International distribution systems

When planning for international markets, distribution plays a very important role. Sometimes distribution may be the biggest constraint to successful marketing as getting the product to the target market can be a costly process if barriers in a distribution structure cannot be overcome. Distribution channels differ to a great extent from one country to another on a number of dimensions, due to influencing factors such as culture, tradition, customs, legal requirements. There are, however a number of things that are common to all channels regardless the product category or the market. Marketing channels have been defined by Bradley as a set of independent organizations involved in the process of making a product or service available for use or consumption 1 . One of the main differences in establishing a domestic or an international distribution system consists of the complexity of the variables involved in the choice of international activities, when each foreign market has a different distribution system.

Bradley F., Op. Cit., p. 546.

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This chapter presents the main aspects a company must consider when making international channel decisions. In order to decide over the distribution strategy in a particular country, a company should study: & What are the general distribution structures in a country. & What are the specific (wholesaling, retailing) distribution patterns in a certain industry. & What are the middlemen choices in that country. & What are the factors affecting the choice of the distribution channel. & How to locate, select, motivate, evaluate and terminate channel members. & What alternative distribution strategies can be used. & What are the main logistic decisions to be taken.

10.1 International distribution patterns

In every country and in every market, consumer and industrial products go through a distribution process in order to get to the consumer. Each country has its own distribution structure. Even though distribution decisions are similar in all countries, the way they are put into practice is different because in each country there are different channel alternatives and different market patterns. Each country has its own distribution structure through which goods pass from the producer to the consumer and in each country, the behaviour of channel members is a result of the interaction of cultural environment and the marketing process of companies. Channel structures can vary from little developed distribution infrastructure found usually in emerging markets to highly developed systems found usually in developed industrialized countries. The first thing the company should do is to look at general distribution patterns in a particular country. To do so the company should analyse the types of distribution structures existent in that country, according to criteria such as philosophy and the way the product gets from the producer to the consumer. According to philosophy, there are 2 : Import-oriented channel structures. Mass consumption structures.
2

Cateora Ph. and Graham J. , 1999, Op. Cit, p. 408-409.

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According to how the product gets from the producer to the consumer, there are: Conventional channel structures (that use intermediaries). Modern channel structures direct channels (to consumer). Import-oriented distribution structures These structures originated in economies that were/are dependent on imported manufactured goods and are usually met in developing countries. Typically in such structures where the importer controls a fixed supply of goods, develops a philosophy of selling a limited supply of goods at high prices to a small number of affluent customers. It results a sellers market, as demand exceeds supply and the customer is the one who seeks the supply. In that country the distribution structure developed has a limited number of middlemen that perform both wholesaling and retailing functions. The import-oriented philosophy influences all aspects of market activities and behaviour and determines an import-oriented attitude in which the notion of economies of scale and using the price as a way to stimulate demand are not known. For instance, in Brazil, a bank ordered piggy banks for a local promotion. Because the promotion went well, better than expected, the banker placed a reorder three times higher. The reaction of the local manufacturer was to increase the price based on the theory that with a higher demand the prices go up. This happened in spite of the fact that production costs (due to economies of scale) would decrease. In these countries there is the one-deal mentality of pricing at retail and wholesale levels. The importer controls the supply and he will set the price at whatever the market will bear. Each shipment is a deal and the price of goods will be set for every deal based on landed cost and the assessment of demand and supply at that moment. This type of attitude and mentality affects the development of intermediaries and their functions, in one word the way they perform their jobs. Today there are a few countries that fit perfectly in this model, but even if countries have developed economically and the market systems changed accordingly, if their channel structures evolved from import-oriented system, influences can still be seen. Mass consumption-distribution The philosophy in a mass distribution structure is that a supplier sells to as many as possible customers and one supplier does not dominate the distribution system. The channel structure in these countries is highly developed and has a variety of intermediaries.

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The mass consumption distribution structure prevails in industrialized countries. The supply of goods is large and there is a buyers market as the buyer has strong negotiation power. Producers try to push the goods towards consumers and highly developed channel structures with a variety of intermediaries are developed in order to do this. The distribution system is formed on the idea that the channel of distribution is a chain of intermediaries that perform specific activities and each of them sells to a smaller unit beneath, until the chain reaches the consumer. Each intermediary has specialized functions and usually in these countries fully integrated distribution systems have developed. Traditional channel structures These are the channels that use intermediaries to get the product from producer to consumer. They also differ according to the length, as well as the form of organization. The length of the channel, according to the number of intermediaries between the producer and the consumer can be short (few intermediaries) or long (a larger number of intermediaries). The form of organization can vary from corporate (chains of retailers), to franchise (when the distributor will be a franchisee of a large company) or independent (such as solitary boutiques). Modern channel structures These are the direct channels that go straight to the consumer. Such methods can be the door-to-door, telemarketing, through catalogues, via internet or through mail. Such direct marketing techniques were initiated in developed countries and are used there on a large scale. They are also used by multinationals as a distribution channel choice in markets with insufficient and/or underdeveloped distribution systems. Traditional direct marketing firms such as Zepter and Oriflame have been successful in Latin America, Asia and Eastern Europe. The Internet gives the possibility to develop the e-commerce as a form of direct selling. E-commerce is developed in industrialized countries where computers are spread to a large percentage of population and the telephone service is cheap enough, where there is a banking system that permits payment by card and where postal and express services are well developed in order to deliver the products (logistics is a key constraint in e-commerce).

