Distribution Strategies in Emerging Markets:
Case Studies in Latin America
kRCHIVES
by
Jaime Garza Ramirez
M Eng. in Logistics and Supply Chain Management (2009),
Massachusetts Institute of Technology, MA, USA
B. S. Industrial and Systems Engineering (2004),
ITESM (Monterrey Tech), Nuevo Leon, Mexico
Submitted to the Engineering Systems Division and Sloan School of Management in Partial Fulfillment of
the Requirements for the Degree of
Master of Science in Engineering and Management
at the
Massachusetts Institute of Technology
September 2011
© 2011 Jaime Garza All rights reserved.
The authors hereby grant to MIT permission to reproduce and to distribute publicly paper and electronic
copies of this thesis document in whole or in part in any medium ow known or hereafter created.
..
Signature of Author ...........................
Master of Science in
. ....
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. . . .. ................
Jaime Garza Ramirez
sig and anagement, ESD, Sloan
151th,h2011
Certified by .................................
Researc
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.............
Dr.
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Th si S
A ccepted by ..........................................
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-rf.Pat
Hale
Professor, Engineering Systems Division
Director, SDM Program
1
Distribution Strategies in Emerging Markets:
Case Studies in Latin America
By
Jaime Garza Ramirez
Master of Engineering, Logistics and Supply Chain Management, 2009
Massachusetts Institute of Technology
Submitted to the System Design and Management program on July 15 th, 2011, in Partial
Fulfillment of the Requirements for the Degree of
Master of Science in Engineering and Management
ABSTRACT
Defining sales and distribution schemes to serve a Latin American country is more of
an art than science. The process of designing and selecting distribution channels is quite
challenging and it demands an in-depth understanding of the market. The fact that most
Latin American countries are experiencing significant growth and development makes it
difficult for companies to implement the same distribution strategies used to serve mature
markets. Leading firms are now exploring creative ways to effectively reach and
efficiently serve each segment of the market. This research intends to explore the key
drivers that shape the design and selection of sales and distribution channels, as well as to
build a framework that could help companies design or select channels that are aligned to
their core business strategy.
Thesis Advisor: Dr. Edgar Blanco, Researcher at the MIT Center for Transportation &
Logistics
Program Director: Prof. Pat Hale
Topics: Supply Chain Management, Channel Management, Go-to-Market Strategies, and
Distribution Strategies in Latin America
2
TABLE OF CONTENTS
2
......--...............................................
ABSTRACT ...........-.........-
5
..-..........-
ACKNOWLEDGEMENTS................-..........................
LIST OF FIGURES..........................................................................6
LIST OF TABLES ......-.....-...............-........
..-....................-- -
...............-
1. INTRODUCTION ...................
2. REVIEW OF LITERATURE ...
-
7
--
9
...-........-
10
..........................
--......-.......
10
13
14
2.1 CHANNELS OF DISTRIBUTION: A LANDSCAPE ................................................................................
2.2 THE RISE OF GO-TO-M ARKET STRATEGIES.....................................................................................
2.3 CHANNEL DESIGN AND CHANNEL SELECTION ..............................................................................
2.3.1 R elevant F ramew orks .................................................................................................................-----...--.
2.3.1.1 "DesigningChannels ofDistribution" - Technical Note ...............................................
2.3.2 Channel Structures: Direct vs. Indirect......................................................................................
2.3.3 Traditionalvs. M odern Channel...................................................................................................
14
25
29
33
2.4 DISTRIBUTION STRATEGIES IN DEVELOPING COUNTRIES ..........................................................
35
2.4.1 D istribution Strategies in Latin America....................................................................................
35
2.5 DISTRIBUTION STRATEGIES IN DEVELOPED COUNTRIES ............................................................
54
54
2.5.1 Distribution Strategies in the United States ..............................................................................
2.6 DISTRIBUTION STRATEGIES COMPARISON: DEVELOPED VS. DEVELOPING..........................61
.............
3. METHODOLOGY & ANALYSIS .....................
.....
3.1 PRIMARY AND SECONDARY MARKET RESEARCH ..........................................................................
3.2 C A SE STU DY A NA LY SIS........................................................................................................................
...
...............
4. ANALYSIS ..................
..............................................
65
65
.70
88
88
97
4.1 ANALYSIS BASED ON LITERATURE REVIEW ...................................................................................
4.2 ANALYSIS BASED ON PRACTICAL EXPERIENCE ...............................................................................
4.3 RESULTS COMPARISON: ANALYSIS FROM LITERATURE VERSUS ANALYSIS FROM
...............
PRA CTICAL E XPERIEN CE .........................................................................................................
---107
..............................................
110
.....................
5. CONCLUSIONS............
.111
6. FUTURE RESEARCH ................................................
7. APPENDIX
.....
8. REFERENCES.......
........
.......
.......
...............
.......
............
3
...............................................
-...............................................
112
119
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4
Acknowledgements
I would like to thank Dr. Edgar Blanco for supervising my thesis and providing me
guidance throughout the process, and for giving me the opportunity to work as a
Research Assistant at the MIT Center for Transportation & Logistics.
In addition, I would like to highlight the help and dedication provided by researchers
from the Center for Latin America Logistics Innovation based in Colombia, Bogota.
I want to thank all my classmates and professors who brought new perspective and
knowledge and who helped me become a better person both personally and
professionally.
I certainly would like to thank Prof. Pat Hale for the support provided during the SDM
program.
Last but not the least, I would like to thank my wife Nancy and our son Jesus, who are
the light of my life. They deserve special thanks for their unconditional support. These
acknowledgements would not be complete without thanking my mother Beatriz, my
father Jaime, and my brother David for believing in me and supporting me.
5
List of Figures
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE
1. FACTORS THAT DETERMINE CHANNEL CHOICE ............................................................................................
2. CHANNEL CHOICE FUNCTIONS .........................................................................................................................
14
15
18
18
3. C HANNEL OBJECTIVES ............................................................................................................................................
4. D ESIGNING A CHANNEL STRUCTURE ...................................................................................................................
20
5. FACTORS AFFECTING DISTRIBUTION CHANNELS - MANIQOBA DA SILVA (2008) .............................
AL
(2006)..................................................................21
ET
6. CHALLENGES IN CHANNEL DESIGN - NESLIN
7. CHANNEL VALUE NETWORK - VINHAS ET AL (2010)................................................................................23
31
8. DIRECT TO STORE DELIVERY (DSD) BENEFITS ..........................................................................................
2007.................................37
AMERICA
LATIN
IN
FORMAT
STORE
BY
SHARE
MARKET
NIELSEN,
9. AC
37
10. ILCAD, MARKET SHARE BY STORE FORMAT IN LATIN AMERICA 2008 .........................................
11. ALTERNATIVE DSD PROCESS MODELS - NATU (2009)........................................................................39
12. URBAN VS RURAL POPULATION (2010) - UN DATA.............................................................................42
13. NUMBER OF STORES BY RETAIL FORMAT (AC NIELSEN 2010)..........................................................44
14. % SALES (COMMODITY VALUE) BY RETAIL FORMAT (AC NIELSEN 2010)...................45
15. % RETAIL INDEX (A T K EARNEY 2010)...........................................................................................................46
16. % INCOME SHARE BY POPULATION DISTRIBUTED BY PERCENTILES (WORLD BANK DATA: 2006-
47
2 0 0 8 ) .....................................................................................................................................................................................
2010).....48
NIELSEN
(AC
MEXICO
IN
FIGURE 17. % CONSUMPTION BY STORE FORMANT AND INCOME LEVEL
FIGURE 18. AVERAGE PRICE INDEX BY CHANNEL TRADITIONAL VS. MODERN (AC NIELSEN 2010)...........49
50
FIGURE 19. % LOGISTIC PERFORMANCE INDEX 2010 ........................................................................................................
FIGURE 20. POINT OF SALES AND LOGISTICS COSTS BY COUNTRY (SCR 2010 AND AC NIELSEN 2006).........50
FIGURE 21. % OF PAVED ROADS - WORLD BANK (2004/2005).....................................................................................51
FIGURE 22. NEEDS LADDER OF EMERGING CONSUMERS IN LATIN AMERICA - D'ANDREA ET AL (2011).........52
FIGURE 23. MARKET COMPARISON FOR CONSUMER GOODS (TREEWATER ET AL, 2009).................................53
FIGURE 24. % SALES BY CHANNEL FORMAT (GROCERIES) IN THE US 2010 (EUROMONITOR, 2010)......55
FIGURE 25. % DSD ILLUSTRATIVE EXAMPLE, OTTO ET AL (2009)................................................................................56
FIGURE 26. % USE OF DSD IN TOP 10 FOOD CATEGORIES IN THE US, KEH AND PARK (1997).............57
58
FIGURE 27. % SALES BY RETAIL FORMAT (EUROMONITOR GROCERY RETAIL 20 10) ....................
59
FIGURE 28. RETAILING 2010: RECOVERY (EUROMONITOR 20 10) ............................................................................
FIGURE 29. LOGISTIC PERFORMANCE INDEX 2010 (WORLD BANK)........................................................................60
FIGURE 30. LOGISTIC COSTS, SHARE OF TRADITIONAL CHANNEL, AND MARKET FRAGMENTATION WORLD
BANK (2010), EUROMONITOR (2010), AC NIELSEN (2009)...........................................................................60
FIGURE 31. MACRO-COMPARISON BETWEEN DEVELOPED AND DEVELOPING CITIES/COUNTRIES EUROMONITOR (2010), AC NIELSEN (2010), DATAMONITOR (2009), UN, OECD, WORLD BANK,
61
IN EGI, B U SIN ESS M ONITOR ..........................................................................................................................................
FIGURE 32. GROCERY RETAILING - MOST TO LEAST DEVELOPED MARKETS, EUROMONITOR (2010).............62
FIGURE 33. PLANET RETAIL: GLOBAL RETAIL 20 10..........................................................................................................63
89
FIGURE 34. MARKETING AND PRICING POLICIES BY CATEGORY - MIRACLE (2008) .........................................
93
FIGURE 35: DISCRIM INATION ANALYSIS RESULTS ............................................................................................................
95
FIGURE 36: CRITICAL DIMENSIONS FROM DISCRIMINANT ANALYSIS ....................................................................
FIGURE 37: MAJOR VARIABLES AFFECTING CHANNEL DESIGN/SELECTION.......................................................97
..........................- 98
FIGURE 38: WORKSHOP FINDINGS ...........................................................................................................
100
FIGURE 39: KEY DIMENSIONS FOR CHANNEL DESIGN/SELECTION ...........................................................................
FIGURE 40: FRAMEWORK FOR CHANNEL DESIGN/SELECTION....................................................................................101
102
FIGURE 41: DEFINED CRITERIA FOR EVALUATING COMPANIES .................................................................................
FIGURE 42: SELECTED SCHEMES BY COMPANY...............................................................................................................103
104
FIGURE 43. DIRECTIONAL AND TACTICAL/OPERATIONAL APPROACHES .................................................................
FROM
IN
THE
ANALYSIS
AND
FIGURE 44. FACTORS CONSIDERED IN THE ANALYSIS FROM LITERATURE
107
PRA CTICA L EX PERIENCE ...............................................................................................................................................
6
List of Tables
TABLE
TABLE
TABLE
TABLE
TABLE
TABLE
TABLE
TABLE
TABLE
68
1: SALES AND DISTRIBUTION SCHEESMES .........................................................................................--..----------..............
2: GROUP CATEGORIES - MIRACLE (1965)..................................................................................................................88
90
3: FACTORS AFFECTING CHANNEL DESIGN - MALLEN (1996) ..........................................................................
91
.-----------........
4: CRITERIA USED FOR EVALUATONION ................................................................................................--..
5: CRITERIA APPLIED TO MIT BREWERY *TRADITIONAL CHANNEL ....................................................................
...................................................
ME..............................................95
7: CURRENT SCHEME VERSUS PREDICTED SCHEME
92
102
8: COMPANY' SCORES BASED ON TWO DIMENSIONS....................................................................................................
9. QUALITATIVE ANALYSIS & RESULTS JUSTIFICATION.............................................................................................106
10. SUMMARY OF ANALYSIS FROM LITERATURE AND ANALYSIS FROM PRACTICAL EXPERIENCE BY COMPANY
..........................................................................................................................................--.-
7
-.
....................10 8
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8
1. Introduction
While distribution channels are predictable and standardized in developed countries,
these channels vary significantly in developing nations. Defining a distribution scheme to
serve a Latin American country is more of an art than science. The process of designing
and selecting distribution channels is quite challenging and it demands an in-depth
understanding of the market. The fact that most Latin American countries are
experiencing significant growth and development makes it extremely difficult for
companies to implement distribution strategies that are used to serve mature markets.
This is the main reason why Go-to-Market strategies are starting to become critical for
companies competing in emerging markets. Leading firms are now exploring creative
ways to effectively reach and efficiently serve each segment of the market. The fact that
the traditional market (i.e. Mom & Pop stores) is profitable and that it stills represents a
significant share of the sales to consumers has shaped the way in which enterprises are
doing business in Latin America. Both domestic and multinational companies compete
not only in product offerings, marketing, service, and price but also in market coverage
and distribution.
Companies competing in Latin American have to deal with the unique characteristics
of each market. They must identify the critical factors that drive the channel
design/selection process. For instance, access to rural communities, security restrictions,
transportation infrastructure, merchandising, service and financial requirements from
customers are some of the variables that influence the sales and distribution schemes used
by companies. Ultimately, companies have to decide whether or not they should offer
products in rural communities, and whether or not to use direct sales or wholesalers to
serve customers. Moreover, companies have to deeply understand how their customers
buy their products and how these customers sell their products to end consumers in order
to determine the best way of serving their markets.
This research intends to explore the key drivers that shape the design and selection of
sales and distribution channels, as well as to build a framework that could help
companies design or select channels that are aligned to their corporate strategy.
9
2. Review of Literature
This section provides a reference point for understanding how literature related to
distribution and marketing channels has evolved over the last century.
2.1 Channels of Distribution: A Landscape
Over the last century, there has been an enormous effort to understand how companies
design, organize, and operate their channels of distribution. The relevance of this topic to
the fields of marketing, logistics, finance, and economics has brought together many
researchers from diverse disciplines. As a result, multiple perspectives and frameworks
have been developed as a mean to explain the dynamics of distribution channels.
Although the concept of "channel" was not formalized until the last century, the first
attempts to establish routes to market through middlemen date back to ancient times. For
example, Hasebroek (1965) illustrated the role that middleman played in ancient Greece.
Hasebroek (1965) provided evidence of three types of middleman: the kapelos or local
leader, the naukleros or also known as merchant-ship-owner, and the emporos or
individuals who buy products from manufacturers or local dealers and sell them to
foreign dealers or communities. Certainly, distribution techniques have been around for
thousands of years. Another precedent of the concept of distribution was noted by
Friedman (1984), who described how merchants of perfumes and spices in ancient
Babylonia peddled from town to town to distribute their products.
At the beginning of the 2 0th century, researchers started to formally explore the flows of
products and services between manufacturers and consumers. Weld (1917) suggested that
the functions performed by middlemen could be seen as marketing functions. Also, Weld
(1917)
emphasized that the notion of marketing functions is fundamental for
understanding the mercantile structure, and that splitting up of the marketing process
among successive middlemen is a case of specialization in marketing functions.
Moreover, Weld (1917) described how the organization of any trade is characterized by
10
the extent to which the functions are divided among several middlemen or are merged
into few middlemen or even into the producer himself.
Breyer (1921) provided a brief description of marketing flows, enterprise channels, and
business unit channels. This fact is relevant because the understanding of marketing
flows has allowed organizations to think about more efficient ways to reach the endconsumer. It was not until the 1950's when marketing functions were explored in more
depth. McGarry (1951) made a great effort to characterize marketing functions into
several categories: the contactual, merchandise, pricing, propaganda, physical
distribution, and termination functions. McGarry's (1951) paper emphasized on the role
of the contactual function and its influence on the nature of the business relationship
between manufacturers, intermediaries, and consumers.
Alderson (1957, 1965) provided a very insightful perspective. By using a systems
theory approach, he distinguished between function and structure of a marketing system.
He described function as the behavior or activities to be performed by the marketing
system and structure as the types of organization that support these activities. He
introduced the concept of a transvection, which refers to the unit of action by which a
single product is placed in the hands of the consumer after moving through all the
intermediate sorts and transformations. In terms of channels of distribution, Alderson
(1957) explained that marketing intermediaries come into existence because they can
affect economies in sorting, and that both manufacturers and retailers intent to be the
control group, which develops the marketing plan for the channel and turns it into an
organized behavior system. Similarly, McCammons and Little (1965) used a system
theory framework to describe behavioral dimensions of channels and to show how
relationships among organizations require channel management and coordination.
Cox, Goodman, and Fischandler (1965) took a step further and described the concept of
marketing flows in more depth. They explained how marketing activities are embedded
in major flows such as product, information, and risk. Moreover, the authors discussed
problems that often emerge when trying to measure distribution.
11
McVey (1960) made a major contribution to the field by describing how channel
structure could be independent of a single organization. In addition, McVey (1960)
explained how channel choice is affected by internal and external factors of a firm, and
briefly described the potential roles that middleman play in distribution. Little (1970) and
Mallen (1973) highlighted how channel functionalists tried to align marketing functions
to the channel structure, and described four dimensions related to the distribution
structure. The dimensions were the following: the number of channel levels, the number
of channels, the type of middlemen, and the number of middlemen. Mallen (1973)
defined a marketing channel as the sequence of firms performing the movement of
ownership, the negotiation of title, and the physical movement of product.
Louis W Stern made major contributions to the field. In his book, Stern (1969) applied
a social systems perspective to channel structure and described conceptual models of
relationships between firms. Stern (1969) focused on the dimensions of power and
conflict. Stern (1980) presented a framework for measuring the magnitude of major
variables influencing and ordering channel structure and behavior. Stern (1980)
highlighted the fact that internal and external political economies shape the structure of a
distribution channel. Frazier and Summers (1986) explored the role of power and conflict
in inter-firm relationships in a higher level of detail.
McGuire et al (1983) provided a numerical analysis of the trade off between the
benefits of not having to incur distribution and selling expenses directly with the costs of
losing complete control over how the products are marketed. McGuire et al (1983) led
some light for understating incentives of specific channel structures.
More recently, Wilkinson (1990) discussed the evolution of channel structure, and
described how systems operate in dynamic environments in which they constantly
experience disruptions such as changes in demand, costs, social, political, and economic
related factors. Even though Wilkinson (1990) did not explicitly mention it, infrastructure
12
could be interpreted as part of a cost disturbance. Also, Wilkinson (1990) introduced the
concept of self-organization of channel structure to marketing activities.
Coughlan et al (2006) defined marketing channels as a set of interdependent
organizations involved in the process of making a product available for use. Chopra et al
(2007) isolated the distribution process, and defined it as the necessary steps required to
move and store products from a supplier stage to a customer stage. Chopra et al (2007)
highlighted that it is critical to understand the role of distribution to achieve supply chain
profitability. Recently, Kotzab (2009) described distribution as the total sum of all
activities and related institutions, which are necessary to guarantee a successful
connection between production and consumption.
