STUDY MARKETING CHANNELS

8/7/2019 STUDY MARKETING CHANNELS

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Often the question comes up, what is a channel? A channel to market is the method of gettingyour product into the customer¶s (the end user¶s) hand. This can either be through direct sales, or

through a reseller. Direct sales can occur in person, via the phone, the web or mail. Indirect, or channel sales typically refers to sales through a reseller. A reseller can order from you direct (one

tier between you and the end user), or from a wholesale distributor--you would sell to a

wholesale distributor and they in turn would sell to multiple resellers (two tiers between you andthe end user (hence the common term ³two-tier´ distribution)).

Note: some companies or divisions (i.e., Motorola semiconductor, etc.) call the reseller thedistributor (or disty)--this is correct, but not in the typical and more common two-tier distribution

model. Hence, it is important to get the channel terminology down whenever talking about thechannel--or you could be in violent agreement, and not know it.

Which Channel to Use?

The first question to address is whether you should go direct or indirect. Often the answer isboth--especially since the popularity of the Internet. The key, however is to avoid most of thechannel conflict.

Channel conflict occurs when the vendor (you) and the reseller, or different reseller types (retail,

VAR, mail order, Internet) compete for the same business. I say ³most´ of the channel conflict,since it is fine to have some conflict--resellers may compete, and there may be some of the

business that you can take direct . For example, you might go direct with massive deals that aretoo big for a reseller to finance (such as a 1.3 billion deal overseas), or very small deals that

don¶t require any special training/installation/consulting--hence won¶t provide margins for your resellers who make money on their µvalue added¶ services.

To minimize conflict you could:

y Segment the products (different products are sold through different reseller types or channels)

y Setup exclusive or limited territoriesy Sell direct at a higher price than the average street price

y Setup different promotions for different resellers--rotating so they all have advantages atdifferent times

y Provide MDF/Co-op and let the resellers choose to establish their own competitiveadvantage

y Setup reseller levels--rewarding higher margins and support for higher authorization (theresellers choose whether they can be competitive)

y Setup a process to determine if a customer has worked with a reseller prior to taking thebusiness direct (so you don¶t steal business they cultivated), etc.

There are multiple ways that you can reduce conflict--the key is to be aware that it could exist

and of your ramifications (short and long-term), and that you do something about it to keep your reseller and revenue targets satisfied.



One vendor long gone, Ashton Tate, had a terrible problem with channel conflict (they wouldsell direct and undercut a prospect the reseller had cultivated)--as a result, their resellers hated

them. They still sold their products since they were so popular (dBase), but were rooting for acompetitor to take them out--which happened.

It is also a problem if you have no conflict, since it usually indicates that you don¶t have enoughsales coverage--there could be parts of the market you are not covering (missing RFQ¶s, notknowing about the opportunities, your product is not sold where the customers traffic, etc.).

Direct or Indirect?

The question to go direct, indirect or both is often determined by the following:

1. Ability to recruit resellers. If you cannot get your product into distribution, or find

resellers, the answer is simple, you go direct.

2. Product type. If you are selling a product that requires a lot of training, installation andsupport, you may go direct until you get your resellers trained and certified--or, if youhave a large enough sales force, you may stay direct. However, if you have enough sales

people to only cover the largest customers (10 sales people to cover top 100 telcos, butnot enough to cover the middle 5,000 telcos), you may wish to use resellers to cover the

middle market--then segment your product line, one for direct and one for resellers.3. Market dynamics. As the market technology adoption changes and products that used to

require support become easier to use, and customers know what they want--you may godirect (like Dell (it was actually a modest model in the early days, since most users

needed more support but became effective4. Price point. High-end premium quality consumer products (such as expensive cookware,

the best vacuums, etc.) are sometimes sold direct (and usually person-to-person) since thebenefits (which are real, but not always obvious) must be sold. However, this does not

mean that high-priced products can¶t be sold via the channel (boats, planes, million dollar SFA products, etc.).

5. Customer requirements. Some customers require mandate a direct relationship with thevendor to ensure their needs are met. In some cases, when an account insists on going

direct, the reseller can still earn a bounty for delivering the qualified, pre-sold lead.6. Ability to manage resellers. Much of the decision to go direct or indirect is also

dependent on the companies ability to understand how the channel functions, come upwith a competitive program, and manage the reseller programs and relationships.

The final decision on direct or indirect is based on your business model and how you address the

questions above.

