Fundamentals of Marketing, MAR1010                                         Week 6

Professor Weeks

Chapter 10

Marketing Channels and Supply Chain Management

Chapter Objectives

•  Explain why companies use distribution channels and discuss the functions these channels perform.

•  Discuss how channel members interact and how they organize to perform the work of the channel.

•  Identify the major channel alternatives open to a company.

•  Explain how companies select, motivate, and evaluate channel members.

•  Discuss the nature and importance of marketing logistics and integrated supply chain management.

Chapter Overview

This chapter covers the important topics of supply chain management. Supply chains consist of both upstream and downstream partners, including suppliers, intermediaries, and even intermediary customers. The term value delivery network expands on the limited nature of "supply chain." It consists of the company, suppliers, distributors, and ultimately customers who "partner" with each other to improve the performance of the entire system.

The chapter focuses on marketing channels--the downstream side of the value delivery network. A company's channel decisions directly affect every other marketing decision. And because distribution channel decisions often involve long-term commitments to other firms, management must define its channels carefully, with an eye on tomorrow's likely selling environment as well as today's.

Channel members add value by bridging the major time, place, and possession gaps that separate goods and services from those who would use them. Members of the marketing channel perform many key functions, such as gathering and distributing marketing information; promoting products; contacting prospective buyers; matching supply with demand; negotiating final prices; and performing the physical distribution of the goods, financing large purchases, and taking the risk of selling the product.

For channels to work properly, each channel member's role must be specified and conflict must be managed. Conventional distribution systems typically lacked a strong leader; vertical marketing systems (VMS) have evolved to provide that channel leadership. The three major types of VMSs include corporate, contractual, and administered.

In designing marketing channels, managers must analyze customer needs, set channel objectives, identify major channel alternatives, and then evaluate those alternatives. In designing international channels, marketers will face additional complexities. Each country has its own unique distribution system that has evolved over time and changes very slowly.

Marketing logistics, also called physical distribution, involves planning, implementing and controlling the physical flow of goods, services, and other related information from points of origin to points of consumption. It involves getting the right product to the right customer in the right place at the right time. Marketing logistics addresses not only outbound distribution, but also inbound and reverse distribution. The major logistics functions include warehousing, inventory management, and transportation.

Chapter Outline

•  Introduction

•  Caterpillar believes its dominance over seven decades in the market for heavy construction and mining equipment results from its unparalleled distribution and customer support system.

•  Caterpillar sells more than 300 products in nearly 200 countries, generating sales of more than $20 billion annually. It has 27% of the worldwide construction-equipment business, more than double that of number two Komatsu.

•  Competitors often bypass their dealers and sell directly to big customers to cut costs or make more profits for themselves, but Caterpillar wouldn't think of going around its dealers. Caterpillar's superb distribution system serves as a major source of competitive advantage. The system is built on a firm base of mutual trust and shared dreams.

•  Most firms cannot bring value to customers by themselves. Instead, they must work closely with other firms in a larger value delivery network.

•  Supply Chains and the Value Delivery Network

•  The supply chain consists of "upstream" and "downstream" partners, including suppliers, intermediaries, and even intermediary customers.

•  Upstream from the manufacturer or service provider is the set of firms that supply the raw materials, components, parts, information, finances, and expertise needed to create a product or service.

•  Marketers have traditionally focused on the downstream side of the supply chain, which are the marketing channels or distribution channels that look forward toward the customer.

•  It is the unique design of each company's supply chain that enables it to deliver superior value to customers.

•  The term supply chain may be too limited--it takes a make-and-sell view of the business.

•  A better term would be demand chain because it suggests a sense-and-respond view of the market. Under this view, planning starts with the needs of the target customers, to which the company responds by organizing resources with the goal of building profitable customer relationships.

•  Even this might be too limiting, however. A value delivery network is made up of the company, suppliers, distributors, and ultimately customers who partner with each other to improve the performance of the entire system.

•  This chapter focuses on marketing channels--on the downstream side of the value delivery network.

•  There are four major questions concerning marketing channels:

•  What is the nature of marketing channels and why are they important?

