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CHANNEL DYNAMICS
Distribution channels do not stand still. New wholesaling and retailing institutions emerge, and new channel system evolves. In this section will look at the recent growth of vertical, horizontal and multi channel marketing systems. VERTICAL MARKETING SYSTEMS One of the most significant recent channel developments is the rise of vertical
marketing systems, which have emerged to challenge conventional marketing channels. A conventional marketing channel comprises an independent producer, wholesaler, and retailer. Each is a separate business entity seeking to maximize its own profits. No channel member has completed a substantial control over the other members. A vertical marketing, marketing system (VMS) by contrast, comprises the producer, wholesaler and retailer acting as a unified system. One channel member owns the others a franchises them or has so much power that they all cooperate. The vertical marketing system can be dominated by the producer, the wholesaler or the retailer. A marketing channel that is professionally managed and centrally controlled by a single marketing channel member is a vertical marketing system(VMS).
Vertical marketing system improve distribution efficiency by combining the efforts of individual channel members. TYPES OF VERTICAL MARKETING SYSTEM.
There are three types of vertical marketing system.
Vertical Marketing Systems
Corporate
Administrated
Contractual
Corporate Vertical Marketing System In corporate VMS, successive stages of a marketing channel are united under one owner ship. A corporate VMS combines successive stage of production and distribution under single ownership. For example, singer owns the retail outlets that sell is sewing machines, fire stone Tire & Rubber co owns many of the outlets that sell its tires. Raymonds owns some retail stores across the country, while also producing textiles and woolens. Bata and woodlands own their shoe shops across the country while also manufacturing foot wears.
Administrated Vertical Marketing System In administrated VMS, a marketing channel in which channel members remain independent but informal coordination allows for effective inter organizational management. An administrated VMS coordinates successive stages of production and distribution not through common ownership but through the size and power of one of the member. Manufactures of dominate brand are able to secure strong trade cooperation and support from resellers. Brand leader or firms that are market leaders are able to obtain trade cooperation. Firms like Hindustan Lever, Lipton, Proctor and Gamble, Nestle, Telco, Maruthi and
others are able to get shelf space, promotional support, and also support for price policies from the trade, mainly because their brands are market leaders. Kellogg Co., Campbell soup company use administrated channels.
Contractual vertical marketing system
Wholesaler –sponsored voluntary chain Retailer cooperatives Franchise organizations
WHOLESALER – SPONSORED VOLUNTARY CHAIN
Wholesalers organize voluntary chains of independent retailers to help them complete with large chain organization. The wholesaler develops a program in which independent retailers standardize their selling practices and achieve buying economies that enable the group to complete effectively with chain organizations. A wholesaler, by banding together a number of independently owned retailers in a voluntary group, can provide goods and support services for more economically than these some retailers could secure solely as individuals.
McKesson‘s greatest strength is the nearly 3300 independent drug stores that operate as part of its voluntary chain under the value-Rite name, which provides purchasing power, sales promotions and ancillary services from car leasing to insurance.
RETAILER COOPERATIVES Retailer cooperatives consists of independent retailers who set up a central buying organization and conduct joint promotional efforts. It is a voluntary association, but the impetus for the cooperative come from the retailers rather than from a wholesaler. The retailers might take initiative and organize a new business entity to carry on wholesaling and possibly some production. Members concentrate their purchase through retailer cooperatives and plan their advertising jointly. Profit are passes back to members in proportion to their purchases. Retailer– sponsored cooperatives have been important in the marketing of foods. For example, Topco Associates is owned cooperatively by a
group of supermarket chains and grocery wholesalers located in various markets through out the country. The TOPCO‘S control function is to serve its 25 owner- member companies in the purchasing, product development, quality control, packing and promotion of a wide variety of private label (controlled-brand) food such as Top Frost, Food club and non-food products.