International distribution systems

In order to emphasize the differences existent between different distribution structures at international level, a short description of distribution patterns in a couple of countries will be done. For instance, if we compare the USA distribution structure with the Japanese distribution structure, we can see that they are completely different. The American structure is characterized by a large variety of retailers, by a diminishing number of wholesalers, a lot of discount stores and large retailers that control the network. The Japanese structure is characterized by many small wholesalers dealing with a large number of retailers, and manufacturers control networks. Small retailers benefit from strong protection through The Large Scale Retail Store Law. The law strictly regulated the retail sector until 1998. The law required that any store larger than 500 square meters needed the approval of the prefecture, of MITI (Ministry of International Trade and Industry) and the agreement of local retailers. The law was designed to protect small retailers against competition coming from domestic and foreign large companies. After 1998 the Japanese distribution system started to restructure. The Retail law has been relaxed in the sense that stores larger than 1000 square meters have to get the above mentioned approvals. Specialty discounters developed in competition with the traditional stores. These type of stores offer low prices as they buy directly from manufacturers. Some of them do this based on global purchasing (buy anywhere in the world as long as it is as cheap as possible), global retailers arrived and consequently new choices in price appeared for the Japanese consumer. Japanese prices used to be the highest in the world (2-4 times higher than USA prices) because there was no price competition on the one hand and because of the large number of intermediaries on the other hand. The American structure serves the consumers who make large and less frequent purchases as the time became more limited in families and as people have higher incomes and can afford to spend more money at one shopping trip, while the Japanese structure serves the consumers who make small frequent purchases at small conveniences stores based on the idea that in this way they can get fresh and good quality products and a good service. Box no. 10.1 presents more details about the Japanese distribution systems.

International Marketing

BOX NO. 10.1 The Japanese distribution system The Japanese distribution system is complex, and highly fragmented comprising numerous retail firms and different layers of wholesalers, most of them being small organizations. Japan has traditionally been segregated by product type and the subsequent development of many specialized marketing channels. For instance, meat stores sell about 80% of the meat items. The main features of the Japanese distribution system are: 1. Personal relationship. The system puts a great emphasis on the development of strong personal relationships with users in order to ensure both stable supply and price over a long period of time. This strong relationship of service, loyalty and commitment to consumers is passed on the whole distribution structure from producers to wholesalers and retailer. See also Box no. 4.2. about keiretsus. 2. Credit and payment. Due to a limited capital equity, producers supply goods to wholesalers who pay back in 6 months time (usually payments take place twice a year in Japan). This type of defferred payment is known as Tegatas and allows wholesalers to manage with small amount of capital. 3. Sale or return. Retailers take back goods from customers and wholesalers are willing to take back unsold goods from the retailers, showing the strong links of the Japanese distribution system and the close ties among Japanese companies. 4. Delivery. The high frequency of deliveries is much part of the system. Wholesalers sell to retailers in small quantities at regular intervals, due to the limited financial resources of the intermediaries. Many Japanese homes are small and they lack storage space, therefore they shop several times a week. 5. Cultural values. The Japanese consumer demands a high level of service, such as availability of credit and free home delivery, long opening hours and the right to return non-defective goods. On the business culture, vertical integration is very strong in Japan based on strong personal relationships. Source: Chee H. and Harris R., 1998, Global Marketing Strategy, Pitman Publishing, p. 467-471.

The Romanian distribution structure underwent visible changes in the last 15 years. It is a distribution structure in transition from a structure dominated by large scale wholesalers that sold to a specified number of retailers certain quantity of goods according to the plan, towards a new distribution structure. During the communism there were a few large wholesalers that had territorial exclusivity and sold according to plan. After 1990 the emerging distribution structure was formed of many small private Romanian wholesalers and retailers. Many international companies have formed their own distribution force, as existing middlemen were not considered to be able to fulfil adequately all distribution functions. Starting mid 1990s foreign large retailers, wholesalers and cash and carry-s entered the Romanian market, as part of their globalisation process (Metro, Sel-Gros, Bila, Carrefour, Cora).

International distribution systems

10.2 Distribution patterns for the product category

After studying the distribution structures of a country at a general level, the company should study what are the patterns of distribution in the particular industry the company function in, for that specific product. Whatever the distribution decisions the company will take these are dependent of what already exists in each country it wants to enter. Aspects such as the following ones have to be studied: Middlemen services. Line breadth. Costs and margins. Channel length. Nonexistent channels. Blocked channels. Power and competition. Stocking. Middlemen services. Services attitudes of middlemen vary from one country to another according to culture and to the distribution structure developed in that country. In Egypt for instance, the main purpose of the trading system is to handle physical distribution of available goods. The middlemen are not interested in promoting and selling individual items of merchandise and the manufacturer must undertake much of the promotional and the selling effort. In China, the wholesalers see as their only function to store the goods and wait for the customer to come and take it 3 . Line breadth refers to the number of product lines carried by wholesalers and retailers. Every country has a distinct pattern of distribution as far as the line breadth is concerned. Some countries have broad lines distribution systems as wholesalers and retailers carry everything and other countries have narrow lines distribution systems, when wholesalers and retailers are specialized on certain products. In UK traditionally wholesalers and retailers are specialized and carry single product lines such as ties, scarves, socks and cards or category product lines such as baby products. In Italy there are numerous specialty houses and in Finland retailers carry general lines of merchandise.
3

Cateora Ph and Graham J., 1999, Op. Cit., p. 416.

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Costs and margins of trade companies have to be studied for every country as they differ according to the level of competition, to the services offered, to the efficiencies and inefficiencies of scale, to purchasing power and tradition. In India for instance, in urban areas competition is high and costs and margins are low, while in the rural area competition is low due to lack of capital, traders have monopoly and they practice high prices with wide margins. In USA supermarkets have a 2-3% margin, while in UK the margin is 7-8% and in Romania in the retail industry it goes up to 30%. Channel length refers to the number of intermediaries between producer and consumer. Generally it was noticed that at international level channels are shorter for industrial goods and consumer goods with high prices than for products with low prices. Non existent channels. In many countries (usually less developed countries) adequate market coverage cannot be obtained through only one channel (as in developed countries). In some other countries there are not at all appropriate channels of distribution. For instance, in Peru, the informal distribution system accounts for 25% of sales in retailing. Street markets and ambulatory sellers offer wider market penetration than formal channels. Therefore, a company should use different distribution channels both formal or informal in order to reach different market segments. Blocked channels. An international marketer may be blocked from using the distribution channel he wants due to the fact that competitors already established product lines in various channels and distributors do not want to take supplementary new products. Also, associations and cartels of middlemen may restrict the number of distribution alternatives available to a producer. In UK glasses are sold only based on prescription through registered optical (that are controlled by a few large companies), while in USA reading glasses may be bought in many different types of stores, including supermarkets.