•  How do channel firms interact and organize to do the work of the channel?

•  What problems do companies face in designing and managing their channels?

•  What role do physical distribution and supply chain management play in attracting and satisfying customers?

•  The Nature and Importance of Marketing Channels

•  A marketing channel or distribution channel is a set of interdependent organizations involved in the process of making a product or service available for use or consumption by the consumer or business user.

•  A company's channel decisions directly affect every other marketing decision.

•  Distribution channel decisions often involve long-term commitments to other firms. Therefore, management must design its channels carefully, with an eye on tomorrow's likely selling environment as well as today's.

How Channel Members Add Value

•  The use of intermediaries results from their greater efficiency in making goods available in target markets. Through their contacts, experience, specialization, and scale of operation, intermediaries usually offer the firm more than it can achieve on its own.

•  The role of marketing intermediaries is to transform the assortments of products made by producers into the assortments wanted by consumers.

•  Producers make narrow assortments of products in large quantities, but consumers want broad assortments of products in small quantities.

•  Intermediaries play an important role in matching supply and demand.

•  Channel members add value by bridging the major time, place, and possession gaps that separate goods and services from those who would use them.

•  Members of the marketing channel perform many key functions:

•  Information: gathering and distributing marketing research and intelligence.

•  Promotion: developing and spreading persuasive communications about an offer.

•  Contact: finding and communicating with prospective buyers.

•  Matching: shaping and fitting the offer to the buyer's needs.

•  Negotiation: reach an agreement on price and other terms of the offer.

•  Physical distribution: transporting and storing goods.

•  Financing: acquiring and using funds to cover the costs of the channel work.

•  Risk taking: assuming the risks of carrying out the channel work.

•  In dividing the work of the channel, the various functions should be assigned to the channel members who can add the most value for the cost.

Let's Discuss This

Mobile phone manufacturers largely distribute their products through service providers such as Verizon, AT&T Wireless, and T-Mobile. Why have they chosen this method of distribution?

Number of Channel Levels

•  Each layer of marketing intermediaries that performs some work in bringing the product and its ownership closer to the final buyer is a channel level.

•  The number of intermediary levels indicates the length of a channel.

•  A direct marketing channel has no intermediary levels; the company sells directly to consumers.

•  An indirect marketing channel contains one or more intermediaries.

•  From the producer's point of view, a greater number of levels means less control and greater channel complexity.

•  The institutions in the channel are connected by several types of flows.

•  The flows include physical flow of the products, the ownership flow, the payment flow, the information flow, and the promotion flow.

•  These flows can make even channels with only one or a few levels very complex.

•  Channel Behavior and Organization

•  Distribution channels are complex behavioral systems in which people and companies interact to accomplish individual, company, and channel goals.

•  Some channel systems consist only of informal interactions among loosely organized firms.

•  Others consist of formal interactions guided by strong organizational structures.

Channel Behavior

•  Each channel member plays a specialized role in the channel. The channel will be most effective when each member is assigned the tasks it can do best.

•  Ideally, all channel firms should work together smoothly. They should understand and accept their roles, coordinate their activities, and cooperate to attain overall channel goals.

•  Although channel members depend on one another, they often act alone in their own short-run best interests. Disagreements over goals, roles, and rewards generate channel conflict.

•  Horizontal conflict occurs among firms at the same level of the channel.

•  Vertical conflict is more common; it is conflict between different levels of the same channel.

•  Some conflict in the channel takes the form of healthy competition.

•  Severe or prolonged conflict can disrupt channel effectiveness and cause lasting harm to channel relationships.

Vertical Marketing Systems

•  Historically, conventional distribution systems have lacked leadership and power, often resulting in damaging conflict and poor performance.

•  One of the biggest channel developments over the years has been the emergence of vertical marketing systems that provide channel leadership. Figure 10-3 contrasts the two types of channel arrangements.

•  A conventional distribution channel consists of one or more independent producers, wholesalers, and retailers. Each is a separate business seeking to maximize its own profits.