2.2 The Rise of Go-to-Market Strategies
Although there has been an intensive effort to explore the concept of a
market/distribution channel, its structure, and its function within the context of an
enterprise, there is still a clear gap between theoretical and practical concepts. Certainly,
top management consulting companies such as Boston Consulting Group, Mckinsey, and
Bain have documented and published several case studies and technical notes related to
distribution and go-to-market strategies. However, due to the nature of the subject, there
has not been a clear effort to develop a framework that links contemporary theory and
practice. A plausible reason for this is that, when implementing a distribution strategy,
companies must adapt and tailor their strategies to address specifics needs of the market.
This section provides a high level summary of insightful research that has been
conducted to understand the concept of a go-to-market strategy.
As companies experience stronger competition, they start looking for ways to protect
and/or increase their market share and profits. It is not a surprise that most firms focus on
eliminating operational inefficiencies (i.e. level of inventory, manufacturing costs,
procurement costs) and fail to recognize opportunities in their marketing process. More
specifically, companies overlook the importance of understanding the market needs,
13
sources of power, channels structure, and commercialization processes. The benefits of
having the distribution channels aligned to the needs of the market can make a dramatic
difference in the performance of a company. As Rangan (2006) mentioned on his book,
in many cases distribution channels seem like "a repository of lost opportunities" that
serve neither end users nor channel partners very well. The main reason for this is that
channels are constructed from the supplier out, rather than from the customer-in. Often,
when choosing distribution channels, firms forget to align their competitive strategy and
value
propositions to the different market
channels.
Unquestionably,
channel
configurations must rely on a deep understanding of customer's needs, overall
competitive strategy and performance objectives (Alderson et al, 1997).
Frazier and Shervani (1992) defined a route to market as the distinct process through
which a product or service can be selected, purchased, ordered, and received by a
customer. The concept of a Go-to-Market Strategy emerged as a response to leading
companies trying to understand which are the most efficient and effective channels for
delivering their value proposition.
2.3 Channel Design and Channel Selection
The frameworks for channel design or channel selection that have been developed in
the last 30 years are no standardized. Most of these frameworks include multiple
variables that have been tailored to the specific needs of a particular industry, company,
and geography. This section intends to provide a summary of the most relevant
frameworks that have been developed so far to address the issue of channel design and
channel selection.
2.3.1 Relevant Frameworks
Rangan et al (1992) provided a high-level summary of past research related to channel
design and summarized the influencing factors of channel choice (Figure 1).
FIGURE
1.
FACTORS THAT DETERMINE CHANNEL CHOICE
14
Factors Determining Channel Choice
Spleserce If:
Aski
1. Replacement rate
2. Gross margin
3. Adjustment
4. Time of consumption
& Searching time
Miracle (19)
& Unit value
7. Significance of purchase
8. Purchasing effort
98 Rate of technological change
10. Technical complexity
11. Need for service
12. Frequency of purchase
13. Rapidity of consumption
14. Extent of usage
Sueline 111901
1$. Market decentralization
18. Lot size
17. Assortment
18. Waiting time
Li1en (158)
15. Order size
1M Product complexity
17. Product lif-cycle stage
10 Frequency of usage
Transesion Cost Theory: Constructs Used in Marketing Channel StudIes
(Anderson end Schmittleln 104; John and Welt, 1M, Klein, Frecler, and
Rath 1IS01
19. Product customization requirements
20. Need for special equipment or services
21. Complexity of customer buying and decision-making process
22. Complexity of product Information to be exchanged
23, Transaction size
24. Rate of technological change
25. Volatility of demand
Distiator 0:
LowHigh
LHog
9
High
High
High
Low
High
High
High
High
High
High
Low
Low
Low
Low
Low
Low
Low
Low
Low
High
High
High
Low
Large
Narrow
High
High
Small
Wide
Low
Large
High
Introduction
Low
Small
Low
Maturity
High
High
High
High
High
Large
High
High
Low
Low
Low
Low
Small
Low
Low
Low
Low
Low
In addition, Rangan et at (1992) rationalized the previous list of factors (figure 1) into
eight channel functions. The implications for channel choice are summarized in figure 2.
FIGURE
2. CHANNEL CHOICE FUNCTIONS
15
Channel Choice Functions
Custome's Requirement of
Productarkett Facto
Mlentifled in the
Literature
Reference
Searching time, technical
complexity, rate of
technological change
Adjustment,
customization,
customer importance
Aspinwall (1962), Miracle
(1965), Lilien (1979
Williamson (1985)
Aspinwall (1962),
Williamson (1985),
Corey, Cespedes,
Rangan (1989)
Miracle (1965) Corey,
Cespedes. Rangan
(1989)
Miracle (19651, Rucklin
(1966), Lilien (1979),
Williamson (1985)
Bucklin (1966), Corey,
Cespedes, Rangan
Channel Functions
1. Product information
2. Product customization
3. Product quality
assurance
4. Lot size
5. Assortment
6. Availability
7. After-sales service
8.
Logistics
Product criticality,
significance of
purchase
Purchasing effort, unit
value, extent of usage,
order size
Assortment, one-stop
shopping
Frequency of usage, time
of consumption,
replacement rate
Waiting time, need for
service
Need for special
equipment,
transportation
(1909)
Aspinwall (1962). Miracle
(1965), Bucklin (1966),
Williamson (1966)
Miracle (1965, Bucklin
(1966)
Bowersox O199),
Williamson (19065)
Indirect V
ireat I:
High
Low
High
LOw
important
Unimportant
Large
Small
Nonessential
Essential
Not critical
Critical
Not critical
Critical
Complex
Simple
convenience
Rangan et al (1992) suggested a method for selecting channels of distribution. This
method consists of three steps: the first step involves constructing operational indicators
based on the factors shown in figure 2, and evaluating customer requirements for each of
these eight channel functions. The second step involves combining the experts'
evaluations as a mean to select a channel decision, and identifying generic channel
options. The third step consists of identifying specific channel path options and selecting
the profit-maximizing channel option.
Anderson et al (1997) described the channel design process as being similar to the steps
followed in developing a competitive strategy. Anderson et al (1997) emphasized that a
channel should support the overall strategy of a company and that it must meet the
following
requirements:
effectiveness,
coverage,
cost-efficiency,
and long
run
adaptability. Anderson et al (1997) also presented a very insightful framework for
channel design. The framework suggests two phases. The first phase involves assessing
the company's situation by identifying threats, opportunities, strengths and weaknesses
that will affect channel performance and viability. As part of this phase, customer's
requirements from channels must be analyzed. The next phase involves identifying and
16
selecting channel alternatives. This phase consists of four major steps. The first one is to
align channels with the overall competitive strategy by: designing channels that satisfy
channel activities required by customers, creating barriers to competitive response, and
enhancing the deliver of superior customer value. The second step involves decomposing
and recomposing channels into integrated collections of functions. The third step consists
of investing in learning by creating a portfolio of options for dealing with uncertainty.
The final step involves translating strategic choices into programs, projects, and shortterm controls for monitoring channel performance.
Also, Anderson et al (1997) emphasized that multiple marketing channels are most
prevalent in fast changing market environments and that, when a product market matures
slowly, the channel has time to adapt to changes in customer-buying patters.
Magrath and Hardy (1987) provided three major criteria for evaluating marketing
channels: efficiency, effectiveness and adaptability. Efficiency is measured by channel
capacity and cost, effectiveness is measured by market coverage, control and
competence, and finally adaptability is measured by flexibility and vitality. In addition,
Magrath and Hardy (1987) discuss some trade-offs involved in the channel selection
process. For example, effective channels may offer market share and image control at the
expense of profits.
Webb and Hogan (2002) pointed out that, over the last decade, marketers have adopted
more complex channel strategies as a response to shifts in consumer shopping behaviors,
globalization, and Internet, and that with the use of multiple distribution strategies,
enterprises could be able to adapt to changing customer needs and shopping patterns. In
addition, Webb and Hogan (2002) highlighted the importance of recognizing that
multiple channels can originate conflicting demands in internal company resources such
as capital, personnel, products and technology. Certainly, these elements need to be
considered when designing a channel structure.
17
The book written by Rushton, Oxley and Croucher (2000) illustrates a channel selection
process involving the following tasks: 1) understand channel objectives, 2) identify
market, product and channel characteristics, and 3) understand competitive characteristics
and company resources. Rushton, Oxley and Croucher (2000) provided a list of common
channel objectives (shown in figure 3) and a formal structure for channel design (shown
in figure 4).
FIGURE
3. CHANNEL
OBJECTIVES
Common Channel Objectives:
To
To
To
To
To
To
make the product readily available to the market consumers at which it is aimed
enhance the prospect of sales being made.
achieve co-operation with regardto any relevant distributionfactors.
achieve a given level ofservice
minimize logistics and total costs.
receivefast and accuratefeedback of information.
FIGURE
4. DESIGNING A CHANNEL STRUCTURE
Set and coordinate distribution objectives
Specify the distribution tasks
Develop alternative channel structures
Evaluate the relevant variables
Choose the best channel structure
Select channel members]
Myers et al (2004) stated that a single channel used to be all that was required by
companies to deliver products to customers, but now, companies are using many routes
(channels) to meet customer demand. Also, Myers et al (2204) suggested that the rewards
of using a variety of "right" channels to serve customers could be substantial. For
instance, the cost to serve customers can be reduced by as much as 10 to 15 percent,
18
revenues per customer could be increased by as much as 15 to 20 percent through higher
retention rates and an better mix of products, and underserved segments can be
penetrated.
Vinhas and Anderson (2005) argued that channel types collide when they sell
standardized products. This is derived from the lack of opportunities for competing
channels to differentiate in ways other than price and service.
Palombo (2009) elaborated on the process of choosing the correct channel, by
emphasizing that the selection of a correct channel is a key component of international
selling and that many organizations change from one channel to another until they
become satisfied with its performance. Also, Palombo (2009) provided references on
literature that focused on channel control, channel coverage, and channel costs. In
addition, the Palombo (2009) described how cultural environment could affect a
marketing channel structure and strategy, as well as the relationships among international
channel members.
Further studies have concluded that distribution systems in developed countries are
much more manageable than in developing countries. Marketing channels tend to be long
in developing countries as serious financial and organizational constraints hamper the
organization and distribution among members in the marketing channel. Additionally,
legal systems and crime prevention are deficient, and corruption is often a serious
problem (Ghauri, Lutz, and Tesfom 2004). These obstacles make it difficult for a
company to establish a relationship-management
approach to marketing channel
management.
Manigoba da Silva (2008) summarized 27 factors affecting the length of the distribution
channel into a channel choice framework. The 27 factors were collected from previous
research on channel selection, channel structure, and channel design. Figure 5 provides a
summary of these factors.
19
FIGURE
5. FACTORS AFFECTING DISTRIBUTION CHANNELS - MANIQ0BA DA SILVA
(2008)
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Neslin et al (2006) introduced the concept of multichannel customer management,
which refers to the design, deployment, coordination, and evaluation of the channel
through which customers and suppliers interact. Neslin et al (2006) suggested a
framework for understanding key challenges experienced by managers when designing a
multichannel strategy. The framework encompasses five key challenges: 1) data
20
integration, 2) understanding consumer behavior, 3) channel evaluation, 4) allocation of
resources across channels, and 5) coordination of channel strategies. In addition, this
framework provides a set of questions for guiding managers through the channel design
process. These questions include: what determines channel choice? Is a multichannel
approach a means to segment customers? Should the channels be independent or
integrated? What aspects of the channel design should be integrated? (see figure 6).
FIGURE 6. CHALLENGES IN CHANNEL DESIGN - NESLIN ET AL (2006)
Challenge
Data Integration
Understand
Consumer
Behavior
Channel
Evaluation
Topic
Research
Comments
Does integration pay off?
What is an acceptable amount of integration?
What data should be integrated?
What activities benefit from integration?
*
*
**
Some indication that CRM IT pays off,but no study of CDI.
No formal research; see equations 1-4 for framework.
No formal research.
Some evidence that cross-selling benefits.
Impact on brand loyalty?
Does multichannel grow sales?
What determines channel choice?
Are there channel segments?
Do consumers decide by channel or firm?
*
*
What is the contribution of an additional channel?
What is the contribution of each channel?
What channels synergize best with others?
*
Which channels should the firm employ?
Allocating
resources across IHow allocate marketing across channels?
channels
What determines equilibrium channel structure?
Channel
Strategies
Should
ICoordating
channels hendependent or integrated?
Which aspects should be i
Should prices be consistent across channels
How develop channel syner?
Use channels to segment or for different functions?
How do we manage research shpig
*
*
*
*
*
*
*
*
**1a
Mixed results regarding impact of multichannel.
Clear generalization the multichannel customer buys more.
Much research on attributes, situational variables, etc.
Segmentation definitely exists, but no universal scheme.
No formal research.
Appears Internet usually does not cannibalize other channels.
Initial work suggests contribution varies bychannel and firm
Some findings that Internet and store can synergize.
No formal research.
Some methodological studies; no substantive generalizations.
No formalresearch-is itaafrsoner's dilemma?
Some work suggests integration is better, but not definitive.
Some related work but no clear conclusions.
Some work across retailer types. More research needed.
Promotions and information=>purchase links may work.
No formal research.
hng hne attribueahveoc-nusprmtn.
Coughlan et al (2006) discussed how the channel structure of an enterprise has two
main dimensions: 1) the number of different routes to market (channels) used, and 2) the
number of members in each route.
Jindal et al (2006) discussed the evolving role of customers in the firm's distribution
strategy as a major force for the adoption of a broader variety of routes to market, and
highlighted how different routes to market provide different levels of service outputs, and
that instead of designing a distribution structure to address the interests of channel
members, companies seem to be focusing on customer demands. Moreover, Jindal et al
21
(2006) suggested that it is important to understand why firms offer a variety of channel
formats to their customers, how and which firms excel by doing so, how broad the variety
they should offer, and how they should manage their distribution structure. Particularly,
firms must answer these questions in order to maximize its distribution efficiency and
effectiveness. Jindal et al (2006) presented and tested a set of interesting hypothesis and
found that: 1) the more a firm follows a differentiation marketing strategy, the more
variety of routes to market the firm uses, 2) the more a form follows a low-cost marketing
strategy, the broader the variety of routes to market the firm uses, 3) the more systematic
the customer feedback collection by a firm, the broader the variety of routes to market the
firm uses, 4) the greater the expertise of a firm's customer base, the narrower the variety
of routes to market the firm uses, and 5) the greater the price sensitivity of a firm's
customer base, on average, the narrower the variety of routes to market the firm uses.
These findings support the premise that a firm that implements a low-cost strategy tends
to use an extensive variety of channels to make its products and services available and
therefore achieve economies of scale. By the same token, firms that focus on a
differentiation strategy tend to use an extensive variety of channels. Moreover, the
findings show that there is no single best distribution structure, and that an enterprise
should designs its optimal distribution structure by aligning its overall strategy and the
characteristics of the environment in which it operates.
Vinhas et al (2010) reviewed current literature on channel design and identified some
opportunities in the channel design and management domain; specifically, highlighted
that channels of distribution should be seen as value constellations or value networks, and
that customers are important actors in this network, both as value creators and as value
appropriators. In addition, Vinhas et al (2010) emphasized on the need to account for
relationships and outcomes at different levels evolving from traditional distribution
systems to value creation within multichannel marketing. Vinhas et al (2010) elaborated
on how the design and management of multiple distribution channels impact value
creation at different levels in the channel system, and described several factors that must
be considered when designing a channel. These factors include: channel ownership
(direct, indirect, and multiple independent channel entities), channel types, multiple
22
channels, and customer management (acquisition, retention, pre- and post-sales services).
Vinhas et al (2010) used the following diagram (figure 7) to illustrate the channel value
network:
FIGURE
7.
CHANNEL VALUE NETWORK - VINHAS ET AL
(2010)
In addition, Vinhas et al (2010) suggested that today's distribution channel systems are
increasingly complex, and that manufacturers often deliver their products through
multichannel systems composed by diverse channel types. Vinhas et al (2010) identified
several research opportunities that have not been explored in the past. Some of these
research opportunities include: understanding how multichannel systems create value for
the participants as well as how multichannel systems should be design.
As stated by Coelho and Easingwood (2008), despite the popularity of multiple channel
strategies, their design has been virtually unexplored. Gassenheimer et al (2006)
mentioned that many papers investigate the issue of multiple channels from the
perspective of managing these channels rather than designing the structure of the
channels. Coelho and Easingwood (2008) presented a model of the antecedents of
multiple channel usage and some interesting hypothesis related to multichannel usage.
23
The proposed model suggests that channel service outputs (product sophistication, market
target sophistication, and channel conflict), market resources and maturity, and resourcebased issues (competitive strength, scope economies, and company size) are main drivers
for influencing the development of multiple channel structures. The hypothesis presented
are summarized as follows:
H1. The relationship between product sophistication and multi-channel usage is
described by an inverted U function: at low levels of sophistication, products are sold
through fewer channels, to avoid strong inter-channel conflict. As product sophistication
increases, so does the room for competitors to differentiate on other dimensions, thus
enabling the utilization of additional channels. At very high levels of sophistication,
however, ensuring the delivery of the service outputs required by consumers should
become paramount, thereby inducing a reduction of multi- channel usage.
H2. Market target sophistication will be positively associated with multiple channel
usage: increased sophistication implies that customers are more sensitive to differences
in offers, being attracted to solutions that best fit their particular needs.
H3. The relationship between channel conflict and multi-channel usage is described
by an inverted U function: at high levels of channel conflict, a negative relationship will
prevail because firms will want to avoid its likely destructive effects. At low levels of
conflict, a positive relationship will emerge, to take advantage of the benefits associated
with moderate channel conflict. The likely consequences of conflict include lower
channel motivation, an increased lack of co-operation among channel members,
deterioration of service levels, more intermediary bias towards competitors' products, and
degradation of communication flows.
H4. Market maturity will be positively associated with multiple channel usage:
companies are more likely to develop multiple channels in mature markets, and the
reasons are as follows: a larger number of channels often require firms to make
substantial additional investments. The utilization of multiple channels is likely to
increase a firm's investment and operational costs in absolute terms. In this context, a
market must be large enough, (i.e. it must comprise the demand, for example, in order to
provide organizations with sufficient resources to recover the larger costs and
investments that are frequently implied by multiple channels). Mature markets make the
utilization of multiple channels feasible, whereas the demand available in new markets
makes it more difficult to justify a multi-channel strategy. In addition, multiple channels
maximize market presence, which in more mature markets is the major determinant of
sales. In summary, a positive relationship is predicted between market maturity and
number of utilized channels.
H5. A firm's competitive strength will be positively associated with multiple channel
usage: multiple channel strategies are becoming increasingly popular distribution
arrangements, as a result of several developments, which include the appearance of more
sophisticated customers demanding more tailor-made offers and more specific channels,
and also of technological developments, which have increased the range of channels
available for companies to use. In this context, it can be expected that the more
competitive companies will be the first to develop multiple channels.
