, whether forward integrated by the manu- facturer or backward integrated by the end-customer in a B2B sector. Agents, brokers, and commission agents buy or sell products and earn com- missions or fees, without ever taking ownership of the products they represent. These channels are critical in service industries, which have nothing to inventory and thus nothing to own. By convention, agents in service industries are not considered part of the wholesale trade, because there are no tangible goods involved. However, ignoring them would limit our view of wholesaling in practice. B2B marketing channel are nearly innumerable. The transportation and warehous- ing industry provides logistics functions; increasingly, third-party logistics providers and value-added warehousing companies view to perform some functions too. Unlike wholesaler-distributors, third-party logistics providers (3PL) do not take title to the services rendered, which replace traditional sell-side markup pricing by wholesaler- distributors. The emergence of large, sophisticated, end-to-end logistics providers we note that the number of manufacturer-owned distribution centers has declined sharply in the past decade or so, in part as manufacturers increasing outsource their 4 WHOLESALING STRATEGIES : They take physical possession of the goods, take title (ownership), promote the product to prospective customers, negotiate transactions, finance their operations, risk their capital (often by granting credit to both suppliers and customers), process orders, handle payments, and manage information. In general, they manage the flow of information both ways: upstream to the supplier and downstream to other channel members and prospective customers. In so doing, they provide utility upstream and - tions more effectively and efficiently than either manufacturers or customers. This generalization varies from one economy to another of course. Japan has long been noted for its very long channels, in which multiple wholesalers touched the goods several times between their emergence from the manufacturer and their final point of consumption. Many wholesalers added margin but little value; thus in sought to purchase directly from manufacturers, which led to still shorter channels— and even greater pressures on wholesalers. 212 An Historical Perspective on Wholesaling Strategy The wholesaling sector is a funny scenario. It is critical and massive, and yet it remains largely invisible to the buyer, who takes the functions is performs for granted. Both manufacturers and customers have a troubling tendency to underestimate the three great challenges of wholesaling: 1. correctly (no errors). 2. effectively 3. efficiently (low costs). retail pharmacies, but the American colonies did not. Instead, medical practitioners prescribed and dispensed medicine on their own. But wholesalers arose to meet forward (e.g., opening retail apothecaries) and backward (e.g., manufacturing drugs from indigenous plants). In the nineteenth century, new pharmacies arose, independent of physicians. These channel members grew in parallel with the growth of the hospital industry, operated locally, and in stiff competition with the vast numbers that operated in the same area. But instead of integrating forward or backward, these manifestations of the concept remained largely independent. - their product lines to include health and beauty aids. Two large national firms dom- inated in terms of name recognition, but most of these wholesalers were smaller, - rectly, effectively, and efficiently. The heart of drug wholesaling (and actually, much of wholesaling in general) is the relatively banal task of picking—taking from a shelf the order frequently, requesting a few units of many different items. The variety of the units - warehouse shelves. And there are simply few economies of scale to find in picking mil- lions of items to move from a pallet to a warehouse loading dock to a storage shelf, and then picking those items from the shelves to put into a bottle for individual customers. do the picking better, faster, and accurately. But it was not until the task could be wholly restructured, using IT and automation, that the fundamentals of the industry shifted—  213 multiple methods continue to be in use, with no standard, best practice in place. Instead, a few tactics turned out to be clearly inappropriate, and firms that bet all their resources on one poor approach or another have since left the market. But the winners changed so many operational aspects that they became nearly unrecognizable. On the operations side, they changed their picking technology, together with their order processing, billing, inventory control, delivery route sched- with suppliers have replaced hundreds of clerks. On the demand side, wholesalers also profited from IT by turning to bar coding, scanning, and electronic order systems with direct data entry (which replaced salespeople who took handwritten notes about wholesale systems allow customers (i.e., pharmacies) to benefit from computerized accounts receivable and credit accounts, which they in turn offer to their customers. The pharmacies never could have been able to afford to provide such services other- wise. Then using the