Channel Management

Channel sales is the overall account liaison and is primarily responsible for selling product intodistribution and the reseller channel (retail, VARs, system integrators). Channel marketing is



responsible for ensuring that product in distributor and reseller locations gets sold out. In essenceChannel sales ensures sell-in, Channel Marketing ensures channel sell-through.

A Channel Marketing Manager is typically responsible for the sell-through function. There are

cases where a Channel Marketing Manager handles all sell-in and sell through via the channel,

and the internal sales people concentrate on selling direct--this may vary according to your organization.

This section of Chanimal is primarily for the Channel Marketing Manager who works inpartnership with the head of Channel Sales to:

1. Establish a competitive reseller program (authorization, margins, levels, etc.)2. Help recruit resellers

3. Prepare the proper reseller collateral4. Create reseller kits (sell sheets, product slicks, catalogs, reseller pricing, NFR product,

distribution part numbers, contact information, reviews, etc.),

5. Manage reseller database andP

artner Relationship Management (P

RM) software6. Jointly invest the market development (MDF) and Co-op funds to increase channel sell-through.

7. This sell-through is accomplished through managing store, VAR and distributor promotions (spiffs, contest, rebates, specials, training, promotions, etc.),

8. Ensuring proper merchandising (retail only)9. Ensuring adequate stocking levels

10. Running reseller education11. Setting up motivational contest to reward sales

12. Manage seeding programs.

Channels

A number of alternate 'channels' of distribution may be available:

Distributor, who sells to retailers

Retailer (also called dealer or reseller), who sells to end customers

Advertisement typically used for consumption goods

Distribution channels may not be restricted to physical products alone. They may be just as

important for moving a service from producer to consumer in certain sectors, since both direct

and indirect channels may be used. Hotels, for example, may sell their services (typically rooms)directly or through travel agents, tour operators, airlines, tourist boards, centralized reservationsystems, etc.

There have also been some innovations in the distribution of services. For example, there has

been an increase in franchising and in rental services - the latter offering anything fromtelevisions through tools. There has also been some evidence of service integration, with services

linking together, particularly in the travel and tourism sectors. For example, links now exist



between airlines, hotels and car rental services. In addition, there has been a significant increasein retail outlets for the service sector. Outlets such as estate agencies and building society offices

are crowding out traditional grocers from major shopping areas.

Channel members

Distribution channels can thus have a number of levels. Kotler defined the simplest level, that of

a direct contact with no intermediaries involved, as the 'zero-level' channel.

The next level, the 'one-level' channel, features just one intermediary; in consumer goods a

retailer, for industrial goods a distributor. In small markets (such as small countries) it ispractical to reach the whole market using just one- and zero-level channels.

In large markets (such as larger countries) a second level, a wholesaler for example, is now

mainly used to extend distribution to the large number of small, neighborhood retailers or dealers.

In Japan the chain of distribution is often complex and further levels are used, even for the

simplest of consumer goods.

In Bangladesh Telecom Operators are using different Chains of Distribution, especially 'second

level'.

In IT and Telecom industry levels are named "tiers". A one tier channel means that vendors ITproduct manufacturers (or software publishers) work directly with the dealers. A one tier / two

tier channel means that vendors work directly with dealers and with distributors who sell todealers. But the most important is the distributor or wholesaler.

The internal market

Many of the marketing principles and techniques which are applied to the external

customers of an organization can be just as effectively applied to each subsidiary's, or each

department's, 'internal' customers.

In some parts of certain organizations this may in fact be formalized, as goods are transferred

between separate parts of the organization at a `transfer price'. To all intents and purposes, withthe possible exception of the pricing mechanism itself, this process can and should be viewed as

a normal buyer-seller relationship. The fact that this is a captive market, resulting in a `monopoly

price', should not discourage the participants from employing marketing techniques. Lessobvious, but just as practical, is the use of `marketing' by service and administrative departments;to optimize their contribution to their `customers' (the rest of the organization in general, and

those parts of it which deal directly with them in particular). In all of this, the lessons of the non-profit organizations, in dealing with their clients, offer a very useful parallel. But in spite of this

many, organizations prefer not to operate at a 'transfer' price because costs gradually increase asthey undergo the distribution process.



