Global Distribution

GLOBAL DISTRIBUTION

Successful entry into Europe of GAP involved offering American fashion not only in clothing but also in store design. The chain determined that the way products are presented to customers is even more important in Europe than in the US, and GAP stores apply that knowledge. In London, GAP’s interiors are white with light wood floors and chrome fixtures. This striking design, which is not typcial of British retailers, has generated attention – and sales.

Two European clothing retailers decided to meetht the enemy on its own turf and battle GAP for a share of the $182B annual US apparel business.

H&M, a $3.9B Swedish chain with more than 700 stores in 12 European countries, hoped to have more than 85 outlets in the US by the end of 2003.

Just like GAP, H&M exclusively sells its own brand clothing, but unlike its competitors the focus is on young styles at prices difficult to match. Working with suppliers throughout Europe and Asia, H&M bypasses the middleman to get items from the fashion runways to its stores within a few short weeks.

Zara, dubbed as Poor Man’s Armani owes its success to a vertically integrated business model spanning design, just-in-time production, rahter than utilizing a network of disparate and slow-moving suppliers, it has more flexibility to respond to fickle fashion trends. The result is that Zara can make a new line from start to finish in three weeks, versus the industry average of nine months.

RATIONALIZING LOCAL CHANNELS• Changing Distributors

• The distribution channel configuration for entry into a foreign markets is rarely optimal once the product is established on the market

• The traditional reason for termination of a distributor is• The exporting firm finds that the distributor is not doing a

good enough job in the market• Multiple Channels (Parallel Distribution)/(Dual

Distribution) • Channel changes do not necessarily involve termination of

contracts• In some cases multiple channels emerge or

are created

MULTIPLE CHANNELS

• Lucky Goldstar’s entry from Korean into the US TV market was made via original equipment manufacturing (OEM) agreements with retailers such as Sears; later a dual distribution system was initiated with sales under its own brand name Goldstar and, more recently, the company has shifted to its new brand name, LG.

• Italian apparel maker Giorgio Armani has set up a number of stores in the West under a separate name, AX Exchange, carrying more casual clothes and lower priced items than the regular Armani’s at his own specialty shops and department stores.

EXCLUSIVE DISTRIBUTION DUAL DISTRIBUTION

EXPORTER

INDEPENDENT LOCAL DISTRIBUTOR

RETAILERS

OEM BUYER

RETAILERS

EXPORTER

INDEPENDENT LOCAL DISTRIBUTOR

RETAILERS

Exclusive and Dual Distribution

LOW

HIGH

MARKET GROWTH

RATE

INTRODUCTORY

--PC’s: HOBBYIST STORES

--DESIGNER APPAREL: BOUTIQUES

GROWING

--PC’s: SPECIALITY RETAILERS

--DESIGNER APPAREL: BETTER DEPARTMENT STORES

DECLINING

--PC’s: MAIL ORDER

--DESIGNER APPAREL: OFF-PRICE STORES

MATURE

--PC’s: MASS MERCHANDISERS

--DESIGNER APPAREL: MASS MERCHANDISERS

The PLC Effect: How Local Channels Evolve

1. Product Requirements

(Perishable lettuce, sensitive apples, fine china, scratched cars, beer without freshness, moldy cakes,...)

2. Logistic Feasibility

(Equipment by DHL, autos by air, faxes of newsletters, freezer railroad cars, shock-absorbent packaging, vacuum-packed,...)

3. Demand Factors

(Importance of speed for repairs, timing of raw materials for inventory, customers’ need for immediate gratification, quality standards of middleman and final user,...)

DETERMINANTS OF CHANNEL CHOICE

4. Competitive Factors

(How fast is fast? How good is good? What are the alternatives for the buyer? Strategic importance of the market?)

5. Middlemen Resources

(Storage capability? Credit or consignment or cash? Motivating with fast delivery? Just-in-time system? Promised supplies? Ability to support the marketing effort?)

6. Own Resources

(Financial, manpower, production capacity)

DETERMINANTS OF CHANNEL CHOICE

WHOLESALING

• Wholesaling Functions• Primary functions of wholesaling

• Making contact• Negotiating• Buying• Selling• Warehousing

• Wholesaling is a major component of a country’s infrastructure and its structure reveals important clues as to the country’s stage of development

WHOLESALING• Full-service wholesalers can usually be counted

on in most countries• However, because of their size and tie-ins with

existing brands and chains they might not be willing to distribute the firm’s products

• The full-service concept should be carefully assessed for each country entered, since a full-service wholesaler will retain market knowledge and control the marketing.

• For the experienced entrant, limited services wholesalers might be more beneficial, because of increased control and more management learning.

WHOLESALERS AND POWER

Power and Competition• The size distribution of wholesalers in many countries

approximates the well-known “80-20” rule• 80 percent of the transactions are handled by 20 percent of the firms

• Efficiency• The trend toward integration is based on the

technological developments that have make large-scale economies and technical coordination feasible

• These vertically and horizontally integrated firms become gate-keepers to the local market – entry barriers.

• Retailers are the middlemen who buy from wholesalers and manufacturers and sell directly to the ultimate consumer.

•The retailing structure involves stores (supermarkets, department stores, specialty stores) as well as banks, restaurants, mail-order,

etc.

