Marketing Channels & Channel Conflicts - Aditya Dasgupta


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This is a research project by Aditya Dasgupta for the purpose of Training & Development. All information has been produced by secondary research and does not claim copyright.

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Marketing Channels & Channel Conflicts - Aditya Dasgupta

  1. 1. 1 A Research Project on MARKETING CHANNELS & CHANNEL CONFLICTS By Aditya Dasgupta For Total Package Project Associates Mumbai
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  3. 3. 3 Index Topics: Sl. No. Name of the topic Page no A Keywords 5 B Abstract 5 1 Introduction to the topic 5 1.1 Project Background 5 1.2 Project objective and limitations 7 1.3 Research problem 7 2. Marketing Channel 9 2.1 Multiple marketing channels 11 2.2 Marketing Channel Strategies 14 2.3 Factors That Affect a Product’s Intensity of Distribution 16 2.4 Marketing Channels versus Supply Chains 18 2.5 Channel choice 19 2.6 Channel Dynamics 24 3.1 Channel conflict 26 3.2. Managing channel conflict 30 3.3. Channel power 31 3.4. Strategic implications of channel decisions 33 3.5 Organisational implications 35 3.6 Channel Integration: Vertical and Horizontal Marketing Systems 37 4 Methodology 38 4.1. Research methodology 38 4.1.1 Research purpose 38 4.1.2 Research approach 38 4.1.3. Research methodology II 39 4.1.4. Data collection method 40 4.2 Case study 41 4.2.1 Detail 41 4.2.2 Nature of setup 42 4.2.3 Research technique 42 4.2.4 Line of business 43 4.2.5 Positioning strategy 46 4.2.6 Big Bazaar VS Kirana Store 47 4.2.7 Big Bazaar and five forces 48
  4. 4. 4 Figures: 4.2.8 Kirana shops and five forces 48 4.2.9 4 ps’ of Marketing 49 4.2.10 Profitability 54 4.3 Reasons for the failure of 58 4.4 10 Steps to fix the online retail servicing channel conflict 61 5 Research realiability 66 5.1 Objective 66 5.2 Research question 66 5.3 Research questions relating to the circumstances for creating a direct marketing channel strategy 66 5.4 Research questions relating to how to implement a direct marketing channel strategy 68 5.5 Management capacity 69 6 Conclusion and Recommendation 71 6.1 Conclusion 71 6.2 Recommendation 72 7 Bibliography 73 Sl. No. Name of the topic Page no 1 Marketing channels 9 2 Schematic representation of direct and indirect channels and channel members 10 3 Alternate Channel Arrangements 12 4 Channel switch 20 5 Channel choice 21 6 Product life cycle and distribution method 22 7 Direct marketing channel drivers and barriers 23 8 The long tail 24 9 Model of the five competitive forces that shape strategy 33 10 Channel conflict strategy matrix 35 11 Cash flow 45 12 Place oriented positioning 46 13 Competitive Rivalry 47 14 Futurebazaar Vs Cromaretail 56 15 Solution 61
  5. 5. 5 A. Keywords: • Direct marketing channel • Marketing channels • Channel conflict • Integrated strategy • Management capacity B. Abstract: Due to fear of channel conflict, manufacturers of business to consumer goods are cautious to get involved with a direct marketing channel. This management project is exploring the circumstances under which a manufacturer can develop a direct marketing channel strategy next to their existing channels and how to implement this strategy. Channel conflict can be monitored, assessed, and managed; therefore other circumstances appear to have more influence on a direct marketing channel strategy by manufacturers. A direct marketing channel would be most successful if it was developed as an integral part of corporate strategy and the organizational structure, however difficult that may be to achieve. Therefore, management capacity is the most important prerequisite to provide the strategy, resources, structure, procedures, and commitment required for successful implementation of an integrated direct marketing channel by a manufacturer of business to consumer goods. 1. Introduction to the topic This chapter will serve as an introduction to the topic of this Management Project, which is to explore how and under which circumstances a business to Consumer manufacturer can implement a successful direct marketing channel Strategy.
