Marketing in the 1970s
Changes in Distrihutive Institutions
WILLIAM R. DAVIDSON
Massive changes are taking place among firms in the distrihutive industries. These changes are as much qualitative as quantitative and defy
ohjective appraisal on the basis of conventional data sources. The author
identifies six major interrelated changes and comments ahout their managerial and research implications.
purpose of this article is to indicate briefly
TtheHE major
changes to be expected in the distribution industries during the first half of the 1970s.
Some of the major implications of these changes
from the standpoint of business strategy and research will be identified. The distributive structure
of the economy is defined to include retailing, service, and wholesaling establishments, plus the distribution activities of manufacturers and other
form-utility producers as well as the product-acquisition activities of consumers. It is important to
consider both the manufacturer and the consumer
as active participants in the distribution process, in
an era characterized by increasing vertical integration and enlarged willingness to shift marketing
functions among or between the traditional channel
of distribution levels.
Changes in the Distrihutive Structure
It is not possible to deal with all anticipated
changes in a comprehensive manner or to support
points of view with documentation within the scope
of this article. Consequently, attention is focused
upon a few major interrelated institutional changes.
The discussion will be somewhat oversimplified for'
purposes of emphasizing the major thrusts within a
complex and dynamic distribution environment.
Moreover, attention is restricted primarily to the
distributive structure for consumer goods, although
many of the changes here discussed have a counterpart in industrial marketing.
The following changes were selected for discussion:
1. Rapid growth of vertical marketing systems.
2. Intensification of intert>'pe competition.
3. Increasing polarity of retail trade.
4. Acceleration of institutional life cycles.
5. The emergence of the "free-form" corporation
as a major competitive reality in distribution.
6. The expansion of nonstore retailing.
Each of these changes represents a trend the direction of which is already evident. These trends are expected to accelerate and intensify in the early 1970s.
The major impact of these trends will be upon the
range of strategies which can be successfully implemented by firms within the distributive structure.
Growth of Vertical Marketing Systems
Conventional marketing systems are being
rapidly displaced by vertically organized marketing
systems as the dominant distribution mechanism in
the economy. Conventional channels are those fragmented networks in which loosely aligned and relatively autonomous manufacturers, wholesalers, and
retailers have customarily bargained aggressively
with each other, established trade relationships on
an individual transaction basis, severed business
relationships arbitrarily with impunity, and otherwise behaved independently.
Vertical marketing systems, by way of contrast,
consist of networks of horizontally coordinated and
vertically aligned establishments which are managed
as a system. Establishments at each level operate at
an optimum scale so that marketing functions within the system are performed at the most advantageous level or position.
The recent rapid and expected continued growth
of vertical marketing systems is evident by the
performance of three major types of distributive
systems with high vertical programming potential
—corporate, contractual, and administered systems.
Corporate systems may be regarded as roughly
synonymous with integrated chain store systems,
although the impetus for vertical programming may
come from companies primarily regarded as retailers
(e.g.. Sears, Roebuck & Company), or manufacturers
(e.g., company-owned stores in the self supply network of Firestone Tire & Rubber Company), or
wholesalers, some of whom have company-owned
stores and are integrated into manufacturing. Chains
of 11 or more store units, which accounted for a
relatively stable one-fifth of total retail sales between 1929 and 1958, exhibited a renaissance of
growth in the 1960s and now account for some 30%
of all retailing, with a continuously accelerating
growth rate evident.
Contractual systems include three sub-types—
wholesaler-sponsored voluntary chains, retailer-cooperative organizations, and franchising organizations. Each sub-type involves voluntary but contractual integration of retail store or service units
with other supply units at an antecedent channel
level. There are no official data on the aggregate
importance of such systems. A recent trade-hytrade analysis bv the author and his associates
8
suggests that 35 to 40% of all retail trade is accounted for by some form of voluntary chain, cooperative, or franchising organization. This includes old organizational forms such as automobile
dealer franchises and the I.G.A. type of food store
voluntary, and very new organizations such as
Ethan Allen furniture franchise stores of the
Baumritter Corporation. Other new forms are the
various convenience food stores and fast food franchise operations.
Contractual systems, like chain store organizations, are not new. However, their recent and expected future rapid growth rate vUis the increasing sophistication of vertical programming are of major
interest. Once characterized primarily by goals of
economy in the form of buying power and low operating expense ratios, such operations have moved into
an era of complete management systems, achieving
high market impact through the rationalization and
clarification of the total firm product-service offer.
The third type of vertical system, administered,
pertains to a line or classification of merchandise
rather than to a complete store operation. While
historically many examples of close store-vendor
relationships existed, there is current intensification
of such relationships by means of vendor-developed
comprehensive programs for distribution through
the entire channel. Of interest are retail merchandising programs developed by O. M. Scott and Sons
Company in lawn products, by Villager in young
women's apparel, by Magnavox Company in the
home entertainment field, and by Kraftco Corp. in
the supermarket dairy case. There are no data of
any overall significance for administered systems of
this type. However, proprietary studies conducted
by the author and his associates for a group of leading firms in the general merchandising field clearly
indicate that such vertically coordinated programs
are growing rapidly.
