Chapter 12 The International Marketing Mix: Distribution

Teaching Objectives
In some markets the distribution system may be the single biggest impediment to successful marketing.
An inadequate distribution system may make the cost of reaching some consumers so high that it puts the
price of the product out of reach of the market. In China, for example, the market for a product that exists
in areas outside the major urban centres is often inaccessible because of a lack of a viable distribution
system. In others, the distribution system may be so structured and difficult to enter that is serves as a
major non-tariff barrier. Although beginning to show signs of weakening, the hold that wholesalers and
manufacturers have over many small retailers and laws that protect the system make the distribution
network almost inaccessible to an outsider. The broad focus of this chapter is to present an overview of a
range of distribution systems that confront an international marketer. The teaching objectives are to:
1) Present the variety of distribution channel structures and show how they affect cost and efficiency
in marketing.
2) Examine the Japanese distribution system as it exists today, changes that are rapidly occurring,
and speculate on the eventual changes that will come about there.
3) Detail both the home country and foreign country intermediary alternatives available to an
international marketer.
4) Discuss the factors affecting the choice of a channel.
5) Review the methods of locating, selecting, and motivating channel members.

Comments and Suggestions

1. To illustrate the extreme channel structures that can confront an international marketer, we suggest to
begin the discussion of this chapter with a comparison of a channel structure with a minimum number of
intermediaries (import-oriented distribution structure), the channel structure found in North America, and
the Japanese distribution system. This discussion provides students with a comprehensive view of some
of the types of channel structures confronting the international marketer. Exhibit 12.1, Comparison of
Distribution Channels between North America and Japan, serves as a good illustration of the fundamental
differences between the two.
2. Following the discussion above, we suggest to present a brief overview of the international channel of
distribution alternatives, followed by a discussion of the five Cs of channel strategy.
3. Catalogue sales and mail order are growing in importance as an effective way to enter some markets.
There have been a number of large catalogue retailers, L.L. Bean, Lands End, and Eddie Bauer, for
example; such companies have a good quality image and are cheaper than comparable local-market
goods. The strength of the foreign currency helps Canadian companies to be price competitive, but the
biggest benefit may come from the personal exemption on import tariffs a foreign consumer receives.

Lecture Outline
I.
II.

III.

IV.

V.

VI.

VII.
VIII.

Global Perspective: 500 Million Sticks of Doublemint TodayBillions Tomorrow

Channel of Distribution Structures
A.
Traditional Distribution Structure
B.
Trends: From Traditional to Modern Channel Structures
C.
Retail Giants and Globalization
Distribution Patterns
A.
General Patterns
B.
Retail Patterns
Alternative Intermediary Choices
A.
Home-Country Intermediaries
B.
Foreign-Country Intermediaries
C.
Government-Affiliated Intermediaries
Factors Affecting Choice of Channels
A.
Character
B.
Coverage
C.
Continuity
D.
Control
E.
Cost
Locating Channel Members and Managing Channels
A.
Locating Intermediaries
B.
Selecting Intermediaries
C.
Motivating Intermediaries
D.
Controlling Intermediaries
E.
Terminating Intermediaries
The Internet
International Physical Distribution
A.
Interdependence of Physical Distribution Activities
B.
Benefits of an Integrated Physical Distribution System
C.
Export Shipping and Warehousing
D.
Packing and Marking
E.
International Freight Forwarders
F.
Free Trade Zones
G.
Role of the Internet in International Logistics
H.
The 24-Hour Rule and Logistics

Questions
1.

Define the following terms:

Distribution structure

Foreign sales corporation

Distribution process

Dealers

Traditional distribution structure

Import jobbers

Disintermediation

Manufacturers representatives

Agent intermediaries

Five Cs of distribution

Merchant intermediaries

Integrated logistics management

Home-country intermediaries

Intermodal services

Free trade zone

Export management company

(EMC)
Host-country intermediaries

Foreign freight forwarder

Trading companies

Total physical distribution system

Manufacturers export agent

(MEA)