•  A vertical marketing system (VMS) consists of producers, wholesalers, and retailers acting as a unified system. One channel member owns the others, has contracts with them, or wields so much power that they must all cooperate. The VMS can be dominated by either the producer, the wholesaler, or the retailer.

•  A corporate VMS integrates successive stages of production and distribution under single ownership.

•  A contractual VMS consists of independent firms at different levels of production and distribution who join together through contracts to obtain more economies or sales impact than each could achieve alone.

•  The franchise organization is the most common type. There are three types of franchises: manufacturer-sponsored retailer franchiser system; manufacturer-sponsored wholesaler franchise system; and a service-firm-sponsored retailer franchiser system.

•  An administered VMS is one where leadership is assumed not through common ownership or contractual ties but through the size and power of one or a few dominant channel members.

Horizontal Marketing Systems

•  A horizontal marketing system is one in which two or more companies at one level join together to follow a new marketing opportunity. By working together, companies can combine their financial, production, or marketing resources to accomplish more than any one company could alone.

•  Companies might join forces with competitors or noncompetitors. They might work with each other on a temporary or permanent basis, or they may create a separate company.

Applying the Concept

Why are there bank branches in many grocery stores today? Discuss why this application of a horizontal marketing system makes sense for both the grocery store and the bank.

Multichannel Distribution Systems

•  More and more companies have adopted multichannel distribution systems, which are also called hybrid marketing channels.

•  This occurs when a single firm sets up two or more marketing channels to reach one or more customer segments.

•  Figure 10-4 shows a hybrid channel. These days almost every large company and many small ones distribute through multiple channels.

•  With each new channel, the company expands its sales and market cover-age and gains opportunities to tailor its products and services to the specific needs of diverse customer segments.

•  Multichannel systems are harder to control and they generate conflict as more channels compete for customers and sales.

•  One major trend is toward disintermediation--more and more, product and service producers are bypassing intermediaries and going directly to final buyers, or to radically new types of channel intermediaries.

•  This presents problems and opportunities.

•  To avoid being swept aside, traditional intermediaries must find new ways to add value in the supply chain.

•  To remain competitive, product and service producers must develop new channel opportunities, such as Internet and other direct channels. Developing these channels brings them into direct competition with their established channels, resulting in conflict.

Applying the Concept

Discuss some likely trends in the distribution of automobiles in the 21st century. Will there be a shift away from exclusive distribution? What might the distribution channel(s) look like?

•  Channel Design Decisions

•  In designing marketing channels, manufacturers struggle between what is ideal and what is practical.

•  A new firm with limited capital usually starts by selling in a limited market area.

•  In this way, channel systems often evolve to meet market opportunities and conditions.

•  Channel analysis and design should be purposeful--decision making should include analyzing consumer needs, setting channel objectives, identifying major channel alternatives, and evaluating those alternatives.

Analyzing Customer Needs

•  Marketing channels are part of the overall customer value delivery network. Thus, designing the marketing channel starts with finding out what target consumers want from the channel.

•  The company must balance consumer needs not only against the feasibility and costs of meeting these needs, but also against customer price preferences.

Setting Channel Objectives

•  Companies should state their marketing channel objectives in terms of targeted levels of customer service. In each segment, the company wants to minimize the total channel cost of meeting customer service requirements.

•  The company's channel objectives are influenced by the nature of the company, its products, its marketing intermediaries, its competitors, and the environment.

•  Environmental factors such as economic conditions and legal constraints may affect channel objectives and design.

Identifying Major Alternatives

•  The company should next identify its major channel alternatives in terms of types of intermediaries, the number of intermediaries, and the responsibilities of each channel member.

•  A firm should identify the types of channel members available to carry out its channel work.

•  Company sales force

•  Manufacturer's agency

•  Industrial distributors

•  Companies must also determine the number of channel members to use at each level.

•  Intensive distribution is a strategy in which they stock their products in as many outlets as possible.

•  In exclusive distribution, the producer gives only a limited number of dealers the exclusive right to distribute its product in their territories.

•  In between intensive and exclusive distribution is selective distribution--the use of more than one, but fewer than all, of the intermediaries who are willing to carry a company's products.