24
H6. Scope economies will be positively associated with multiple channel usage: the
larger a firm's scope economies, the higher its ability and willingness to invest in more
channels. Companies with small scope economies are better off by creating simpler and
more economical structures, comprising fewer different types of channels. In summary,
significant scope economies can constitute an important entry barrier and justify a firm
incurring the high costs of more complex distribution structures.
H7. Company size will be positively associated with multiple channel usage:
company size can be considered as a complementary measure for a firm's resources,
thereby implying that a large firm will be in a better position to develop multiple channel
strategies. Moreover, large companies also tend to have wider market experience, which
enables them to manage more complex distribution structures.
Unfortunately, current academic research has not been able to formulate a clear
distinction on how firms should differentiate the structure of their channels of distribution
in developing and developed countries. There is clear evidence suggesting that the level
of infrastructure development, culture, type of geography, type of product, customer's
income and education levels, market fragmentation, and regulations play a critical role in
shaping the structure of distribution channels.
2.3.1.1 "Designing Channels of Distribution" - Technical Note
In his technical note "Designing Channels of Distribution", Spekman (2009) describes
in great detail the concept of distribution and the types of distribution channels that are
currently used in practice. Speakman (2009) described the term "distribution" as the
process of getting goods from the producer to the ultimate consumer, and emphasized
that distribution occurs through channels, and that effective sales require that producers
determine and then manage a channel or array of channels with the aim of assembling
products, personnel, advertising message, and downstream selling partners that,
combined, maximize competitive advantage.
A summary of some of the most relevant information provided by Speakman (2009) is
provided below:
25
-
Channel of distribution is a set of interdependent firms that collaborate to make a
product or service available for end-use consumption.
-
Producers may change channels in response to changes in market conditions,
technology, or other factors, but ill-advised or poorly implemented changes in
channels invariably result in loss of reseller support, disappointing sales, and lower
profits.
-
For many firms, how to go to market-how to design a distribution system-is a key
strategic marketing decision, with each approach providing a unique set of benefits
and costs.
-
Channel members must recognize that they cannot act alone and must work together
to meet the needs of the end-user customer; if any member thinks of another as
dependent, an opportunistic and detrimental self-interest is likely to emerge, and
power and conflict could rule the relationship.
e
A marketing channel represents a process in which certain activities are performed
and certain flows-movements of goods, materials, money, and information-must
occur as products or services that proceed from provider to end user. Such activities
as managing inventory, providing assortment, breaking bulk, financing, assuming
risk, and others enable the timely, efficient, and effective movement of products and
services.
e
The objective of channel management is to identify the combination of channel
members that best supports the business strategy, balancing responsiveness to
customers with total incurred channel cost while retaining enough control to ensure
adequate network cooperation.
e
There are 5 main types of intermediaries:
Types of Channels
Distributors
Description
Business that sell to other businesses. They create value
through the movement of goods by providing activities such
26
as providing assortment, breaking bulk, financing and
managing inventory. These channel members usually take
ownership of the goods.
Master Distributors
These
channel
intermediaries
often sit
between
the
manufacturer and other middlemen and hold inventory of
hard-to-get parts. They often have sub-distributors who work
with them doing more traditional distribution and logistics
functions.
Value-added resellers
(VARS)
Designers, engineers, or consultants who partner with
manufacturers of products that are used in their designs.
They typically buy at a discount and then resell the product
as part of their solution.
Manufacturer Reps
i Independent
sales agents who carry different manufacturer's
lines of product and serve as a third-party sales force for
these firms. They carry multiple lines (often noncompeting)
and specialize in different end-user applications. They are
usually paid a commission on the sale.
Brokers
These are a form of manufacturer's rep and associated with
the retail trade serving less complex products. They will
work at the store level merchandising the shelves on behalf
of the manufacturer they represent.
To describe the extent to which a market is covered, usually three strategies are used:
intensive, exclusive, and selective distribution.
Level of Distribution
Intensive
Description
A strategy whereby the product--often, frequently purchased
goods of relatively low price-is widely available to a very
large set of customers. The goal is to make the product so
ubiquitous in the market that finding and purchasing it
requires little effort. The downside to such widespread
distribution is that, for the manufacturer, maintaining control
27
over how the product is sold is very difficult.
Exclusive
Reduces greatly the availability of the product and is
associated with one outlet per region or location. Often
certain rights are granted in exchange for exclusivity,
whereby the manufacturer influences a set of business
decisions made by its channel partners. Related to exclusive
distribution is exclusive dealing, where the seller demands
that the reseller sell only his products or noncompeting
products, enforceable by sanctions if intermediaries do not
comply.
Selective
Is a more limited form of distribution where the product is
less widely distributed than if an intensive strategy was
employed but is more available than under an exclusive
arrangement. The objective is to gain a level of coverage and
retain some semblance of control (influence) over how a
product is sold, how an image is portrayed, and other factors
that might affect the product's sales and reputation.
Channel design consists of a series of steps and can be compared to fundamental
principles in marketing-segmentation, positioning, and targeting, then establishing
(or refining) the channel.
Channel Design Steps
Segmentation
Description
The objective of the segmentation step is to understand the
needs of the different segments and how a channel can be
configured to align with these requirements.
Positioning
In the positioning step, the channel that optimally serves each
of the key segments is identified.
Targeting
Targeting involves deciding which segments will be served
and which will not be, and is influenced by a number of
internal and external factors ranging from "managerial
bandwidth" to resource allocations and competitive realities.
28
Implementation
The implementation is where the manager must address
issues of power, conflict, and channel coordination.
Three factors can force management to change its channel design. The first is a
proliferation of customer needs. The second factor is a shift in power from one level
in the channel to another. Often, disintermediation-where one channel member takes
on another's activities or renders them obsolete or unnecessary-raises concern, as
will the threat of backwards integration. And the third factor is a change in strategic
priorities.
2.3.2 Channel Structures: Direct vs. Indirect
Rosenbloom (2004) highlighted how marketing channels are key for the success of the
manufacturer. Moreover, channels represent a strategic advantage for the manufacturer.
Kotzab (2009) provided an insightful comparison of the types of channels considered by
Rosenbloom (2004) and Coughlan (2006):
Channel Format
Manufacturer-based
channelformats
Description
Manufacturer direct, manufacturerowned full service wholesaler-
Example
distribution, company stores,
license, broker or locker stock
Retailer-based
channelformats
Franchise, dealer direct, warehouse
clubs, mail order, food retailers
'd
department stores, mass
merchandisers, specialty stores,
Blockbuster Video,
McDonalds, Sam's Club,
Land's End, Safeway, J.C.
Penney, The Gap,
Carrefour, 7-Eleven
convenience stores, hypermarkets
Service providerbased channel
formats
Contract warehousing, sub.
processor, cross dockmg,
intermodal, roller freight, stack
trains and road rail- ers, direct
mailer, value-added resellers
29
Caterpillar Logistics
Services
Door-to-door
channelformats
Route, home party, multi-level-
Buyer-initiated
channelformats
Co-op, dealer-owned co-op, buying
groups
Point-of-
Kiosks, vending machines,
cnduisn
channelformats
Catalog and
technology aided
channelformats
Tupperware, Electrolux
marketing
Topco, AMC
computer access information
Specialty catalogs, business-tobusiness catalogs, TV-/Home-
QVC
shopping, trade shows
Wholesale-based
channelformats
Merchant wholesalers, agents,
brokers and commission merchants
Chopra and Meindl (2007) came up with six generic distribution network structures (a) retail storage with customer pickup, (b) manufacturer storage with direct shipping, (c)
manufacturer storage with in-transit merge, (d) distributor storage with package carrier
delivery, (e) distributor storage with last mile delivery and (f ) manufacturer storage with
pickup.
As it can be noticed, there are many ways in which a company can serve its customers.
In literature, each of these paths is called a "channel". At a macro-level, the most
common channels used by companies can be classified into 2 categories:
-
Direct
" Direct to Store Delivery (DSD)
*
-
Direct to Warehouse (DW) / Distribution Center (DDC)
Indirect
*
Through Intermediaries: Wholesalers /Distributors/ 3PLs / Value-Added Resellers
e
Through Collaborative Partners
30
Otto et al (2009) defined Direct Store Delivery as a business process that manufacturers
use to sell and distribute goods directly to point of sales, including additional product and
market related services such as merchandizing, information gathering, or equipment
service and bypassing any retailer or wholesaler logistics. A company that uses a DSD
model does not send goods through any intermediary. Some of the specific reasons for
using direct model are summarized in the following diagram (figure 8):
FIGURE
8. DIRECT TO STORE DELIVERY (DSD) BENEFITS
According to GMD 2005 DSD report, from the manufacturers' point of view, DSD
means that their logistical responsibilities are significantly expanded. DSD increases their
systems' complexity. It is a massive expense factor: There are large fleets of trucks to be
operated, the delivery points are increased significantly (often at difficult to reach
locations), and the size of shipments being "dropped off' at each location are small and
harder to manage. Certainly, from logistical perspective, DSD might face challenges such
as:
31
"
Vehicle sizes, road access, andparkingare restrictedat many typical outlet delivery
addresses
" Time slots for delivery are narrow in order to avoid deliveries disturbing ven- ding
processes
" Owners/staffare not always present at their premises
" There is no dedicated stafffor receiving goods
" There is no truck-docking and unloadingequipment.
* A larger number of outlet stops requiredfor the delivery of a given volume of goods
" Enhanced, more complex planning demands due to multiple restrictions for
deliveries at outlets
- Reduced efficiency of delivery truck operations due to smaller truck sizes, relatively longer times spent at the outlet stops
"Additional time needed for the performance of value-added services at the consignees' locations
" Idle times accumulatingfor drivers when they need the consignees' signatures or
otherproof of delivery while staff isjust serving customers.
Mathews (1995) showed that direct store delivery models could be categorized into two
main schemes: (1) route sell (also known as spot or van sell) and (2) pre-sell. The
differences between both schemes can be viewed in the order generation and order
fulfillment processes. Otto et al (2009) defined the route sell approach as being
characterized by an individual, who performs both selling and delivery functions, and
commented that this approach has been challenged by several impacting factors (such as
an increase in distribution costs or the product proliferation in terms of brand/package
combinations). On the other hand, in the pre-sell, the selling is either done via a
salesman, also know as the pre-seller, making personal sales on the point of sales or by a
sales person making the sales call over the phone. According to the GMA, the pre-sell
model is defined as " form of DSD in which order placements occur prior to product
delivery.
32
Depending on the industry, some companies are required to perform a variation of
DSD. For instance, in the retail industry, leading manufactures have been delivering
products directly to the retailer's warehouses/distribution centers. This is a common
practice in the industry. It helps retailers to reduce demand variability and exploit benefits
of centralization.
As noted in the previous section, Speakman (2009) defined distributors as a business
that sells to other businesses, creating value through the movement of goods by providing
activities such as providing assortment, breaking bulk, financing and managing
inventory.
Hertz et all (2003) defined a 3PL (Third Party Logistics Providers) as an external
provider who manages, controls, and delivers logistics activities on behalf of a shipper.
The activities performed by a 3PL can include all or a part of the logistics activities such
as: transportation, warehousing, freight consolidation and distribution, product marking,
labeling, and packaging, inventory management, traffic management and fleet operations,
freight payments and auditing, cross docking, product returns, order management,
packaging, carrier selection, rate negotiation, and logistics information systems.
2.3.3 Traditional vs. Modern Channel
The traditional channel can be described as an informal channel through which
companies serve (sell and deliver products) mom and pop stores and other small store
formats such as pharmacies, liquor stores, fruit and vegetable centers, bars, restaurants,
etc. As it will be discussed in the following sections, the traditional channels is very
important in developing economies in Latin America, Asia, and Africa. In contrast, the
modern channel takes the form of global and local supermarket, hypermarket and club
stores, which are important in developed countries.
Treewater et al (2009) highlighted some of the relevant characteristics of the traditional
and modern distribution channel:
33
- Traditional
*
Low overhead costs due to the size of the store and the limited number ofpersonnel
*
Low customer base
*
Closerproximity to their customers compared to the modern channel
*
Located where modern retailershave not access (i.e. ruralareas and small cities)
For low-income households, this channel is typically the only real option for daily
purchases
Offer limited number of SKUs and thus it takes less time for customer to locate and
purchase items once inside the store
* Align to impulse purchasegoods
*
Family owned
* Price sensitive customers prefer this channel
* Massive underreportingof cash sales in an effort to lower tax payments
Modern
-
*
Offer consumers an alternative shopping experience marked by unprecedented brand
selection, bulk pricingand a well-lit, climate-controlledshopping experience
*
Consumers can save time by purchasinga wide range of goods under the same roof
* Have solid share in the A and B+ income segments, and are trying to penetrate Band C consumers
For every supermarket/ hypermarket that is opened, 50 small stores are closed
Formal ordering,accounting,and administrativesystems
* Higher overheadcosts than traditionalstores
In addition, modem stores have significant larger store size than the traditional. For
instance, the size of a supermarket store can vary from 400 m2 (squared meters) to
15,000 m2. A typical traditional mom and pop store can vary from 20 m2 to 200 m2.
34
A more detailed analysis of the store formats that composed these channels will be
discussed in the next section.
2.4 Distribution Strategies in Developing Countries
While distribution channels are quite predictable and stable in developed countries,
these channels vary significantly in developing nations. Although the modem channel is
growing at a very fast pace, the traditional channel captures most of the share of the
market.
In a recent publication, the consulting firm Deloitte mentioned that besides China;
Mexico, Brazil, Egypt, India, Indonesia, Russia, Turkey, and Vietnam are the most
attractive markets for the traditional channel.
2.4.1 Distribution Strategies in Latin America
Distribution in Latin America is more of an art rather than science. The process of
designing and selecting distribution channels is quite challenging and it demands an indepth understanding of the market. The fact that Latin American countries are in the
developing phase makes it very difficult for companies to implement the same
distribution strategies used to serve developed countries. This is the main reason why Goto-Market strategies are starting to become critical for companies competing in the Latin
America market. Leading firms are now exploring innovative ways to reach effectively
and serve efficiently each segment of the market. The fact that the traditional (informal)
market is very profitable and that it stills represents a big share of the sales to consumers
has shaped the way in which enterprises are doing business in Latin America. Both
national and multinational companies compete not only in product offerings, marketing,
service, and price but also in market coverage and distribution.
35
Latin American companies have to deal with unique characteristics of each market.
They must understand the geography of territories, access to rural communities, security
restrictions, transportation infrastructure, and financial requirements from customers.
Ultimately, companies have to decide whether or not they should offer products in rural
communities, and whether or not to use direct sales or wholesalers to serve customers.
Moreover, companies have to deeply understand how their customers buy their products
and how these customers sell their products to end consumers in order to determine the
best way of serving their market.
Major companies in Latin America are now defining a clear value proposition for their
target segments. Spohrer et al (2008) defined a value proposition as the promises and
contracts that entities agree to, because they believe following through will realize valuecocreation for both entities; a repeated value proposition that creates profits for a
company is known as a business model. In general, value propositions should define in
detail how to sell products to customers (i.e. order management, order frequency,
financial aids), how to provide service to customers (i.e. frequency of visits to POS,
merchandising activities at POS), and how to deliver products to customers (i.e.
inventory levels, consignment schemes, delivery frequency). Distribution channels must
be aligned to each value proposition and vice-versa.
Channel Structure: Traditional vs. Modern
The structure of distribution channels in Latin America varies significantly from the
one used by developed nations such as US and UK. The traditional channel in Latin
countries represents a big share of the market. For instance, according to AC Nielsen, in
2007 the market share of the traditional channel in Mexico, Argentina, Chile, and
Colombia was approximately 48%, 71%, 40%, and 53% respectively (see figure 9).
Nonetheless, the modem channel is becoming more important each day. According to
ILCAD (2008), the share of the traditional channel for Mexico, Argentina, Chile, and
Colombia was 44%, 67%, 38%, 53% (see figure 10). Recently, TSN Research (2010)
mentioned in one of its yearly reports that it is possible to find three levels of
development in the modem channel (self- service from supermarket shelves) as we delve
36
more deeply into each country. Chile, Brazil, and Venezuela are markets in which retail
accounts for over 48% of the total distribution. On the other hand, in Mexico, Argentina,
Ecuador and Colombia the traditional channel (served by a shop keeper) is predominant
and supermarkets and hypermarkets have a market share of around 35%. Finally, in
countries like Peru and Bolivia, modem trade represents only 13% of household
expenditure. Certainly, all these differences between countries make it almost impossible
for companies to standardize distribution strategies. Although, there has been a clear
trend that shows how modem retail has becoming more important for companies
competing in the Latin American territory, still the traditional markets is extremely
important and thus require special attention from every enterprise. Moreover, the
traditional channel not only is important but also is more profitable than the modem
channel.
FIGURE
9. AC NIELSEN, MARKET SHARE BY STORE FORMAT IN LATIN AMERICA 2007
47%
1I
FIGURE 10. ILCAD, MARKET SHARE BY STORE FORMAT IN LATIN AMERICA 2008
37
Io%
Im
I
4
a
a
Modern
Traditional
Natu (2009), mentioned that organized trade, or also known as large retailers, today
comprise around 50% of the Mexican market, while at the same time there are
approximately 800,000 mom and pop stores who continue to grow in number. Natu
(2009) pointed out that although there is consolidation via these retailers, the small store
segment is strong and is a mean to serve a large base of consumers while being a source
of good margins for manufacturers. So is the case for Venezuela, Colombia, Brazil,
Uruguay, Paraguay, Peru, and most countries in Central America.
Overall, in the last 5 to 10 years, the modem channel gained relevance in almost all
Latin American economies; however, the adoption of this channel has varied significantly
from country to country. For instance, the share of the modem channel in Mexico and
Brazil has remained stable at nearly 45% to 50% since 2007. In contrast, the share of
modem channel in Chile has now reached over 70%.
Direct vs. Indirect Models
Leading companies in Latin American countries have been using direct store delivery
(DSD) service models. Coca-Cola Femsa, Heineken (formerly - Cerveceria Cuauhtemoc
38
Moctezuma), Grupo Bimbo, Coca-Cola Femsa, and Alpina are just some example of
companies that are using a wide variety of DSD-based distribution schemes. Often, DSD
is used in industries where manufacturers have high margins. One of the underlying
reasons why DSD is relevant is because it enables higher levels of execution in terms of
merchandising and control. On the downside, usually DSD results in higher
transportation and service costs for the manufacturer.