Channel decisions

Channel strategy

Gravity

Push and Pull strategy

Product (or service)<>Cost<>Consumer location

Managerial concerns

The channel decision is very important. In theory at least, there is a form of trade-off: the cost of

using intermediaries to achieve wider distribution is supposedly lower. Indeed, most consumer goods manufacturers could never justify the cost of selling direct to their consumers, except by

mail order. Many suppliers seem to assume that once their product has been sold into thechannel, into the beginning of the distribution chain, their job is finished. Yet that distribution

chain is merely assuming a part of the supplier's responsibility; and, if they have any aspirations

to be market-oriented, their job should really be extended to managing all the processes involvedin that chain, until the product or service arrives with the end-user. This may involve a number of decisions on the part of the supplier:

Channel membership

Channel motivation

Monitoring and managing channels

Channel membership

1. Intensive distribution - Where the majority of resellers stock the 'product' (withconvenience products, for example, and particularly the brand leaders in consumer goods

markets) price competition may be evident.

2. Selective distribution - This is the normal pattern (in both consumer and industrial

markets) where 'suitable' resellers stock the product.

3. Exclusive distribution - Only specially selected resellers or authorized dealers (typically

only one per geographical area) are allowed to sell the 'product'.

Channel motivation

It is difficult enough to motivate direct employees to provide the necessary sales and servicesupport. Motivating the owners and employees of the independent organizations in a distribution

chain requires even greater effort. There are many devices for achieving such motivation.Perhaps the most usual is `incentive': the supplier offers a better margin, to tempt the owners in

the channel to push the product rather than its competitors; or a competition is offered to thedistributors' sales personnel, so that they are tempted to push the product. Dent defines this

incentive as a Channel Value Proposition or business case, with which the supplier sells the



channel member on the commercial merits of doing business together. He describes this asselling business models not products.

Monitoring and managing channels

In much the same way that the organization's own sales and distribution activities need to bemonitored and managed, so will those of the distribution chain.

In practice, many organizations use a mix of different channels; in particular, they maycomplement a direct salesforce, calling on the larger accounts, with agents, covering the smaller

customers and prospects.

Comparison of two organizations

A successful advertising campaign organized in the context of a strategic marketingplan is important for any business. Advertising by nursery companies exhibiting at

industry trade shows is becoming increasingly important for companies wishing toestablish their presence in the industry. In the United States, nurserymen spend an

average of 4% of annual gross sales on advertising (Brooker and Witte, 1997), witha sizable portion of that budget allocated to advertising at industry trade shows. Asnoted by Daniel (1996), trade show marketing requires strategic planning which is

³more than just showing up and working a booth´ (p. 27). Trade show marketing isimportant due to its direct and indirect sales effects. Potential customers and casual

visitors tour the booths of their choice and become familiarized with companyproducts. These visits can impact on companies¶ sales (Kotabe and Helsen, 1998).

Consequently, exhibiting at a trade show should be treated like any other componentof a marketing and advertising plan with a focus on attracting potential customers

The primary marketing objective of most marketers is to profitably provide their products and

services for as many consumers or users as possible. A formal structure for sales and distributionis needed to achieve this task of moving products from fixed points of origin to millions of

consumers. This structure is the marketing channel. There are two parts to it:

1. The material distribution structure that moves a product from the manufacturer to the

consumer or user

2. The marketing structure that, as a part of the distribution channel, ensures theachievement of marketing bjectives



Activities in the Marketing Channel

The principal tasks of a marketing channel are:

1. Communicating

2. S

elling3. Shipping and storing4. Providing products and customer service

Communicating

Marketing communications include advertising, promotional literature, trade promotions, mail,

telephone campaigns, product training, and any vehicle of marketing information. The

communications loop in a marketing channel can include following up on complaints or billing

for marketing communication. To be of value, all communications should be timely and

accurate, for the success or failure of marketing channels depends upon the uninterrupted flow of

information. Channel communications are two-way systems, with information flowing from the

marketer to the consumer and back from the consumer.

Selling

The task of selling involves the act of transferring product titles from one channel member to

another. This may require a series of intermediaries such as wholesalers, brokers, agents, and

retailers before the final act of transferring the product to the consumer is completed. Though

selling is one of the principal tasks of a marketing channel, it may be an independent function in

the corporate structure and considered separate from marketing. However, the transfer of titlesremains a part of marketing-channel management regardless of the sales people or marketing

people handling the responsibilities.

Shipping and Storing

The choice of intermediaries depends on their abilities to collect, stockpile, and distribute

products. Physical distribution can be performed by facilitating agencies, such as public

warehouses and freight carriers, at one or more levels in the channel of distribution. Shipping

and storing products takes place at every level of the channel before the products reach users.