•  The producer and intermediaries need to agree on the terms and responsibilities of each channel member.

•  They should agree on price policies, conditions of sale, territorial rights, and specific services to be performed by each party.

•  Mutual services and duties need to be spelled out carefully.

Evaluating the Major Alternatives

•  Each alternative should be evaluated against economic, control, and adaptive criteria.

•  Using economic criteria, a company compares the likely sales, costs, and profitability of different channel alternatives.

•  The company must also consider control issues. Using intermediaries usually means giving them some control over the marketing of the product, and some intermediaries take more control than others.

•  The company must also apply adaptive criteria. Channels often involve long-term commitments, yet the company wants to keep the channel flexible so that it can adapt to environmental changes.

Designing International Distribution Channels

•  International marketers face many additional complexities in designing their channels.

•  Each country has its own unique distribution system that has evolved over time and changes very closely.

•  Channel Management Decisions

•  Once the company has reviewed its channel alternatives and decided on the best channel design, it must implement and managed the chosen channel.

•  Channel management calls for selecting, managing, and motivating individual channel members and evaluating their performance over time.

Selecting Channel Members

•  Producers vary in their ability to attract qualified marketing intermediaries.

•  When selecting intermediaries, the company should determine what characteristics distinguish the better ones. It will want to evaluate each channel member's years in business, other lines carried, growth and profit record, cooperativeness, and reputation.

Managing and Motivating Channel Members

•  Once selected, channel members must be continuously managed and motivated to do their best.

•  The company must sell not only through the intermediaries but to and with them.

•  They practice strong partner relationship management (PRM) to forge long-term partnerships with channel members.

•  In managing its channels, a company must convince distributors that they can succeed better by working together as a part of a cohesive value delivery system.

Evaluating Channel Members

•  The producer must regularly check channel member performance against standards such as sales quotas, average inventory levels, customer delivery time, treatment of damaged and lost goods, cooperation in company promotion and training programs, and services to the customer.

•  The company should recognize and reward intermediaries who are performing well and adding good value for consumers. Those who are performing poorly should be assisted or replaced.

•  Public Policy and Distribution Decisions

•  For the most part, companies are legally free to develop whatever channel arrangements suit them.

•  Laws affecting channels seek to prevent the exclusionary tactics of some companies that might keep another company from using a desired channel.

Exclusive Dealing

•  Exclusive distribution is when the seller allows only certain outlets to carry its products. When the seller requires that these dealers not handle competitors' products, its strategy is called exclusive dealing.

•  Both parties can benefit from exclusive arrangements.

•  But exclusive arrangements also exclude other producers from selling to these dealers.

•  This brings exclusive dealing contracts under the scope of the Clayton Act of 1914.

•  They are legal as long as they do not substantially lessen competition or tend to create a monopoly, and as long as both parties enter into the agreement voluntarily.

•  Exclusive dealing often includes exclusive territorial agreements.

•  Producers of a strong brand sometimes sell it to dealers only if the dealers will take some or all of the rest of the line. This is called full-line forcing.

•  These tying arrangements may not be illegal, but if they lessen competition substantially, they do come under the Clayton Act.

•  Producers are free to select their dealers, but their right to terminate dealers is somewhat restricted.

•  Sellers can drop dealers "for cause."

•  They cannot drop dealers if, for example, the dealers refuse to cooperate in a doubtful legal arrangement.

•  Marketing Logistics and Supply Chain Management

•  Companies must decide on the best way to store, handle, and move their products and services so that they are available to customers in the right assortments, at the right time, and in the right place.

•  Physical distribution and logistics effectiveness has a major impact on both customer satisfaction and company costs.

Nature and Importance of Marketing Logistics

•  Marketing logistics, also called physical distribution, involves planning, implementing, and controlling the physical flow of goods, services, and related information from points of origin to points of consumption to meet customer requirements at a profit. It involves getting the right product to the right customer in the right place at the right time.

•  Marketing logistics addresses not only outbound distribution (moving products from the factory to resellers and ultimately to customers) but also inbound distribution (moving products and materials from suppliers to the factory) and reverse distribution (moving broken, unwanted, or excess products returned by customers or resellers).