Natu (2009) pointed out that multinational manufacturers (MNCs) typically rely on
indirect service models. A major reason for this is that MNCs prefer safety to developing
the business opportunity. DSD requires knowing the market and its culture, and many
MNCs avoid taking this risk. In contrast, regional and local manufacturers tend to depend
on indirect service models, due to capital and scale constraints. Their choice of DSD
service models tends to be increased once they understand the specific requirements of
their customers. Also, Natu (2009) commented that in certain markets, due to overly
restrictive labor regulations, manufacturers have relied on one-man distributors to
achieve some of the benefits of DSD execution, while at the same time retaining the
variability of selling expenses. Often the route to this service model is via a direct
approach initially, where execution standards are established, and a subsequent switch to
one-man distributors is made with the intention of making selling costs variable.
Some of the DSD schemes that are commonly used in Latin America are the presales
and the on-route sales (Refer to figure 11).
FIGURE 11. ALTERNATIVE DSD PROCESS MODELS -NATU (2009)
39
Alternative DSD Process Models
Route Sale
S
saew doIwerlng
based o
ea.#W~
o ~der
CD 0~
0
Ein
Presales
Saft. IFome /
6M
filmple
T4800"e
on CWVR
raNw tow to bwo
St~
baud cm muEp
stsUE. eg Wddig
odve
aw
Va th
swfg perkwimned
Demwd esmewd by an
p
. the de
Cutomer dwemnd
rane
via EIDI
E44M I Fat I
Tow____is
Predicted Demand
Dmand Votans2ad
eWwneU,
1 orlAmt
Presold Orders
1) Presales is characterized by using a seller to visit customer's premise (i.e. point of
sale), establish relationship with customer, capture the order, and execute merchandising
activities.
2) On-board Sales (Route Sales) uses a seller/driver to capture the order and deliver the
product in the same visit. Product is stored in the vehicle. Moreover, the seller/driver
executes merchandising activities.
In contrast, indirect distribution in Latin America can be represented by the following
schemes:
1) Wholesaler scheme, where the wholesaler is responsible for capturing customer's
orders and delivering the product to the point of sales
2) Distributor (exclusive) scheme, where the distributor is responsible for delivering the
product. *In some cases, an exclusive 3PL is responsible for the sale and distribution of
the product.
40
3) Distributor (non-exclusive), or general distributor, who also sells/delivers product
from other companies, is responsible for delivering the product to the POS. *In some
cases, a general 3PL is responsible for the sale and distribution of the product.
4) Partner scheme, which is characterized by collaboration between two or more
companies to sell and/or deliver products to the point of sales. A seller (from either the
company or the partner) establishes relationship with the POS and captures the order
(manually or electronically). Merchandising is executed by the seller/driver. Products are
delivered (jointly) to the store.
Urban vs. Rural Consumers
Latin America countries, as many other developing nations, are characterized by
having a significant portion of their population living in rural territories (see figure 12).
According to the UN, in 2010, the percentage of people living in rural territories in
countries such as Brazil, Mexico, Colombia, Chile and Latin America is 14%, 22%, 25%,
11% and 20% respectively. In terms of distribution, most companies struggle to find
effective and efficient models to serve customers rural customers. One of the primary
challenges for Latin American companies is to exploit economies of scale. The distance
from distribution centers to rural customers drive up transportation costs and thus results
in higher total landed costs. In addition, rural territories are characterized by having small
population, low volume, and strong demand for low-end products, making it much more
costly for companies to serve customers.
As it was mentioned above, designing or selecting distribution channels to
differentiate rural and urban customers is a challenge. Leading companies are tailoring
distribution strategies to maximize the value of both rural and urban consumers. For
example, Coca-Cola Femsa has been able to deploy more than ten different distribution
schemes, which vary from both the commercial (order management) and supply
(deliveries) perspectives.
41
FIGURE
12. URBAN
VS RURAL POPULATION (2010) - UN DATA
700,000
100
90
20000
300,000
70
60
300,000
40
301
200,000
~
20
Latin America and
the Caribbean
A"
Brazil
Percentage rural (%)
100,000
Mexico
Colombia
Percentage urban (%)
Chile
hTotal population (thousands)
There is no doubt that the number of people living in poverty is higher in rural markets
than in urban territories. Most rural markets in Latin America are characterized by being
underdeveloped and consequently require differentiated marketing strategies.
Low literacy levels pose a major challenge to companies. The low levels literacy in
rural areas often results in communication problems and thus companies struggle to
advertise their products. Sometimes enterprises have to provide technical training to the
owner of store in order to push their product to end consumers. This is much more
expensive than just providing point of sales materials and printed advertisement.
Moreover, languages and cultural diversity of rural communities adds complexity to the
equation.
Low per capita income is another important factor that influence the way in which
companies serve the rural market. One of the main sources of income in rural territories
comes from agricultural activities, which reflects in a higher variability of demand. Rural
consumption is not only seasonal but also unpredictable.
42
One of the greatest challenges of serving rural communities is transportation. Often,
when we think about rural territories we believe that traveling distance is the major driver
of costs; however, poor road infrastructure (i.e. unpaved roads), limited access (i.e.
mountains, rainforest), and security issues (i.e. assault, theft, organized crime) are
additional factors found in rural communities. As a result of these factors, ineffective
distribution channels have served rural territories. Most companies rely on intermediaries
to reach end consumers, thereby forgetting about the effectiveness and efficiency of
distribution.
Store Formats
The Latin American territory features unique characteristics in terms of not only
distribution and transportation but also in marketing and consumer behavior. According
to TSN (2010), there is a predominance of local chains, especially in Brazil, Mexico, and
Colombia, where 75% of the spending in the modem channel is incurred by domestic
players, who rule in terms of number of stores and regional coverage. Also, the level of
concentration of retailers in Latin America is very low. The top five key accounts stand
for less than 15% of the region's market. This allows the industrial sector to have a
higher bargaining power than retailers.
According to AC Nielsen (2010), the retail market can be segmented into seven
categories:
* Hypermarkets
* Supermarkets
* Pharmacy
* Convenience Stores
e
Traditional Stores
* Kiosk
* Other
43
Although, these formats vary from country to country, the following table intends to
provide a high level description of the main characteristics for the most common store
format in Latin America.
Store Format
Hypermarkets
Supermarkets
Convenience Stores
Traditional (Mom &
Pop)
Main Characteristics
Stores size: 5,000 to 13,000 m2
Portfolio: between 25,000 and 50,000 SKUs
Territory: Urban
Income class: mostly middle and high
Stores size: 3,500 to 5,000 m2
Portfolio: between 1,500 and 10,000 SKUs
Territory: Urban
Income class: mostly middle and high
Stores size: 200 to 500 m2
Portfolio: limited
Territory: Urban and Rural
Income class: low, but mostly middle and high
Stores size: 20 to 150 m2
Portfolio: very limited
Territory: urban and rural
Income class: low, middle
In 2010, retail in the Latin American region was dominated by three store formats:
hypermarkets with a share of 26% of the sales of the total market, supermarkets with a
share of 25%, and traditional stores with a share of 25%. Certainly, this data illustrates
the relevancy of hypermarkets and supermarkets in terms of volume and sales. It is
important to be aware that the market share of the traditional vs. modem varies
significantly if evaluated in terms of number of stores (point of sales) rather than in terms
of absolute demand. (For further information refer to figure 13 and 14)
FIGURE
13. NUMBER OF STORES BY RETAIL FORMAT (AC NIELSEN 2010)
44
1.4%
0.2%
0.2%
0.5%
1.2%
WHypermarkets
WLarge Supermarkets
WSmall Supermarkets
WTraditional Grocers
WC-Stores + Gas Stations
WPharmacies
id Perfume Stores
FIGURE 14. % SALES (COMMODITY VALUE) BY RETAIL FORMAT (AC NIELSEN 2010)
1%.
Hypermarkets
hdLarge Supermarkets
ha Small Supermarkets
hd Traditional Grocers
a
C-Stores + Gas Stations
h Pharmacies
h
Perfume Stores
Reardon et al (2002) described how some consolidated retail formats have been
introduced in urban concentrations in developing economies. However, this introduction
has not strongly affected the small retail sector. The difference in consumer shopping
patterns, levels of income, security issues, and weak transportation infrastructure are
some variables that play an important role in shaping retail formats.
45
Overall, retailers in the modem channel in Latin America have different levels of
maturity. For instance, if we look at the 2010 Retail Index provided by AT Kearney (see
figure 15), we can observe that Brazil, Chile, Uruguay, and Peru are ranked within the
top 10 countries in the world. In contrast, Mexico, Colombia, and El Salvador are ranked
in
2 5 th, 2 6 th 2 7 th
position respectively. This Index suggests that the evolution of the retail
sector in Latin America varies significantly from country to country.
FIGURE 15. % RETAIL INDEX (AT KEARNEY 2010)
Income Levels
Natu (2009) highlighted that coexistence of the traditional and modem channel is
based on shopper behavior, particularly amongst those at the bottom of the pyramid.
Lower income consumers and shoppers do so frequently, and at neighborhood stores. "As
an example, a beer shopper may go to the corner store to pick up a large bottle for
consumption at home. This very same shopper may go to another neighborhood store
later in the day, to socialize andplay dominoes with his friends and share a six-pack.
More often than not, the store owner is also a friend who lives close by, and gives credit
when needed without collateral". - Natu (2009)
46
It is not a surprise to find many people living below the poverty line in rural markets.
However, income limitations are also seen in urban cities. Latin American countries have
a significant disparity in terms of socioeconomic classes. This is one of the major reasons
why companies have explored different channels and distribution strategies. If we look at
the percentage of income shared by the population (distributed by percentiles) in
Argentina, Brazil, Mexico, and Colombia, we can see that all of them present a similar
pattern. The highest 20% percentile accounts for almost 60 % of the income share of the
country. The next 20% percentile accounts for nearly 20% of the income share. This
means that 40% of the population accounts for 80% of the income share of the country
(see figure 16).
FIGURE 16. % INCOME SHARE BY POPULATION DISTRIBUTED BY PERCENTILES (WORLD
BANK DATA: 2006-2008)
70
60
WARG
50
40
BRA
30
LCHL
20
10
0W
Income share
COL
Income share
held by lowest held by second
20%
20%
Income share
Income share
held by third
held by fourth held by highest
20%
20%
income share
20%
As it was mentioned in section 2, several store formats have emerged to address the
needs of each segment of the population. Hypermarkets, Supermarkets, and Price Clubs
go after the top 40% percentile. In contrast, traditional mom & pop stores go after the
lower 60% percentile.
47
If we look at distribution income in Mexico, we can see that the traditional mom and
pop stores represents approximately 53% of the consumption of the low-income class.
The opposite is true for the high-income class, who spends 50% of its income in
supermarkets and only 18% in traditional mom and pop stores (see figure 17).
FIGURE
17. % CONSUMPTION BY STORE FORMANT AND INCOME LEVEL IN MEXICO
(AC NIELSEN 2010)
Total Mexico
High Class
Mid Class
EFMA"07 EFMA'06
EFMA*07 EFMAWOB
EFMA"07 EFMA'013
* Tradtonal
I
SMarket
*
Direct
- Price Club
,UGoven.
*
Mini-Markets
Low Class
EFMAV7 EFMA*08
i IPharmacy
Others
Given the scale of large retailers they have tended to be at distances that require a car
or need transportation. This makes access difficult for economic reasons as well as those
to do with security concerns, and the physical limitations of carrying a number of bags
over distances.
Ironically, according to AC Nielsen (2010), the prices of comparable products in the
traditional stores are approximately 12% higher than in supermarkets or hypermarkets
(figure 18). This suggests that the dynamics of the market have been and will continue to
shape the behavior of shoppers. As rural communities continue to vanish and the
disparities in income start to decrease, the preference for a particular channel will change.
48
FIGURE
18. AVERAGE PRICE INDEX BY CHANNEL TRADITIONAL VS. MODERN (AC
NIELSEN 2010)
Price Position by channel (comparable
products)
*
Traditional
4
Self Independent
-
Market
Modem
0 ,3 "45,4*A
4
~
70~
K532
to~9sS5SM
0A,
WRWA
MY
XXt SW
W~ WMht
MY
ft
SW WV
ft
Infrastructure
Mahajan et al (2006) mentioned that the poor development in infrastructure of markets
and the limited earning power have driven the growth of the small retailer format.
Actually, the fact that small store formats are vastly present in developing countries
makes it harder for these nations to exploit economies of scale and efficiencies. Mentzer
and Samli (1981) explained how the infrastructural limitations in some developing
economies might impose constraints on the efficiency of logistical systems. It is clear that
the poor transportation infrastructure in developing countries results in low consumer
outreach.
If we look at the Logistic Performance Index published by the World Bank, we can
notice how developing countries lack of the required infrastructure to efficiently compete
with developed countries. In 2010, Latin American & Caribbean countries achieve a LPI
of 2.46 out of 5.0. The scale of this index is from 1 to 5, where 1 is the worst and 5 is the
49
best possible grade. The "infrastructure" dimension evaluates the development of ports,
airports, roads, rail, warehousing and transloading as well as IT related to transportation
(see figure 19).
FIGURE
19. % LOGISTIC PERFORMANCE INDEX 2010
United States
Brazil
Mexico
Chile
Argentina
Colombia
Latin America & Caribbean (regional average)
1
2
3
4
5
By the same token, the low logistic performance index translates in higher logistics
costs. For instance, the metric of logistic cost as a percentage of GDP (LCGDP) provides
a macro view of the state of logistics in each country. According to the 2010 State of
Logistics Report, the logistic cost as a percentage of GDP of the US is about 7.7% (see
figure 20). In contrast, the LCGDP in Latin American countries such as Brazil, Mexico,
Colombia, Chile and Argentina varies from 18% to 27%. In other words, The US is
almost three times more efficient (in terms of logistics) than the selected Latin American
countries.
FIGURE
20. POINT OF SALES AND LOGISTICS COSTS BY COUNTRY (SCR 2010 AND AC
NIELSEN 2006)
POINTS OF SALE
IN COUNTRY
tOR=CSCTS
AS A 7,
PRODUCT COST
BRASIL
MEXICO
COLOMBIA
CMILE
ARGENTINA
922.000
655,000
477,000
116,000
317,000
26%
20%
23%
+18%
*27%
50
Another important metric that helps understand the logistic and transportation
infrastructure of a country is the paved roads as a percentage of total roads (PR/TR). A
higher percentage of paved roads suggest a access to rural territories. Also, by comparing
the LCGDP to the PR/TR, it can be observed that there is negative correlation.
Unfortunately, there is not enough data available to run an econometric model to validate
this hypothesis.
FIGuRE 21. % OF PAVED ROADS - WORLD BANK (2004/2005)
% Paved Roads
100
90
so
70
60
65
so
40
30
30
10
2
0
Switzerland
United
States
Mexico
Argentina Costa Rica Ecuador
Peru
Uruguay
Bolivia
Personal Relations
Personal relations between the end consumer and the owner of the point of sale are key
in Latin American countries. Several researchers have explored the interactions between
these two parties. Most of them agree that personal relations create loyalty from endconsumer. Sim (2000) provided some reference describing how retail stores in emerging
markets use social interactions among the people of the neighborhood to foster trust and
to build a stronger relationships. It is common to see that owners of mom and pop stores
51
provide credit to customers without the use of any contract or legal document. Actually,
the credit amount and terms are subject to the level of trust between the parties.
Natu (2009) notes that MNCs entering retail channels in developing economies need
to keep in mind the neighborhood store's dual nature-
commercial and social. Beyond
retailing, companies can also consider how they can build other kinds of profitable but
socially embedded institutions in developing markets. Prahalad (2005) provided an
example of an India-based company (ITC) that began an initiative to use technology to
make rural markets for grains and produce more efficient. ITC sponsored a system of
networked computers that operated out of volunteers' homes in a set of villages. Using
these computers, farmers would compare prices at the mandis, price movements at global
commodity exchanges, and prices offered by ITC at its own collection units. Informed
farmers could choose when and where they would sell their- grain. By cutting out the
intermediary and reducing inefficiency, ITC provided farmers with access to a more
efficient market and better prices-a socially beneficial outcome-while ensuring that
the company received a steady supply of raw material for processing-a profit-enhancing
outcome.
The needs ladder of emerging consumers in Latin America suggest that access and
proximity are the basic needs that drive consumption in these nations. This is one of the
reasons why mom and pop stores have been quite successful over the last decades. The
term access refers to the price, credit, and service provided by the merchant. Personal
relations play a critical role since they address the fundamental need of end consumers
(see figure 22).
FIGURE
22. NEEDS LADDER OF EMERGING CONSUMERS IN LATIN AMERICA D'ANDREA ET AL
52
(2011)
The Needs Ladder of emerging conumers in Latin America
Pao
S.
-SV4IP
AES04rbA
Informal Market
Overall, in Latin American countries, the informal channel is dominant in most of the
product categories. The informal market, as defined by the International Labor
Organization, refers to all economic activities by workers and economic units that arein law or in practice-not covered or insufficiently covered by formal arrangements.
Treewater E, Price J (2007) researched channel dynamics for major product/service
categories such as: impulse goods, produce, consumer package foods, cosmetics,
household items, electronics, IT, shoes, apparel, and music. The results of the research
suggested that the informal channel is largest channel for all except package foods,
cosmetics, household cleaning items, and branded clothes. Nonetheless, the modem
convenience stores, supermarkets and hypermarkets are the fastest growing channel in
2007 (refer to figure 23).
FIGURE
23. MARKET COMPARISON FOR CONSUMER GOODS (TREEWATER ET AL, 2009)
53
Consumer Good
2nd Largedt
1i twrgedt
Imp** Good
How"Okri~ciom
foodani
s
me
OIuE(Hypervoroe)
MOOan
HOc
Mooem convenenc
despro
ee
o
Produce
Growing
Fstes
"I
new
ie
0Oeme
ModosnecONy
clothes
-kanded
arandedeneses
00eneeWr
Mmo
Mu*sic
M
O
a9MenwmIow
OOO
ecoiy)wmeI
2.5 Distribution Strategies in Developed Countries
Leading companies in the United States have standardized their distribution channels.
As a highly developed country, the US is characterized by an advance infrastructure, and
consolidated markets.
While distribution channels are unpredictable and long in developed countries, channels
are more stable and short in developing nations. Moreover, in developed markets, the
modem channel represents the majority of the market.
2.5.1 Distribution Strategies in the United States
The process of designing and selecting distribution channels in United States is less
challenging than in emerging countries, at least in terms of the number of different
schemes that are used to serve customers. The fact that most industries tend to be
consolidated rather than fragmented plays an important role in the process of selecting
efficient distribution channels. Leading firms are able to exploit economies of scale, and
utilize the advanced infrastructure available in most territories in the US. Nonetheless, as
in emerging markets, both domestic and multinational companies compete not only in
product offerings, marketing, service, and price but also in market coverage and
distribution.
54
Channel Structure: Traditional vs. Modern
According to Euromonitor, modem grocery retailers are most prevalent in the United
States. Modem retailers represent 84% of sales, 61% of outlets and 81% of selling space
in the US. On the other hand, the traditional channel seems to be declining as consumers
favor modem formats like supermarkets, hypermarkets and discounters (figure 24). As in
developing countries, independent small grocers concentrate on customer service and
offer a local and customized environment. By the same token, convenience stores focus
their strategies on impulse items.