information obtained through these systems, wholesalers offered detailed advice about which inventory to hold and how to display it (planograms), while also updating their prices quickly. In short, technology made it possible to change everything, and very rapidly. Acquiring firms rushed to achieve the size needed to amortize their huge investments. Firms being acquired sought to avoid making such investments. Through the free use of such mutually beneficial mergers and acquisitions, a few big firms emerged that had instituted an astonishing degree of organizational change. That is, the winners used service to pharmacies), and efficiently (lower cost). This story recounts how it might take an industry 200 years to grow large—and then 20 years to consolidate. that need to cope with a shrinking downstream (wholesale) channel. Wholesaling Value-Added Strategies wholesalers perform. You might refer back to our generic channel functions. But often the first thing that pops to mind is that wholesalers gather, process, and use information about buyers, suppliers, and products to facilitate transactions. Although this traditionally has earned them substantial compensation, modern communication In addition, as we noted briefly already, wholesalers add value by creating an efficient infrastructure and product categories) and scale (high volume). This advantage, which they can share with suppliers (upstream) and customers (downstream), reflects their special- ization in channel functions and enables wholesalers to compete with manufacturers time and place utility by putting the right product in the right place at the time the customer wants it. 214 absorb risk, in the sense that - salers filter the product offering, suggesting appropriate choices for each customer and lie in collaborative filtering software, which uses information the wholesaler gathers about the preferences and choices of all its customers to suggest the best solutions for algorithms have for years steered customers to the books and music considered or pur- chased by “other people who bought” the same product the focal customer is buying. For B2B buyers, wholesalers also engage in many functions that traditionally constitute manufacturing functions, in the sense that they transform the goods they at the last minute (assemble to order). In general, they support customization through postponement of the final manufacturing step; kitting combines various components into sets, often with instructions for finalizing their manufacture. They also might add on proprietary complements design new products from unique combinations of components, or program semiconductors, or perform other actions in which they treat various elements as input to their chan- unite knowledge of the supplier base with information about the customer base and their - - Wholesaling Strategies in Foreign Markets badly suited, or the proper marketing strategy to make it fit might not be evident. The strategy that worked in the home market could be a disastrous misfit, even if the prod- uct appeals to the foreign market. And of course, there are inevitable issues involved - ties, many manufacturers enter foreign markets with little ambition—and equally little channel members to make arguments other than those focused on sheer price competi- one type of intermediary that can be of particular assistance to such manufacturers.  215 Sidebar 7-1 Export trading companies One type of channel member for exports is the they sell, by taking training from manufacturers, export intermediary,9 an independent firm located and then training foreign customers and giving in the exporter’s country, not the host country. These them after-sales service. Second, they are deeply intermediaries perform channel functions (and forge knowledgeable about foreign markets and export marketing strategies) for multiple manufacturers in processes. Visible indicators usually identify these noncompeting product categories. In effect, they firms, such as their multilingual and foreign-born function as outsourced export departments for multi- personnel. They also tend to be smaller firms, such ple manufacturers, searching for markets, negotiating that another good indicator of their knowledge contracts, and monitoring contracts for performance. level is the makeup of the top three managers. In In the United States, they generally are known as more knowledgeable firms, the top three export management or export trading companies. Many manufacturers bypass them, but these inter- mediaries can help a manufacturer make a quantum leap in its level of international sophistication—and therefore its export performance. Overall, the firm possesses extensive for- The best performers in this category have eign connections, as well as strong industry two characteristics. First, they master the products experience. market situation they face. A blind insistence that “this is our global distribution pol- the manufacturer uses (i.e., merchants, agents, distributors, direct buying offices), as long as the choice reflects local conditions, and the channel member receives support. ability to meet delivery commitments. - informally. And they are cooperative, with each party interested in sharing gains and seeing