•  It involves entire supply chain management--managing upstream and downstream value-added flows of materials, final goods, and related information among suppliers, the company, resellers, and final consumers.

•  The logistics manager's task is to coordinate activities of suppliers, purchasing agents, marketers, channel members, and customers.

•  Companies can gain a powerful competitive advantage by pursuing improved logistics to give customers better service or lower prices.

•  Improved logistics can yield tremendous cost savings to both the company and its customers. As much as 20% of an average product's price is accounted for by shipping and transportation alone.

•  The explosion in product variety has created a need for improved logistics management.

•  Improvements in information technology have created opportunities for major gains in distribution efficiency.

Goals of the Logistics System

•  No logistics system can both maximize customer service and minimize distribution costs.

•  Maximum customer service implies rapid delivery, large inventories, flexible assortments, liberal return policies, and other services--all of which raise distribution costs.

•  Minimum distribution costs imply slower delivery, smaller inventories, and larger shipping lots, which represent a lower level of overall customer service.

•  The goal of marketing logistics should be to provide a targeted level of customer service at the least cost.

•  A company must first research the importance of various distribution services to customers and then set desired service levels for each segment.

•  The objective is to maximize profits, not sales.

Major Logistics Functions

•  The major logistics functions include warehousing, inventory management, transportation, and logistics information management.

•  A company must decide on how many and what types of warehouses it needs and where they will be located.

•  A storage warehouse stores goods for moderate to long periods.

•  Distribution centers are designed to move goods rather than to store them. They are large and highly automated warehouses designed to receive goods from various plants and suppliers, take orders, fill those orders efficiently, and deliver goods to customers as quickly as possible.

•  New, single-storied automated warehouses have advanced, computer-controlled materials-handling systems requiring few employees. Computers and scanners read orders and direct lift trucks, electric hoists, or robots to gather goods, move them to loading docks, and issue invoices.

•  Inventory management also affects customer satisfaction. Here, managers must maintain the delicate balance between carrying too little inventory and carrying too much.

•  Just-in-time logistics systems carry only small inventories of parts or merchandise, often for only a few days of operation. New stock arrives exactly when needed, rather than being stored in inventory until being used.

•  The choice of transportation carriers affects the pricing of products, delivery performance, and condition of the goods when they arrive.

•  Trucks have increased their share of transportation steadily and now account for 39% of total cargo ton-miles (more than 69% of actual tonnage). They account for the largest portion of transportation within cities as opposed to between cities.

•  Railroads account for 38% of total cargo ton-miles moved. They are one of the most cost-effective modes for shipping large amounts of bulk products.

•  Water carriers, which account for about 10% of cargo ton-miles, transport large amounts of goods by ships and barges on U.S. coastal and inland waterways. Although the cost of water transportation is very low for shipping bulky, low-value, nonperishable products, water transportation is the slowest mode and may be affected by the weather.

•  Pipelines are a specialized means of shipping petroleum, natural gas, and chemicals from sources to markets.

•  Although air carriers transport less than 1% of the nation's goods, they are an important transportation mode. Airfreight rates are much higher than rail or truck rates, but airfreight is ideal when speed is needed or distant markets have to be reached.

•  The Internet carries digital products from producer to customer via satellite, cable modem, or telephone wire.

•  Intermodal transportation is combining two or more modes of transportation.

•  Piggyback describes the use of rail and trucks.

•  Fishyback is combining water and trucks.

•  Trainship combines water and rail.

•  Airtruck combines air and trucks.

Integrated Logistics Management

•  Integrated logistics management recognizes that providing better customer service and trimming distribution costs require teamwork, both inside the company and among all the marketing channel organizations.

•  The goal of integrated supply chain management is to harmonize all of the company's logistics decisions.

•  Some companies have created permanent logistics committees made up of managers responsible for different physical distribution activities.

•  Companies can also create management positions that link the logistics activities of functional areas.

•  Companies can employ sophisticated, systemwide supply chain management software.