FIGURE 24. % SALES BY CHANNEL FORMAT (GROCERIES) IN THE US 2010
(EUROMONITOR, 2010)
% Sales by Channel Format
40%
36%
35%
25%
20%
15%
29%
307%
24%%
10%%
5%
2%1%
sa
0%
EE
0
0
*Orangebar represents the percentage of sales correspondingto independentowners.
Direct vs. Indirect Models
Direct Store Delivery (DSD), as described by Otto et al (2009), is a business process
that manufacturers use to both sell and distribute goods directly to the point of sales or
point of consumption including additional product and market related services such as
merchandizing, information gathering, or equipment service (figure 25).
55
FIGURE
25. % DSD
ILLUSTRATIVE EXAMPLE, OTTO ET AL (2009)
Otto et al (2009) presented the following relevant facts from the GMA 2006 forum:
food retailers in the US received well over half a billion deliveries each year via DSD,
which is outnumbered only by the US Postal service in the number of items delivered.
Within the US, DSD produced up to 30% of total retail sales volume of small- and largeformat retail stores in the US and contributes more than 80% of retail dollar growth for
the top 20 CPG categories in large-format stores. Specifically, in the US, typical small
and large format stores received, respectively, 1,100 and 12,000 DSD deliveries a year.
Typical small format stores receive nearly 80,000 items from its combined DSD suppliers
- while a large-format store received three million items. According to the GMA 2008
DSD report, as retailers become more advanced in store execution, DSD is uniquely
positioned to power growth. For example, in 2008, DSD represented 24 percent of unit
sales and 52 percent of retail profits in the grocery channel. The labor contribution from
DSD suppliers represented 25 percent of total store labor in the North American market.
For retailers, DSD unleashed an opportunity to drive growth, power innovation, and
improve cash flow.
Keh and Park (1997) suggest that product categories such as branded products where
freshness is critical, branded products with large movement volumes and products which
56
need extensive in-store inventory management, are the most prominent DSD-product
categories (refer to figure 26).
FIGURE
26. % USE OF DSD IN TOP 10 FOOD CATEGORIES IN THE US, KEH AND PARK
(1997)
Catgory
Use of DSD Processes (
Total Carbonated Beverages
$ Sales inBo
V
$14.3
/
$13.2
btla
srea dMkodo o/
$t.
Total Fresh Produce
ToM
Total Salty Snacks
VMa
/
TOW lPaMs*sg.Md
Total Prepared Foods-Frozen
$10.6
$10.1
Total Cheese
Tataleer
$129
$9.5
V
/
Tot Cand
$0.2
$8A
$7A
Coelho et al. (2003), suggested that most multinational firms would prefer to deploy
direct distribution; however, most are forced to use intermediaries, indirect channels.
Etzel et al (2004) defined indirect channel as a channel of producer, final customer, and
at least one level of middlemen represents.
Store Formats
The United States, as other developed countries, presents specific features in terms of
the store formats used in the retail industry. According to Euromonitor (2010), storebased retailing can be divided into the following categories:
e
Hypermarkets
e
Supermarkets
e
Convenience Stores
- Warehouse Clubs/Discounters
e
Traditional Stores
57
Although, these formats vary significantly between points of sale, the following table
intends to provide a high level description of the main characteristics for the most
common store format in the United States
Store Format
Hypermarkets (similar
to Supercenters)
Supermarkets
Convenience Stores
Warehouse Club
Traditional (Mom &
Pop)
Main Characteristics
Stores size: 100,000 to 300,000 ft2
Portfolio: between 60,000 and 70,000 SKUs
Territory: Urban
Income class: Low-Middle, Middle, Middle-High
Stores size: 20,000 to 50,000 ft2
Portfolio: from 20,000 up to 30,000 SKUs
Territory: Urban and Rural
Income class: Low-Middle, Middle, Middle-High
Stores size: 2,000 to 3,000 ft2
Portfolio: 2,000 to 3,000 SKUs
Territory: Urban and Rural
Income class: low, but mostly middle and high
Stores size: 100,000 to 150,000 ft2
Portfolio: 20,000 SKUs
Territory: Urban
Income class: low and middle
Stores size: 500 to 2,000 ft2
Portfolio: very limited
Territory: urban and rural
Income class: low, middle
In 2010, grocery retail in the United States was dominated by three store formats:
supermarkets with a share of 36%, hypermarkets with a share of 29% of the sales of the
total market, and small grocery retailers with a share of 24% (see figure 27). Certainly,
this data illustrates the relevancy of the modem channel in terms of volume and sales.
FIGuRE 27. % SALES BY RETAIL FORMAT (EUROMONITOR GROCERY RETAIL 2010)
58
1%
SSupermarkets
WHypermarkets
W
Small Grocery Retailers
WFood/Drink/Tobacco
Specialists
WDiscounters
WOther Grocery Retailers
Overall, the United States was among the few regions to see a contraction in the
number of grocery stores over 2005-2010. The number of traditional grocery retailers
was significantly reduced, with the pace of closure increasing as the modem channels
matured in the market.
FIGURE 28. RETAILING 2010: RECOVERY (EUROMONITOR 2010)
Sales Driven by More Buying, Not New Stores
a
3Middle East and Africa
AsiaPacfic
2
1
WAustralasia
Latin America
Western EuropeE L6
E
c
0 -*rA
= 0
-1
En
North America
Eastern Europe
-2
0
2
4
6
8
% value CAGR 2005-2010
10
12
14
As we can observe in figure 28, North America, specifically the United States
presented a CAGR (from 2005 to 2010) in sales of approximately 3.3%. This data
indicates that the North America retail market has reached maturity and stores have
begun to consolidate. Rather than increasing sales through new store openings, US
retailers are experiencing growth by more buying at the same stores.
Infrastructure
59
If we look at the Logistic Performance Index published by the World Bank, United
States presents a much higher index, which translates into a better transport
infrastructure, customs process, logistics competence and IT processes related to
logistics. It is important to notice that there is a significant gap in the LPI rating of Latin
America and Caribbean countries and the United States. This translates into lower
logistic costs as a percentage of GDP. For instance, while Brazil and Mexico have
logistic costs as a percentage of GDP of 26% and 20% respectively, the United States is
much more efficient with only 7.7% (refer to figure 29 and 30).
FIGURE
29. LOGISTIC PERFORMANCE INDEX 2010 (WORLD BANK)
United States
Brazil
Mexico
Chile
Argentina
Colombia
Latin America & Caribbean (regional average)
3
FIGURE
4
5
30. LOGISTIC COSTS, SHARE OF TRADITIONAL CHANNEL, AND MARKET
FRAGMENTATION WORLD BANK (2010), EUROMONITOR (2010), AC NIELSEN
(2009)
Sao Pablo, Mexico,
MEX
37%
COL
55%
922.000
655,000
26%
20%
TRADmONAL
CHANNEL%
PONTS OF SALE
INd
COUNTRY
Bogota,
BR
46%
Saniogo, Buenos A.
NYC,
SF0,
USA
Rome,
ITALY
London
USA
24%*
24%
22%
20%*
317,000
1,128,112
1,128,112
317,000
286.680
27%
7.7%
7.7%
11.2%
10.2%
CHI
28%
ARG
60%
477.000
116.000
23%
18%
UK
(IMAUS1OffS)
LOGISTCS COsTS
AS A
G
y EP
*Data estimated by Euromonitor
60
2.6 Distribution Strategies Comparison: Developed vs. Developing.
The fact that there are significant differences in consumption patterns, infrastructure,
income levels, and business practices between emerging nations and developed countries
is key for explaining the adoption of multiple distribution strategies across industries. As
it was mentioned in section 2, developing nations such as Latin American markets are
characterized by a fragmented market with hundreds of thousands of mom and pop
stores. For example; Colombia, with a population of 46 million, has approximately
477,000 small neighborhood stores, while the United States, with a population of almost
307 million, has 1,128 million of small stores (figure 31). There are three times more
stores per person in Columbia than in the United States. Certainly, companies in
developing countries struggle to find new ways to serve fragmented markets. In the case
of Colombia, companies needs to design distribution strategies to reach the traditional
channel, which represents 55% of the CPG market. This is one of the major reasons why
companies competing in developing countries have exploited multichannel distribution
with a number of different schemes that enable serving both urban and rural customers.
FIGURE
31. MACRO-COMPARISON
BETWEEN DEVELOPED AND DEVELOPING
CITIES/COUNTRIES - EUROMONITOR (2010), AC NIELSEN (2010), DATAMONITOR
(2009), UN, OECD, WORLD BANK, INEGI, BUSINESS MONITOR
61
.t
SmoPablo, Mexico,
19.8/
195
MEX
21/
110
388
Bogota,
COt
Santago, Buenos A.
ARG
CHI
NYC,
USA
SFO.
USA
0.8/
Rome,
ITALY
2.7 /
London,
UK
7.8 /
307
60
62
8.3/
46
6.7/
17
12.9 /
40
8.3/
307
390
167
120
362
1406
301
144
565
86.5
77.8
75.1
8?
92%
82%
82%
68%
90%
LPI - COUNTRY
3.20
3.05
2.77
3.09
3.10
3.86
3.86
3.64
3.95
TRADiDONAL
46%
37%
55%
28%
60%
24%*0
24%*
22%
20%o*
922.000
655.000
477.000
116,000
317.000
1.128,112
1,128,112
317.000
286,680
26%
20%
23%
18%
27%
7.7%
7.7%
11.2%
10.2%
0.33
0.39
0.063
0.054
0.13
5.7
5.7
0.45
0.56
CITY I COUNTRY
POPULAION
(mi11o1n)
CITY GDP
(USD$ Bison)
% URBAN IN
COUNTRY)
CHANNEL%
POINTS OF SALE
IN COUNTRY
(SMAU
ML
LOGITCS COSTS
AS A% OP
CARBON
EMISSIONS
According to Plar et Retail and the Euromonitor Retailing Report (2010), the
dominance of specific store formats and channels vary between least developed and most
developed countries. While hypermarkets and supermarkets
dominate developed
countries, independent small grocers and specialty stores represent the majority of the
business and sales in least developed countries. In Finland, Germany, South Korea and
Australia, supermarkets and hypermarkets represent approximately between 50 and 60%
of the total grocery retailing. In contrast, these formats represent only 5% of the total
grocery retailing sales in India and Vietnam (refer to figure 32)
FIGURE
32.
GROCERY RETAILING - MOST TO LEAST DEVELOPED MARKETS,
EUROMONITOR (2010)
62
Grocery Retailing - Most to Least Developed Markets
Finland
Most
hk
developed
Germany
South Korea
Developed markets
are defined as
those with a low
share of value
sales accounted for
by independent
small grocers,
food/drink/tobacco
specialists and
other grocery
retailers
Australia
GLOBAL AVERAGE
China
_
Brazil
Turkey
Bulgaria
Argentina
Philippines
Vietnam
Least
developed
India
0%
20%
40%
" Hypermarkets
60%
80%
100%
* Supermarkets
" Discounters
Forecourt retailers
UConvenience stores
aFood/drink/tobacco specialists
Independent small grocers
a Other grocery retalers
Similarly, the value sales growth by hypermarkets for the United States between 2003
and 2009 was approximately 49% versus only 19% in Latin American countries. On the
other hand, the value sales growth by independent small grocers in Latin America was
26% versus only 3% in the United States. This number reflects the level of consolidation
that US retail stores experienced in the last decade.
FIGURE 33. PLANET RETAIL: GLOBAL RETAIL
Latin America
2010
United States
Ind6pWndent
amse gmaacs
2%
2%
CGnverienc.
2%
-to%
-u
Ohm
1%
63
The data presented above (figure 33) is relevant for understanding why companies in
the CPG industry have been developing new distribution strategies that are effective and
efficient, and most importantly that are aligned to the needs of the market.
64
3. Methodology & Analysis
The research approach used in this thesis involves a mix of methods, which include
primary and secondary market research and case study analyses.
Overall, the high-level methodology that was used to collect and analyze information,
and validate findings is the following:
Objectives
Topics
Distribution Channels
" Marketing Channels
SGo-to-Market
SCM in emerging economies
* Direct to Store Deliveries
- Wholesalers & 3PL
*Primary Market Research
- Face to Face Interviews
* Telephone interviews
* On-site Visits
An aly sis
- Amanco (Brazil)*
* MIT CEMENT (Colombia)
e Brigthstar (Ecuador)*
* Grupo Bimbo (Mexico)
- Campbells (Mexico)
* MIT BREWERY (Mexico)
* MIT CONFECTIONARY (Colombia)*
- MIT CANDY (Ecuador)*
* Cruz Azul (Mexico)
* MIT PAINT (Colombia)*
* Johnson Controls (Mexico)
- MIT SOFT DRINKS (Latin America)
* MIT FOODS (Colombia)*
* MIT TOBACCO (Ecuador)*
* Corporate Reports & Annual
Reports
*Industry & Market Reports
*Country Reports
*Academic Papers
Articles & Publications
Case Studies
3.1 Primary and secondary market research
Primary market research refers to the information that comes directly from the source.
Secondary market research refers to the research that is already compiled and organized
by external sources. The primary market research conducted for this thesis consisted of
face-to-face interviews, telephone interviews, and group interviews. The sources of
information used for the secondary market research include corporate annual reports,
scorecards, internal databases, articles, academic papers, case studies, industry research
reports, and country research reports.
65
The information collected for this research is not exhaustive and therefore only depicts
the most representative sales and distribution schemes employed by the companies. The
organizations considered in this research are the following:
(Brazil)
Industrial
Products
Amanco
is
a Latin
American
producer
of
integrated water solutions for the construction,
infrastructure and irrigation industries. It is also
involved in the trading of construction products.
(Colombia)
Cement
MIT Cement is a leader in the Colombian cement
industry, with over 51% of market share; it is a
top cement producer in Latin America with
investments in Panama, Haiti and the Dominican
Republic. It is a top concrete producer in the
United States and also exports cement and clinker
to 27 countries.
(Latin
America)
CPG Food
Grupo Bimbo is considered one of the most
important bakeries in the world due to its
production volume, sales and brand positioning.
In Mexico, as well as in many Latin American
countries, it is the largest food company and
undisputed leader in the national baking industry.
(Ecuador)
Telecom
Brightstar
is
an
innovative
global
services
company that provides services and solutions and
value-added
distribution
that
enhance
the
performance and profitability of the three key
participants in the wireless device ecosystem:
device manufacturers,
network operators
and
retailers.
(Mexico)
CPG Food
Campbell Soup Company is a manufacturer and
marketer of high-quality foods and
simple meals,
including soups and sauces, baked snacks, and
healthy beverages.
66
(Mexico)
CPG Beverages
MIT Brewery is a Mexican brewer that has a
custom-crafted portfolio of 28 high-quality beer
brands. Innovatively packaged and promoted to
entice consumers at the point of sale, MIT
Brewery's beers are brewed at fourteen modem
facilities across Latin America.
(Colombia)
CPG -
MIT Confectionary is one of the largest players in
Food
the
Colombian
confectionary
industry.
Its
portfolio includes a wide range of food products
including:
cookies,
wafers,
snacks,
candies,
lollipops, chocolate, pastries, chewing gum, ice
cream and preserves.
(Ecuador)
CPG -
Food
MIT Candy offers confectionery products. The
company's
products
include
candies, toffees,
chewing/bubble gums, chocolates, lollipops, and
novelties, as well as sugar free cinnamon, apple,
and watermelon products. It sells and exports its
products through distributors in Ecuador and
internationally.
(Mexico)
Cement
Cruz Azul is one of the largest cement producers
in Mexico.
(Colombia)
Chemicals
MIT Paint is a chemicals company competing in
the Colombian market. It supplies the automobile,
hardware & domestic, stationery and industrial
segments.
(Mexico)
Automobile
-
Batteries
JCI is the global leader in lead-acid
starter
batteries, advanced lead-acid batteries for StartStop vehicles and Lithium-ion batteries for hybrid
and electric vehicles. In Mexico, JCI has an
extensive network of distributors to serve regional
markets.
67
MIT Soft
(Latin
America)
CPG Beverages
MIT Soft Drinks produces and commercializes
beverages in Mexico, Guatemala, Nicaragua,
Costa
Rica,
Panama,
Colombia,
Venezuela,
Brazil, and Argentina
(Ecuador)
o{
b
CPG Tobacco.
MIT Tobacco Ecuador manufactures local and
international tobacco brands. In addition, the
company distributors cigarettes and liquor.
(Colombia)
CPG -
MIT
Foods is a food company
present
in
Colombia, Mexico, Chile and the United States.
For more
than
75
years, MIT Foods have
developed products and applications in which
vegetable oils and fats make all the difference.
*Note: Information about this company was obtained through primary market research
conducted in collaboration with the Center for Latin-American Logistics Innovation
(CLI), which is based in Bogota, Colombia.
Table 1 provides a description of the all distribution schemes used by the previous
companies:
Table 1: Sales and Distribution Schemes
Type
Direct
Direct
Scheme
Presales with
Scheduled
Delivery
Onboard
Sales
A seller visits customer's
.
premise (i.e. point of sale),
establishes relationship
Distribution
Products are delivered
with customer, captures
(Sale and delivery do
the order, and executes
not occur at the same
merchandising activities
time)
to the store within a
specified lead-time.
The seller/driver captures the order and delivers the
product in the same visit. Product is stored in the
vehicle. In addition, seller/driver executes
merchandising activities.
Direct
Telesales with A seller calls the customer
68
Products are delivered
Scheduled
Delivery
(point of sale), establishes
relationship with
to the store within a
customer, and captures the
Merchandising is
order.
executed by the driver
specified lead-time.
or merchandising
figure
Direct
EDI with
Scheduled
Delivery
Customer sends order
electronically
Products are delivered
to the store with a
specified lead-time.
Merchandising is
executed by the driver
or merchandising
figure
Indirect
Wholesalers
(Presales and
Scheduled
Delivery)
A seller establishes
relationship with
Wholesalers deliver
wholesaler and captures
sale within a specified
the order (manually or
lead-time.
products to point of
electronically). Wholesaler
sends pre-seller to the
point of sales
Indirect
Wholesalers
(Onboard)
_ _*
Indirect
Distributors
(Exclusive)
A seller establishes relationship with wholesaler and
captures the order (manually or electronically). The
wholesaler sends a seller/driver to capture the POS
orders and to deliver the product in the same visit.
A seller establishes relationship with point of sales
and captures the order (manually or electronically).
An exclusive distributor sends delivers the product.
*In some cases, an exclusive 3PL is responsible for
the sale and distribution of the product.
Indirect
Distributors
(No
Exclusive)
A seller establishes relationship with point of sales
and captures the order (manually or electronically).
69
A general distributor, which also sells/delivers
product from other companies, delivers the product
to the POS. *In some cases, a general 3PL is
responsible for the sale and distribution of the
product.
Indirect
Partners
A seller (from either
Products are delivered
company) establishes
(jointly) to the store.
relationship with the POS
Merchandising is
and captures the order
executed by the
(manually or
seller/driver.
electronically).