International distribution systems

Stocking. Sometimes foreign middlemen carry limited inventories due to lack of capital, the high cost of credit and fear of inflation. For the producer this may mean out of stock conditions and sales lost to competitors. Sometimes manufacturers are providing warehouse facilities and extend long credit in order to encourage middlemen to carry large inventories. However, for small stores large inventories are impossible to carry. Power and competition. Patterns of power concentration should be studied for each country. There are countries where manufacturers and/or wholesalers have larger power, such as Japan and other countries where retailers have larger power such as USA and countries in Western Europe. Retail patterns should be studied separately. The structure of retailing in terms of number of retailers and size is of interest. Producers can sell directly to large dominant retailers, but it can be difficult to sell directly to small retailers, who in the aggregate handle a great volume of sales. In Italy, there are many small retailers as they are protected by local legislation. In order to open a new retail store, a company must obtain a license from a municipal board formed of local traders people. In South Africa there are 31.000 stores in total. 1.000 of these are the large stores that concentrate 60% of the grocery sales. The rest of 40% of the sales can be covered through the 30.000 retailers, but they might be difficult to reach 4 . In UK the market is dominated by few large retailers (such as Asda, Tesco, Sainsburys, Safeway) and access to the market is possible only through them 5 .

4 5

Ibid, p. 418. Czinkota M.R. and Ronkainen I.A., Op. Cit., p. 390.

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10.3 Setting and implementing the distribution strategy

After the company studied what is available in the foreign market will decide over its distribution strategy. The main aspects related to the distribution strategy are channel design, channel management and logistics.

10.3.1 Channel design

In order to make channel design decisions the company has to look first at the factors that influence the possible designs of the channel. One of the most used techniques to do this, is the so called C rule that was proposed by a number of authors as presented in table no. 10.1. Table no. 10.1 Factors affecting distribution channel design the C method
Cateora et al. Cost Capital requirement Control Coverage Character Continuity Czinkota et. al. Customer characteristics Culture Competition Company objectives Character Capital Cost Coverage Control Continuity Communication Usunier Consumers and their characteristics Culture Character Capital Cost Competition Coverage Continuity Control Chee et al. Company objectives Capital Cost Coverage Continuity Character of the product Communication Control Customer characteristics Culture Complementary skills Competition Channel power

Sources: Cateora Ph. and Graham J., 1999, International Marketing, Mc Graw Hill, p 436-439; Czinkota M.R. and Ronkainen I. A., 2001, International Marketing, Hartcourt College Publisher, p. 392; Usunier J.C., 1996, Marketing Across Culture, Prentice Hall, p. 349-350; Chee H. and Harris R., 1998, Global Marketing Strategy, Financial Times Pitman Publishing, p. 446-455.

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Part of these factors have been approached under the study of existing product category distribution systems, as many are the characteristics of the existent distribution systems in different countries. We will be discussing some of those that are considered to be among the most important. Customer characteristics and culture. Distribution channels create utility for customers, therefore customer characteristics, such as the demographic and the psychographic ones, will be a basis for channel design decisions. The company should consider customer numbers, shopping habits, reaction to different selling techniques, income, geographical distribution. Table 10.2 presents a number of cultural influencers over distribution at retailers level. Table no. 10.2 Influence of culture on distribution through retailers
Selected aspects of distribution Shopping hours Aspects that might differ according to culture Is time spent shopping seen as wasted (economic time)? Is the return of goods (complaining) standard behaviour? Religion based arguments in favour of restricted opening hours Products may be banned because of religious or legal prescriptions Human nature is good (friendliness towards shoppers) versus bad (indifference/negative view of service to others) Compliance with rules Differences according to level of educational and economic development

Opening hours Product range Willingness to service consumers

Waiting lines Self-service versus personnel in contact

Source: Usunier J.C., 1996, Marketing Across Cultures, Prentice Hall, p. 352.

Cost. There are three categories of channel costs that have to be taken into consideration and compared for all distribution alternatives in a country: the initial costs, the maintenance costs and the logistical costs. The initial costs include all cost for locating and setting up the channel, such as travelling expenses to locate and select channel members, negotiation costs and the capital costs necessary to set up a channel. The maintenance cost includes the cost of auditing and controlling the channel, local advertising expenses, the promotions and the operational

International Marketing

discounts to intermediaries or the salaries of salespeople and sales managers, as well as their travelling expenses where the company has its own sales force. The logistical costs comprise transportation expenses, storage costs, the cost of breaking the bulk shipments into smaller sizes and the costs of customs paperwork. The costs have to be evaluated in a strong relationship with functions that the distributor fulfils. There are two main types of functions that distributors have to deal with, namely the commercial functions and the logistical or the physical functions. Among the commercial functions are the credit (paying the products when they are received, not after they are sold), the promotion of the products, merchandising as one important way of promoting, conducting market studies as they are the closest to the consumer and the transfer of title from one middlemen to another and to the final consumer. Among the physical/logistical functions there are the reception of merchandise (port/airport), the transport local/national/international, warehousing, packaging/ break bulk and after-sale services. It is necessary for the company to estimate the costs of all alternatives in order to be able to choose the most suitable option. High distribution costs are usually reflected in higher prices at the consumer level and may endanger the entry in the new market. Capital requirements refer to the issue of what financial resources are necessary to maintain a distribution channel in terms of cash flows. Maximum investment is usually required when the company establishes its own channels through its own sales force. The distribution through intermediaries requires capital for providing initial inventories or loans. Coverage refers to both the number of areas in which the companys product is represented and the quality of that representation. Coverage can be therefore assessed on geographical or market segments. The selection of one channel member over another may be influenced by the respective market coverage. It is easier to obtain geographical market coverage in large urban areas than in small cities or less populated areas. In order to determine a distributors market coverage the following must be determined: a) location of sales offices that indicates where efforts are focused, b) salespersons home base, as they generally have the best