Customer Services

The role customer services plays can vary from product to product or from one business

organization to another. Customer services include the tasks performed to inform, teach, comply

with legal requirements, and provide facilitating services. Direct product services and technical

advice can also be counted as customer services. Some companies consider customer services to



be a part of the product itself.

A marketing channel is much more than a simple conduit for consumer goods; it includes every

facet of a business. From communicating a product¶s concept to providing guarantees of the

product¶s value or usefulness to consumers, the marketing channel is the backbone of marketing

activities.

Direct versus indirect systems

In designing a distribution system, a manufacturer must make a policy choice between sellingdirectly to customers and employing salespeople and using intermediaries i.e. selling through

agents, wholesalers and retailers. Initially, the decision is usually based on cost factors:Distribution costs are largely a function of:

1. the number of potential customers in the market;

2. how concentrated or dispersed they are;3. how much each will buy in a given period;

4. costs associated with the practical side of the distributive operation (e.g. transport,warehousing and stockholding all of which are dealt with in detail in Chapter 10).

If the manufacturer has a large enough potential sales volume, there may be a strong case for selling direct and employing a sales force.

Industrial goods manufacturers tend to use direct selling and often deliver direct to the

user/customer, although in some cases wholesalers or µfactors¶ are used. Consumer goodsmanufacturers tend to use a network of marketing intermediaries because of the dispersion and

large numbers of potential customers. Again, there are exceptions (e.g. Avon Cosmetics who selldirect to homes through agents). Most often, manufacturers will sell to wholesalers who, in turn,

break bulk, add on a mark-up and sell to retailers. However, with the increased size and power of the large food multiples, manufacturers sell direct to them and they perform their own

wholesaling function. Whether selling through retail chains, or wholesalers then retailers, theimportant point is that the manufacturer relies on these middlemen for ultimate marketing

success, as it is these intermediaries who have the responsibility of taking the product to theultimate consumer.

3 The nature of distribution

Distribution arrangements tend to be long term in nature. Because of this time horizon, channel

decisions are usually classed as strategic, rather than tactical or operational ones. There are two

reasons for treating channel decisions in this way:

1. Channel decisions have a direct effect on the rest of the firm¶s marketing activities. For

example, the selection of target markets is affected by, and in turn affects, channel designand choice. Similarly, decisions about individual marketing mix elements (e.g. pricing)

must reflect a company¶s channel choice.



2. Once established, a company¶s channel system may be difficult to change, at least in theshort term. Although distribution channels are not impervious to change and new

channels emerge as old established channels fade, few companies are able to change their channel structure with the same ease of frequency as they can change other marketing

mix variables like price or advertising strategies. Because channel arrangements are

likely to change slowly over time, manufacturers need to continually monitor thedistributive environment and reassess their existing channel structure in an attempt toexploit and capitalise on any change. However, they should be aware of developments

that are taking place, so as not to be caught off guard. Nowhere is this more true than inthe case of the speed of development of the internet as a direct retailing medium, that has

caught many traditional distributors off balance.

4 Strategic elements of channel choice

An important consideration for marketing management in formulating channel policy and the

number of marketing intermediaries used is the degree of market exposure sought by the

company for its products. Three distribution strategies, resulting in varying degrees of marketexposure, can be distinguished.

4.1 Intensive distribution

Products, when viewed by consumers in their totality, are seen as a bundle of attributes or

satisfactions including possession utilities and time and place utilities. Producers of conveniencegoods and certain raw materials aim to stock their products in as many outlets as possible (i.e. an

intensive distribution strategy). The dominant factor in the marketing of such products is their place utility. Producers of convenience goods such as pens, confectionery and cigarettes try to

enlist every possible retail outlet, ranging from multiples to independent corner shops, to create

maximum brand exposure and maximum convenience to customers. With such products, everyexposure to the customer is an opportunity to buy, and the image of the outlet used is of lesssignificant factor in the customer¶s mind than the impression of the product.

4.2 Exclusive distribution

For some products, producers deliberately limit the number of intermediaries handling their products. They may wish to develop a high quality brand image. Exclusive distribution to

recognised official distributors can enhance the prestige of the product. Exclusive (or solus)distribution is a policy of granting dealers exclusive rights to distribute in a certain geographical

area. It is often used in conjunction with a policy of exclusive dealing, where the manufacturer

requires the dealer not to carry competing lines. Car manufacturers have such arrangements withtheir dealers. With the arrangement goes a stipulation by the manufacturer that the distributor isable to uphold appropriate repair, service and warranty handling facilities. By granting exclusive

distribution, the manufacturer gains more control over intermediaries regarding price, credit andpromotional policies, greater loyalty and more determined selling of the company¶s products.

