Chapter 9 – Place (Distribution) Strategy
- Explain channel power and the types of companies that wield it.
- Describe the types of conflicts that can occur in marketing channels.
- Describe the ways in which channel members achieve cooperation with one another.
Strong channel partners often wield what’s called channel power and are referred to as channel leaders, or channel captains. In the past, big manufacturers like Procter & Gamble and Coca Cola were often channel captains. But that is changing. More often today, big retailers like Walmart and CostCo are commanding more channel power. They have millions of customers and are bombarded with products wholesalers and manufacturers want them to sell. As a result, these retailers have increasingly more power over manufacturers.
Category killers are in a similar position. Consumers also have more marketing channel power. Regardless of what one manufacturer produces, or what a local retailer has available, consumers use the Internet to find whatever product they want at the best price available and have it delivered, depending on whether the company delivers to their country or has border and customs restrictions.‡
A dispute among channel members is called a channel conflict. Channel conflicts are common. Part of the reason for this is that each channel member has its own goals, which are unlike those of any other channel member. The relationship among them is not unlike the relationship between you and your boss (assuming you have a job). Both of you want to serve your company’s customers well. However, your goals are different. Your boss might want you to work in the weekend, but you might not want to because you need to study for a Monday test.
All channel members want to have low inventory levels but immediate access to more products. Who should bear the cost of holding the inventory? What if consumers don’t purchase the products? Can they be returned to other channel members, or is the company in possession of the products responsible for disposing of them? Channel members try to spell out details such as these in their contracts.
No matter how well written contracts are, there will still be points of contention among channel members. Wholesalers and retailers may criticize manufacturers they work with who aren’t doing more to promote their products, for example, distributing coupons for them, running TV ads or using more social media, so the products sell more quickly. Meanwhile, manufacturers may want to know why wholesalers aren’t selling their products faster and why retailers are placing them at the bottom of shelves or not restocking the shelves. Apple opened its own retail stores around the country in part because it didn’t like how its products were being displayed and sold in retailers’ stores.
Channel conflicts can also occur when manufacturers sell their products online. When they do, wholesalers and retailers often feel like they are competing for the same customers. Likewise, manufacturers often feel slighted when retailers dedicate more shelf space to their own store brands. Store brands are products retailers produce themselves or pay manufacturers to produce for them. Dr. Thunder is Walmart’s store-brand equivalent of Dr. Pepper, for example. Because a retailer doesn’t have to promote its store brands to get them on its own shelves like a national manufacturer would, store brands are often priced at a lower price. Some retailers, such as Loblaws with its President’s Choice Brand, sell their store brands to other retailers, creating more competition for manufacturers.
Vertical versus Horizontal Conflict
The conflicts we’ve described so far are examples of vertical conflict. A vertical conflict is a conflict that occurs between two different types of members in a channel, say, a manufacturer, an agent, a wholesaler, or a retailer. By contrast, a horizontal conflict is conflict that occurs between companies of the same type, say, two wholesalers that sell the products of the same manufacturer. Horizontal conflict can be healthy because it is competition driven. However, it can create problems, too.
Channel leaders such as Walmart have a great deal of say when it comes to how channel conflicts are handled because of the volume of goods they sell. But even the most powerful channel leaders strive for cooperation. A manufacturer with channel power still needs good retailers to sell its products to; a retailer with channel power still needs good suppliers from which to buy products. One member of a channel can’t squeeze all the profits out of the other channel members and still hope to function well. Moreover, because each of the channel partners is responsible for promoting a product through its channel, to some extent they are all in the same boat. Each one of them has a vested interest in promoting the product, and the success or failure of any one of them can affect that of the others.
Flash back to Walmart and how it managed to solve the conflict among its telephone suppliers: because the different brands of landline telephones were so similar, Walmart decided it could consolidate and use fewer suppliers. It then divided its phone products into market segments of inexpensive phones with basic functions, mid-priced phones with more features, and high-priced phones with many features. The selected suppliers were asked to provide products for one of the three segments. This gave Walmart’s customers the variety they sought. And because the selected suppliers were able to sell more phones and target different types of customers, they stopped undercutting each other’s prices (Hitt et al., 2009).
One type of horizontal conflict that is much more difficult to manage is dumping, or the practice of selling a large quantity of goods in another country at a price too low to be economically justifiable. Typically, dumping can be made possible by government subsidies that allow the company to compete on the basis of price against other international competitors who have to operate without government support, but dumping can also occur due to other factors. One goal of dumping is to drive competitors out of a market, or in reaction to being shut out of a country or region. U.S. lobster companies dumping their products on other Asian markets at steep discounts was a response to newly-imposed tariffs in China which closed off the Chinese market to U.S. exporters (Lynch, 2018).‡ While there are global economic agreements that prohibit dumping and specify penalties when it occurs, the process can take so long to right the situation that producers have already left the business.
Achieving Channel Cooperation Ethically
What if you’re not Walmart or a channel member with a great deal of power? How do you build relationships with channel partners and get them to cooperate with you? One way is by emphasizing the benefits of working with your company. For example, if you are a seller whose product and brand name are in demand, such as Rolex, you want to point out how being one of its “authorized sellers” can boost a retailer’s store traffic and revenues.