Expect for ownership difference, wholesaler and retailer cooperatives operate in much the same ways. Members join with the understanding that they will purchase a substantial portion of their merchandise from the group and will standardize retail advertising, identification and operating procedures as necessary to confirm with those of the group to obtain economics and better impact. Members usually contribute to a common advertising fund and operates stores under a common name.
the financial and managerial arrangements that binds the parties. In the former instance, the relationships between Businessland and IBM is forged with respect to specific products trademarked by IBM that it sells outright to Business land. In the latter case, McDonald‘s relationship with its franchisees involves royalties and an entire business format that McDonald‘s instructs its franchisees to use. It is because of this confusion that the remainder of this section is divided into two parts, the first dealing with authorized franchise systems and the other with franchisee/franchisor systems. Authorized Franchise System To maintain some semblance of control over the marketing of their products, suppliers will authorize wholesale or retail outlets. Simply put, the means that they are trying to limit the distribution of their products to those outlets that meet some minimum criteria they have establishes regarding the outlet‘s degree of participation in one or more of the marketing flows. In these situations a franchisor authorizes distributors (wholesalers or retailers or both) to sell a product or product line using it trade name for promotional purposes. The focus in product franchising is on what is sold. Examples are authorized tire, auto, computer, major appliance, television, and household furniture dealers whose suppliers have established strong brand names. Such authorization can also be granted at the wholesale level-for example, to soft drink bottlers and distributors or dealers by manufacturers of electrical and electronics equipments( Square D, Allen Bradley, General Electric), office furniture (steelcase), machine tools (DoAll), and semiconductors (Texas Instruments, Motorola). Franchisor/Franchisee System A franchisor/franchisee system is defined here as an entire business format where one firm (the franchisor) licenses a number of outlets ( franchisees) to market a product to service and engage in a business developed by the franchisor using the latter‘s trade names, trademarks, service marks, know-how, and methods of doing business. In contrast to product
franchising, the focus here is on how the business is run. The franchisor‘s primary compensation comes in the form of royalties and/or fees. The franchisor may also sell the products, sell or lease the equipment, and/or sell or lease the premises necessary to the operation. For example, McDonald‘s insists that all of its units purchase from approved suppliers, provides building and design specifications, provides or helps locate financing for its franchisees, and issues quality standards that each unit must abide by in order to hold its franchise. Franchisor/franchisee systems are present in almost all business fields. It can be readily seen that the franchisee system covers a wide variety of goods and services – accounting services, auto accessories, auto rentals, campgrounds, computer services, dry cleaning, employment agencies, fast foods, convenience food markets , and vending machine operations, among others. Like entrepreneurs, franchisees invest their money and own their business but they don‘t have to develop a new product, create a new company, or test the market. In return, the franchisees give up some independence and pay franchisors anywhere from 1.5 to 12 percent of gross sales. Most of the growth in franchising in recent years has come from business format franchising (versus product franchising) in which the franchisor rules nearly every aspect of the enterprise, from an outlet‘s appearance to worker training. However, holding a franchise or operating under franchise name apparently has no connection at all with chances of entrepreneurial survival. Types of Franchise Systems
Type Explanation
Mobile franchise
Distributor ship
Co-owner ship Co- management
or with the
territorial franchise holder. A franchise that dispenses its product from a moving vehicle, which is either owned by the franchisee or leased from the franchisors. Examples include Country Store on Wheels and snap-On Tools. The franchisee takes title to various goods and further distributes them to sub franchisees. The distributor has exclusive coverage of a wide geographical area and acts as a supply house for the franchisees who carry the product. The franchisor and franchisee share the investment and profits. An example is Denny‘s Restaurant. The franchisor controls the major part of the investment. The partner manager shares profits proportionately. Examples include Travel lodge and Holiday Inn the Hotel and motel business.