  6. 6. 6 1.1 Project background Since the mid 1990’s, the Internet became an accepted medium by the general public, providing the modernised world tremendous opportunities and challenges, for individuals, (local) businesses and (multi)-national corporations.Because of the Internet, new business models are being explored, new markets have become available, marketing as a whole has changed, worldwide networks and connections are made, and the end-consumer has received a powerful voice. The Internet has made it possible to reach a large audience without the requirements of a physical presence, making location and time irrelevant for both seller and buyer. These factors are combined in a unique platform for buying and selling, named e- commerce. E-commerce can be described as the process of buying, selling, or exchanging goods, services and information via the Internet. Although direct sales has always been around, not requiring a physical presence to reach a large audience and the potential and benefits of e-commerce provide additional ingredients for (incumbent) manufacturers of business to consumer goods to get involved with selling direct to their end consumers. Additionally, e-commerce and the Internet include some unique characteristics that provide additional benefits for direct selling: the ability to inexpensively store, search, organize, and disseminate vast amounts of information; combined with interactivity and superior customer experience (compared to printed catalogues). Once a manufacturer has decided to add direct selling to its portfolio of distribution channels, there is the potential of (additional) channel conflict as the distributor and retailer feel the manufacturer will act as a direct competitor. Channel conflict as a result of a direct sales channel has been around since direct selling itself, and is not a new phenomenon because of the emergence of e-commerce. However, the relative low entry and set-up cost of e- commerce has made the direct sales channel a renewed strategic option for manufacturers which subsequently has resulted in renewed interest in channel conflict A marketing channel is defined as a system involved with the task of,either directly or indirectly, making anything of value available for use orconsumption. Next to channel conflict, there are other challenges a manufacturer must overcome by operating both direct and indirect marketing channels. Additionally,knowledge about the
  7. 7. 7 Internet medium, potential internal conflicts, product and company positioning; all have an influence on how a direct marketing channel strategy can be developed and implemented. Consider Microsoft’s digital encyclopedia, Encarta, which was first sold on CD and via online subscription in the early 1990s. Encarta nearly destroyed Encyclopedia Britannica, a firm that had dominated the print encyclopedia business for literally centuries. Ironically, Microsoft had actually tried to partner with Encyclopedia Britannica to use its encyclopedia information to make Encarta but was turned down. But today, Encarta no longer exists. It’s been put out of business by the free online encyclopedia Wikipedia. The point is that products and their marketing channels are constantly evolving. Consequently, you and your company have to be ready to evolve, too. 1.2 Project objective and limitations This report, written as the final paper of the Wellingkar College DLP MBA program, will provide insight to managers of business to consumer manufacturers who are contemplating a direct marketing channel, by exploring under which circumstances a manufacturer can develop a direct marketing channel strategy and how this strategy can be successfully implemented. ‘  The term direct marketing channel in this Management Project refers to a direct marketing channel using the Internet and e-commerce. This Management Project will assist both stakeholders in identifying a variety of aspects that could be taken into account when developing and implementing a direct marketing channel. The limitations of this Management Project are in the generalization of the problem, available time and the project guidelines. 1.3 Research problem As described in the project background, the Internet offers great opportunities for manufacturers. However, actually developing and implementing a (successful) strategy for a direct marketing channel is reluctantly done by (incumbent) business to consumer manufacturers as they fear channel conflict with their existing marketing channels will do more harm than good.Manufacturers create the brand and carry out the research and development required to innovate existing products, develop new technologies and products.They invest marketing funds in their brand to create (global) awareness and
  8. 8. 8 stimulate demand for their products. However, a manufacturer is reliant on its distribution channel to get the coverage required to sell their goods. These intermediaries provide amongst others the geographical coverage required to present the manufacturer’s products to as many potential customers as possible. The Internet will never fully replace brick and mortar retail, and retailers themselves are looking into ways of combining e-commerce into a multichannel strategy. However, if a manufacturer is keen to start a direct marketing channel next to their existing marketing channels, their traditional distribution channel threatens to act. This paradigm limits the manufacturer to pursue strategic opportunities, like a direct marketing channel. Although there has been extensive research on how to deal with channel conflict, most manufacturers are influenced by the prospect of channel conflict, which prevents them from starting a direct marketing channel. The uncertainty of both the impact of the channel conflict on the regular business and the success of the direct marketing channel paralyses the manufacturers.It might be that (incumbent) manufacturers use channel conflict as an excuse not to get involved with a direct marketing channel. By not getting involved, manufacturers miss out on the benefits, potential and, most important; ignore their end-consumers wants and desires. There are some manufacturers who are successful in combining their direct and indirect marketing channels, for instance Apple, albeit they too have channel conflict issues. In order to provide guidance for manufacturers to add a direct marketing channel, this Management Project will revolve around the following research problem: Under which circumstances can a direct marketing channel strategy becreated by business to consumer manufacturers? Not only the circumstances are of interest in this Management Project, but also how the strategy can be implemented, which is therefore the second part of the research problem: How can the created direct marketing channel strategy are successfullyimplemented?