Oftentimes companies produce informational materials and case studies showing their partners how they can help boost their partners’ sales volumes and profits. Channel partners also want to feel assured that the products coming through the pipeline are genuine (and not knockoffs) and that there will be a steady supply of them. Your goal is to show your channel partners that you understand these issues and can help them generate business.
Sometimes, when a product is in high demand, retailers have to convince the makers of products to do business with them instead of the other way around. Or, if a retailer is just entering the marketplace and does not have a great deal of power. For example, though Amazon dominates the online market today in 2003 it had to work hard to convince manufacturers that it could sell more than just books and music (Amazon, 2003).
Producing marketing and promotional materials their channel partners can use for sales purposes can also facilitate cooperation among companies. In-store displays, brochures, banners, photos for web sites, and advertisements the partners can customize with their own logos and company information are examples.
Educating your channel members’ sales representatives is an extremely important part of improving cooperation, especially when you are launching a new product. The reps should be provided with training and marketing materials in advance of the launch so their activities are coordinated with yours. A company that operates by this principle is the make-up company Sephora, who offers extensive training via its Sephora University (Sephora, n.d.).
In addition, companies run sales contests to encourage their channel partners’ sales forces to sell what they have to offer. Offering your channel partners certain monetary incentives such as discounts for selling your product can help too.
Another issue channel partners sometimes encounter relates to resale price maintenance agreements. A resale price maintenance agreement is an agreement whereby a producer of a product restricts the price a retailer can charge for its products. Producers of upscale products often want retailers to sign resale price maintenance agreements because they don’t want the retailers to deeply discount their products. Doing so would “cheapen” their brands, producers believe. Producers also contend that resale price maintenance agreements prevent price wars from breaking out among their retailers, which can lead to the deterioration of prices for all of a channel’s members.
Both large companies and small retail outlets have found themselves in court as a result of price maintenance agreements. In Canada, price maintenance agreements fall under the Competition Act. There are several conditions that must be met to create a fair marketplace and to avoid even the appearance of impropriety (Competition Bureau Canada, 2018a). ‡
Channel Integration: Vertical and Horizontal Marketing Systems
Another way to foster cooperation in a channel is to establish a vertical marketing system. In a vertical marketing system, channel members formally agree to closely cooperate with one another but have no affiliation with one another. All the members operate independently. If the sale or the purchase of a product seems like a good deal at the time, a company pursues it. However, there is no expectation among the channel members that they have to work with one another in the future.
A vertical marketing system is also be created by one channel member taking over the functions of another member. This is a form of disintermediation known as vertical integration. Procter & Gamble (P&G) has traditionally been a manufacturer of household products, not a retailer. However, that changed in 2009, when it acquired The Art of Shaving, a seller of high priced men’s shaving products located in upscale shopping malls. P&G also runs retail boutiques around the globe that sell its prestigious SK-II skin-care line (Neff, 2009). However, by January 2020 P&G made the decision to close most of the retail stores citing lack of customer demand for high-end shaving products sold in stand-alone retail stores (Brunsman, 2020). The company chose to focus on its customizable and online subscription service for razors and other shaving products (Gillette, n.d.). ‡
Vertical integration can be forward, or downstream, as in the case of P&G just described. Backward integration occurs when a company moves upstream in the supply chain, that is, toward the beginning. An example is when Walmart bought McLane, a grocery warehousing and distribution company. As much as physical facilities, Walmart also wanted McLane’s operating knowledge in order to improve its own logistics.
Franchises are another type of vertical marketing system. They are used not only to lessen channel conflicts but also to penetrate markets. Recall that a franchise gives a person or group the right to market a company’s goods or services within a certain territory or location (Daszkowski, 2009). McDonald’s sells meat, bread, ice cream, and other products to its franchises, along with the right to own and operate the stores. Each of the owners of the stores signs a contract with McDonald’s agreeing to do business in a certain way.
Subscription services are another type of vertical integration in which a company controls the product selection, distribution and timing of the purchase. Research has categorized subscription services into three categories: (1) predefined, (2) curated and (3) surprise. Pre-defined subscription services generally offer convenience to consumers who are able to select the delivery period of their product based on their usage rate. Examples in this category include the Great Canadian Shave Club or the Dollar Shave Club. Curated subscription services are typically specialty offerings. Examples include Meal Kits brands such as Chef’s Plate or Meal Kit.
Surprise subscription services are a selection of products from a category that the consumer has selected. While the customer may choose the category from which they will receive a product, they do not choose the specific brand or type of product they will receive. Examples in this category include wine club brands such as Wine Collective and Wine Align.‡ A similar offering in this category is complete surprise, wherein the consumer pays a specific price to receive a ‘surprise box’ which can contain small items from different categories (e.g., crafts and supplies). The consumer would have no prior knowledge of what items will be in their surprise box every month.
A horizontal marketing system is one in which two companies at the same channel level, say, two manufacturers, two wholesalers, or two retailers, agree to cooperate with another to sell their products or to make the most of their marketing opportunities, and is sometimes called horizontal integration. The Internet phone service Skype and the mobile-phone maker Nokia created a horizontal marketing system by teaming up to put Skype’s service on Nokia’s phones. Skype hoped to reach a new market (mobile phone users) this way. Nokia hoped to sell its phones to people who like to use Skype on their personal computers.