4.3 Selective distribution



This policy lies somewhere between the extremes just described. The manufacturing firm maynot have the resources to adequately service or influence the policies of all the intermediaries

who are willing to carry a particular product. Instead of spreading its marketing effort over thewhole range of possible outlets, it concentrates on the most promising of outlets.

Channel members should have certain facilities in order to store and market products effectively,for example, frozen food products require that intermediaries have adequate deep freeze displayfacilities. Specialised resources may be necessary, for example, certain ethical pharmaceutical

products require that intermediaries are capable of offering advice as to the use and limitations of the product, so such products might be restricted to pharmacies. The product may have a

carefully cultivated brand image that could be damaged by being stocked in limited line discountoutlets where products are displayed in a functional way to reduce overheads and the final price.

Selective distribution is used where the facilities, resources or image of the outlet can have adirect impact on customers¶ impressions of the product. An example here is µup market¶ brands

of perfume.

5Changing channel systems

Cravens (1988) stated that channels do change and manufacturers often respond too slowly to

such evolution. Individual changes may be small when viewed in isolation, but cumulativechange can be significant. When planning long-term channel strategy, companies need to

monitor such change and attempt to anticipate future macro-environmental developments and agood example of such change that is now upon us has just been cited in relation to internet

developments.

Change occurs at all levels in a channel system, but it has been very noticeable in UK retailing.

Significant changes in retailing practice have occurred over the past three decades. This period

has seen an increasing polarity in the distribution turnover of retail firms. At one end of thespectrum there are large-scale operators: multiples, discount chains and the Co-operativemovement. At the other end there are many small shops. Some of these are completely

independent retailers who purchase from wholesalers and µcash-and-carry¶ outlets or who havejoint purchasing agreements through µretail buying associations¶. Others are linked to

wholesalers through the voluntary chain/group movement, sometimes called symbol shops (e.g.Spar) and are similar to franchises, explained later in this chapter. Numbers of shops have

declined with an increased concentration of market share in the hands of a small number of largemultiples that have grown at the expense of Co-operatives, independents and smaller multiples.

6 The wheel-of-retailing:

Growth of multiples, µone-stop¶ and µnon-shop¶ shopping

The wheel-of-retailing concept refers to evolutionary change in retailing and is similar to the

product life cycle concept. The concept states that new retailing institutions enter the market aslow-status, low-margin, low-price operations and then move up market towards higher status,

higher margin and higher priced positions. New forms of retailing can be seen as going throughvarious life-cycle stages (i.e. introduction, growth, maturity and decline). The wheel-of-retailing



appears to be turning with ever increasing speed with each new retail innovation taking less timeto reach the maturity stage. For example, evidence suggests that it took approximately 50 years

for the older-style department stores to reach the maturity (i.e. steady sales) stage; supermarketstook about 25 years and hypermarkets only 10 years. The concept is even analogous to Charles

Darwin¶s theory of evolution of plants and animals that proposed a changing environment leads

to adaptation and hence evolution. Darwin also explained that there is no need for adaptation in astable environment; there has to be change for the evolutionary process to occur. We shall look at some of the environmental changes that have taken place which have instigated adaptation and

evolution in retailing over the relatively short period just described.

6.1 The search for economies of scale

In search for greater profits, larger retail chains devised larger scale methods of operation andsupermarkets have culminated in today¶s hypermarkets (stores with at least 50,000 square feet of

selling space) and even larger µmegamarkets¶. Each new retailing mode has led to greater economies of scale and better financial return.

6.2 The abolition of resale price maintenance (RPM)

Until the mid-1960s, manufacturers¶ resale prices were protected by resale price maintenance(R PM) under which retailers had to sell at prices stipulated by the manufacturers; if they sold

goods below the stipulated price, further supplies could be withheld.

R PM protected small independent retailers from price competition from larger multiples becausethese larger operators were legally unable to pass on their cost economies to customers. There

were some very well-reported case of multiples, notably Tesco, having supplies withheld for selling below a manufacturer¶s stipulated price (i.e. too cheaply), which was, of course, the best

publicity that could have been attained.