  9. 9. 9 2. Marketing channel Figure 1 Before the Internet, manufacturers made products, which were advertised through mass media and sold through a network of distributors and retailers to get the products available to as many potential customers as possible. The importance of distribution is evident: customers must have access to the products in order to purchase them. This network of distributors and retailers can be described as a marketing channel, as they perform more tasks than just distribution and sales. Goldkuhl (2005) has defined a marketing channel as ‘a system involved with the task of, eitherdirectly or indirectly, making anything of value available for use or consumption’. The current economic downturn has deliberately been unmentioned as that has a (relatively) short term impact on customer behaviour. An indirect marketing channel consists of various
  10. 10. 10 channel members, such as distributors and retailers, whereby each member adds value in their own right. Most manufacturers choose to use indirect marketing channels that already sell into specific markets to provide the geographical coverage and additional services required to present the manufacturer’s products to as many potential customers as possible. In a direct marketing channel, the manufacturer engages in direct contact with his end customer, which can be achieved through telephone, sales force, catalogue, or the Internet. Additionally, a direct marketing channel attracts customers with a different buying behavior. Figure 2 :Schematic representation of direct and indirect channels and channel members Channel members are in the business of acquiring and selling manufacturer products, whatever the underlying conditions, and are in principle not exclusive to only one manufacturer. Resellers will primarily stock only those products that will help them obtain their financial goals. From here on the term channel member will be used to describe any indirect marketing channel member, i.e. importer, distributor, reseller, or any other intermediary. This means that, unless a manufacturer has a (very) limited product range, per definition not all products offered by a manufacturer (or brand) will be available through the channel members.
  11. 11. 11 Channel members perform a number of activities that are difficult to duplicate by manufacturers, such as warehousing, providing immediate availability, offering assortments constituted from different manufacturers that allow ones top shopping and providing services, including personal assistance, dressing rooms and repair and return services. 2.1. Multiple marketing channels Multiple marketing channels are defined as using more than one channel to reach the customer. Multiple marketing channels are used as different customers, with different buying behaviours, will flexibly use the channel that best serves their needs (ibid.).Offering multiple marketing channels to consumers may have both competitive and complementary efforts: competitive as it might lead to channel preference, complementary as it might lead to higher customer satisfaction. According to Wilkinson (1973), channels require to operate as an integrated whole to attain efficiency, which can only be accomplished with effective co-operation and coordination between members. Technological change, new products introduced, and the changing nature of the environment are the forces that make cooperation and coordination important (ibid.). Channel integration, for instance, allows a customer to gather product information through the online channel, purchase in a physical outlet, and obtain service again online. Channel integration is most likely to occur within one channel member’s domain, i.e. if a retailer uses various physical shops, aimed at different customer segments, or even in combination with an Internet store. However, a manufacturer can also integrate with his indirect marketing channel, for instance by providing detailed product information and availability at a certain channel member. Alternatively, a manufacturer can also integrate forward, meaning a reduction in channel members between the manufacturer and the end-customer. Although an integrated channel can provide a superior customer experience, highly integrated channels are costly to establish and operate in terms of investments in personnel, equipment, facilities, software, and inventory. Look at the channels in Figure 3"AlternateChannel Arrangements". Notice how in some situations, a wholesaler will sell to brokers, who then sell to retailers and consumers. In other situations, a wholesaler will sell straight to retailers or straight to consumers. Manufacturers
  12. 12. 12 also sell straight to consumers, and, as we explained, sell straight to large retailers like Target. Figure 3: Alternate Channel Arrangements The point is that firms can and do utilize multiple channels. Take Levi’s, for example. You can buy a pair of Levi’s from a retailer such as Kohl’s, or you can buy a pair directly from Levi’s at one of the outlet stores it owns around the country. You can also buy a pair from the Levi’s Web site. The key is understanding the different target markets for your product and designing the best channel to meet the needs of customers in each. Is there a group of buyers who would purchase your product if they could shop online from the convenience of their homes? Perhaps there is a group of customers interested in your product but they do not want to pay full price. The ideal way to reach these people might be with an outlet store and low prices. Each group then needs to be marketed to accordingly. Many people regularly interact with companies via numerous channels before making buying decisions.