the relationship pay off for both sides. These relationships have strong internal working norms, which in turn reflect the time, effort, and resources the manufacturer fulfilling prophecy of poor performance. Wholesaling Strategies in Emerging Economies - saler for granted, blissfully unaware of the costs that wholesalers incur. These blinders are particularly strong in emerging economies. In emerging markets, the low level of institutional trust further undermines business trade, leaving wholesalers without the trust and credibility that are their main tools for promoting business transactions 216 and ensuring business performance.10 Yet effective and efficient wholesaling is a vital prerequisite of nearly any industry. In developing economies, the need for good distri- bution is both particularly acute and badly met.11 The reasons may have to do with societal attitudes. 12 Its harsh natural climate prevents most value-added agricultural commodities from growing well practices have taken off in Niger. Yet onions have not been nearly as successful as they should be, considering the agricultural situation and market demand. That is, farm- According to a team of aid agency analysts, it was the lack of a wholesaling sector. In agriculture, wholesaling usually consists of brokers and wholesalers. Brokers move the crop from the field to the wholesaler, which involves the considerable physical co-ops use their countervailing power to reduce that level). On the surface, their prof- its appear to be exploitation, according to farmers, retailers, and government officials. end-users who believe the price they pay is too high. But all these members are ignoring the costs that the wholesalers incur. These onion wholesalers also are not getting rich. As - - tion. Many consumers can afford only one onion. Bulk breaking can even mean buying a smaller onion. These actors regularly pay late, if at all, or want to use another currency, or ask if they may provide goods or future considerations (offsets) rather than currency. taking delivery, that some percentage of the merchandise arrived spoiled, and simply switch wholesalers that challenge these claims. poor national infrastructure. - ment of this cost is not the truck, though Niger suffers from poor roads that (e.g., customs, police), who erect multiple unnecessary checkpoints, even within take their grievances to the government might find their entire truck fleet vandal- ized in the night.  217 - dise they might have taken as payment in lieu of cash. arrangements of all kinds. attempted it, they were unpleasantly surprised by their vast magnitude. By far the greatest cost was illicit rent seeking; beyond its direct costs, this effect has indirect impli- could be smoothed out by holding onions in storage facilities. But wholesalers hesitate to build them because, like trucks, they are easy to see and vandalize. The vandals are likely to be disgruntled government employees who feel entitled to more bribe money than they are getting. without adding value. The public believes wholesalers are getting rich by engaging in - - work with relatives, friends, and other in-group members, as a way to coordinate their is a standard way to hedge high risks in any economy, including highly developed ones.13) Furthermore, women in Niger are limited in many sectors but flourish in wholesaling, though their low literacy rates demand that they employ literate people to read and write for them. The collection of illiterate women hiring relatives looks, on the surface, like strong evidence of nepotism and favoritism, rather than merit-based wholesalers create and assume they are making supernormal profits. In contrast, wholesalers are not well compensated for their risks. Aid agency could do more, particularly if they were willing to invest more. The Niger onions would be perfect sources for a Nestlé factory in Niger that makes dried onions. But the factory does not source locally, because the multinational requires its onions be Ultimately, analysts concluded that the best way to help the Niger farmer would be to help the Niger wholesaler.14 They recommended a program of public education - ple is not an isolated situation: tea middlemen. Negative public attitudes (again based on the mistaken impression that the services most consumers take for granted. 218 Of course, none of this discussion should be taken as a guarantee that whole- their own interests to a dysfunctional level, unless checked by countervailing forces. of alternative wholesalers. In Taiwan, many wholesalers also competed vigorously toward wholesalers feature widespread skepticism about whether they add any genu- the chapter, when we discuss how wholesalers generate revenue. Alliance-Based Wholesaling Strategies availability often creates a situation in which the wholesaler-distributor backs up and or maintenance situations, distributors can supply products and minimize downtime; master distributors are an important provider of this function. Another wholesaling trend seeks other, innovative ways to respond to emergencies while cutting costs. The federations of wholesalers. In federations, the goal is to enter into progressive, cooperative arrangements with other channel members, in which