International distribution systems

penetration near their homes and c) previous years sales by geographic location that indicate the channel members success in each geographic area. Control. The use of intermediaries leads to loss of some control over the marketing of the firms products. With a direct sales force, a manufacturer can control to a larger extent price, promotion, type of retail outlet to be used and other marketing aspects. Longer channels, especially with distributors who take title to goods, often result in little or no control over the marketing activity. Character of the product. The nature of the product will have an impact on the design of the channel:

for the perishable goods or those with a short shelf life will be used
shorter channels in order to reach the consumer quickly,

for the products requiring after-sale services (such as technical products)

short channels, such as direct sales or a trained agent, will be used,

for non-perishable products usually longer channels will be used, for the bulky products a short channel is preferred in order to minimize
the distance and the number of times the products change hands between channels intermediaries. Besides the nature of the product, the size of the product line also affects the selection of channel members. For instance, a distributor or a dealer is more likely to stock a broader product line, while an agent usually sells limited product lines. Continuity is important as channel design decisions are the most long-term of the marketing mix decisions. Therefore, maximum care should be taken in choosing the right type of channel, given the intermediaries available and the environment. Ensuring continuity rests on the company because foreign distributors may have a more short-term view of the relationship. Most middlemen have little loyalty for their suppliers. They handle their brands when they sell and they quickly reject them when they fail to produce profit during a period. Or it might be the case that when one individual retires or moves out of the distribution activity the company may find that it lost its distribution in that area country. In Japan wholesalers believe that it is important for manufacturers to continue to improve the product even after initial success. If no improvements are made local

International Marketing

competitors are likely to enter the market by producing the product at a lower price and distributors will turn to them 6 . Communication refers to the exchange of information between channel members that is essential to the functioning of the channel. There are various distances between the international company and the potential distributors, that may cause problems. The shorter the distance between the potential channel member and the manufacturer the better chances for increased communication. There are a few types of distance to consider 7 : geographic distance the physical distance separating the two partners: from Bucharest to New York, cultural distance the differences in values, norms and behaviour between the two partners: Asian countries have a high context way of communicating, while Westerners have a low-context way of communicating, social distance the familiarity with each partners operating methods: during Ramadan fasting period in Islamic countries no serious business takes place, temporal distance the length in time between the placement of an order and the actual delivery of the product: due to transformation of telecommunication and transportation it is possible at present to deliver goods in just few days from one continent to another, technological distance the differences in process technologies between the two partners reflected in compatibility, competitiveness, product experience and quality of the product: exports from less developed countries are perceived as inferior to exports from developed countries. Competition is necessary to be assessed in order to decide over channel design. Channel competition can occur in a number of ways: first is the competition of products that are placed on the shelves side by side and second through blocking the distribution channel by filling them with competitors products and refusing the company access to the market.

6 7

Czinkota M.R. and Ronkainen I.A., Op.Cit., p. 401. Chee H. and Harris, Op. Cit, p. 451.

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The design of the distribution channel should definitively start from the companys objectives of profitability and market share, objectives to be further translated at the level of distribution objectives once the distribution strategy is set. The main decisions that a company has to take when designing the channel refer to segmentation-targeting- positioning and to setting the channel structure. 1. Segmentation-targetingpositioning starts by dividing the market in groups through segmentation. In distribution, segments are best defined on the basis of demands for the service outputs of the marketing channel. A distribution channel also adds value to the product marketed through it and this is important to the consumer. The value-added services created by channel members and consumed by the end-users along with the product purchased are called service outputs. Service outputs include aspects such as bulk-breaking, spatial convenience, waiting and delivery time and assortment and variety 8 . End-users in different countries have varying demands for these service outputs and the company has to decide whom to serve and how, through the intermediaries it chooses. When targeting, the company chooses what segments to serve and what segments to ignore, given the way different consumers want to buy products. By positioning, the company will try to define what is the optimal channel to serve each segment, trying to design a distribution channel that meets the segments demands. 2. Establishing the channel structure involves taking decisions over the following aspects: channel length, channel width, types of intermediaries, the use of multiple channels. Channel length refers to the number of intermediaries involved in the physical or ownership path of the product from the manufacturer to the consumer. The company can choose long channels with a large number of intermediaries or short channels with only a few or no intermediaries at all, according to the influencing factors discussed above. Jeannet and Hennessey consider that the channel length is influenced by three aspects, namely: a) products distribution density, as products
8

Coughlan A.T. and Stern L., 2001, Marketing Channel design and management in Kellogg on Marketing, Dawn Iacobucci (ed.), p. 252.

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with extensive distribution usually have longer channels of distribution, b) the average order quantities, that often depends on the purchasing power and income of the targeted customer group and c) the availability of channel members 9 . Figure no. 10.2 presents possible configurations of the distribution channels for different types of products. Looking at the distribution chains, we can say that one can eliminate a middlemen but not the channel functions. Therefore, the real question is who can do the job at the least cost? The wholesaler? The manufacturer? The retailer? If there is no wholesaler, the retailer will fulfil the breaking the bulk function. If the producer sells directly to the consumer, the warehousing function will stay either with the producer or/and with the consumer. Either one buys a 1 kg detergent boxes more often or one buys a 5 kg detergent box, case in which one does not consume more, but takes over the warehousing function. Channel width refers to the number of intermediaries at each level in the distribution chain. Closely related is the distribution density that has to be set by the company. The distribution density refers to the number of outlets or distribution points required for the efficient marketing of the firms products. The key for setting the distribution density lays with the consumers shopping behaviour, in terms of the effort expended to locate a desired item. This behaviour may vary to a large extent from one country to another. The possible distribution strategies that a company can adopt from the density point of view are: extensive (intensive) distribution, selective distribution, exclusive distribution. Extensive/intensive distribution means that a firm tries to place its products or services in as many as possible outlets. This type of distribution is recommended for consumer goods and convenience goods for which the consumer does not make a special effort to get the product (soft drinks, chewing gum, cigarettes, etc.). Selective distribution means that a firm selects a few retail outlets to carry its products. In this case the consumer will search in more outlets before making the decision to buy the product. It is indicated for products that inspire brand loyalty from consumer (clothes, cosmetics etc.).