  13. 13. 13 Using multiple channels can be effective. At least one study has shown that the more marketing channels your customers utilize, the more loyal they are likely to be to your products. Companies work hard to try to integrate their selling channels so users get a consistent experience. For example, QVC’s TV channel, Web site, and mobile service— whichsends alerts to customers and allows them to buy products via their cell phones—all have the same look and feel. A company can also use a marketing channel to set itself apart from the crowd. Jones Soda Co. initially placed its own funky-looking soda coolers in skate and surf shops, tattoo and piercing parlors, individual fashion stores, and national retail clothing and music stores. The company then began an up-and-down-the-street “attack,” placing product in convenience and food stores. Finally, the company was able to sell its drinks to bigger companies like Starbucks, Barnes & Noble, Safeway, Target, and 7-Eleven stores. Would you like to purchase gold from a vending machine? Soon you will be able to—in Germany. Germans like to purchase gold because it’s considered a safe alternative to paper money, which can become devalued during a period of hyperinflation. So, in addition to selling gold the usual way, TG-Gold-Super-Markt company is planning to install “gold to go” machines in five hundred locations in German-speaking countries. The gold is dispensed in metal boxes, and cameras on the machine monitor the transactions to prevent money laundering.  All in All, the Marketing Channels can be summarized as follows : A. Conventional Channel or Non- Integrated Channel 1. Manufacturer to Consumer In this channel there is no intermediary. Manufacturer makes the goods and directly distributes to consumers. 2. Manufacturer to Retailer to Consumer Retailer is the intermediary between manufacturer and consumer. He purchases goods from manufacturer and sells to consumer. 3. Manufacturer to Wholesaler to Retailer to Consumer In this channel, there are two option, one is wholesaler and other is retailer. Wholesaler buys large scale and sells to retailer and the retailer sells to consumer. 4. Manufacturer to Wholesaler to Consumer Consumer can buy easily and directly from wholesaler. So, in this channel there is only one intermediary and he is wholesaler. 5. Manufacturer to agent to wholesaler to retailer to consumer
  14. 14. 14 B. Integrated Channel or Non conventional channels Integrated channel are modern channel for distribution of goods. These channel can be divided into two parts. 1. Vertical Channel Vertical channel is that corporate channel which are useful for the flow of products which are capital nature. In this, if one company contracts with other manufacturers who will convert the capital product into most usable shape and sell it to the dealers. Then it will be vertical channel. 2. Horizontal Channel Two companies join together for marketing of any product for reducing competition and excess capacity. 2.2. Marketing Channel Strategies i. Channel Selection Factors Selecting the best marketing channel is critical because it can mean the success or failure of your product. One of the reasons the Internet has been so successful as a marketing channel is because customers get to make some of the channel decisions themselves. They can shop virtually for any product in the world when and where they want to, as long as they can connect to the Web. They can also choose how the product is shipped. ii. Type of Customer The Internet isn’t necessarily the best channel for every product, though. For example, do you want to closely examine the fruits and vegetables you buy to make sure they are ripe enough or not overripe? Then online grocery shopping might not be for you. Clearly, how your customers want to buy products will have an impact on the channel you select. In fact, it should be your prime consideration. First of all, are you selling to a consumer or a business customer? Generally, these two groups want to be sold to differently. Most consumers are willing to go to a grocery or convenience store to purchase toilet paper. The manager of a hospital trying to replenish its supplies would not. The hospital manager would also be buying a lot more toilet paper than an individual consumer and would expect to be called upon by a distributor, but perhaps only semiregularly. Thereafter, the manager might want the toilet paper delivered on a regular