•  The members of a distribution channel are linked closely in delivering customer satisfaction and value as well as building customer relationships.

•  Smart companies coordinate their logistics strategies and forge strong partnerships with suppliers and customers to improve customer service and reduce channel costs.

•  Many companies have created cross-functional, cross-company teams.

•  Other companies partner through shared projects.

•  Integrated logistics companies, called third-party logistics (3PL) providers, perform any or all of the functions required to get their clients' product to market.

•  Companies use third-party logistics providers for many reasons.

•  Getting the product to market is the focus of the logistics provider, so these providers can often do it more efficiently and at lower cost.

•  Outsourcing logistics frees a company to focus more intensely on its core business.

•  Integrated logistics companies understand increasingly complex logistics environments. This can be helpful to companies attempting to expand their global market coverage.

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Chapter 11

Retailing and Wholesaling

Chapter Objectives

•  Explain the role of retailers and wholesalers in the distribution channel.

•  Describe the major types of retailers and give examples of each.

•  Identify the major types of wholesalers and give examples of each.

•  Explain the marketing decisions facing retailers and wholesalers.

Chapter Overview

This chapter is a continuation of the prior chapter on marketing channels; it provides more detail on retailing and wholesaling, two very important concepts in the value delivery network.

It begins with a discussion of retailers and the challenges they face. There are many types of retailers. These retailers can be classified according to several characteristics, including the amount of service they offer, the breadth and depth of their product lines, the relative prices they charge, and how they are organized.

Retailers are always searching for new strategies to attract and retain customers. The major decisions retailers need to make are centered around their target market and positioning, their product assortment and services, their price, their promotion strategies, and where they are located.

Retailing is facing many challenges, including new retail forms, such as warehouse stores. The wheel of retailing concept says that many new retailing forms begin as low-margin, low-price, low-status operations. They challenge established retailers, and then the new retailers' success leads them to upgrade their facilities and offer more service. In turn, their costs increase, and eventually they become like the conventional retailers they replaced. The cycle begins again.

Wholesalers buy mostly from producers and sell mostly to retailers, industrial customers, and other wholesalers. As a result, many of this country's largest and most important wholesalers are largely unknown to final consumers. Wholesalers provide important services, however, and they add value through performing one or more of several functions.

There are many types of wholesalers, including merchant wholesalers, agents and brokers, and manufacturers' sales branches and offices. They face many of the same decisions as retailers, including the choice of target market, positioning, and the marketing mix.

The distinction between large retailers and large wholesalers continues to blur. Many retailers now operate formats such as wholesale clubs and hypermarkets that perform many wholesale functions. In return, many large wholesalers are setting up their own retailing operations.

Chapter Outline

•  Introduction

•  Wal-Mart is the ultimate retailer. Its phenomenal success has resulted from an unrelenting focus on bringing value to its customers. Wal-Mart is passionately dedicated to its value proposition of "Always Low Prices, Always ."

•  Wal-Mart knows its customers well and takes good care of them. It delivers what customers want: a broad selection of carefully selected goods at unbeatable prices.

•  This chapter looks at the nature and importance of retailing, major types of store and nonstore retailers, the decisions retailers make, and the future of retailing, as well as the same topics as they relate to wholesaling.

•  Retailing

•  Retailing includes all the activities involved in selling products or services directly to final consumers for their personal, nonbusiness use.

•  Retailers are businesses whose sales come primarily from retailing.

•  Nonstore retailing has been growing much faster than has store retailing. Nonstore retailing includes selling to final consumers through direct mail, catalogs, telephone, the Internet, TV home shopping shows, home and office parties, door-to-door contact, vending machines, and other direct selling approaches.

Types of Retailers

•  Retailers can be differentiated on amount of service.

•  Self-service retailers serve customers who are willing to perform their own "locate-compare-select" process to save money. Self-service is the basis of all discount operations and is typically used by sellers of convenience goods and nationally branded, fast-moving shopping goods.

•  Limited-service retailers provide more sales assistance because they carry more shopping goods about which customers need information.

•  Full-service retailers, such as specialty stores and first-class department stores, offer salespeople who assist customers in every phase of the shopping process.