Merchandising is executed
by the seller/driver.
Hybrid
H Hybrid
Multiple sales schemes are
Multiple distribution
used to manage the
schemes are used to
relationship with the POS,
deliver products to
provide merchandising, as
customers.
well as to capture the
orders.
3.2 Case Study Analysis
For the purpose of this thesis research, the case study analysis method is used to
describe an actual strategy that is currently or recently employed by selected companies
as a mean to operate their supply chains. All the case studies presented in section 3 were
constructed by using both primary and secondary market research.
MIT Soft Drinks
70
MIT Soft Drinks produces a wide variety of carbonated and non-carbonated
beverages. MIT Soft Drinks is leader in the Latin American market with a market share
of more than 75%.
The carbonated beverages (CB's)/non-carbonated beverages (NCB's) industry are
characterized by requiring intensive merchandising at the point of sales, frequent
deliveries (especially in the traditional market), and financial aids. Most of the companies
selling products in this market compete for the share of wallet of customers.
Consumption of CB's/NCB's is extremely fragmented in the traditional channel, making
market coverage critical for building brand awareness. MIT Soft Drinks has a diverse
product portfolio with more than 90 brands and 280 SKUs. Prices of SKUs vary from
USD$ 50 cents to USD $10.
The company serves approximately 1.5 million points of sales across Latin America.
Its market segmentation is based on type of territory (urban vs. rural), drop size, growth
potential, and customer profile. The following distribution schemes are used to serve the
different market segments:
71
DISTRIBUIS
MES
SALES SCHMES
Own Distribution
Presalas
Collaborator or
Call Center Sales
Onboard Sales
tit
EDI (Platform)
Supervisor/KA
Distribution
14- V
Wholesaler
/ Parner
Mom & Pop Stores
)
Depending on the its market segment, MIT Soft Drinks uses a variety of sales and
distribution schemes to serve customers. For example: urban mom and pop stores are
mainly served through presales (either physically or via telephone) with scheduled
delivery. In contrast, rural mom and pop stores are served through onboard sales and
delivery, and through wholesalers, which use either presellers or onboard sellers. Finally,
MIT Soft Drinks uses presales or EDI (electronic data interchange) with scheduled direct
delivery to serve wholesalers/retailers.
Amanco Brazil
Amanco Brazil produces and sells polyvinyl chloride (PVC) pipes, tubes, and
connectors for commercial and public infrastructure applications. The company is base in
Sao Pablo, Brazil, and it has over 3,000 employees and nine factories.
72
Amanco's products are divided into three major business divisions: Building,
Infrastructure, and Agriculture. In terms of its product portfolio, Amanco has three
segments: tubes, joints, and accessories. The tubes segment accounts for 51% of
Amanco's revenues. The joints and accessories segments accounts for 32% and 11%
respectively. The remaining 6% corresponds to resale and metallic products.
The construction materials industry in Brazil is highly fragmented. There are more
than 105,000 points of sales (POS) across the nation.
Before 2004, Amanco' sales force was comprised of sales representatives, most of
whom were not exclusive to Amanco. These representatives were organized by region
and were external to the company. This sales scheme allowed Amanco to serve such
fragmented market, especially rural areas. Nonetheless, Amanco did not have control
over the sales representative and thereby struggled to deploy any trade marketing
initiative.
In 2005, as part of the new Go-to-Market strategy, Amanco realized that in order to
become a service-driven enterprise, it needed to build closer relationships with its
customer. Amanco restructured its commercial team. The sales representatives were
replaced with an internal sales team.
Even though Amanco use its own sales force and wholesalers to sell its products, the
company
only
delivers
them
through
wholesalers/distributors:
73
exclusive
and
non-exclusive
SALES SCHEME
Distribution
Presales
Collaborator or
Wholesaler
Call Center Sates
Onboard Sales
EDI (Platform)
Supervisor/Key
Account/ Sales
Constructors
'0
Distributors
Distribution
FACTORY
ti.Retaers
~ (~)
DC &
*
Self Constructors
CrossDock
Wholesaler
/ Parner
Mom & Pop Stores
Brightstar (Ecuador)
Brightstar is the world's leader in distribution and supply chain solutions for the
telecom industry. In 2010, Brightstar was present in 18 countries across Latin America,
including Puerto Rico, Venezuela and Ecuador. Globally, Brightstar has local sales and
distribution centers in 50 countries on 6 continents and has reached more than $4.8
billion in revenues.
Initially, Brightstar started its business by trading discounted OEM products into the
Latin American wireless channels. Over the last decade, Brightstar has introduced a
variety of differentiated value-added services for improving supply chains of OEM's,
Mobile Carriers, and retailers. A basic service provided by Brightstar' was to offer thirdparty logistics services (3PL), which primary function was to run a distribution center for
74
the benefit of manufacturers or service providers. In addition, Brightstar offered supply
chain services and solutions to network operators.
The mobile phones supply chain is composed by four different players: 1) Original
Equipment Manufacturers (OEMs), who develop, manufacture, and supply handset
equipment, parts, and accessories; 2) Network Service Providers (NSPs), or also known
as "Carriers", who buy handsets from OEMs and provide wireless network services
through subscription accounts; and 3) Retailers/Distributors, who are responsible for
commercializing handset devices; and (4) the end-user.
Brightstar provides 3PL services for the distribution between OEMs and NSPs, and
from NSPs to retailers, wholesalers, and directly to the point of sales (mom and pop
stores).
75
MIT Brewery (Mexico)
MIT Brewery is a top brewery based in Mexico. The company operates six brewing
plants, and produces more than 8 top brands.
The beer industry in Mexico is characterized by requiring intensive merchandising at
the point of sales, frequent deliveries (especially in the traditional market), and financial
aids (i.e. credit, refrigerators/cooling devices, POS material, and furniture). Most of the
CPG companies selling products in this market compete for the share of wallet of
customers.
Consumption of beer is extremely fragmented in the traditional channel, making
market coverage critical for building brand awareness. MIT Brewery product portfolio
has more than 8 brands and 40 SKUs. Selling prices of most SKUs vary from USD$ 0.7
dollar to USD $5 dollars.
The company serves approximately 250,000 points of sales' in the Mexican territory.
Its market segmentation is based on type of territory (urban vs. rural), drop size, and
customer profile. MIT Brewery uses both direct to store and indirect sales and
distribution schemes:
'Primary market research from 2006/2007
76
DISTIBION
5l.Ms
Presals
EMEf
Own Distribution
Collaborator or
es
Call Center Sales
g
Onboard Sales
EDI (Platform)
Mom & Pop Stores
(Informal)
DstrACOtioR
Retailers
FACTORY
DC
om
Consumer
&Pop Stores
Wholesaler
/ Panmer
Retailers
MIT Cement (Colombia)
MIT Cement is a leader in the Colombian cement industry. With over 50% of market
share, MIT Cement is one of the largest cement producers in Latin America. Also, it is a
top concrete producer in the United States and also exports cement and clinker to 27
countries. The company employs approximately 11,000 people
In 2008, MIT Cement had a market capitalization of over USD$3 billion and income
of over USD$2 billion. The geographic origin of this income is 44% from Colombia,
34% from the United States, 9% from Latin America and 13% from other businesses. In
terms of business, 47% comes from concrete, 40% from cement and 13% from others.
77
The Company has an extensive logistic infrastructure for business development that
allows the mobilization of raw materials and the finished product at competitive costs. It
has four ports in the United States and another four in Colombia. It also has two port
facilities in Venezuela, one in Panama, one in the Dominican Republic and one in Haiti.
In Colombia, MIT Cement is a top transporter of land cargo. Within the expansion and
resource insurance process, MIT Cement has its own power plants for its productive
processes that give it an installed capacity of 250 MW, thus controlling the availability
and cost of this raw material. MIT Cement serves its customers through the following
sales and distribution schemes:
DISTMiaUTION SCHEMES
$ALIESSCHIEME
3PL Distribution
Presales
Collaborator or
whlesaler
Call Center
Wholesaler
Distribution
ED1 (Platform)
sales Manager
Depots
Factory
Retailers
DCs
Mayo
Consurer
Depots
Dep
C
Orders> 10 Tons
Consumer
Campbell's (Mexico)
78
Campbell Soup Company is a global manufacturer and marketer of high-quality foods
and simple meals, including soups and sauces, baked snacks, and healthy beverages. Its
products are sold in more than 120 countries.
Campbell's de Mexico was established in 1959. The company is headquartered in
Mexico City and operates a manufacturing plant in Villagran. Campbell's Mexican
operations offer many authentic condensed and dry soup recipes that are tailored to the
local market. Popular soups include Chile Poblano and Squash Flower cream soups and
broth-based Lentil and Tortilla soups. Campbell's Mexican portfolio also includes V8, V8
Splash, and V8 Smoothies beverages, and Prego Italian sauces.
The company serves retailers and wholesalers through its own sales team and 3PL
distributors. In addition, Campbell's sells and distributes Alcoa products and Tabasco
sauces.
DLTIBUTION
SALLS
CHLMES
3PL Distribution
Collaborator or
Wholesaler
Distribution with
Alcoa
f
Wholesaler
Y1
MIS
Outsource Market
Promotors
Trade Demos
EDI (Platform)
Sales Force
Supervisor
Distribution
Convenience Stores
3SPL
FACTORY
DC
I
Price Clubs
Government
atWholesaler
/ Pamer
79
Mom & Pop Stores
(Informal)
Consumer
Grupo Bimbo (Latin America; Mexico)
Grupo Bimbo was established in Mexico City in 1945, and is considered as one of the
most important bakeries in the world due to its production volume, sales and brand
positioning. In Mexico, as well as in many Latin American countries, it is the largest food
company and undisputed leader in the national baking industry.
Grupo Bimbo, throughout its many subsidiaries, produces, distributes and markets
over 7,000 products. Its product portfolio includes a variety of loaf bread, home made
style pastries, cookies, candy, chocolates, sweet and salted snacks, packed cornmeal and
wheat flour tortillas, fried tortillas, and burnt condensed goat's milk candy.
The company owns more than 150 prestigious brands such as: Bimbo, Marinela, Milpa
Real, Tia Rosa, Mrs. Baird's, Oroweat, Entenmann's, Thomas', Boboli, Barcel, Ricolino,
Coronado, La Corona, Pastelerias El Globo, Suandy, among many others. It is present in
Mexico, The U.S.A., Argentina, Brazil, Colombia, Costa Rica, Panama, Chile, El
Salvador, Guatemala, Honduras, Nicaragua, Peru, Venezuela, Uruguay, Paraguay and
China.
The Group comprises 98 plants, 5 associate and 2 trading agencies. In 2009, Grupo
Bimbo net sales amounted $8,603 million dollars and employed over 102,000 associates.
Grupo Bimbo has the most extensive distribution network in Mexico, and one of the
largest in the American Continent. It exceeds 39,000 routes; it guarantees that the
products are delivered uninterruptedly and fresh to more than 1,800,000 points of sale
located in 17 countries.
The predominant sales and distribution schemes used by the company are described as
follows:
80
DISTRIlBluTe N SCHEMES
SALES SCHEMES
Own Distribution
ah
Wholesaler
'A-
Own Distribution/
Provider
Presates
f
EDI (Platform)
rOnboard
Hilybrid
Exclusive Logistic
Presales Bimbo
*
Wholesaler
/ Parner
PrSales
Sales
0
K...
Food Service
Mom & Pop Stores
(Informal
MIT Confectionary (Colombia)
MIT Confectionary is one of the largest players in the Colombian confectionary
industry. Its portfolio includes a wide range of food products including: cookies, wafers,
snacks, candies, lollipops, chocolate, pastries, chewing gum, ice cream and preserves.
MIT Confectionary currently produces and sells a successful range of its own
products, as it has an ample distribution network that covers the entire national territory.
It also operates as an exclusive distributor for canned fish products and coffee products.
The company counts with wide portfolio of products that reaches over 421,000 clients
throughout the world. MIT Confectionary is one of the top exporters of the country,
spreading its products to over 45 countries including the United States, Central America,
the Caribbean, Australia, and Spain.
81
MIT Confectionary primarily relies on third party logistics providers to serve the
domestic market. The following diagram describes the sales and distribution schemes that
are used to serve the most important channels for the company:
MIT Paint (Colombia)
MIT Paint is a Colombian company. It was founded for the purpose of canning and
commercializing paint in small quantities. Subsequently, MIT Paint introduced aerosol
paint within its portfolio of products.
82
In order to take further advantage of its plant infrastructure as well as distribution
network, MIT Paint expanded its initial portfolio of products to include other lines with
which to cater to the industrial and mass markets.
With offices located in the country's main cities, the company supplies the automobile,
hardware & domestic, stationery and industrial segments of the market through
wholesalers and chain stores.
DIRIBUTION SCHEMES
LES SCHEME
Presales
3PL Distribution
Collaborator or
Wholesaler
Call Center
Wholesaler
Distribution
01
EDI (Platform)
KAM / Sales Manager
Retail Chains
Factory &
Imports
'-0
DC
-
I upermarkets
3PL
DCs
harware
Stores
ffl
Consumer
,A&
rjf
0
9Q%
W
sr
-jmc
Depots/ OTC HW
Stores
MIT Tobacco (Ecuador)
MIT Tobacco is a company from Ecuador. It manufactures and commercializes local
and international tobacco brands. The company also distributes cigarettes and liquor.
83
The company uses the following sales and distribution schemes to reach customers
and end consumers:
DISTRJBUTION SCHEMES
S
SALES SCHEMES
Own Dlstribution
Presales
Collaborator or
Call Center
Wholesaler
EDI (Platform) / E-mail
KAM / Sales Manager
Wholesaler
Distribution
_m
Partners / Wholesalers.
Mom & Pop stores
Distributors
MIT Candy (Ecuador)
MIT Candy is one of the most renowned confectioneries in Ecuador, ant its brands are
exported to more than 38 countries in 5 continents and have conquered markets in North
America, Central & South America, Europe, and Middle East. The company's product
portfolio includes: candies, toffees, chewing/bubble gums, chocolates, lollipops, and
novelties, as well as sugar free cinnamon, apple, and watermelon products.
84
MIT Candy sells and exports its products through distributors based in Ecuador and
internationally. The following sales and distribution schemes describe its domestic
operations:
DISTRIBUTION SCHEMES
SALES SCHEMES
Own Distribution
Presales
Collaborator or
EDI (Platform) / E-mail
Wholesaler
KAM / Sales Manager
Wholesaler
Onboard Sales
Distribution
& Pop
Stores
Mom
ip
Regional
Branch
0. Leaders
Factory
P
DCs
Consumer
t
Retailers
Mom
&Pop Stores
MIT Foods (Colombia)
MIT Foods manufactures a variety of fats, vegetable oils and derivatives for mass
consumption, bakeries and the food industry. For the past 75 years, MIT Foods has also
been developing various products and applications for vegetable oil and fats, with value
added, healthy products and responsible nutrition as their main focus. In addition to their
presence in Colombia, the companies have established several brands in Chile, Mexico
and the United States.
85
MIT Foods started as a union of several companies in the vegetable oil and fats sector
in Colombia. As a result, the company was able to specialize their production, with better
methods and technology. Soon after, the company expanded to Chile, and later Mexico,
by acquiring production factories. MIT Foods currently has factories in Colombia,
Mexico, and Chile.
The company uses the following sales and distribution schemes to serve the
Colombian market:
DmiTRIOUTION SCHEMES
A.ESCME
Presales
3PL Distribution
Distributor
Wa EDI (Platform)
KAM
3PL Distribution
/ Sales Manager
0,
Retail Chains
1,O, o
A
Factory &
Imports
Supermarkets
DC
Distributor
86
Mom & Pop Sotres,
Small wholesalers
and supermarkets
Consumer
I
Johnson Controls - JCI (Mexico)
JCI is the global leader in lead-acid starter batteries, advanced lead-acid batteries for
Start-Stop vehicles and Lithium-ion batteries for hybrid and electric vehicles. In Mexico,
the company focuses on batteries for motor vehicles, and it has an extensive network of
distributors to serve regional markets.
JCI Mexico has allocated significant resources to professionalize its distributors.
Specifically, JCI has worked together with distributors to improve their order to cash
cycle, accounting practices, demand planning and inventory management, warehousing
operations, reverse logistics, sales and distribution schemes, after sales services, and
customer relationship management.
JCI Mexico uses the following sales and distribution schemes to reach end
consumers:
D1iTRIBUTION SCHEMES
SALE$ $CEMIE
Own Distribution
Presales
Distributor
Onboard Sales
EDI (Platform)
3PL Distribution
^
KAM / Sales Manager
Call Center
Retail Chair
Factory &
Imports
Consumer
DC
ift
0
__P
Distributor
87
Mom &t Pop Sotres,
Small wholesalers
and Depotss
4. Analysis
This section is divided in two separate analyses. The first analysis uses existent
literature to determine the factors that affect channel design/selection and then validates
these factors within the context of each company that presented in the case study section.
The second analysis is based on findings that were captured through a series of
workshops that involved managers and senior executives from most of the companies
mentioned in the case study analysis section. The managers and senior executives were
interviewed individually and collectively to determine the factors that potentially affect
channel design/selection.
4.1 Analysis based on Literature Review
As part of this thesis research, a wide variety of factors affecting the length of the
channel were explored in detailed. Manicoba Da Silva (2008) presented a comprehensive
summary of past research for 27 individual factors that affect the length of distribution
channels. Although, over the last four decades, most of these factors were analyzed in
academic research papers, only a few of these factors were applied to practical cases.
Moreover, the dramatic evolution of distribution channels and consumer behavior has
changed the way in which these factors affect the design of distribution channels. Also, it
is important to emphasize that most of these factors were analyzed without considering
their collective effect on the design of a distribution channel nor a framework to prioritize
their effect on the channel structure.
For instance, Miracle (1965) explored the behavior of unit value and frequency of
purchase and their relationship to the marketing mix. Specifically, his research
categorized a variety of products into the following five groups (table 2):
Table 2: Group Categories - Miracle (1965)
Group
Example of products
Cigarettes, candy bards, razor blades, soft drinks
88
II
Dry groceries, pharmaceuticals, small hardware items
III
Radio and TV sets, major household appliances, women's suits
IV
High quality cameras, farm machinery, automobiles, furniture
V
Electronic office equipment, steam turbines
Miracle (2008) concluded that companies use a larger number of distributors for
delivering products in category one (low unit value) than for distributing products in
category five (high unit value), and that the degree to which seller controls price is very
little for products in category one and substantial for products in category five.
FIGURE
34. MARKETING AND PRICING POLICIES BY CATEGORY - MIRACLE (2008)
PNSONU
POucY
TV
pro"*. p7wo
VWWMSil.
I
n
in
IV
V
X
X
Vx
B. t.* wh* .EIiw.J
m~o
Sl~HWN modw.Iff
SipW$.u*1
&h" ttJ
X
X
Certainly, in today's competitive environment, we can observe a significantly different
world, where CPG companies (category one and two) such as Coca-Cola, PepsiCo, and
P&G are delivering products with their own private fleet to both modern retailers and
traditional neighborhood stores.