  15. 15. 15 basis and billed to the hospital via automatic systems. Likewise, when businesses buy expensive products such as machinery and computers or products that have to be customized, they generally expect to be sold to personally via salespeople. And often they expect special payment terms. iii. Type of Product The type of product you’re selling will also affect your marketing channel choices. Perishable products often have to be sold through shorter marketing channels than products with longer shelf lives. For example, a yellowfin tuna bound for the sushi market will likely be flown overnight to its destination and handled by few intermediaries. By contrast, canned tuna can be shipped by “slow boat” and handled by more intermediaries. Valuable and fragile products also tend to have shorter marketing channels. Automakers generally sell their cars straight to car dealers (retailers) rather than through wholesalers. The makers of corporate jets often sell them straight to corporations, which demand they be customized to certain specifications. iv. Channel Partner Capabilities Your ability versus the ability of other types of organizations that operate in marketing channels can affect your channel choices. If you are a massage therapist, you are quite capable of delivering your product straight to your client. If you produce downloadable products like digital books or recordings, you can sell your products straight to customers on the Internet. Hypnotic World, a UK producer of self-hypnosis recordings, is a company such as this. If you want to stop smoking or lose weight, you can pay for and download a recording to help you do this at v. Competing Products’ Marketing Channels How your competitors sell their products can also affect your marketing channels. As we explained, Dell now sells computers to firms like Best Buy so the computers can compete with other brands on store shelves. You don’t always have to choose the channels your competitors rely on, though. Netflix is an example. Netflix turned the video rental business on its head by coming up with a new marketing channel that better meets the needs of many consumers. Maybelline and L’Oréal products are sold primarily in retail stores. However, Mary Kay and Avon use salespeople to personally sell their products to consumers.
  16. 16. 16 vi. The Business Environment and Technology The general business environment, such as the economy, can also affect the marketing channels chosen for products. For example, think about what happens when the value of the dollar declines relative to the currencies of other countries. When the dollar falls, products imported from other countries cost more to buy relative to products produced and sold in the United States. Products “made in China” become less attractive because they have gotten more expensive. As a result, some companies then look closer to home for their products and channel partners. Technological changes affect marketing channels, too, of course. We explained how the Internet has changed how products are bought and sold. Many companies like selling products on the Internet as much as consumers like buying them. For one, an Internet sales channel gives companies more control over how their products are sold and at what prices than if they leave the job to another channel partner such as a retailer. Plus, a company selling on the Internet has a digital footprint, or record, of what shoppers look at, or click on, at its site. As a result, it can recommend products they appear to be interested in and target them with special offers and even prices. [1] Some sites let customers tailor products to their liking. On the Domino’s Web site, you can pick your pizza ingredients and then watch them as they fall onto your virtual pizza. The site then lets you know who is baking your pizza, how long it’s taking to cook, and who’s delivering it. Even though interaction is digital, it somehow feels a lot more personal than a basic phone order. Developing customer relationships is what today’s marketing is about. The Internet is helping companies do this. 2.3. Factors That Affect a Product’s Intensity of Distribution Firms that choose an intensive distribution strategy try to sell their products in as many outlets as possible. Intensive distribution strategies are often used for convenience offerings—products customers purchase on the spot without much shopping around. Soft drinks and newspapers are an example. You see them sold in all kinds of different places. Redbox, which rents DVDs out of vending machines, has made headway using a distribution strategy that’s more intensive than Blockbuster’s: the machines are located in fast-food restaurants, grocery stores, and other places people go frequently.