Because R PM restricted price competition, retailers relied heavily on non-price competition, and

the level of service in many stores was arguably higher than consumers needed since they wouldhave preferred lower prices. R PM was abolished by the Resale Prices Act (1964).

This resulted in many small shops, and a number of wholesalers who traditionally supplied such

outlets, going out of business. The market share that was µfreed up¶ fell into the hands of moreefficient and powerful multiples who used their purchasing economies to compete on price and

pass savings on to customers. Thus, multiples expanded at the expense of independents and thewholesalers who supplied them, as well as the Co-operative movement. The latter was ideally

placed to take advantage of this environmental change (because of their size) but they were tooslow to react. This was largely because of their decentralised structure in terms of the movement

consisting of a large number of individual retail societies whose democratically elected members(their customers) controlled them. Ironically, the Co-operative movement (that was founded in

Rochdale in 1844) was the first to innovate µself-service¶ facilities during the Second WorldWar. This was, however, done for social reasons of freeing up labour to help in the war effort,

and at the end of the War they did not capitalise on this innovation and reverted to personalservice.



6.3 Selective employment tax (SET)

This was a tax on µnon-productive workers¶ (i.e. a tax charged on selective occupations) that wasintroduced in 1966. Its effect was to increase shop workers¶ wage costs by 7 per cent, as it was

the employer, not the employee, who paid the tax. SET made labour more expensive and,

relatively speaking, capital investment cheaper. This encouraged many retailers (who were thelargest employers of non-productive workers) to invest in capital systems (e.g. central checkoutsystems) that made them less reliant on labour. This gave a further push to the widespread

introduction of self-service shopping. Such large investments meant that operators demandedlarger, and quicker, turnover. Quicker turnover meant that consumer goods had a shorter shelf

life, so they were fresher when purchased. Thus, indirectly, SET, helped the multiples to expandat the expense of their smaller competitors.

6.4 Greater market power of multiples

As the power of the multiples increased, they were able to cut out traditional wholesalers and

purchase centrally, directly from manufacturers. Consumer goods manufacturers could ill affordnot to be included in the multiples¶ product lines. Consequently, multiples were able to commandvery advantageous discounts from manufacturers. Independents still had to purchase through

traditional wholesalers, and even though some formed wholesale groups through voluntarychains/groups, they still had difficulty in matching multiples¶ prices. Indeed, multiples in the

1970s were dubbed with the description: "Pile it high; sell it cheap".

The early to mid-1980s saw the introduction of µown label¶ merchandise - ranges of brandscommissioned by individual multiple chains bearing their own logotype (logo). In the 1970s,

multiples introduced their own µeconomy brands¶ without any logo, the idea being that suchmerchandise was a cheap alternative to manufacturer branded and packaged merchandise.

However, consumers quickly realised that such goods, although cheaper, were usually of inferior quality.

The first operator to bring in µown label¶ merchandise was Sainsburys. Other multiple operators

were quick to follow, with the resultthat power within food retailing channels has passed frommanufacturers¶ brands to retailers¶ brands. Most food manufacturers now supply retail chains

with µown label¶ merchandise, with a few notable exceptions (e.g. Nestlé and Kellogg) who stilldo not supply µown label¶, as the feel that this could diminish their power within the channel

(which relies on strong brands). A feature of their advertising is along the lines of: µyou will onlyfind XXXX in an XXXX jar/pack¶. This makes it clear to customers that they do not

manufacture for multiples (even though their brands are often displayed alongside multiples¶µown brands¶ often in similar packaging). Their advertising emphasises the µuniqueness¶ (USP)

of their product (i.e. product characteristics that cannot be replicated).

Despite these few manufacturers who do not supplying µown label¶ products, in the UK the

power within retail channels has definitely switched from manufacturers to retailers (unlikemany other countries where power still rests with manufacturers of strongly branded products).



Some measure of the extent of change in retailing in the UK is the fact that Co-operatives hadmore than 25 per cent share of the retail market in the early 1960s with independent retailers

commanding over 50 per cent. Now the Co-op share is down to less than 6 per cent. Tesco ismore than 15 per cent and Sainsbury¶s is more than 12 per cent. The total share of independents¶

market share, including those who belong to voluntary groups, is now down to 20 per cent.

