Two major types of international channel alternatives are available to a domestic producer. The first involves the use of domestic middlemen who provide marketing services from a domestic base and the second is the use of foreign middlemen.
Domestic Middlemen While convenient to use, these may suffer from a lack of knowledge about a specific foreign market and their inability to provide the kind of local representation offered by foreign-based middlemen. The more common merchant middlemen (those taking title) include the export merchant, who takes physical posses- sion of the goods (mostly manufactured), has a broad line, and sells in his own right; the export jobber, who handles mostly bulky and raw materials (but does not take physical control of them); and trading companies, which sell manufactured goods to developing countries and buy back raw materials and unprocessed goods.
Agent middlemen include brokers; buying offices (primarily concerned with searching for and purchasing merchandise upon request); selling groups (an arrangement by which various producers cooperate to sell their goods overseas); the export management company, which operates in the name of its principal; and the manufacturer’s export agent (MEA), which specializes in only a few countries and has a short-term relationship with its clients.
Foreign Middlemen In contrast to dealing with domestic middlemen, a manufacturer may decide to deal directly with foreign middlemen. This shortens the channel, thereby bringing the manufacturer closer to the market. A major problem is that foreign middlemen are some distance away and therefore more difficult to control than domestic ones. Since many foreign middlemen, especially merchant middlemen, are prone to act independently of their suppliers, it is difficult to use them when market cultivation is needed.
Wholesalers around the world, while performing similar functions, vary tremendously in size, margins, and service quality. A broad generalization is that the less developed a country, the smaller the wholesaler and the more fragmented the wholesale channels. In recent years, however, the emergence of wholesaler-sponsored voluntary chains has tended to consolidate distribution power in the hands of a smaller number of wholesalers. Also, there is a worldwide trend of vertical integration from the wholesale or retail level to the manufacturer. And the growth of national wholesalers in many countries has made it easier for manufacturers to distribute their product(s) nationwide.
Retail Structures in Foreign Countries These vary tremendously across countries because of differences in the cultural, economic, and political environments; for example, a generalization is that the size of retail stores increases as gross national product per capita increases. Both European and Japanese retailing are following a path similar to that pioneered by the United States with respect to store size, self-service, discounting, automation (use of electronic checkout counters), expansion of national chains, and direct marketing. And in some cases the effectiveness and efficiency of retailers in developing nations are being improved with the help of training programs, promotional materials, and inventory planning advice from large multinational manufacturers. A good example of this sort of proactive approach to improving the retail distribution of a firm’s products in foreign lands is provided by Procter & Gamble’s program to increase its revenues in rural China, as discussed in Exhibit 12.9
It is also becoming increasingly possible to promote and sell goods and services directly over the Internet almost anywhere. The online population was estimated to be 1.46 billion in the year 2008, with 248 million in North America, 384 million in Europe, 520 million in the Asia-Pacific region, 39 million in South America, 51 million in Africa, and 42 million in the Middle East. As we have seen, however, while the Internet enables firms to contact customers and generate orders, they must still rely on foreign middlemen to carry out the necessary physical distribution functions.
Channel Design for Services
Producers of services also face the problem of making their outputs available to targeted customer segments. In some cases, this results in forward vertical integration involving decisions about branch outlets—as in bank services that are accessible through branch banks (some of which may be located in supermarkets) and automatic tellers. Another example is a hospital that establishes outpatient clinics to serve the specific health needs of various community segments, such as high-stress or drug- or alcohol-dependent groups.
Ordinarily, the marketing of services does not require the same kind of distribution networks as does the marketing of tangible goods. Marketing channels for services tend to be short—direct from the creator or performer of the service to the end user—hence the emphasis on franchising.
Some services require the use of longer channels, however. Health care services use a variety of channel systems other than the traditional fee system employed by many doctors and hospitals in selling directly to the consumer. Health Maintenance Organizations (HMOs) sometimes use a vertically integrated system, where consumers pay a monthly charge to an organization (such as Baptist Medical Systems-HMO, Inc.) that coordinates the services of all the health care needs of its constituents. Hotels rely increasingly on indirect channels for their bookings. Intermediaries include travel agents who may deal directly with a hotel or contact another intermediary holding blocks of rooms, sales representatives who represent a number of noncompeting hotels or resorts, airlines that provide tour packages that include hotels, and automated reservation services that main- tain a computerized inventory of available rooms travel agents can tap into for a fee, e-hubs that enable business buyers to reserve rooms online, and “name-your-own-price” sites such as www.priceline.com where hotels can dispose of excess capacity if potential buyers offer an acceptable price.
Channel Management Decisions
Designing the perfect channel to accomplish the firm’s objectives is one thing; getting the middlemen to carry the product and perform the desired functions is another. In recent years manufacturers—and in some cases large wholesalers and retailers—have developed vertical marketing systems (VMSs) to improve coordination among channel members, thereby improving their performance. Greater coordination and cooperation in VMSs have led to greater marketing effectiveness and distribution economies by virtue of their size, bargaining power, and the elimination of duplicated functions. As a result, VMSs have become the dominant form of channel arrangement, particularly in the distribution of consumer goods and services.
This section discusses the various types of VMSs and how firms can develop and maintain such systems. Next, we examine the Sources of Power and the inducements and incentives that channel members use to gain the support of other system members. Finally, we identify possible sources of conflict in VMSs and some resolution mechanisms that firms use to preserve cooperation within their channels.
Exhibit 12.9 Procter & Gamble and the Chinese Government Work to Improve Rural Retailers
Since Procter & Gamble, the consumer package goods giant, first introduced Head & Shoulders, Pampers, and many other brands to mainland China in 1988, it has enjoyed steady growth. The firm racked up $2.5 billion in revenues in fiscal 2006, and its wholly owned China business unit employs 6,300 people, many of whom work in the firm’s extensive sales and wholesale distribution network.
While much of P&G’s past growth came from large retailers in China’s biggest cities, company managers expect that future growth will come from the rural countryside where there are more than 700 million potential first-time buyers for many of P&G’s products. Since family incomes in the countryside average less than one-third of those in the cities, however, P&G has been developing new Brand Extensions and packaging to lower costs and prices, and to appeal to rural cultural preferences.
Since retail stores in rural China tend to be small, numerous, and unsophisticated, the firm has also had to expand its distribution network to reach them. The firm relies on a group of wholesale subdistributors and their vans to deliver a variety of P&G products as well as sales aids like posters, display racks, and the like to hundreds of small shops. And the firm signed an agreement with China’s Commerce Ministry in 2007 whereby P&G promises to help renovate existing retail outlets, design and build new ones, and train local shopkeepers in some 10,000 small villages in the art of retailing. The government supports the program as a means of reducing the flow of counterfeit goods and spurring economic development in the countryside, while P&G hopes that improving the effectiveness and efficiency of China’s rural retailers will lower its distribution costs and gain increased local promotion of its many brands.