•  Retailers can also be classified according to the length and breadth of their product assortments.

•  Specialty stores carry narrow product lines with deep assortments within those lines.

•  Department stores carry a wide variety of product lines. Service remains the key differentiating factor.

•  Supermarkets are the most frequently shopped type of retail store.

•  Convenience stores are small stores that carry a limited line of high-turnover convenience goods.

•  Superstores are much larger than regular supermarkets and offer a large assortment of routinely purchased food products, nonfood items, and services.

•  Wal-Mart, Kmart, Target, and others offer super-centers, combination food and discount stores that emphasize cross-merchandising.

•  Category killers feature stores the size of airplane hangars that carry a very deep assortment of a particular line with a knowledgeable staff.

•  Hypermarkets are huge superstores. Hypermarkets have been very successful in Europe and other world markets, but they have met with little success in the United States.

•  Retailers can be classified according to the prices they charge.

•  A discount store sells standard merchandise at lower prices by accepting lower margins and selling higher volume.

•  An off-price retailer buys at less-than-regular wholesale prices and charges consumers less than retail.

•  Independent off-price retailers either are owned and run by entrepreneurs or are divisions of larger retail operations.

•  Most large off-price retailer operations are owned by bigger retail chains.

•  Factory outlets sometimes group together in factory outlet malls and value-retail centers, where dozens of outlet stores offer prices as low as 50% below retail on a wide range of items.

•  Warehouse clubs (or wholesale clubs or membership warehouses) operate in huge, drafty, warehouselike facilities and offer few frills.

•  Chain stores are two or more outlets that are commonly owned and controlled.

•  A voluntary chain is a wholesaler-sponsored group of independent retailers that engages in group buying and common merchandising.

•  A retailer cooperative is a group of independent retailers that bands together to set up a jointly owned, central wholesale operation and conducts joint merchandising and promotion efforts.

•  Franchise systems are normally based on some unique product or service; on a method of doing business; or on the trade name, goodwill, or patent that the franchiser has developed.

•  Merchandising conglomerates are corporations that combine several different retailing forms under central owner-ship.

Retailer Marketing Decisions

•  Retailers are always searching for new marketing strategies to attract and hold customers.

•  Retailers must first define their target markets and then decide how they will position themselves in these markets.

•  Too many retailers fail to define their target markets and positions clearly. They try to have "something for every-one" and end up satisfying no market well.

•  Retailers must decide on three major product variables.

•  The retailer's product assortment should differentiate the retailer while matching target shoppers' expectations.

•  The services mix can also help set one retailer apart from another.

•  The store's atmosphere is another element in the reseller's product arsenal.

•  A retailer's price policy must fit its target market and positioning, product and service assortment, and competition.

•  Most retailers seek either high markups on lower volume or low markups on higher volume.

•  Retailers use any or all of the promotion tools--advertising, personal selling, sales promotion, public relations, and direct marketing--to reach consumers.

•  Retailers often point to three critical factors in retailing success--location, location, and location.

•  It is very important that retailers select locations that are accessible to the target market in areas that are consistent with the retailer's positioning.

•  Central business districts were the main form of retail cluster until the 1950s.

•  A shopping center is a group of retail businesses planned, developed, owned, and managed as a unit.

•  A regional shopping center, or regional shopping mall, the largest and most dramatic shopping center, contains from 40 to more than 200 stores.

•  A community shopping center contains between 15 and 40 retail stores.

•  Most shopping centers are neighborhood shopping centers or strip malls that generally contain between 5 and 15 stores.

•  A recent addition to the shopping center scene is the so-called power center. These huge unenclosed shopping centers consist of a long strip of retail stores, each with its own entrance with parking directly in front.

The Future of Retailing

•  Retailers operate in a harsh and fast-changing environment, which offers threats as well as opportunities.

•  New retail forms continue to emerge to meet new situations and consumer needs, but the life cycle of new retail forms is getting shorter.