6.5 Scrambled merchandising

In an affluent society like the UK consumption of food products is relatively income inelastic. Inother words, people do not buy more food when they have more money. Instead, they tend to

µtrade up¶ and consume better quality foods. Therefore, in order to expand their businesses, largemultiples have diversified, stocking non-food products to further their turnover and profits. Many

multiples now sell such items as electrical goods, garden supplies and clothing, and many nolonger seem like µfood stores¶. However, some of these multiples have decided to go back to

their core business of food retailing, or clearly differentiate such business from their coreactivities (e.g. Sainsbury¶s Homebase), because of the confused µscrambled merchandising¶

images associated with non-food retailing.

6.6 µOne stop¶ shopping

Multiples have introduced hypermarkets and megastores to capitalise on the desire for the

concept of µone stop¶ shopping. As well as shopping for most of a family¶s needs, fromgardening materials and electrical goods to food under one roof, there is an increasing tendency

for customers to shop less frequently (perhaps fortnightly or even monthly instead of weekly).

Payment is increasingly made by credit card or switch cards where the customer¶s bank account

is debited immediately the transaction has been completed, rather than with cash. These trendshave been brought about, and will continue, because of:

1. Growth in car ownership and the number of two car families. This has brought increased

mobility and the ability to travel to µout-of-town¶ sites. Such stores have large catchmentareas, sufficient to warrant the investment in land, building and facilities. Usually, major

operators are also able to attract ancillary shops such as travel agents, newsagents andflorists, to open shops on the same site, so the complex becomes like a little µtown¶ in

itself. An extension of this idea is the establishment of µmetro centres¶ which are usuallylocated near large urban conurbations. Such complexes are designed for car travel as

parking is easy, and these complexes are closed to the elements (e.g. covered walkwaysfrom car parks as well as the retail centre itself). The idea is not only to make shopping a

more µpleasant¶ experience, but to encourage larger, bulk purchases.2. A greater proportion of married women work, which means that family time is often at a

premium, especially if there are children to look after. Time is no longer available for theluxury of µbrowsing¶ in the shopping sense. This rise in average total family income hasmeant that a wife¶s income is often a major contributor to the household budget,

especially now that the notion of µequal pay for equal work¶ has legal status.3. Greater ownership of freezers coupled with greater car ownership means that shoppers

can transport and effectively store larger volumes of food, thereby benefiting



economically from bulk purchasing. In addition, universal microwave cooker ownershiphas boosted sales of µinstant¶ meals, many of which are cooked from frozen.

4. A shift in the population from urban to suburban centres has occurred (unlike poorer countries where the shift is usually toward the cities). City congestion discourages car

drivers who prefer to shop in large out-of-town establishments where parking is adequate

and usually free. However, this trend has recently been reversed with the µgentrification¶of some inner city areas to provide high capacity living accommodation mainly for younger people.

5. The µdivision of labour¶ within marriage is no longer clearly defined. µModern¶ husbands,especially those in the B, C1 and C2 social categories, share roles previously regarded as

being the province of their wives. They now help with shopping unselfconsciously, andshare tasks like looking after children which most husbands 30 years ago would not have

considered. µFamily shopping¶ (with a far wider range of merchandise being offered) hasnow become the µnorm¶.

7 µBusiness format¶ franchising

To franchise means to µgrant freedom to do something¶ (derived from the French verb affranchir ,

meaning µto free¶). Franchising is a system of marketing and distribution constituting a

contractual relationship between a seller (franchiser) and the seller¶s distributive outlets (ownedby franchisees). The common basic features of franchising are:

1. The ownership by an organisation (the franchiser) of a name, idea, secret process or

specialised piece of equipment or goodwill.2. A licence, granted by the franchiser to the franchisee, that allows the franchisee to

profitably exploit that name, idea, or product.3. The licence agreement includes regulations concerning the operation of the business in

which licensees exploits their rights.4. A payment by the licensee (e.g. an initial fee, royalty or share of profits) for the rightsthat are obtained.

Franchising is highly developed in the USA, and although it is popular in the UK, it is a

relatively recent phenomenon. This has led people to believe that it is an µimported¶ idea.However, its roots can be traced back to the middle-ages when important µpersonages¶ were

granted the right to collect revenues in return for various services and considerations (e.g. tocarry out trades to the exclusion of others in certain areas).

The µtied¶ public house (where the publican could only sells ale brewed by the brewery to which

it was µtied¶) is an example of franchising that existed in Britain since the 18th century. This hasbeen ameliorated since the early 1990s because monopolies legislation has compelled breweries

to sell off many µtied houses¶ as it was viewed as a restrictive practice. Franchising has come along way since its early origins. It has been taken from the UK to the USA, where it evolved and

developed, and has been re-exported back to the UK in a more sophisticated form.