  17. 17. 17 Because installing a vending machine is less expensive than opening a retail outlet, redbox has been able to locate its DVD vending machines in more places than Blockbuster can its stores. By contrast, selective distribution involves selling products at select outlets in specific locations. For instance, Sony TVs can be purchased at a number of outlets such as Circuit City, Best Buy, or Walmart, but the same models are generally not sold at all the outlets. By selling different models with different features and price points at different outlets, a manufacturer can appeal to different target markets. Exclusive distribution involves selling products through one or very few outlets. For instance, supermodel Cindy Crawford’s line of furniture is sold exclusively at the furniture company Rooms To Go. Designer Michael Graves has a line of products sold exclusively at Target. To purchase those items you need to go to one of those retailers. TV series are distributed exclusively. A company that produces a TV series will sign an exclusive deal with a network like ABC, CBS, or Showtime, and the series will initially appear only on that network. Later, reruns of the shows are often distributed selectively to other networks. To control the image of their products and the prices at which they are sold, the makers of upscale products often prefer to distribute their products more exclusively. Expensive perfumes and designer purses are an example. During the economic downturn, the makers of
  18. 18. 18 some of these products were disappointed to see retailers had slashed the products’ prices, “cheapening” their prestigious brands. Selecting the best marketing channel is critical because it can mean the success or failure of your product. The type of customer you’re selling to will have an impact on the channel you select. In fact, this should be your prime consideration. The type of product, your organization’s capabilities versus those of other channel members, the way competing products are marketed, and changes in the business environment and technology can also affect your marketing channel decisions. Various factors affect a company’s decisions about the intensity of a product’s distribution. An intensive distribution strategy involves selling a product in as many outlets as possible. Selective distribution involves selling a product at select outlets in specific locations. Exclusive distribution involves selling a product through one or very few outlets. 2.4. Marketing Channels versus Supply Chains In the past few decades, organizations have begun taking a more holistic look at their marketing channels. Instead of looking at only the firms that sell and promote their products, they have begun looking at all the organizations that figure into any part of the process of producing, promoting, and delivering an offering to its user. All these organizations are considered part of the offering’s supply chain. For instance, the supply chain includes producers of the raw materials that go into a product. If it’s a food product, the supply chain extends back through the distributors all the way to the farmers who grew the ingredients and the companies from which the farmers purchased the seeds, fertilizer, or animals. A product’s supply chain also includes transportation companies such as railroads that help physically move the product and companies that build Web sites for other companies. If a software maker hires a company in India to help it write a computer program, the Indian company is part of the partner’s supply chain. These types of firms aren’t considered channel partners because it’s not their job to actively sell the products being produced. Nonetheless, they all contribute to a product’s success or failure. Firms are constantly monitoring their supply chains and tinkering with them so they’re as efficient as possible. This process is called supply chain management. Supply chain management is challenging. Done well, it’s practically an art. We’ll talk more about supply
  19. 19. 19 chains in the next chapter and what companies can do to improve them to better satisfy customers and gain a competitive edge. 2.5. Channel choice Nelson (1970) contrasted search good and experience good. A search good is a product or service with features easily evaluated before purchase and is more subject to substitution and price competition by nature. Branding and detailed product specifications are characteristics of a search good. An experience good on the other hand, is difficult to compare before purchase. Characteristics are reputation and lower price elasticity5 then a search good (ibid.). The internet has made it easier to source and compare products, resulting in price as the prime differentiator for search goods. Although it is thought that consumers go to a shop for information and then go back home to purchase the same item for a lower price online, Blauw Research (2009) has found that actually the reverse is true. The number of consumers who switch from store orientation to Internet purchase is far lower the other way around. Price appears not to be the greatest denominator for online shopping; availability is. 5 Price elasticity refers to influence price has on sales volume. High elasticity means that a lower price means more units sold, while with a low elasticity price itself has less influence on the number of units sold. The end customer’s choice for a channel depends on the following factors: consumer factors (e.g. shopping orientations, life style, past behaviour), retailfactors (e.g. trust and reputation, service), product factors (e.g. complexity, product risk), channel factors (e.g. ease of use, service) and situational factors (e.g. time availability, weather, mood).
  20. 20. 20 Figure 4: Channel switch (adapted from Blauw Research, 2009) Blauw Research (2009) has also found that the prime channel choice for purchase remains the physical location, although the Internet has become a significant channel of choice for consumers. Buying direct from manufacturers is not significant channel choice; possibly because not all manufacturers offer or promote a direct marketing channel.
  21. 21. 21 Figure 5:Channel choice Channel members using one particular channel are perceived as similar to others in terms of their offerings; building more outlets offering the same inventory has been tapped out as a strategy and has resulted in (fierce) price competition. The end-customer does not necessarily experience a difference between the purchased product and the place of purchase. To remain competitive, manufacturers must develop new channel opportunities. End-customer’s needs change with the product life cycle and maturity of the market. This requires a change of channel mix. Direct is the norm for new technology. Growth levels off in a maturing market as potential buying segments and applications become saturated (ibid.). In maturity and declining stages of the product life cycle, online offerings are likely to cannibalise sales through existing channels according to Webb (2002).