•  The wheel of retailing concept says that many new types of retailing forms begin as low-margin, low-price, low-status operations. They challenge established retailers that have become "fat" by letting their costs and margins increase. The new retailers' success leads them to upgrade their facilities and offer more services. In turn, their costs increase, forcing them to increase their prices. Eventually, the new retailers become like the conventional retailers they replaced. The cycle begins again.

•  Americans are increasingly avoiding the hassles and crowds at malls by doing more of their shopping by phone or online.

•  Today's retailers are increasingly selling the same products at the same price to the same consumers in competition with a wider variety of other retailers.

•  This merging of consumers, products, prices, and retailers is called retail convergence.

•  This convergence means greater competition for retailers and greater difficulty in differentiating offerings.

Let's Discuss This

Do you avoid the crowds at malls? Do your parents? Do you think that there could be a backlash against the ever-larger malls and stores? Use the wheel of retailing concept to think about consumers' reactions to crowds, the same merchandise everywhere, and the difficulty retailers have in differentiating themselves.

•  The rise of huge mass merchandisers and specialty superstores, the formation of vertical marketing systems and buying alliances, and a rash of retail mergers and acquisitions have created a core of superpower megaretailers. They are shifting the balance of power between retailers and producers.

•  Retail technologies are becoming critically important as competitive tools.

•  Progressive retailers are using advanced information technology and software systems to produce better forecasts, control inventory costs, order electronically from suppliers, send email between stores, and even sell to customers within stores.

•  Retailers with unique formats and strong brand positioning are increasingly moving into other countries.

•  U.S. retailers are still significantly behind Europe and Asia when it comes to global expansion.

•  There has been a resurgence of establishments that, regardless of the product or service they offer, also provide a place for people to get together.

•  Wholesaling

•  Wholesaling includes all activities involved in selling goods and services to those buying for resale or business use.

•  Wholesalers are firms engaged primarily in wholesaling activity.

•  Wholesalers buy mostly from producers and sell mostly to retailers, industrial consumers, and other wholesalers.

•  Wholesalers add value by performing one or more of the following channel functions:

•  Selling and promoting

•  Buying and assortment building

•  Bulk breaking

•  Warehousing

•  Transportation

•  Financing

•  Risk bearing

•  Market information

•  Management services and advice

Types of Wholesalers

•  Wholesalers fall into three major groups:

•  Merchant wholesalers are the largest single group of wholesalers, accounting for roughly 50% of all wholesaling.

•  Full-service wholesalers provide a full set of services.

•  Limited-service wholesalers offer fewer services to their suppliers and customers.

•  Brokers and agents do not take title to goods, and they perform only a few functions. They generally specialize by product line or customer type.

•  A broker brings buyers and sellers together and assists in negotiations.

•  Agents represent buyers or sellers on a more permanent basis.

•  Manufacturers' agents are the most common type of agent wholesaler.

•  Manufacturers' sales branches and offices are the third major type of wholesaler.

Wholesaler Marketing Decisions

•  As with retailers, wholesaler marketing decisions include choices of target markets, positioning, and the marketing mix. See Figure 11-2.

•  Wholesalers must define their target markets and position themselves effectively. They can choose a target group by size of customer, type of customer, need for service, or other factors.

•  Wholesalers must decide on product assortment and services, prices, promotion, and place.

•  The wholesaler's "product" is the assortment of products and services that it offers.

•  Price is an important decision. Wholesalers usually mark up the cost of goods by a standard percentage, say 20%.

•  Most wholesalers are not promotion minded.

•  Place is important--wholesalers must choose their locations, facilities, and Web locations carefully.

Trends in Wholesaling

•  As the wholesaling industry moves into the 21st century, it faces considerable challenges.

•  The industry remains vulnerable to one of the most enduring trends of the last decade--fierce resistance to price increases and the winnowing out of suppliers who are not adding value based on cost and quality.

•  The distinction between large retailers and large wholesalers continues to blur.

•  Many retailers now operate formats such as wholesale clubs and hypermarkets that perform many wholesale functions.

•  In return, many large wholesalers are setting up their own retailing operations.

•  Wholesalers will continue to increase the services they provide to retailers.

•  Many large wholesalers are now going global.