The development of franchising in the USA dates back to the end of the American Civil War

(1865) when the Singer Sewing Machine Company franchised exclusive sales territories to



financially independent operators. In 1898, General Motors used independently ownedbusinesses to increase its distribution outlets. Rexall followed with franchised drugstores, and the

soft-drink manufacturers Coca-Cola and Pepsi-Cola licensed bottling.

The modern American concept of the business format franchise has gathered strength in Britain

since the early 1960s. It contains all the components of a fully developed business system. Thefranchiser¶s brand name and business format are used for the exclusive purpose of marketing anagreed product or service from a µblueprint¶, with the franchiser providing assistance in

organisation, training, merchandising and management, in return for a µconsideration¶ from thefranchisee. The µformula¶ is very carefully prepared so as to minimise risk when opening the

business. The basic principle that attracts new franchisees is that other people have followed thesame scheme, and since they have been successful, new entrants should also be successful. The

franchiser (normally a large business) supplies a franchisee with a business package or µformat¶,a trade name and specific products or services for sale to the general public. In most cases, the

franchisee pays royalties and, in turn, is granted exclusive access to a defined geographical area.

8 Growth in µnon-shop¶ shopping

During the past 30 years, as well as the many developments of new types of stores in retail

marketing channels (e.g. supermarkets, hypermarkets, limited line discount stores) there has alsobeen a marked increase in various forms of µnon-shop¶ selling that are now discussed.

8.1 µDoor-to-door¶ direct selling

This is a relatively expensive operation, but having no wholesaler and retailer margins meansthat the expense is counterbalanced (e.g. Avon Cosmetics and Betterware). It means that

manufacturers¶ agents have to build up their clientele among customers in the local community

in the expectation that they will purchase from a catalogue on a regular basis.

8.2 Party Plan

This method of direct selling is popular for products such as cosmetics, plastic-ware,kitchenware, jewellery and linen products. A µparty¶ is organised in the home of a host or hostess

who invites friends, and receives a µconsideration¶ in cash or goods based on the amount thatthese friends purchase. It is sometimes resented, as friends often feel there is a moral obligation

to purchase.

8.3 Automatic vending

This form of retailing has grown dramatically since the 1960s and is now used for beverages,

snacks, confectionery, personal products, cigarettes and sometimes newspapers. Vendingmachines are placed in convenient locations (e.g. garage forecourts, railway and bus stations,

colleges, libraries and factories). Automatic vending also supplies entertainment through jukeboxes and arcade games.



Vending machines can also be used to provide services, as seen by the widespread introductionof cash-dispenser machines provided by financial institutions. As well as dispensing cash, these

machines answer balance enquiries, take requests for statements and cheque books and receivedeposits.

8.4

Mail order catalogues

Businesses that use mail order selling are either catalogue or non-catalogue. The former relies

heavily upon comprehensive catalogues to obtain sales, but sometimes use local agents to dealwith order collection and administration. Products can be purchased interest-free and extended

credit terms are available for major purchases. There are also a number of specialist mail-order houses dealing with a limited range of specialist, often µunusual¶ or µexclusive¶ lines, that are

difficult to find in shops.

8.5 Non-catalogue mail-order

This usually relies on press and magazine advertising, and is used to sell a single product or limited range of products. µCraft¶ products are often promoted in this way.

8.6 Other µdirect¶ marketing techniques

The use of direct mail is where a promotional letter and order form is sent through the post.

Organisations using this method include book and record clubs. Television is also used, withorders being placed through a telephone call to a free phone number and the production of credit

card details. Sometimes impersonality is carried to the ultimate through an answering machine.Telephone ordering is often combined with newspaper advertising, especially in colour

supplements.

8.7 Future developments

Television shopping via on-line computers is developing and will become a more popular medium along with the internet. As opportunities for leisure activities increase (e.g. sports

centres and specialist activity clubs) this kind of shopping will become popular because it willfree up more time to pursue such activities. This very direct kind of shopping should also make

goods cheaper, since orders can be placed directly with the manufacturers without the high costsof intermediaries and their associated overheads. Credit facilities will be immediately available

through electronic debiting. As computer systems become more sophisticated, and peoplebecome less µafraid¶ of this new technology, it should become the growth area of retailing in the

future.

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STUDY MARKETING CHANNELS