Logistics integrator

24-Hour Rule

2. Discuss the ways Japanese manufacturers control the distribution process from manufacturer
to retailer.

Manufacturers depend on wholesalers for a multitude of services to other members of the distribution
network. Financing, physical distribution, warehousing, inventory, promotion and payment collection
are provided to other channel members by wholesalers. The system works because wholesalers and
all other middlemen downstream are tied to manufacturers by a set of practices and incentives
designed to ensure strong marketing support for their products and to exclude rival competitors from
the channel.
Wholesalers typically act as agent middlemen and extend the manufacturers control through the
channel to the retail level. Control is maintained by: 1) inventory financing, sales made on
consignment with credits extending for several months; 2) cumulative rebates, rebates given annually
for any number of reasons including quantity purchases, early payments, achieving sales targets,
performing services, maintaining specific inventory levels, participating in sales promotions, loyalty
to suppliers, maintaining manufacturers price policies, cooperation, and contribution to overall

success; 3) merchandise returns, all unsold merchandise may be returned to the manufacturer; and, 4)
promotional support, intermediaries receive a host of displays, advertising layouts, management
education programs, in-store demonstrations, and other dealer aids which strengthen the relationship
among middlemen and the manufacturer.

3. Discuss how the globalization of markets, especially Europe after 1992, affects retail distribution.

There are some important trends in distribution systems that will lead to their eventual globalization.
That is, there is greater commonalty than disparity among middlemen in different countries.
Southland Corporations 7-Eleven Stores are replacing many of the traditional Mom and Pop stores
that have dominated a significant part of Japans retail food distribution. In Spain, 7-Eleven and
Campsa, the Spanish gasoline monopoly, opened 200 7-Eleven minimarkets at Campsa service
stations. Hypermarkets, a retailing innovation developed in France, have expanded beyond French
borders to other European countries and to Canada. Discount, home repair, self-service, and
supermarkets are all mass merchandising concepts gradually spreading all over the world. In
anticipation of Europe after 1992, national and international retailing networks developed throughout
the world. European integration, global brands, globalized media communications, consumers that
expect rational and predictable product assortments, and global companies anxious for their products
to be distributed in the most efficient manner are factors driving a growing number of traditional
distribution channel members to greater efficiencies and competitiveness. Many are developing into
transnational, if not global, operations. Global products require integrated, efficient distribution
systems to achieve maximum effectiveness.

4. To what extent, and in what ways, do the functions of domestic intermediaries differ from those
of their foreign counterparts?

The functions of the domestic and foreign intermediaries are quite similar in many areas, but there are
certain differences. First, the domestic agent usually takes possession of the goods, whereas the
foreign agent does not. In the area of setting prices, the domestic agent has the authority to do so,
while his foreign counterpart does not. Both types of domestic middlemen arrange for the shipping of
goods, but the foreign middlemen do not. Two other differences exist between foreign and domestic
agents. The domestic agent does some promotion and selling, and occasionally extends credit. On the
other hand, foreign agents usually do not participate in these activities.

5. In what circumstances is the use of an EMC logical? How may these circumstances differ
compared to another situation where the use of a trading house, or a freight forwarder, may be
a better alternative?

The export management company is the logical choice of middlemen for firms with relatively small
international volume or for those that do not want to involve their own personnel in the international
function.

Trading houses are likely to be employed when adequate coverage of a market, market access, or
political acceptability is not possible by one firm. This would be the case in trade between developed
and underdeveloped countries as well as between Western nations and the former Communist bloc
countries.

6. Discuss how physical distribution relates to channel strategy and how they affect one another.

Two extremely different channel policies exist in various areas which affect physical distribution. For
example, in Turkey the buyer must seek out the seller with very little service offered by the latter.
This is an example of the marketing channel working backwards. The normal policy is for the seller
to seek out the buyer, excluding the retail market, and for the seller to offer a whole range of services.
In some areas, middlemen are characterized by specialization. This practice tends to make the
distribution process overly complex. Another channel policy found in many countries is the existence
of huge middlemen and tiny middlemen with no one in between these two. The large ones tend to be
very efficient in distribution, while the other is not. In most countries other than the United States and
U.S.S.R., channel length is very long. This slows up the physical distribution of goods. Often,
distribution of goods is slowed because of low inventories caused by the high cost of money. It is
unprofitable to maintain a large stock of goods.

7. Explain how and why distribution channels are affected, as they are
when the stage of development of an economy improves.
As an economy advances, the distribution system begins to take the form of distribution in the U.S.
The apparent reason for this change in structure is due to the decentralization of the total marketing
function. As an economy becomes more sophisticated it places increasingly complicated and
sophisticated demands upon the marketing function. This results in modification of the existing
system to be able to meet the increased demand placed upon it by the emerging economy. Consumer
segments become much larger and diversified and each in turn places new demands on the
distribution system which causes modification in order to administer to the requirements of that
segment.

8. Review the key variables that affect the marketers choice of

distribution channels.