all elements—the nature of assistance, the procedures for providing it, and the appropriate compensation—have been defined in advance. improve service, and open new business opportunities. By cooperating, the members of the federation eliminate redundant inventory or service operations. These adaptive practices are being widely developed; here we describe some prototypes, led by either wholesalers or manufacturers. WHOLESALER-LED INITIATIVES In new, adaptive channels that depend on alliance (or consortium) relationships, wholesaler-distributors pool their resources to create a new, These alliances www.indsupply.com/ affiliated-distributors). distributors that formed this consortium had faced difficulty providing timely, high- quality services to large customers with large contracts—the same ones who are most the consortium therefore refers business that it has trouble handling to Intercore - inventories, engineers, and other service personnel) to service each customer; it also invoices and collects payments in its own name, then distributes profits to the owners (the four distributors), in the form of dividends.  219 Another method for creating an alliance is through a holding company. Otra also are more thorough and less biased than the programs that suppliers usually develop themselves. MANUFACTURER-LED INITIATIVES Adaptive channels need at least one party to take - nies, or divisions. Manufacturers that take the initiative instead organize distributors to pool their abilities and increase the efficiency of the supply chains overall, which ben- efits manufacturers, intermediaries, and end-users. losses of lucrative repair business because they could not provide consistent, timely repairs when they were out of stock of the right parts. Yet the channel overall carried - ing the nature of demand for emergency roadside repairs and thus did not know what - the right part. developed a delivery service, for which it bills dealers. Instead of maintaining three midsized supply warehouses, it built a massive new warehouse that stocks every part, locating it near Memphis, Tennessee. This choice of an obscure airport may seem odd, who are price insensitive in the face of roadside emergencies. Furthermore, the result of this centralized solution is more business for the supplier and its dealers and a In contrast, we find a more decentralized solution in the warehouses of Okuma, a Japanese machine tool manufacturer. Okuma operates two of its own warehouses, elec- RETAILER-SPONSORED COOPERATIVES A retailer-sponsored co-op may seem similar retailers. In practice, there is a substantial difference. To coordinate among themselves, dealers are obliged to create an organization, voluntary group. But the members also must buy shares in the co-op, such that they 220 are owners as well as members. And as owners, they receive shares of the profits gen- erated by their co-op (as stock dividends) and end-of-year rebates on their purchases. Thus, the goals of the co-op and the interests of its members align closely. Unlike wholesaler voluntary groups, retailer co-ops thus have a more formalized role descriptions. They also are better able to influence the marketing efforts of their Sidebar 7-2 Ace Hardware Corporation The roots of Ace Hardware go back to 1924, when The real enemy, however, has ceased to be Richard Hesse, owner of a Chicago hardware store, other dealer cooperatives and instead has grown decided to circumvent wholesalers to reduce costs. from vertically integrated retail chain stores, such Hesse formed a partnership with other small retail- as Home Depot. Although independent hardware ers to buy in bulk. The idea worked so well that, stores’ business is growing, the chains’ business is in 1928, Ace Hardware Stores incorporated. Today, growing faster. These chain retailers operate enor- Ace is a very profitable Fortune 500 firm (in size), mous, impersonal stores (big boxes), featuring counting sales in billions of dollars. Overall, Ace is massive selection and low prices, though less per- the largest retailer-owned cooperative and leader sonalized service. Their soaring popularity has driven in the hardware industry in terms of wholesale and more small hardware independents to join co-ops retail sales and strength of the brand. Ace has over such as Ace. 4,600 stores across all 50 states and more than 60 Over time, Ace thus has shifted its focus, countries generate annual retail sales of approxi- from signing up new outlets to helping its existing mately $12 billion.19 members compete against the big boxes. How can Becoming an Ace dealer requires an initial it do so?20 In the following summary (with the ben- membership fee of $5000, an initial purchase of efits to the dealer in italics), we address another way $5,000 in voting stock, and substantial sums to to help independents compete: franchising. (For a remodel stores and convert operations to meet the further discussion of franchising, see Chapter 8.) Ace standard. Then there is the real commitment: By managing the wholesale side of its busi- a minimum annual level of merchandise purchased ness carefully, Ace uses its buying power to obtain from Ace. Much of it is private-label merchandise, low prices from suppliers. It achieves hig