As Mallen (1996) mentioned in his paper, the recent explosive expansion of mass
merchandising and retailers initiated a trend towards shorter (or more direct) channels. In
many cases this trend has taken the form of vertical integration across supply chains.
Companies have started to seek new ways to gain closeness and control over the market.
An example that illustrates the recent evolution in distribution structure can be observed
by analyzing the geographic concentration of a market, also known as the density of the
market, which refers to the number of customers per square mile. Mallen (1996) suggests
that the greater the total size of the market, the more direct, intensive and multiple can the
89
channel system be. A market that has a hundred people spread over a specific area is still
more applicable to direct distribution than one composed of 50 customers over this same
area. There is no doubt that it is less costly for a manufacturer to visit 50 customers in a
metropolitan area - for example, downtown Mexico City - than to visit the same number
of customers spread in 5 squared miles. However, to reach a larger market companies
may require more outlets and therefore more intensive distribution than a smaller market.
Even though the previous
statement about direct distribution and geographic
concentration makes sense in theory, companies are considering multiple factors when
designing their channels of distribution.
The factors considered in this section of the research are the following:
Table 3: Factors Affecting Channel Design - Mallen (1996)
Factor
Description
Market Share
The percentage of the total available market or market segment
that is being serviced by a company (i.e. Coca-Cola has 60% of
the US Market)
Drop Size
Refers to the average quantity of products that is delivered to a
customer or group of customers during a specific period of time
(i.e. 1500 SKUs, 5 tons, etc.)
Product
Level of effort (in terms of merchandising) required from the
Complexity
manufacturer to sell a product or group of products. Three levels
(Merchandising)
were defined. High: merchandiser must visit customer's premises
at least for 20 minutes every week. Medium: merchandiser must
visit customer's premises once a month. Low: the customer does
not require a merchandiser from the manufacturer/producer.
Frequency of
Refers to the average number of times that a customer or group of
Purchase
customers requests an order from a manufacturer during a specific
period of time (i.e. weekly orders, bi-weekly orders, thee orders
per week)
90
Geographic
Refers to the number of customers per unit of measurement. (i.e.
Concentration
500 customers per squared miles, 10 stores per squared kilometer)
The analysis was applied only to the companies that provided sufficient information
to conduct the analysis. As part of this analysis, the companies described in the case
study section were evaluated using the previous list of factors. The criteria used for
assigning a score to each factor is the following:
Table 4: Criteria used for Evaluation
Score
5 - High
4Medium/High
Market Drop
Size
Share
> 80 % <10
customers
served
per
vehicle
>10 and
>60%
<15
and
customers
<80%
served
per
Frequency Geograp.
Product
Purchase Density
Complexity
>50 POS
Daily
Intense
per area
Merchandising &
Negotiation (In
every visit)
Intense
Merchandising
(Weekly)
3 times per
Week
>35 and
<40 POS
per area
Merchandising is
only required
when a
promotion takes
place
Weekly
>20 and <
34 POS
per area
Merchandising is
>25 and
rarely required
<35
customers
served
per
vehicle
Merchandising is
>35
customer not required
served
per
Every 2
Weeks
>10 and
<20 POS
per area
Monthly
<10 POS
per area
vehicle
3 - Medium
>40%
and
<60%
>15 and
<25
customers
served
per
vehicle
2Low/Medium
>20%
and
<40%
1 - Low
<20%
vehicle
91
Since most of the companies used multiple channels to serve their customers, the
scored was assigned by channel by company. The following table illustrates the analysis
for MIT Brewery:
Table 5: Criteria Applied to MIT Brewery *Traditional Channel
Scheme
Presales
Specialized Presales
On-board
Wes
Call Center
Drop Size
4
5
1
1
2
1
1
5
5
2
2
1
1
1
1
1
Retailers/Wholesalers
5
1
2
Retailers/Wholesalers
EW
Exclusive Wholesaler
Wholesaler
Parnr
3PL
Food Service
Express
1
1
3
1
5
1
KAM
Hybrid
Product Complexity Frequency of Purchase Geographic Concentration
5
5
5
5
5
5
Market Share
5
5
1
2
As it can be observed in table 5, a presales scheme is used to serve markets with a high
market share, medium to high and high drop size, high levels of merchandising required,
high frequency of purchase, and located in dense urban areas. In contrast, an on-board
sales scheme is used to serve markets with low market share, low drop size, low levels of
merchandising requirements, medium to low and low frequency of purchase, and located
in rural territories. Note: detailed data used for analysis conducted for selected companies
is summarized in the appendix
In addition, a discrimination analysis was used to validate if the factors could be
considered reliable predictors of the sales and distribution schemes used by companies
competing in Latin American markets. The main purpose of a discriminant function
analysis is to predict group membership based on a linear combination of the interval
variables. The procedure begins with a set of observations where both group membership
and the values of the interval variables are known. The end result of the procedure is a
model that allows prediction of group membership when only the interval variables are
known. A second purpose of discriminant function analysis is an understanding of the
data set, as a careful examination of the prediction model that results from the procedure
can give insight into the relationship between group membership and the variables used
to predict group membership.
92
In this specific exercise, the software JMP (from SAS) was used to generate the
discrimination analysis. The interval variables that were considered are: market share,
drop size, product complexity, frequency of purchase, and geographic concentration. The
group memberships considered are: presales, specialized presales, call center, hybrid, onboard sales, wholesalers/distributor, and exclusive wholesaler.
The following figure show the results of the discrimination analysis:
FIGURE
35: DISCRIMINATION ANALYSIS RESULTS
v Dwriinant Scores
Number Misclassified
Percent Misclassified
-2Log1ikelihood
93
Training
6
17.14
55.96
Row
Actual
SqDiet(Actual) Prob(Actual) -Log(Prob)
Presales
2.1454
0.5401
0.616
Specialized Presales
0.6805
0.1104
0.385
On-boardSales
0.5143
2.6309
0.85
CallCenter
2.9590
0.990
0.009
5 Hybrid
0.9998
0.0000
0.000
8 Presales
2.1454
0.5401
0.616
7 Specialized Presales
0.805
0.1104
0.385
8 Onboard Sales
0.5143
2.s09
0.6865
9 CallCenter
2.950
0.9909
0.009
10 Hybrid
0.0000
0.000
0.9998
11 Presales
0.0857
0.6947
2.723
12 Specialized Presiles
0.6805
0.1104
0385
13 On-boardSales
0.7558
6.2508
0.280
14 Call Center
2.9)0
0.9909
0.009
15 Exclusive Wholesaler
-8.88e468
0.9791
0;021
16 Hybrid
0.0000
0.9998
0.000
17 Wholesaler
0.0416
3.181
9.4304
18 Presales
2.2410
0.5074
0.878
19 Wholesaler
4.9813
0.7942
0.230
2D Preesles
4.4073
0.3811
1.019
21 Wholesaler
0.0429
0.8135
0.208
22 Presales
2.1454
0.5401
0.618
23 Specialized Presales
0.1104
0.805
0.385
24 On-boardSales
15.4193
0.0009
7.034
25 Presales
0.50
7.2408
0.534
28 Call Center
9.5333
0.0398
3.229
27 Presales
3.2072
0.7016
0.354
28
FoodService
-7.11e15
1.0000
0.000
29
Presalese
3.2072
0.7016
0.354
30 Call Center
6.6178
0.1275
2.00
31 Presales
2.1454
0.5401
0.616
32 Specialized Presales
1.762
0.7748
0.255
33 Wholesaler
1.7058
0.9527
0.048
34
Wholesaer
0.0429
0.8135
0.200
35 Wholesaler
0.0429
0.8135
0.208 L
I
2
3
4
S
Predicted
Othlers
Prob(Pred)
Presdes
0.5401 Specialized Presales0.22 Wholesaer 0.23
0.6805 Presales0.29
SpecializedPresides
On-boardSales
0.5143
Exclusive Wholesaler
0.48
CallCenter
0.9909
0.9998
Hybrid
Presales
0.5401 Specialized Presales0.22 Wholesaler
0.23
0.6805 Presales0.29
Presales
Specialized
Onboard Sales
0.5143 Exclusive Wholesaler
0.48
Call Center
0.9909
0.9998
Hybrid
Specialized Presales
0.8890
Specialized
Presales
0.6805Presales0.29
On-boardSales
0.7558 Exclusive Wholesaler
0.11 Hybrid0.13
CallCenter
0.9909
Exclusive Wholesaler
0.9791
0.9998
_ Hybrid
Presales
0.7512 Specialized Presales 0.18
Presiales
0.5074 Specialized Presales0.42
0.7942 On-board Sales0.19
Wholesaler
0.5067
Presales
Specialized
0.8135 Presaes 0.11
LWholesaler
Presales
0.5401 Specialized Presales0.22 Wholesaler 0.23
0.8805 Presales 0.29
Specialized Presdes
0A65 Specialized Presales 0.10 Wholesaler 0.39
Presales
0.5860
CallCenter 0.20 Wholesaler
0.20
Presales
0.7512 Specialized Presales0.16
Presides
0.7018 CallCenter0.13 Wholesaer 0.13
Food Service
1.0000
Presides
0.7018 CallCenter0.13 Wholesaler
0.13
Presides
0.7016 Wholesaler 0.13
Presales
0.5401
Specialized Presales 0.22 Wholesaler
0.23
0.7748 Presales0.14
SpecializedPresales
0.9527
Wholesaler
Wholesaler
0.8135
Preseles0.11
0.8135 Presales0.11
_ Wholesaler
Note: raw data used for these analyses is provided on the appendix.
The results of the discrimination analysis were very insightful. The frequency of
purchase turned out to be not statistically significant, therefore only four factors were
included in the model. Out of the 35 observations used for the analysis, only 6 (17%)
observations were misclassified in terms of the sales and distribution scheme that is
currently employed by the companies. In other words, based on the limited amount of
data available, the four factors that were used for prediction could be seen as good
predictors of the sales and distribution schemes.
Table 7 shows the current and predicted sales and distribution schemes for the
companies selected for this analysis. As it can be observed, 6 observations were
misclassified. These observations correspond to MIT Cement, Bimbo, Campbell's, MIT
Confectionary, MIT Candy, and MIT Paint. In the case of Bimbo and MIT Candy, the
limit between a presales and a specialized presales scheme is not precise. By the same
token, the limit between presales and on-board sales schemes lacks precision. In the case
of MIT Cement and MIT Paint, a physical presence of a sales and marketing figure is not
required and therefore the companies use a call center instead of a presales scheme.
94
Finally, Campbell's (Mexico) is using dedicated sales team to work together with
wholesalers to deliver merchandising and trade marketing.
Table 7: Current Scheme versus Predicted Scheme
rWhesaler
Presales
spresence ofsaesmarketing
figure not required
Call center
n-board
Presa
~-S-p6iallisif
s_
Wholesaler
Hybid
On-board Sales
paz
P
Thie limitbtenpeaeadoboard tacks precision (further
researchkynore observations)
Presales
Presales
Presales
Presales
Specialized Presales
_
Call Center
sile
~
P-D
r oisrdaes~~--
Ine
No
isusi ng aTdue-PLas
Yes
Wholesaler
imit between presales and
specialized presales is not clear
_T
Wholesaler
aa
pPresales
-------------------------------_ -_
Whles
~
a
On-board Sales
Wholesaler
Capel' is using deicate sales
team to work together with wholesalers
(specifically in merchandising activities
and sales plans)
Call Center
HybridOn-board Sales
-
NPysi
Woesar
er
ras
H b
-~~--
Th4-1iibeer
6presales and
Specialized presales is not clear
Presales
isales
Drn
MITSof
~--~~~~-----
Hybrid
On-board Sales
Specialized Presales
~
ess--~yes
Yes~-
pese eoTsaes
~i
-
figure
not required
ai
_
-
~~
In addition, the discrimination analysis generates a canonical plot, through a graphical
representation of multiple dimensions, explains how the selected factors help explaining
the sales and distribution schemes adopted by the companies. The canonical plat is shown
below:
FIGuRE 36: CRITICAL DIMENSIONS FROM DISCRIMINANT ANALYSIS
95
Canonical Plot
M rket Share
Product Complexity
rSpecialized
Presales
Wholesaler
Presales
Onboard
\
Sales
Geographic
Concentration
Call
Center
Drop Size
Exclusive
Wholesaler
As it can be observed in the plot (figure 36), the selection of wholesalers and on-board
sales is driven by market share and geographic concentration, while the selection of
presales is driven by product complexity (service requirements) and the drop size.
The results of the analysis are intuitive. Manufacturers serving markets characterized
by low market share and low geographic concentration could rely on wholesalers or onboard sales schemes. By the same token, markets characterized by customers with high
drop size as well as high merchandising requirements could be served through a presales
scheme, which allow manufacturers to create stronger bonds with customers as well as to
provide a superior service.
In conclusion, this analysis suggests that market share, product complexity, geographic
concentration, and drop size are variables that could potentially help companies explain
the reasoning behind the channel design/selection process.
96
4.2 Analysis based on practical experience
The main objective of this analysis was to explore and collect from firsthand
experience the factors that drive the channel design/selection process. In order to get this
firsthand experience, a team comprised by members of the MIT Center of Transportation
and Logistics and the Center for Latin American Logistics Innovation conducted a series
of practical workshops that gathered managers and executives from different industries
and countries within in the Latin American territory. All the participants had firsthand
experience in supply chain management, logistics, and/or sales. A total of 25 managers
and senior managers participated in these workshops. In addition, five academic
researchers and professors provided their feedback during the workshops.
The methodology used in the workshops is described as follows:
1. Each participant filled out a questionnaire. As part of the questionnaire, the
participants had to identify the top 5 factors that drive channel design/selection.
2. All 30 participants were divided into groups of 6 individuals.
3. Each group was provided a list of factors (gathered from the literature review) that
could potentially drive the channel design/selection process; specifically, on the
factors that determine the type of distribution and commercial scheme used when
serving customers. (Refer to figure 37)
FIGURE 37: MAJOR VARIABLES AFFECTING CHANNEL DESIGN/SELECTION
97
4. Each group was given 90 minutes to brainstorm and discuss which factors had the
most impact on the channel design/selection process.
5. The individual and group results were collected and analyzed. Figure 38 shows the
results from the analysis:
FIGURE
38: WORKSHOP FINDINGS
98
--
Category
Product
Factors
High Contribution Margin
13
19%
Mature Product
38'
31%
High Product Complexity
13'
25%
6'
38%
81E%
13%
13%
25'
63%
19%
44%
50%
56%
50%
%
50%
31%
19%
25%
19%
W-75%
19%
6%
13%
75%L
13%
38%
6%
1%
13%
13%
6%
38%
Power of Negotiation
1~ 19%
69%
High Service Strategy
I
1
Short Shelf Live
Low Weight / Density
High Brand Recognition
a
High Unit Value
Corporate
High Market Coverage
Low Cost
High Market Coverage
a
Broad Product Portfolio
1%
Ii%
50%
75%1
6%
UlWE
W
I
4
31%
31%
19%
6%
56%
Wi
31%
38%
31%1
56%1
19%
38%
56%
6%&
13%
38%
B
56% I
25% B
31%j
6%
19%
25%
31%
44%
63%
13%9
25%
69%
6% &
25%
63%
19%
19%
38%3
56%i_
1%
31%g
6%
13%
13%
56%
31%1
13%
13%
25%
6%
6%
13%
2
6%
38%
56%
25%
19%
E 3
31%
25%
31%[
56%
31%
38%
31%
56%1
38%
13%1
13%
High Price Volatility
63%
6%
High Average Value per Order
High Frequency of Promotions
13
0%
19%
6%
25%
50%
31%1
19%
High Competitor's Growth
4
25%
25%
44%
19%3
38%
High Demand Volatility
3
31%
13%
56%
25%1F
19%
50%1
31%1
19%
381"
13%1
31%1
56%1
13%
38%
56%
38%
High Product Complexity
63%1
13%
56%1
6%
Low Weight / Density
13%1
25%
High Brand Recognition
50%
High Unit Value
56%
High Market Coverage
13%
13%
38%
Short Shelf Live
1
Low Cost
6%1
a
19%I
6%1
nS%
63%
19%
44%
38%
50%
0%
50%
31%
19%
56%
6%
25%
19%
19%
6%
63%
31%
31%
31%
56%
19%
25%
6%
6%
6%
13%
13%
56%
31%
25%
31%
44%
High Market Coverage
13%
6%
38%
44%
19%
63%
13%
25%
Power of Negotiation
63%
6%
25%
High Service Strategy
Broad Product Portfolio
19%
High Level of Merchandising (POSMaterials
High Innovation Velocity
Market
1
56% 1
44% 1
13% 1
31%
38%
25%
13%
High Purchasing Frequency
Corporate
3
I
19%
6%
25%
High Innovation Velocity
High Number of Competitors
1
%I
High Level of Merchandising (POSMaterial
Market
19%
1
19%
19%
13%
19%
6%
13%
0%
0%
38%
44%
25%
31%
44%
56%
31%
6%
13%
13%
6%
6%
6%
6%
56%
31%
13%
6%
13%
13%
63%
13%
25%
25%
56%
6%
38%
56%
25%
19%
38%
13%
High Price Volatility
50%
25%
High Number of Competitors
44%
19%
38%
38%
31%
31%
31%
31%
High Purchasing Frequency
19%
63%
19%
19%
25%
56%
38%
56%
6%
High Average Value per Order
56%
13%
31%
0%
19%
13%
13%
High Frequency of Promotions
56%
25%
19%
6%
25%
50%
31%
19%
High Competitor's Growth
44%
13%
44%
50%
25%
25%
44%
19%
38%
High Demand Volatility
38%
25%
38%
56%
31%
13%
56%
25%
19%
The results suggest the following:
e
The factors that drive the decision of serving the customers directly are: high
contribution margin, high service strategy, high merchandising requirements, and
high innovation velocity (new product introduction).
e
The factors that drive the decision of serving the customers through distributors
are: high market coverage and low cost strategy.
99
e
The factors that drive an exclusive distribution are: high product complexity, short
self life, high unit value, high service strategy, high average value per order and
contribution margin, and high requirements for power and negotiation.
* The factors that drive the selection of a presales scheme are: high requirements of
power and negotiation, broad product portfolio, and high average value per order.
6. The results were shown to the participants.
7. The following dimensions (figure 39) were created collectively to synthetize and
capture the top factors that drive the channel design/selection process:
FIGURE 39: KEY DIMENSIONS FOR CHANNEL DESIGN/SELECTION
Number of
SKUs
Number of
Competitors
Drop Sie
Product
Lifecycle
Physical
Characteristics
Di-Omension 1:
Competition
Dimension 2: DensIty
of Orders
Merchandising
Requirements
-
Purchasing
Frequency
..
-Brand..