Jeannet J.P. and Hennessey H.D., Op. Cit., p. 604.

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Exclusive distribution means that only one retail outlet is used to carry the product. It is assumed that the consumer will searched for the desired product and will not accept substitutes. It is suitable for products such as automobiles. Types of intermediaries to be used. There are two basic decisions that the company has to take when choosing intermediaries to serve a particular foreign market. The first is to determine what type of relationship to have with intermediaries, the alternatives being distributorship or agency relationship. The second is that the company has to decide whether to use indirect exporting, direct exporting or integrated distribution to penetrate a foreign market. Distributorship or agency relationship? A distributor (merchant) is a company that purchases the product from the producer and sells it further. Therefore, it has more independence than the agency, being able to better control the marketing activity for product lines carried. The main characteristics are that they take title to manufacturers goods, assume trading risks and are less controllable by the manufacturer. An agent operates based on commission, does not usually handle physical goods and has less freedom of movement than a distributor, meaning that the manufacturer has more decision power over marketing activities. The main characteristics are that agents work on commission and do not take title to the merchandise. Middlemen are differentiated according to the fact they take title to the goods or not. Middlemen in different countries have different names but regardless the names they have, that sometimes can be misleading, the marketer should study what are the functions that the middlemen fulfil. Many middlemen in international markets wear many hats and they can be clearly identified only in the relationship with a specific firm. A middleman can fulfil all distribution functions for some companies or only some distribution functions for other companies, meaning that the same company can be an agent for a client and a merchant/distributor for another company. Indirect exporting, direct exporting or integrated distribution? Indirect exporting means to sell your products to another domestic firm that acts as sales intermediary and usually takes over the producers operations on the international side. Indirect exporting is practiced by firms in their early stages of the internationalisation process.

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Direct exporting means that the company takes direct responsibility for its products abroad by either selling directly to a foreign customer or finding a local foreign representative to sell its products in the market. Integrated distribution means that the company makes an investment into the foreign market in order to sell its products in that market or more broadly. Such investment can be a sales office, a distribution network or even a manufacturing facility. Table 10. 3 presents possible types of middlemen that can be involved in international marketing. The use of multiple channels. Another decision that the company has to make is either to go through a single distribution channel or more distribution channels. The addition of new distribution channels is meant to offer alternative ways for current and potential customers, so that to have customized channel approaches for each distinct consumer segment in the market. For many products the use of multiple distribution channels becomes a necessity as one of the executive managers of Bloomingdale, one of the major USA retailers stated, that each product should be sold in three channels at the same time: brick-and-mortar store, catalogue and on-line channel 10 . However, where multiple channels are managed together, the potential for channel conflict is great.

10.3.2 Channel management

The logical steps to be followed when developing international distribution channels, as part of the channel management are: 1. Locating middlemen. 2. Selecting middlemen. 3. Motivating middlemen. 4. Controlling middlemen. 5. Terminating middlemen. Locating and selecting middlemen are the first steps in the process. In order to locate middlemen, the company establishes a number of criteria to be used in evaluating middlemen. Most companies emphasize on actual or potential
10

Coughlan A.T. and Stern L., Op. Cit., p. 264.

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productivity of the middlemen, but there are more criteria that should be taken into consideration. Table 10.4 presents a model for channel member selection.

Table 10.3 International channel intermediaries

Domestic (indirect) Agents (commission based) Broker Is a low cost agent that brings buyers and sellers together Foreign (direct) Agents (commissioned based) Broker Works based on commission and deals with commodities, operating on a country or on a group of countries basis. Manufacturers representative Does not take physical possession of goods, but takes the responsibility for the producers goods in a city, regional market area, entire country or several countries Conducts business in a foreign nation under an exclusive contract with the parent company, compensation being based on percentage of the profits.

Export agent

Is an individual middleman that has a short term relationship with the manufacturer for whom provides a selling service in one or two markets

Export management company (EMC)

Works under the name of manufacturer, as a low cost independent marketing department with direct responsibility to the parent firm Deals mostly with commodities and works on a job-lot

Managing agent

Export jobber

International distribution systems Domestic (indirect) basis assuming responsibility for arranging transportation. Merchants (take title of goods) Global retailer/ Buys from local suppliers and sells in wholesaler their subsidiaries abroad. Trading company Accumulates, transports and distributes goods from many countries. Generally located in developing countries. Purchases merchandise on request and does not have long-term relationships. Arrangements to distribute the product of another company. Also called piggybacking. Foreign (direct)

Merchants (take title of goods) Complementary Arrangements to marketing distribute the product of another company Distributor/ dealer Has the exclusive rights in a foreign country to sell the products of the manufacturer

Buying office

Retailer/ wholesaler

Buys from foreign manufacturers and sells the goods further.

Complementary marketing

Purchasing agent

Purchases goods from manufacturers and sells them to wholesalers and retailers

Source: Cateora Ph and Graham J., 1999, International Marketing, Irwin McGraw Hill, p. 426-434; Czinkota M.R. and Ronkainen I.A., 2001, International Marketing, Hartcourt College Publishers, p. 403.

Productivity refers to the potential sales volume or how much would the company be able to sell through those middlemen. Financial strength wants to see what is the liquidity of the middlemen.

International Marketing

Managerial stability and capability evaluates the knowledge and managerial stability of the middlemen on which the fulfilment of the distribution functions depends. The reputation of business is important as when the producer is not known in the foreign market, the selling is influenced to a large extent by the reputation of the seller. The location of the potential intermediaries will be done based on screening the possibilities by sending letters of intention, following up the best respondents, checking prospective middlemen via references and also personally checking the promising firms and finally signing the agreement. Table no. 10.4 Criteria for channel member selection
Characteristics Goal and strategies Size of the firm Financial strength Reputation Trading areas covered Managerial stability and capability Compatibility Experience Sales organizations Physical facilities Willingness to carry inventories After-sales service capability Use of promotion Sales performance (productivity) Relations with the local government Overall attitude Weight Rating

Source: Adapted after Chee H. and Harris R., 1998, Global Marketing Strategy, Financial Times Pitman Publishing, p. 459.