Intensification of Intertype Competition
All channel levels are characterized by increasing
competition of an intertype character. A phenomenon
known in the early 1950s as scrambled merchandising has surpassed all early expectations predicted
for it. Owing to increased fragmentation or segmentation of the consumer market, a wide variety
of establishment types find it increasingly feasible
to abandon "line of trade" conventions and to offer
a variety of products that may be purchased by consumers to which that type of firm has market access.
It is estimated that as many as 450,000 retail establishments (about one-fourth of all retail stores)
are involved to some degree in selling tires, batteries,
or other automotive parts, supplies, or accessories.
As many as 200,000 outlets are believed to be involved to some degree in marketing housewares.
This accelerated trend means that wholesale distributors and manufacturers who wish to achieve a
significant total market share will find it increasingly
Journal of Marketing, January, 1970
necessary to develop multiple marketing programs
designed to meet the economic goals and operating
characteristics of specific outlet types. It also
demonstrates the diminishing analytical significance
of conventional Census of Business classifications
(e.g., drugstores, hardware stores, and jewelry
stores).
Increased Polarity of Retail Trade
Retail trade is becoming increasingly polarized at
two extremes. On the one hand are mass-merchandising operations that have successfully implemented
supermarket approaches. This group includes the
general merchandise types of discount or promotional department stores, and also the more specialized establishments with a large mass appeal. Examples are the 70,000 square foot stores of Central
Hardware Company of St. Louis, the home modernization stores of the Wickes Corporation and Lowe's
Companies, Inc., and the large mass appeal drug
store such as Super X, a relatively new division of
The Kroger Company. Super X has developed into
the third largest U.S. drug chain since its first store
opening in 1961. At the other pole are highly
specialized boutique types of stores which carry a
deep assortment of a very specialized line, often
limited to a concept or a "look," as opposed to commodity types. Illustrative examples are Villager
specialty shops which feature only a well-coordinated
assortment of classic sportswear items, and the
Ethan Allen stores of Baumritter which sell only
Early American style furniture and coordinated
furnishings. Such shops tend to be strong on
services and are often distinguished by the provision of consumption advice as opposed to conventional
selling approaches.
At both poles, establishments tend to be organized
into vertical marketing systems upon the achievement
of scale. Between the poles are conventional and
often nonprogrammed single-line stores of the family
apparel, hardware, drug, and jewelry types. For
these stores and their supply systems, the polarization is suggestive of increased obsolescence and
profit difficulties in the 19708.
• ABOUT THE AUTHOR. William R.
Davidson is professor and chairman.
Faculty of Marketing, College o( Administrative Science, The Ohio State
University. He is coauthor of Marketing, 8th ed. and Retailing Management.
3rd ed., and author of numerous papers
and articles. Professor Davidson is a
past president of the American Marketing Association.
Professor Davidson
acknowledges
with gratitude the constructive help and assistance received
from his associates. Dr. Alton F. Doody, professor of marketing. The Ohio State University; Dr. Cyrus C. Wilson, vice
president. Management Horizons, Inc.; and Dr. Bert C. McCammon, Jr., director of the Center for Advanced Studies in
Distribution, a Division of Management Horizons, Inc., Columbus, Ohio.
Marketing in the 1970s
Acceleration of Institutional Life Cycles
Institutions, like products, may be regarded as
having life cycles which consist of stages such as
inception, rapid early growth, maturity, and decline.
The time required to reach a mature stage is constantly diminishing. Conventional department stores,
as an institutional type, achieved a mature position
over the span of about three-quarters of a century.
The more standardized variety store reached maturity within half a century. Supermarkets achieved
the same within little more than a quarter of a
century. Fast food service chains and franchising
organizations will have achieved maturity in little
more than one decade.
Further acceleration of institutional life cycles
is to be expected. There will be an attendant massive impact upon existing institutional forms. The
reasons include a variety of total vertical marketing
systems models, a growing number of entrepreneurs
and managers with interorganizational administrative skills, and a stock market that will instantly
fund on a large scale any promising new concept.
The "Free-form" Corporation in Distribution
Distribution industries, once characterized by
institutions which specialized by channel level and
by kind of business classifications, are feeling the
accelerated impact of the emergence of the freeform distribution corporation as a major competitive reality. Free-form corporations are in part a
response to other changes previously discussed,
especially intertype competition and the polarity of
trade, and in part a perceived opportunity to redefine
business purpose so as to better utilize corporate
resources and distinctive competences.
The J. C. Penney Company, Inc. is now an example of a free-form corporation. Ten to fifteen years
ago, Penney's was a chain of small town, limited
service, general merchandise stores. It has now
evolved to an aggressive free-form operation consisting of full-scale urban Penney department
stores, Penney auto and truck service centers. Treasure Island discount stores, the Thrifty Drug Company chain, a large catalog sales division, a financial
subsidiary for accounts receivable funding, a life
insurance marketing program, and European stores
through an equity interest in Sarma S.A., a Belgian
company with 100 stores and 270 franchised units.