Market
Awareness/
Mgrket She
ACoverage
Revenue per
Order
The first dimension was named "Competition Intensity". It integrates the following
factors: number of competitors, product lifecycle, merchandising requirements,
market share, and brand awareness. This dimension captures the level of service
required to compete in a specific market.
100
The second dimension was named "Density of Orders". It includes the following
factors: drop size (average size of orders), number of SKUs, physical characteristics
of products (i.e. bulky, fragile, perishable), purchasing frequency, market coverage,
and average revenue per order. This dimension intends to describe the effort required
to deliver products to customers.
8. As a final step, the most common sales and distribution schemes were positioned
according to the dimensions defined in the previous step. The actual position of the
sales and distribution schemes is directional, which means that there is no underlying
quantitative analysis driving the exact position of each scheme. The following
framework (figure 40) shows the final iteration develop by the research group.
FIGURE
40: FRAMEWORK FOR CHANNEL DESIGN/SELECTION
Competition Intensity
High
Low
High
On-Board
Presales
Direct Sales
Exclusive Distribution with Presales
Exclusive Distuibutor with Direct Sales
Exclusive Distributor by Category
General Distributor
Density of
Orders
General Distributor
Low
Note: Direct Sales is equivalent to sales via EDI,Internet Portal,and Telephone/Call
Center. This scheme does not requirethe physical presence of a sales/marketingfigure.
To take into practice and validate the results of the workshop, the framework shown
above was used to evaluate the companies presented in the case study section. The
criteria used for evaluating selected companies is described in figure 41.
101
14
FIGURE
rn,
41: DEFINED CRITERIA FOR EVALUATING COMPANIES
I tum ILL
umpeuturs
-
regn I proaucts cnaracterizea Dynign weignt,
perishable, fragile *i.e. ice cream, cement) - 3
Medium (Some handling requirements are
required *i.e. glass bottles) - 2
Low (Not special requirements *Plastic) - 1
3
Medium (between 2 and 5 competitors) - 2
Low (<2competitors) - 1
Competitor's Growth
Product Lifcycle
Introduction or Declive - 3
Growth - 2
Mature - 1
Merchandising
Requirements
Brand Awareness
Market Share
High (>5 % in Revenues) - 3
Medium (between 5 and 10 %in Revenues) - 2
Low (<5%in Revenues) - 1
Orders per Day
Average Revenue per Order
High(>3 per Week) - 3
Medium (between 1 and 2 per Week) - 2
Low (Not/Rarely Required) - 1
/
Drop Size
High (>70% ) - 3
Medium (between 20% and 70%)- 2
Low (<20 %) - 1
Purchasing Frequency of
Customers
Market Coverage
Number of SKUs
High (<20 customers served per vehicle) - 3
Medium (between 20 and 40 customers served per
vehicle) - 2
Low (>40 customers served per vehicle) - 1
High (> 40) - 3
Medium (between 20 and 40) - 2
Low (<20) - 1
High (> USD$200) - 3
Medium (between USD$100 and USD$200)- 2
Low (<USD$100)- 1
High (Daily, or 3 times per week) - 3
Medium (Weekly) - 2
Low (Every two weeks or more) - 1
High (Urban and Rural Territories) - 3
Medium (Urban and some Rural Territories) - 2
Low (Selected Urban Territories) - 1
High (>50)- 3
Medium (between 10 and 50) - 2
Low (<10) - 1
The results of the analysis are summarized in the following table:
Table 8: Company' scores based on two dimensions
102
Company
Competition
Intensity
Density of
Orders
MIT Soft Drinks
MIT Brewery
BIMBO
AMANCO
CRUZ AZUL
CAMPBELL'S
BRIGHTSTAR
MHONSON CTL
MIT Cement
MIT Candy
MIT Tobacco
MIT Confectionary
MIT Foods
MIT Foods (Food Service)
MIT Paint
As it can be observed in the table above, leading companies such as MIT Brewery
MIT Soft Drinks, and Bimbo scored high on both dimensions, requiring high levels of
service as well as a high effort to deliver products to customers. In contrast, Amanco,
Campbell's Mexico, and Johnson Controls Mexico are some of the enterprises that
received a lower score in both dimensions. The effort required to deliver products as well
as merchandising requirements demanded from these companies are not as high as the
ones demanded from companies such as MIT Brewery, MIT Soft Drinks and Bimbo.
Note: raw data used for these analyses is provided on the appendix.
The following diagram (figure 42) show the relative positioning of each company in
the context of the framework developed in the workshops:
FIGURE
42: SELECTED SCHEMES BY COMPANY
103
Competition Intensity
High
High
+
MTkfewWv
Mf Cement
BRIGHITZ AR9
Density of
Orders
MTohT
(I~~~
JOHNSON CTLS
AMANCO
Low
Even though this analysis provides insights on the sales and distribution schemes that
could satisfy both customers and manufacturers requirements, it is important to highlight
that the analysis was conducted at a company level and thus can only be used as
directional (figure 43). Most of the companies use multiple sales and distribution
schemes depending on the territory (urban versus rural), channel (retailer versus mom
and pop), and line of products.
FIGURE 43. DIRECTIONAL AND TACTICAL/OPERATIONAL APPROACHES
104
Company Level
_Operai
Region/Tentory Level
Channel/Customer Level
nal
Product level
Table 9 shows a comparison between the predominant scheme used by selected
companies and the suggested schemes based on the framework presented above. There
were several differences between the current and recommended schemes. It is important
to emphasize that the framework provides a recommendation based the "ideal" model
given the criteria defined for the two aggregated dimensions. When comparing these
results, it can be observed that the current predominant channel (schemes) and the
suggest channel (schemes) are aligned in terms of the type of distribution (Direct versus
Indirect). However, major differences emerge when differentiating between Exclusive
and General Distribution, as well as Exclusive Distributor with Presales and Exclusive
Distributor with Direct. One plausible reason for these discrepancies is that most of the
selected companies differentiate their sales and distribution schemes depending on the
customer/channel profile and type of territory. For instance, MIT Paint does not sell
enough volume to justify having an Exclusive Distributor and therefore the company uses
an Exclusive Distributor by Category. Similarly, MIT Tobacco Ecuador requires intense
merchandising to push products from partner companies and therefore it requires a
Presales/On-board scheme.
105
Table 9. Qualitative Analysis & Results Justification
Company
MIT Cement
Current Strategy
Direct - w/Marketing figur
Distribut for Category Distributor
w/Presales
Predominant Channels Suggested Channel
Exclusive Distributor for
ECluve
f
Category Dtro
- w/Presales
Direct
Direct - Presales, onboard sales
Direct - Presales
Justification
Strategies to increase direct
distribution - roll out of a call center for
orders between 1 and 100 bulks
Direct - wlPresales, onMITboard
sales, call center
Exclusive Distributor w/Presales, on-board sales
MIT Foods
Exclusive Distributor for
Category - w/Presales
Exclusive Distributor for Exclusive Distributor Category - w/Presales
w/Presales
Do not have enough volume and
variety of SKU to justify an Exclusive
Distributor. However, a sales team
supervise the sales and distribution
schemes of the distributor (shared
KPIs by channel and by customer)
MIT Brewery
Direct - w/Presales, onboard sales, call center, Direct - w/Presales, onEDI
board sales
Exclusive Distributor w/Presales, on-board sales
Direct - w/Presales,
on-board sales
JHONSON CTL
Exclusive Distributor Exclusive Distributor w/Presales, on-boad sales, w/Presales, on-boad
call center
sales, call center
Exclusive Distributor Dirto
Customers do not have the
infrastructure (telephone, internet
connection, computer)
Direct - w/Presales
Exclusive Distributor
Corporate Strategy focused on service
and strong bonds with customers
Direct - w/On-board
sales
Direct - w/Presales,
on-board sales
Direct - w/Presales
MIT Foods (Food
Service)
BIMBO
MIT Paint
AMANCO
Exclusive Distributor by
Category - w/Presales
General Distributor w/Presales
Direct - w/Presales, onboard sales, call center,
EDI
Exclusive &General
Distributor - w/Presales, on
board sales
Direct - 3PL w/Presales
Exclusive Distributor by
Category - w/Presales
Exclusive &General
Distributors - w/Presales
_______________________________
MIT Candy
Exclusive Distributor w/Presales, on-board sales
Exclusive Distributor by Exclusive Distributorw/Presales
Category - w/Presales
Exclusive7&General
Distributos
w/Presales
Exclusive Distributorw/On-board sales
Not enough volume to justify an
Exclusive Distributor
Exclusive Distributor Direct
General Distributor
Some of the factors that justify the
current schemes are: Products are
classified as "by Impulse", Loyalty,
Merchandising Control, Intense
Competition, IT Development
Direct - 3PL w/Presales
CAMPBELL'S
Exclusive Distributor by
Category - w/Sales and
marketing figure
Direct
-
w/Presales
MIT Confectionary
Exlusive & General
Distributor - w/Presales
Direct - wlPresales
MIT Tobacco
CRUZ AZUL
Exlusive Distributor w/Presales, on-board sales
Exlusive &General
Distributor - w/Presales
Direct - 3PL w/Presales Exclusive Distributor Direct
Exclve Distribu
Direct - 3PL w/Presales
ieDtu
Exlusive Distributor w/Presales, on-board
sales
Exlusive & General
Distributor - w/Presales
106
Company uses 3PL as an exclusive
distributor
Some of the factors that justify the
current schemes are: Products are
classified as "by Impulse", Loyalty,
Merchandising Control, Intense
Competition, IT Development
Exclusive Distributor - This company has a partnership with
Direct
liquor and tobacco companies that
required special merchandising
Direct
Company has plans to transition
towards direct (3PL as a subsidiary)
4.3 Results Comparison: Analysis from Literature versus Analysis from
Practical Experience
As it can be observed in table 10, both analyses provide a high level direction in terms
of the type of sales and distribution strategy that a company should employ. In a sense,
the analysis based on the literature delivers more accurate results because of the higher
level of granularity used as input data. Nonetheless, the analysis based on practical
experience does help to determine whether a company should use a direct or indirect
sales and distribution scheme. The factors considered in both analyses are similar. Even
though the analysis from literature is based on four factors, most of the variables
considered in the analysis based on practical experiences relates to one of these four
factors (see figure 44).
FIGURE
44.
FACTORS CONSIDERED IN THE ANALYSIS FROM LITERATURE AND IN THE
ANALYSIS FROM PRACTICAL EXPERIENCE
Workshops
Number of Competitors
Competitor's Growth
Product Lifcycle
Literature
Market Share
Product Complexity
Drop Size
Geographic Concentration
Merchandising Requirements
Brand Awareness / Market Share
Physical Characteristics of Product
Drop Size
Orders per Day
Average Revenue per Order
Purchasing Frequency of Customers
Market Coverage
Number of SKUs
Workshops
Number of Competitors
Competitor's Growth
Product Lifcycle
Merchandising Requirements
Brand Awareness / Market Share
Physical Characteristics of Product
Drop Size
Orders per Day
Average Revenue per Order
Purchasing Frequency of Customers
Market Coverage
Number of SKUs
107
Captured in
Market Share
Market Share
Product Complexity
Product Complexity
Market Share
Product Complexity
Drop Size
- (Not significant in the model)
Geographic Concentration
Table 10 provides a summary of the recommended sales and distributions schemes for
each company. It can be observed that both analyses (based on literature and based on
practice) had a hard time matching the schemes used by the following companies: MIT
Cement, MIT Confectionary, MIT Candy, and MIT Paint. Even though, given the overall
position in the market, the companies might opt to use channels that do not require
intense merchandising or service; these firms allocate resources to have additional control
at the point of sales. A possible reason for this is that, with the exception of MIT Paint,
the companies are providing superior levels of service to build loyalty and protect market
share at the point of sales.
Overall, both analyses seem to capture some of the most important factors that drive
the channel design/selection process. Even though there are some discrepancies between
the current and the recommended sales and distribution schemes, most can be explained
by either the corporate strategy or some specific elements of the dynamics of the market.
Table 10. Summary of Analysis from Literature and Analysis from Practical
Experience by Company
108
C
5. Conclusions
Designing or selecting sales and distribution channels requires an in-depth
understanding of the strategy of the firm as well as of the requirements of the market. The
results of the analysis presented in this research suggest that it is critical for companies to
design channels from the customer-in rather than from the supplier-out. Both analyses are
more representative at higher levels or granularity. In the analysis based on literature, the
results were more accurate because the data was collected a market/segment level. By the
same token, the analysis based on the findings from the workshop suggests that sales and
distributions schemes should be designed at a segment level (i.e. by channel, by
region/territory, by line of products, etc.) rather than at a company level. We believe that
the framework presented in Section 4.2 is robust enough to be used by companies as they
design their GTM strategies.
In general, enterprises must identify customer requirements at a customer/segment
level, as well as understand the dynamics of the geography, competitors, and end
consumers. In particular, Latin American countries, like many other emerging nations,
are complex to understand. The lack of logistic and technological infrastructure, the
disparity in the level of income amongst the population, the security issues, cultural
factors, and the maturity level of the traditional and modem channel adds significant
complexity to the channel design process. Certainly, companies require having multiple
sales and distribution schemes to meet the diverse requirements from customers or
segments of customers. Only by having a multichannel strategy, companies are able to
allocate resources in such a way that their revenues are maximized and their cost to serve
is minimized.
110
6. Future Research
The analyses presented in this thesis research are limited to list of selected companies,
most of which belong to the consumer packaged goods industry, as well as to a set of
variables defined through a series of workshops and literature review. The research,
through the framework defined as part of the analysis based on practical experience,
intends to provide a high level recommendation on how companies should design or
select a sales and distribution channel to serve the market. However, there are two key
analyses missing from this research. The first one is to research additional representative
factors that could drive the channel design/selection process. For instance, some factors
that emerged from literature review and from discussions with colleges include: access to
cash, trends in urbanization of cities/territories, and the buying power of customers and
consumers. The second analysis should replicate the analysis based on practical
experience, for each company, at a regional level, customer/segment level, and channel
level.
In addition, another element that should be explored is the cost to serve, which is a
measurement that gives an integrated view of costs at each stage of the supply chain. It
reflects the total cost of servicing a product, customer, channel, and/or region. The cost to
serve metric should be included in the framework, since it helps companies determine the
profitability of sales and alternative distribution schemes.
111
7. Appendix
Company Assessment based on Criteria - Raw Data for Analysis based on
Literature Review
16
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Detailed Assessment by Company (Raw Data) - Analysis based on Practical
Experience
Medium (between 2 and 5 competitors) - 2
Low(<2 competitors) -1
Competitor's Growth
2
3
2
1
2
1
3
2
High(>5% in Revenues)-3
Medium (between 5 and 10 % in Revenues)-2
Low(<5% in Revenues)-1
Product Lifcycle
I
1
1
2
2
1
2
1
Introduction or Declive- 3
Growth - 2
Mature - 1
Merchandising
3
3
3
2
2
2
1
1
High (>3per Week)- 3
Medium (between 1 and 2 per Week) - 2
Low (Not/RarelyRequired)- 1
1
2
1
2
2
1
2
1
High (>70% -3
Medium (between 20%und 70%)- 2
Low {<20%) - 1
Requirements
Brand Awareness/
Market Share
Cot petitionlittenSity
Number of Competitors
Competitor's Growth
Product
ifcycle
Merchandiing
Requirements
2313
3
3
3
High (>5 Direct Competitors) - 3
Medium (between 2 and 5 competitors) - 2
Low (<2 competitors) - 1
3
1
1
3
3
2
3
High (>5 % in Revenues) - 3
Medium (between 5 and 10 % in Revenues)- 2
Low (<5% in Revenues)- 1
2
1
1
1
2
1
2
Introduction or Declive - 3
Growth - 2
Mature - 1
1
3
2
High(>3 per Week) - 3
Medium (between 1 and 2 per Week) - 2
Low (Not/Rarely Required) - 1
2
High (>70%) -3
Medium (between 20% and 70%) - 2
Low (<20 %)- 1
1
Brand Awarenes
Market Share
117
Physical Characteristics of Product
e
Hign ( products characterizedby high weight,
perishable,fragile *i.e. ice cream,cement) - 3
Medium (Some handlingrequirements are
required *i.e. glass bottles) -2
Low(Not special requirements *Plastic) - 1
Drop Size
2
2
1
2
3
2
2
3
High (<20customers servedper vehicle) - 3
Medium (between 20 and 40 customersservedper
vehicle)- 2
Low(>40customers servedper vehicle) - 1
Orders per Day
3
3
3
1
2
2
1
1
High (> 40) - 3
Medium (between 20 and 40) - 2
Low(<20) - 1
Average Revenue per Order
1
2
1
2
3
2
3
3
High (> USD$200)- 3
Medium (between USDS100and USD$200)-2
Low(<USD$100)- I
Purchasing Frequency of
3
3
3
2
2
2
2
2
High (Daily,or 3 times per week) - 3
Medium (Weekly) - 2
Low (Everytwo weeksor more) - 1
Market Coverage
3
3
3
3
2
1
2
3
High (Urban and Rural Territories) - 3
Medium (Urban and some Rural Territories) - 2
Low (SelectedUrban Territories) - 1
Number of SKUs
3
2
3
2
1
3
2
1
High (>50) - 3
Medium (between 10 and 50) - 2
Low(<10) - I
Customers
Physica Characteristics
Product
1
3
2
High( products characterized by highweight,
perishable, fragile *i.e. ice cream, cement) - 3
Medium (Some handling requirements are
required *I.e. glass bottles) - 2
Low (Not special requirements *Plastic) - 1
Drop Size
3
1
1
1
1
2
2
High (<20 customers served per vehicle) - 3
Medium (between20 and 40 customersservedper
vehicle)- 2
Low (>40customersservedpervehicle)- 1
Orders per Day
1
3
2
3
3
1
1
High (> 40) -3
Medium (between 20 and 40)- 2
Low (<20)- 1
Average Revenue per Order
3
1
3
1
1
3
2
High (> USD$200)- 3
Medium (between USD$100andUSD$200)- 2
Low (<USD$100)
-I
Purchasing Frequency of
Customers
2
2
2
3
2
2
2
High (Daily,or 3 times per week)- 3
Medium (Weekly) -2
Low (Everytwo weeksor more)- 1
Market Coverage
3
3
3
3
3
3
3
High (UrbanandRuralTerritories)-3
Medium (Urban andsomeRural Territories) - 2
Low (SelectedUrbanTerritories)- 1
Number of SKUs
I
1
1
2
2
1
3
High (>50)- 3
Medium (between 10 and 50)- 2
Low(<10) - 1
118
8. References
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-
Turbulent Environments" Journal of Marketing 55:4 (October) 77-93
Achrol Ravi S. and Kotler Philip (1999) "Marketing in the Network Economy"
-
Journal of Marketing 63 (Special Issue) 146-163
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Aiken, M. and Hage J. (1968)
"Organizational
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and Intra-
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-
Alderson, W. (1950) "Marketing Efficiency and the Principle of Postponement" Cost
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-
Alderson, Wroe (1957) Marketing Behavior and Executive Action, Homewood, Ill:
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