According to Cateora et al. 11 the screening and the selection process should follow the next steps: 1. a letter of intention, including information about the product and what are the distribution requirements, is sent to each prospective middleman,
11

Cateroa Ph and Graham J., 1999, Op Cit , p. 440.

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2. the best respondents will be asked more detailed information such as lines handled, size of the firm, number of salespeople and territory covered, 3. middlemen are checked through references from other clients, 4. personal check of the promising firm (if possible). After the prospective middlemen have been located, the company should select those that can perform and will be eliminated those that are under financed (if we cannot support them financially through credits), those that have low sales volume, those that cannot be trusted. Experienced exporters suggest that the best way to find the suitable middlemen is to go to that country and talk to ultimate users to find out whom they consider the best distributors. After a middleman has been found, evaluated and selected, an agreement with him should be made. The distribution agreement between the producer and the middleman should include the specific responsibilities of the manufacturer and middleman including the annual sales minimum. It is recommended that initial contracts to be signed only for one year, to see the performance of the middleman for the first year. Motivating middlemen. Once middlemen have been selected, the manufacturer should motivate them in order to keep a high level of interest in the manufacturers products. The main motivational tools that can be used are: Financial rewards- incentives (discounted products) and margins. Psychological rewards- publicity, local newspaper, trips in the country of the manufacturer. Communication- letters, periodicals with information, personal visits. Support- credit, special product information, technical assistance, product service, advertising support. Close relationship- long term relationship, friendship in some cultures (Arab, Japan, Latin America). The financial incentives in the form of higher than average gross margins can be used as a powerful inducement at international level, particularly for the management of independent distributors, wholesalers and retailers. The expected gross margins are influenced by the cultural history and by the channel. If a retailer usually gets a 50% margin and the firm offers 40%, the effort of that retailer may be less than expected for the companys product. A combination of motivational tools is recommended to be used at international level to keep the distributors interested in the companys products.

International Marketing

Controlling and evaluating middlemen. The company wants to exert enough control over channel members to help guarantee that they interpret and execute the companys marketing strategies. The company has to make sure that local intermediaries implement price, sales, advertising and service policies. The issue of control becomes more difficult at international level due to the usually longer chain on the one hand and due to differences in culture, tradition, legal systems in distribution on the other hand. The issue of control becomes important when there are no integrated distribution systems and when the company distributes its products through independent intermediaries mainly. There are two types of control a company may pursue when controlling its distribution systems in a country: Control over the system Control at middlemen level The control over the distribution system takes place through: & cost and market coverage objectives comparison against the planned ones, & the existence of grey markets is controlled, when through secondary wholesaling (unauthorized outlets) the goods of the company are entering the country. Goods intended for one country are diverted (exported) through distributors to another country where they compete with existing retail and wholesale organizations. The companys products that entered the country through unauthorized channels become the greatest competitors for its own products. Such situations can enter in conflict with exclusive arrangements with distributors and affect the relationship of the manufacturer with these distributors. Temporary distribution audits are recommended in order to revise existing distribution systems due to changes in circumstances. The analysis should include aspects such as: different channels used by each product line, costs of maintaining each channel and costs trends, sales trends and sales volume of each channel, types and numbers of end-users served by each channel, number of middlemen involved in channel, degree of control over channel and balance of bargaining power, contractual obligations, contract expiry dates, exclusivity rights, channels used by main competitors.

International distribution systems

The control at middlemen level, through which the manufacturer should know and control to a certain degree the activities of the middlemen. At a minimum, marketing channels should provide the products/services as follows 12 :

where they are displayed and combined with complementary and substitutable items (assortment breadth) allowing for market demand. Therefore, the company would measure performance by evaluating the outputs of the system based on evaluative criteria, such as: sales volumes, market coverage, services offered, prices, advertising. Controlling can be done through reports and also through personal visits by company representatives. When control fails or the interests of the company are not met the middlemen must be terminated. Terminating middlemen There are two main questions related to the middlemen termination: When do we terminate middlemen and how do we terminate middlemen? When? Middlemen will be terminate when they cannot be controlled, when they do not perform by not meeting the planned sales volume and when the market situation changes and the distribution strategy has to change. How? Middlemen can be terminated through simple dismissal, as in USA or Romania or with compensation because of legal protection. In some countries, legal protection makes it difficult to terminate a relationship with a middlemen. In Columbia, for instance, when a manufacturer terminates an agent, it is required to pay 10% of the agents average annual compensation multiplied by the number of years the agent served, as a final settlement. In other countries in order to determine whether the relationship should be ended the company has to go through an arbitration process. Whenever contracts are signed with middlemen competent legal advice is very important, so that termination conditions to be stipulated in the distribution agreement.

in desired quantities (lot size), when needed (delivery time), at different locations (market decentralization),

12

Bradley F., Op. Cit., p. 558.

International Marketing

10.3.3 Channel relationship

After the company established the distribution strategy, it has to implement it by managing the channel through the steps discussed above, but also by managing the channel relationships. Manufacturers and intermediaries in international channels have very different perspectives. Table no. 10. 5 presents the different needs of channel members. It is necessary to achieve a minimum concordance between the objectives and the needs of all parties in the distribution system: manufacturer, intermediary and the consumer. Conflict relationships. Conflict in distribution channels arises when interorganizational management breaks down, when one channel members actions prevents the channel from achieving its goals. Table no. 10.5 The needs of channel members
Factors important to manufacturer Final consumer considerations Company strategic issues Financial returns Probability of effective long-term working relations Potential intermediarys financial status Management ability Factors important to intermediaries Product and/or brand image Support assistance provided Compatibility of the product with the intermediarys existing line Trade reputation of the manufacturer Potential profit contribution

Source: Bradley F., 1995, International Marketing Strategy, Prentice Hall, p. 550.

