Channel quality refers to the expertise, competencies, and skills of established retailers in a nation and their ability to sell and support the products of international businesses. Although the quality of retailers is good in most developed nations, in emerging markets and less developed nations from Russia to Indonesia, channel quality is variable at best. The lack of a high-quality channel may impede market entry, particularly in the case of new or sophisticated products that require significant point-of-sale assistance and after-sales services and support. When channel quality is poor, an international business may have to devote considerable attention to upgrading the channel, for example, by providing extensive education and support to existing retailers, and in extreme cases by establishing its own channel. Thus, after pioneering its Apple retail store concept in the United States, Apple opened retail stores in several nations—including the United Kingdom, France, Germany, Japan and China—to provide point-of-sales education, service, and support for its popular iPod, iPad, iPhone, and iMac products. Apple believes that this strategy will help it to gain market share in these nations.
The expertise, competencies, and skills of established retailers in a nation, and their ability to sell and support the products of international businesses.
CHOOSING A DISTRIBUTION STRATEGY
A choice of distribution strategy determines which channel the firm will use to reach potential consumers. Should the firm try to sell directly to the consumer? Or should it go through retailers, go through a wholesaler, use an import agent, or invest in establishing its own channel? The optimal strategy is determined by the relative costs and benefits of each alternative, which vary from country to country, depending on the four factors we have just discussed: retail concentration, channel length, channel exclusivity, and channel quality.
Because each intermediary in a channel adds its own markup to the products, there is generally a critical link among channel length, the final selling price, and the firm’s profit margin. The longer a channel, the greater the aggregate markup, and the higher the price that consumers are charged for the final product. To ensure that prices do not get too high as a result of markups by multiple intermediaries, a firm might be forced to operate with lower profit margins. Thus, if price is an important competitive weapon, and if the firm does not want to see its profit margins squeezed, other things being equal, the firm would prefer to use a shorter channel.
However, the benefits of using a longer channel may outweigh these drawbacks. As we have seen, one benefit of a longer channel is that it cuts selling costs when the retail sector is very fragmented. Thus, it makes sense for an international business to use longer channels in countries where the retail sector is fragmented and shorter channels in countries where the retail sector is concentrated. Another benefit of using a longer channel is market access—the ability to enter an exclusive channel. Import agents may have long-term relationships with wholesalers, retailers, or important consumers and thus be better able to win orders and get access to a distribution system. Similarly, wholesalers may have long-standing relationships with retailers and be better able to persuade them to carry the firm’s product than the firm itself would.
Import agents are not limited to independent trading houses; any firm with a strong local reputation could serve as well. For example, to break down channel exclusivity and gain greater access to the Japanese market, when Apple Computer originally entered Japan, it signed distribution agreements with five large Japanese firms, including business equipment giant Brother Industries, stationery leader Kokuyo, Mitsubishi, Sharp, and Minolta. These firms use their own long-established distribution relationships with consumers, retailers, and wholesalers to push Apple computers through the Japanese distribution system. Today, Apple has supplemented this strategy with its own stores in the country.
If such an arrangement is not possible, the firm might want to consider other, less traditional alternatives to gaining market access. Frustrated by channel exclusivity in Japan, some foreign manufacturers of consumer goods have attempted to sell directly to Japanese consumers using direct mail and catalogs. Finally, if channel quality is poor, a firm should consider what steps it could take to upgrade the quality of the channel, including establishing its own distribution channel.
• QUICK STUDY
1. Outline the main differences between countries in distribution systems.
2. How do differences in distribution systems influence a company’s choice of distribution strategy?