The four main variables which affect the marketers choice of distribution channels are (1) the
availability of middlemen, (2) the cost of their services, (3) the functions performed (and the
effectiveness with which each is performed) and (4) the extent of control which the manufacturers can
exert over the middlemens activities.

9. Account, as best you can, for the differences in channel patterns that
might be encountered in a highly developed country and an
underdeveloped country.

The attitude toward the middlemen in underdeveloped countries is generally negative, whereas his or
her place in developed countries is accepted. This feeling in underdeveloped areas exists because the
people emphasize production and consider the middleman unproductive. The result is often that this
function is done on the side or secretly, which makes distribution overly difficult. Also, distribution is
done on a small scale, whereas developed countries are often characterized by the extremely large
middlemen. The poor nations live on a subsistence level. They are not so dependent on trade as
developed countries are. Therefore, the importance of distributors is low. Distribution is slow and
inefficient in underdeveloped countries because the population is widely scattered, inventories are
low (high cost of capital), the middleman is very small, and margins are high. The developed nations
are generally of opposite character.

10. One of the first things companies discover about international patterns of channels of
distribution is that in most countries it is nearly impossible to gain adequate market coverage
through a simple channel of distribution plan. Discuss.
A single channel of distribution is often unavailable in foreign countries. One reason is that the
channels used may be very unfamiliar to the producer and only seem to be complicated. More
realistic reasons may be true in financial arrangements or the unavailability of middlemen. In many
countries, middlemen may be specialists in either product or market area or both. If this is the case,
several different middlemen are needed to distribute a single product in a country or to distribute
several products within a single contiguous area.

11.

Discuss the various methods of overcoming blocked channels.

Buying equity from the middlemen and thereby gaining entrance to the channel. Buying distribution
through wide margins, contract bonuses, and other forms of cash settlements will unblock the
channel.

Seeking alternative channels or new channels can get around the dilemma. The most expensive means
is for the company to build its own channel.

12. Explain free trade zones and illustrate how an exporter may use them.
More than 130 countries around the world have established well over 1,000 various types of free
trade zones (FTZs) to help boost their economies by facilitating international trade and investment. 34
An FTZ is, among other things, a tax-free enclave in which imported goods can be stored or
processed. The zone is not considered part of the country as far as import and other regulations are
concerned. Payment of import duties is postponed until the product leaves the FTZ area for re-export
or for sale in the host country itself. Over time, a number of different types of zones have evolved.
The main types of zones are shown in Exhibit 12.7.
Generally, zones can be classified as follows:
By function: Some zones focus on imports, the best example being those in the U.S. Most zones in
the developing world focus on manufacturing for re-export (Export Processing Zones, or EPZs).
Zones in Europe and some other parts of the world, such as Colon in Panama (the worlds largest of
its kind) are oriented to both imports and exports but do not provide for manufacturing.
By size: Some zones are as small as a bonded warehouse or showroom, or even the humble dutyfree shop we buy from when crossing borders; most are similar to industrial parks, able to
accommodate from a handful to a few thousand firms (e.g., Jebel zone in Dubai has over 2,000
tenants); and some cover an entire city, region, province, or other geographic area, such as the
Shenzhen Special Economic Zone (SEZ) in China.
By ownership level: Most zones are government-owned and operated, and are intended to house
several firms. However, several countries allow individual plants to be designated as subzones of
main, government-operated zones, or simply as independent zones in their own right. Mexicos
maquiladoras, 35 of the U.S.s subzones, and the Philippines ecozones (eco for economic), are
examples.
The advantage of free zones is that an exporter or manufacturer can use them to store, sort, package
or re-package, label or re-label, repair, assemble, or produce productsall the while enjoying a tax
and duty free environment for the ingredients or components used in making the products. For
example, a producer may collect various components from various source countries into a zone,
create the final product there, re-export it in various lot sizes to zones at various target markets, and
warehouse it there until demand requires that it be released to the market. Throughout this process, no
customs or duties are paid until the final rollout at the end market. Additional advantages include
that zones are, more often than not, located at strategic points along trade routes, and that
governments in developing countries support them by providing them with more advanced
infrastructure than in the country-proper area, better security, and other privileges.
Given these advantages, companies use FTZs in one of two main ways. First, they may use an
individual zone as a hub for assembly, distribution, and/or just-in-time-marketing. For example, if a
producer of canned food sends large product shipments to various markets with the cans already
labelled to meet the target countries legal requirements, it runs the risk that sales may be more brisk
than expected in one market than another resulting in shortages in one case and an overstock in the
other. Instead, the producer can send one shipment, smaller than the combined total in the previous
scenario, to a zone but without labelling the products. The labelling can then be done according to
demand from each of the markets served. If more than one zone is used, this raises the second main