Cooperation is essential for distribution due to the numerous firms involved, many of which being independent decision makers and not under common ownership. The situation is complicated by culture, distance and legal factors in international markets. Channel conflict is common but at the same time dangerous, as one channel member can harm total channel performance.

International distribution systems

Channel conflict can have more forms: 1. According to the sources of conflict differences between channel members goals and objectives (goal conflict), disagreement over the domain of action and responsibility (domain conflict), differences in perceptions of the market place (perceptual conflict). 2. According to the level it takes place: vertical conflict that occurs between different levels in a marketing channel. For instance, when a channel member bypasses another member and sells or buys the product direct, or a disagreement over the way the profit margins are distributed among channel members, horizontal conflict occurs between intermediaries at the same level in a marketing channel, such as between two or more retailers or two or more wholesalers. In general channel conflict reduction takes place based on the application of one or more sources of power. The company has to make a difference between poor channel design that can affect the channel performance too and the poor performance due to channel conflict. Power relationships. Inducing all channel members to implement the channel design appropriately is essential. But not all of them may have the same incentives to operate in the desired manner. If a channel member does not perform appropriately, the entire channel effort suffers. One way to determine the chain to react appropriately is to have a channel captain, who using its channel power to implement the optimal channel design, as in many cases channel leaders use power to coordinate and implement channel strategy. A channel members power is its ability to control the decision variables in the marketing strategy of another member in a given channel at a different level of distribution 13 . Firms use power in bargaining, they make commitments, provide rewards, make threats and sometimes compromise in order to manage the conflict. There are five sources of power that leaders of distribution channels can use:

13

El-Ansary A.I. and Stern L.W., 1972, Power Measurement in the Distribution Channel in Journal of Marketing Research, vol .9, p. 47.

International Marketing

& reward power: when a company is perceived as being able to offer economic advantages (such as wider margins and promotional allowances) to a distributor, & coercion power: when a company is perceived as being in the position to punish a distributor by reducing margin, slowing shipments and reducing territory rights, & expertise power: when a company is perceived as possessing special knowledge (such as managerial and technical training) that can be shared to the distributor, & referent power: refers to the attraction of being associated with other firms of well-known brands in the market, & legitimacy power: when the company is perceived as having the right to lead (such as in the case of contractual vertical marketing). Coordination relationship. When the disparate members of the channel are brought together to advance the goals of the channel, rather than their own independent and likely conflicting goals, the channel is said to be coordinated. The term denotes both the coordination of interests and actions among the channel members who produce the outputs of a marketing channel and the coordination of performance channel flows with the production of the service outputs demanded by target end-users. Coordination is the end goal of the entire channel management process. Channel coordination is not a one time achievement but anon-going process of analysis and response to the market, to the competition and the abilities of the members of the channel.

10.3.4 Alternative strategies to distribution

When international companies find non-responsive channels abroad, they can develop alternative approaches. Among the most common alternative approaches to gain access to distribution channels are the following:

piggybacking, joint ventures, original equipment manufacturers, acquisitions, franchising.

International distribution systems

Piggybacking is an arrangement with another company that sells to the same customer segment, to take new products for distribution as if they were theirs. One producer (the carrier) uses their established overseas distribution network to market goods of another producer (the rider) along side their own. The carrier acts as an agent by selling the riders products on a commission basis. The new company is practically piggybacking its products on the shoulders of the established companys sales force. The arrangement is very useful for firms that have difficulties in getting intermediaries to pioneer new products for them. In addition the firm retains control over pricing and product positioning. The method is quite common in the pharmaceutical industry. Joint ventures are projects in which two or three parties invest and form a new legal entity. In the case of distribution the foreign producer forms a joint venture with a local partner that has access to the distribution network. This is one of the most frequently used way by foreign producers to get access to the Japanese market. In 1993 the Japanese brewery market was dominated by four domestic producers: Kirin, Asahi, Sapporo and Suntory with a total of 98% market share. In order to get over the locked distribution channels, the USA producer Budweiser, established a joint venture with Kirin, the largest brewer of the four to distribute its imported products. Due to slow increase in the market share in 1998, the USA company asked its distribution partner to produce canned beer locally to assure freshness in the Japanese market 14 . Original equipment manufacturers (OEMs) agreement occurs when an international producer supplies products to a local firm, who in turn sells the products under the local firms established brand name. The international manufacturer gains access to the local firms distribution network and the local company broadens its product line. Distributing in foreign markets under a OEM agreement has the disadvantage that the local OEM will put its own label on the imported label and the international company does not have access to local consumers and cannot achieve a strong identity in the market. Acquisitions take place when the foreign producer buys equity in an intermediary or it buys an entire local company in order to gain instant access to the distribution channels. It is important to try to find a company that has good relationships to

14

Jeannet J.P. and Hennessey H.D. , Op. Cit., p. 618.

International Marketing

wholesale and retail outlets. The disadvantage is that it requires a substantial amount of capital. Franchising is another alternative distribution entry strategy to rapidly overcome traditional channel obstacles. This is an agreement in which the franchiser makes a total marketing program (including brand name, product, method of operation and management advice) available to a franchisee in a foreign market. Numerous international companies use these methods of market entry: McDonalds, Benetton, the Body Shop.

10.4 International logistics

International logistics were defined by Kotabe and Helsen as the design and management of a system that directs and controls the flows of materials into, through and out of the firm across national boundaries to achieve its corporate objectives at a minimum total cost 15 . International logistics comprises the materials management (as the inflow of raw materials, parts and supplies in) and through the firm and physical distribution that refers to the movement of the firms finished products to its customers. At international level, international logistics is even more important due to its complexity, given the fact that on average 35% a companys expenditure is accounted for physical distribution activities. The main components of physical distribution are traffic and transportation management, inventory control, material handling and warehousing, order processing and fixed facilities location management. Table no. 10. 6 presents the main decisions that have to be taken at the level of each logistical component. Table no. 10.6 Main decisions in international logistics
Logistical activity Traffic or transportation management Inventory control Material handling and warehousing Main decisions to be taken Choose the mode of transport Frequency of order in a given period The amount to order The way products are stored and

15

Kotabe M. and Helsen K., Op.Cit., p. 466.