•Different economies have different retail structures (e.g. Gillette blades are sold through drugstores in the US, tobacco shops in Italy, department stores in Germany, on the street in Moscow, at

movie counters in Thailand, & from traveling vans in India)

Retailing

RETAILING• Retailing and Lifestyles

• The retailing structure has to adapt to the varying living conditions (the lifestyles) of individual households

• Creating New Channels• As economic growth takes place and global trade

expands, new alternatives emerge• Global Retailing

• The logistical and operational know-how of leading retailers is helping to increase the trend of retailing being globalized at a fast rate• The rapid deployment of point-of-purchase information technology

has shifted the power in the channel toward large retailers

• Global expansion of retailing is still difficult. Most large retailers are still pre-dominantly domestic.

• The Body Shop is one success story. The factors that helped its global expansion include:

• 1. STANDARDIZED PRODUCTS, GLOBAL BRAND• 2. GLOBAL SEGMENTS• 3. A STRONG STORE “CONCEPT”• 4. CONCEPT MOBILITY• 5. SIMILAR INFRASTRUCTURE (REPLICABILITY)

Global Retailing?

GLOBAL LOGISTICS – the transportation & storage activities necessary to transfer the physical product from

the manufacturing plants & warehouses in different countries to various local market countries

Nowadays, global distribution has been consolidated such that fully integrated transportation from point to point

across the world is possible at low cost.

Global Logistics

Transportation was traditionally one of the strongest trade

barriers. Not so any more, because of increased efficiency:1. SEAMLESS: FROM TRUCK TO TRAIN TO SHIP

2. CONSOLIDATION OF TRANSPORTATION AND WAREHOUSING

3. EXPRESS SERVICES (FedEx, UPS, DHL)

4. RESULT: LOGISTICS ARE OFTEN OUTSOURCED AND NOT A GREAT TRADE BARRIER ANYMORE.

Transportation as a Trade Barrier

GLOBAL LOGISTICS

• Air Express• Technical innovations in computerized inventory

systems and numerically controlled machines for good handling made possible the growth of air express systems

• Ocean Carriers• For shipments of bulky and low-value-per-unit products

• Ocean vessels are still the most economical carrier alternative overseas

• There have been a number of global carrier alliances in the shipping industry due to the savings involved in sharing resources and the advantage in providing integrated one-stop services to the shipper

GLOBAL LOGISTICS

• Overland Transportation• The increasing volume of international trade has put the

inland distribution system under pressure• One North American solution has been the roll-on-roll-off system

in which a loaded container is simply rolled onto a railcar and shipped by rail for part of the way, avoiding congested freeways

• Warehousing• The competitive need on the part of global companies to

be “close to the customer” and provide fast and efficient service • This places increased demand on warehousing and inventory

management

GRAY TRADE - parallel distribution on genuine goods by intermediaries other than authorized channel members

Three main factors motivate entrepreneurs to engage in gray trade:

1. Wide price discrepancies between national markets

2. Limited availability of certain models or versions in one market

3. Inexpensive logistics means that transportation can be accomplished with relative ease

Parallel Distribution & Gray Trade

Distributors Distributors Distributors Distributors

Retailers Retailers Retailers Retailers

Importer Importer Importer

Distributors Distributors Distributors Distributors

Retailers Retailers Retailers Retailers

Importer Importer Importer

Europe Hong Kong Japan North America

Broken arrows denote the flow of Seiko watches through unauthorized channels of distribution.Solid arrows denote the flow of Seiko watches through authorized channels of distribution.

Seiko’s Channels of Distribution

EROSION OF BRAND EQUITYcan happen if the gray goods do not perform to the level

expected

STRAINED RELATIONSHIPS WITH AUTHORIZED CHANNEL MEMBERS

arises when channel members face intra-brand competition

LEGAL LIABILITIES usually involves warranties that can’t be honored

COMPLICATION OF GLOBAL MARKETING STRATEGIES

forecasted sales in a market may not be realized when there is a sudden influx of gray goods

Effects of Gray Trade

Supply InterferenceEngaging in relationship building with distributors and requesting the careful screening of orders and careful disposal of surplus inventory

Dealer InterferenceSearching for gray imports at the gray traders’ outlets in the importing

country, then asking the dealer to help dispose of the inventory

Demand InterferenceUsing advertising to educate customers about the drawbacks of gray goods

Strategic AttackCreating stronger reasons for customers to patronize authorized dealers

Channel Actions against Gray Trade

What type of channel/middlemen should be used to ensure that the strategic marketing objectives are met in that

country?

What are the important functions in the channel network for that country?

Global Channel Design

Two major considerations:

REVISIT YOUR FSA’S Key success factors and FSA’s vary across countries and across

channels

WHAT CHANNELS ARE AVAILABLE?Once you identify the critical features of your channel network, find

out if the country market possesses these channels

CHANNEL TIE-UPChannel members might be difficult to enlist due to entry barriers,

competition, and special trade allowances

COORDINATION & CONTROLOnce a distribution network is established, coordination & control

from a centralized headquarters should be feasible

Designing Global Channels

The wholesale & retail structure of a local market reflects the country’s culture & economic progress & the way business is

done in that country, but new channel modes may be successful if timing & conditions are right.

Takeaway

Channel management is a matter of local execution.

Local subsidiary managers need to play important roles in implementing any global distribution strategy.

Takeaway

Global logistics & transportation are important determinants of financial performance, and their efficiency has been

improving dramatically.

Takeaway

Parallel distribution & gray trade create control problems for the global firm & resellers, and they can be managed through

close cooperation with local distributors in key markets.

Takeaway

The creation of globally coordinated channels has to start with a clear understanding of how the firm-specific advantages depend on distribution channel design.

Takeaway