Another outstanding and prophetic example is the
Dayton-Hudson Corporation formed in 1969 by the
merger of two of the best known department store
companies (Dayton's of Minneapolis and Hudson's
of Detroit). This corporation also operates Diamonds
department stores (Phoenix) ; Lipman's department
stores (Portland, Ore.) ; Target Stores, Inc., a prominent general merchandise discount chain; Lechmere's, a Boston area hard lines mass merchandiser;
two chains of specialty book stores; several jewelry
store operations; and real estate subsidiaries en-
gaged in shopping centers and other land development activities.
The number of corporations with a newfound
willingness to go anywhere and do an>i;hing in distribution will have increasing competitive impact.
This development is likely to enlarge markedly concentration ratios at all levels of distribution. Moreover, such corporate approaches are often perceived
as strategic ways of avoiding the decline phase of
the institutional life cycle.
Growth of Nonstore Retailing
In an increasingly affluent society which is ever
more oriented to education, leisure, and recreation,
it may be expected that functions performed by
consumers in the product acquisition process will
be somewhat reshuffled with important benefits
accruing to various forms of nonstore retailing and
the distribution networks that supply nonstore
operations. Many housewives will have a lower
relative preference for "shopping," especially for
routine categories of consumption, than for other
demands upon or optional uses of time.
This trend is expected to benefit at-home selling,
illustrated by the growth of Avon Products, Inc.,
with 1968 sales of $558.6 million, an increase of
599^ since 1965. Catalogue selling is also expected to expand. Penney's adventuresome entry
into this field and the expanded use of seasonal
catalogues by all manner of regular store retailers
illustrate the growth of catalogue selling. Marketing
through the mail is presumably increasing as illustrated by single-item and short catalogue promotions.
Examples are product selling promotions by major
oil companies and banks to credit card customers,
credit card companies, magazines, and other firms
not basically in the business of operating stores.
The consumer's desire for time and place utilitj' is
increasing the range of products available through
vending machines as well as the number and types
of vending locations. The development of electronic
devices is making new approaches possible to at-home
shopping for staples which can be supplied by
routinized order processing and delivery from central
distribution warehouses.
Many new concepts involving nonconventional
forms are expected to emerge partly as the contribution of entrepreneurs and also as a new dimension
of the mature corporation which has been reprogrammed for project management approaches under
the free-form pattern.
Research Implications
None of the major trends selected for emphasis in
the preceding sections is readily traceable through
Census of Business benchmark data, other conventional wholesale trade series, or annual statistical
series of trade associations. Hence, one research
problem of considerable magnitude is merely one of
measurement. Beyond that, there are research chal-
10
Journal of Marketing, January, 1970
lenges of managerial significance to ascertain improved methods of managing interorganizational
relationships, to devise sophisticated management
systems which will provide information that will
help managers understand and optimize total system relationships, and to explore ways in which
product life cycle concepts can be better applied to
institutions. In the realm of social concern, it is
essential to study more comprehensively the impact
of these developments upon consumer choice, the
state of competition, and the need for modifications
in public policy, especially antitrust.
Among the methodologies that are expected to
receive major emphasis in the pursuit of these research objectives are (1) empirical economic studies
of competitive conditions and market performance;
(2) computer simulation models to evaluate total
systems performance under varying conditions; (3)
behavioral analyses of concepts of power and conflict in channel relationships; and (4) the utilization of laboratory methods in the refinement of such
behavioral concepts, with a view to better understanding their utilization in total system marketing.
MARKETING MEMO
Applied vs. Academic Research . . .
. . . there are major differences between what usually passes as applied social research and what could happen if we were more self-conscious about what we are
trying to do.
What this comes down to is a big issue indeed. For what is implicit in these
differences is the distinction between an academic discipline and a profession; and
what I am saying is that applied work in this field should be modeled more on the
latter than the former. Professions are based on academic disciplines, but they are
by no means the same. Professions deal with individual cases: they are after practical
consequences that matter: their first allegiance is the treatment of the particular case;
they must make decisions despite uncertainty.
Has the time come for the emergence of a profession out of the behavioral sciences,
as with the relation of medicine to biology, engineering to physics, and the business
schools to economics? My own answer is "yes," to a limited degree—limited because
we still have few self-conscious and self-respecting practitioners of this type and because the idea needs slow and careful development. In some ways we are on the
road, but only partially so. What I like to call policy research, in the sense presented
here, is certainly coming. If nothing else, the demands of the complex mass society
will call forth such applied studies in education, law, health, art and culture, the
mass media, urban affairs, crime and delinquency, and, . . . population control.
—Bernard Berelson, "The Researcher as
a Man of Action," Current Controversies in Marketing Research, edited by
Leo Bogart for The Market Research
Council, pp. 13-20, at pp. 19 and 20.