International distribution systems moved Ways to shorten order processing Location of warehousing facilities in relationship to production facilities

Order processing Fixed facilities location management

Traffic and transportation deals primarily with establishing the transportation mode. The main choices are air, sea, rail, truck or a combination of some of them. In order to take the best decision the marketer has to know the specific properties of the different modes of transport. The three most important factors in determining an optimal transportation mode are value to volume ratio, the perishability of the product and the cost of transportation 16 . The value to volume ratio is determined by how much value is added to the materials used in the product. Perishability of the product refers to the quality degradation over time and or product obsolescence along the product life cycle. The cost of transportation should be considered in the light of the value to volume ratio and the perishability of the product. Ocean shipping is usually used for the transport of heavy, bulky and nonperishable products such as oil, steel, automobiles. They have the advantage that container ships carry standardized containers that facilitate the loading and the unloading of cargo and inter-modal transfer of cargo. Air freight. The total volume of international trade using air shipping is small (less than 2% of the total volume of international trade of goods) even though increasing in the last years. Usually the high value small volume goods are more likely to be shipped by air, such as semiconductors, diamonds and also perishable goods such as flowers. Most goods are transported through inter-modal transportation through which more modes of transportation are employed. When different modes of transportation are involved, the company has to make sure that cargo is utilized at full load, in order to minimize the per unit transportation cost. Inventory control is important as inventory represents tied up capital and the company is preoccupied to reduce its level to the minimum required. In order to do that, many companies have adopted the Japanese system Just In Time (JIT) for delivering parts and components. Order processing has as main concern the shortening of the cycle and the allowance for lower safety stocks. At present the available communication technology influences the time it takes to process an order, where this technology is available. Mail, telephone or fax systems do not work perfectly everywhere.
16

Ibid, p. 469.

International Marketing

However, a rapid order processing can be a competitive advantage, as offers more satisfaction to consumers, and more satisfaction means repeated business. Material handling and warehousing refers to the way the products are handled and stored. These decisions depend on where the firms customers are geographically located, on the pattern of existing and future demand and the level of customer service required. For those products that have to be delivered quickly, the storage facilities have to be located near the customer. Warehousing at international level involves dealing with different climates or longer average storage periods that may require changing warehousing practices. More recently automatic warehousing has been introduced in developed countries as a new concept for the handling, storage and shipping of goods. Warehouses are often near the factory and goods are stored automatically in bins up to twelve stories high. The delivery and the retrieval of goods are controlled by a computer system. Although automated warehouses require capital significant investment in technology they have as effect a good reduction in costs. Fixed facilities location management refer to the relationship between the main fixed elements in the logistical flows, namely the production and the warehousing facilities. A balance has to be obtained between satisfying the customers requirements (for whom facilities have to be placed as close as possible to him so that delivery to be quick) and the overall logistic costs.

10.5 Trends in distribution

Distribution systems throughout the world are evolving permanently as a result of economic, social and political changes. Therefore, when developing a world-wide distribution strategy marketers have to be aware of possible future developments. There are a number of trends in distribution that manifest at worlds level and we will present them shortly here. Internationalisation of distribution is one trend as retailers of all kinds (supermarkets, discount stores, department stores, hypermarkets) are being developed globally shifting from developed countries to emerging economies. Such examples are IKEA, McDonalds, Pizza Hut, Carrefour, Marks and Spencer, Laura Ashley, etc. The European Union motivated retailers in these countries to expand

International distribution systems

overseas, as they saw global retailers entering their markets. Table no. 10.7 presents a number of retailers that are active at pan-European level. Table no. 10.7 The main pan-European retailers
Retailer Aldi Bata Benetton Body Shop International C&A Carrefour Hennes&Mauritz IKEA La Boutique Melanie Maildex Marks&Spencer Metro Mister Minit Patagonia Ter Meulen Post Thorn EMI Toys R Us Headquarters Germany Canada Italy United Kingdom Holland France Sweden Switzerland France Holland United Kingdom Switzerland Germany USA Holland United Kingdom USA Markets Pan-european Pan-european Pan-european Pan-european Pan-european Pan-european Pan-european Pan-european Pan-european Pan-european Pan-european Pan-european Pan-european Pan-european Pan-european Pan-european Pan-european

Source: Samiee S., 1995, Strategic Considerations in European Retailing, Journal of International Marketing, vol. 3, no. 3, p. 49-76.

The development of large scale retailers is another trend of the last years. The trends evolves in the existence of fewer but larger supermarkets. The factors that have been identified as contributors to this trend are 17 : the availability of refrigerators and freezers on a large scale, the development of transportation capacity with increased car ownership and the rise of the two income families with the consequence of a reduction in shopping time but with an increase in cash availability. Information technology influences to a larger extent the developments in distribution world wide. The retail industry moved fast to the use of electronic check-out that scans the bar codes, speeds up the checking out process, reduces
17

Chee H. and Harris R., Op. Cit, p. 443.

International Marketing

errors and eliminates the need to put the label on each product, improves inventory control, gives the opportunity to track consumer behaviour. Both manufacturers and retailers can collaborate in using the data offered by information technology to better satisfy the consumer. The development of direct marketing is another recent trend. The main instruments of direct marketing such as telemarketing (selling by telephone), direct mail and door-to-door sales are developed in many countries. Examples are companies like Amway, Mary Kay Cosmetics, Oriflame, Avon, Zepter, Herba Life, many of them functioning after the multilevel marketing principles. Other trends include the shift from traditional to modern structures (new forms; new alliances, new processes), the development of specialty stores (also known as category killers), stores that are specialized in single product lines and are called like this, due to the prices, the variety, the assortment that kill this product category in other stores, discount stores and supermarkets extended to a large degree in the last years in developed countries but also in developing countries.