way in which zones can be capitalized uponthe manufacturer can create entire zone networks as
part of its international supply chain and global strategic planning.
Canada is the only G8 country that does not have active FTZs of any kind. By contrast, the U.S. has
more than 250 general purpose zones (in the U.S. they are called Foreign Trade Zones) and over
500 individual corporate facilities designated as Subzones. While the absence of zones domestically
in Canada affects trade overall, the presence of zones in the U.S. and Mexico presents a great
opportunity for Canadian producers wanting to expand there. More than 2,600 foreign companies
participate in Mexicos maquiladoras program, with finished products valued at more than $30 billion
annually.
13.
Research selected foreign trade zones in the U.S., using their
websites, and outline the services and benefits they offer to firms that
use them.
This is a student project.
14. Why would an exporter use the services of a freight forwarder?
Discuss.
The foreign freight forwarder, a licensed distribution intermediary, arranges for the shipment of goods
as the agent for an exporter. The forwarder is an indispensable agent for an exporting firm that cannot
afford an in-house specialist to handle paperwork and other export trade mechanics. In Canada, these
intermediaries are represented by the Canadian International Freight Forwarders Association
(www.ciffa.com). Even in large companies with active export departments capable of handling
documentation, a forwarder is useful as a shipment coordinator at the port of export or destination.
Besides arranging for complete shipping documentation, the full-service freight forwarder provides
information and advice on routing and scheduling, rates and related charges, consular and licensing
requirements, labelling requirements, and export restrictions. Further, the agent offers shipping
insurance, warehouse storage, packing and containerization, and ocean cargo or airfreight space.
15. Besides cost advantages, what are the other benefits of an effective
physical distribution system?
There are more benefits to a system of physical distribution than cost
advantages. An effective physical distribution system can result in optimal
inventory levels and, in multiplant operations, optimal production capacity, both
of which can maximize the use of working capital. In making plant-location
decisions, a company with a physical distribution system can readily assess
operating costs of alternative locations to serve various markets. A physical
distribution system may also result in better (more dependable) delivery service
to the market. When production occurs at different locations, companies are able
to determine quickly the most economical source for a particular customer. As
companies expand into multinational markets and source these markets from
multinational production facilities, they are increasingly confronted with cost
variables that make it imperative to employ a total systems approach to the
management of the distribution process to achieve efficient operation. Finally, a
physical distribution system can render the natural obstructions created by
geography less economically critical. Getting the product to market can mean
multitransport modes, such as pedal power in Vietnam and speed trains in Japan.

16. Why would a company engage the services of an intermodal transportation service instead of
performing activities in-house?
In the last decade there has been continuous improvement in the services
available to the international shipper both in the home market and abroad.
Intermodal services, a transportation system that unites various modes of
transportation into one seamless movement of goods from factory to the
customers port of entry, have become more efficient as deregulation allows the
coupling of various modes of transportation. In addition, intermodal marketing
companies (IMCs) evolved to broker transportation services so that an exporter
can make one transaction with an IMC that takes care of the movement of goods
from factory to customer, rivalling the simplicity of single-mode freight
transportation. The IMC stitches together each of the transportation modes
involved in freight movements, which may involve as many as four separate
transportation modes. As one logistics specialist commented, no matter how
fast or timely the ship carrying a 14-metre container from Shenzhen to Long
Beach, it is the speed and dependability of the whole pipelinethe underlying
modes and logistics functions to achieve the door-to-door requirements of the
shipper that matters. Intermodal services in other parts of the world are not as
advanced as in North America and Europe but are improving (you may want to
refer back to our discussion on the massive infrastructure improvements in the
developing world as well as Europe, in Chapter 5).
Another innovation in transportation and logistics is the service provided by
companies such as United Parcel Service (UPS), Federal Express (FedEx), and
others. Besides providing air-express service for packages, these companies are
offering complete logistics management services for their clientstruly door-todoor delivery around the world.
The globalization of marketing and manufacturing, in which component parts are made in several
countries, assembled in some others, and serviced the world over, puts tremendous pressure on a
companys ability to physically move goods. A narrow solution to the physical movement of goods is
the selection of transportation. A broader and clearly superior application is the concept of logistics
management or physical distribution.