Leasing The franchisor leases the land, buildings and equipment to franchisees. Leasing is used conjunction with other provisions. Licensing The franchisor licenses the franchisee to use his trademarks and business techniques. The franchisor either supplies the product or provides franchisees with a list of approved suppliers. Manufacturing The franchisor grants a franchise to manufacture its product through the use of specified materials and techniques. The franchise distributes the product, utilizing the franchisor‘s techniques. The method enables a national manufacturer to distribute regionally when distribution costs from central manufacturing facilities are prohibitive. One example is sealy. Service The franchisor describes patterns by which a franchisee supplies a professional service, as exemplified by employment agencies.
Rationale for Franchising Franchise system represent the extreme form of limiting the market, short of outright ownership. That is through the stipulations in the contracts they sign, the parties purposively subvert and circumscribe the market
Franchisors provide both initial and continuous services to their franchisees. Initial services include Market survey and site selection, Facility design and
layout,Lease negotiation advice ,Financing advice, Operating manuals,Management training programs,Franchisee employee training While the amount of involvement with franchisees is usually high, a franchisor‘s provision of an initial service indicates nothing about the depth of its involvement. Continuous services includes Field supervision, Merchandising and promotional, materials Management and employee retraining ,Quality inspection , National advertising, Centralized planning, Market data and guidance, Auditing and record keeping ,Management reports ,Group insurance plans Almost all franchisors have a continuous program of field services. Field representatives visit the franchise outlet to aid the franchisee in every day operations, check the quality of product and service and monitor performance. All franchisees are usually required to report monthly or semimonthly on key elements of their operations – weekly sales, local advertising, employee turnover, profits, and other financial and marketing information. This regular reporting is intended to facilitate the various financial, operating, and marketing control procedures. Sources of Franchisor Revenue Sources of franchisor revenue include
- Initial franchise fees. Many franchisors charge an initial fee to new franchisees. The fee is charged to cover the franchisor‘s expenses for site location, training , setting of operating controls, and other initial services as well as developmental costs in building the system. Initial fees tend to rise as a franchise becomes more successful.
- Royalty fees. Franchisors charge a royalty fee or commission. The fee is usually based on the gross value of a franchisee‘s sales volume. Five percent of gross sales is the most common royalty agreement in franchising. Some franchisors require minimum payment per month. In certain cases the royalty rate decreases as sales volume increases, while in others the royalty fee is a flat rate regardless of the sales volume. Some franchisors collect a royalty on a unit of sales basis. For example, motel franchisors charge a fee per room; soft ice cream franchisors charge a fee for each gallon of mix sold to the franchisee; car wash equipment franchisors charge a fee per car washed.
channel of ―independents ‖
Electric Miller Beer
Holiday Inn Pizza Hut
Sherwin Williams paints
The above table shows the characteristics of Traditional and Vertical Marketing system. It shows the cooperation and control in traditional marketing system and vertical marketing system. HORIZONTAL MARKETING SYSTEM
Another channel development is the horizontal marketing system, in which two or more unrelated companies put together resources or programs to exploit an emerging marketing opportunity. Each company lacks the capital, know-how, production, or marketing resources to venture alone, or it is afraid of the risk. The companies might work with each other on a temporary or permanent basis or create a separate company. Adler calls this as ―symbiotic marketing‖.
MULTICHANNEL MARKETING SYSTEM
In the past many companies sold to a single market through a single channel. Today, with the proliferation of customer segments and channel possibilities, more companies have adapted multi channel marketing. Multichannel marketing occurs when a single firm uses to or more marketing channels to reach one or more customer segments. For example, Compaq sells its personal computers directly to corporate buyers as well as through mass electronics retailers, small computer specialist stores, and value– added resellers.
By adding more channels, companies can gain three important benefits. The first is increased market coverage – companies often add a channel to reach a customer segment that its current channels can‘t reach ( e.g., adding rural agents to reach sparsely located farmer– customer). The second is lower channel cost companies may add a new channel to lower their cost of selling to an existing customer group( e.g., selling by phone rather than personally visiting small customers). The third is more customized selling – companies may add a