  22. 22. 22 Figure 6: Product life cycle and distribution method. In mature markets, heavy competition has a commoditising effect which fixates consumers on price, diminishes the difference between offerings, and creates consumers who will be less receptive to innovation and marketing. The type of product can strongly influence the preference for a channel, even though it might be in a mature market. Products that are more expensive, risky, and complex require physical examination and are more suited to be sold through the offline channel. The Internet is particularly preferred for relatively commoditised products and repeat purchases (ibid.), which Blauw Research (2009) has presented in the following figure: Figure 5 Product category and channel choice. The marketing channel mix used by a manufacturer should be changed accordingly to fit the requirements of the market. Manufacturers should determine for each of their offerings whether exclusive, selective, or wide distribution is most suitable for their products.
  23. 23. 23 Figure 7: Direct marketing channel drivers and barriers Incumbent manufacturers have become dependent on their indirect marketing channel to offer (a selection of) their products. The Internet provides the opportunity to directly engage with and sell to end-customers; not only for channel members, but also for manufacturers. Indirect marketing channels have benefits which cannot be easily copied by manufacturers themselves or any direct marketing channel. It is therefore unlikely that direct marketing channels will be a complete substitute for indirect channels. However, the potential benefits for any business to get involved with an Internet marketing channel (e-commerce) are: a reduction of costs, improved supply chain operation, increased customer service, obtain customer knowledge, find new markets and take advantage of the ‘long tail’. Through physical outlets, only a small concentrated inventory is available, whereby usually 20% of products are responsible for 80% of revenue. As shelf space is not limited on the Internet, an unlimited inventory is possible, providing unlimited choice to consumers. This unlimited inventory is described as the ‘long tail’ (ibid.). The potential total value of the ‘long tail’ is assumed to be larger than the ‘head’ (ibid.)
  24. 24. 24 Figure 8: The long tail From the more than 1 million items that lists, 95% is sold at least once a month.Channel members are exploring the Internet as a direct marketing channel as that enables them to offer a wider range of products and the potential of integrated channels, thereby serving (other) customer’s needs. Multi-channel retailing has become an essential strategy for success. Informed customers are not willing to pay more for commodities, but are willing to pay premium for what they really want.Customers also value customised products more than standard products, which results in a higher purchase intention and justifies premium pricing. Customisation and personalisation is usually not offered through indirect channels and thus a great differentiator from the indirect channels.Manufacturers are likely to increase their use of direct channels whenDistribution costs in serving end users are relatively low. However, manufacturers are reluctant to get involved with a direct marketing channel, if they fear for channel conflict. 2.6.Channel Dynamics  Channel Power Strong channel partners often wield what’s called channel power and are referred to as channel leaders, or channel captains. In the past, big manufacturers like Procter & Gamble and Dell were often channel captains. But that is changing. More often today, big retailers like Walmart and Target are commanding more channel power. They have millions of customers and are bombarded with products wholesalers and manufacturers want them to
  25. 25. 25 sell. As a result, these retailers increasingly are able to call the shots. In other words, they get what they want. Category killers are in a similar position. Consumers like you are gaining marketing channel power, too. Regardless of what one manufacturer produces or what a local retailer has available, you can use the Internet to find whatever product you want at the best price available and have it delivered when, where, and how you want.
  26. 26. 26 3. Channel conflict Channel conflict occurs when manufacturers (brands) disintermediate their channel partners, such as distributors, retailers, dealers, and sales representatives, by selling their products directly to consumers through general marketing methods and/or over the Internet. Channel conflicts are common. Part of the reason for this is that each channel member has its own goals, which are unlike those of any other channel member. The relationship among them is not unlike the relationship between you and your boss (assuming you have a job). Both of you want to serve your organization’s customers well. However, your goals are different. Your boss might want you to work on the weekend, but you might not want to because you need to study for a Monday test. All channel members want to have low inventory levels but immediate access to more products. Who should bear the cost of holding the inventory? What if consumers don’t purchase the products? Can they be returned to other channel members, or is the organization in possession of the products responsible for disposing of them? Channel members try to spell out details such as these in their contracts. Channel conflicts can also occur when manufacturers sell their products online. When they do, wholesalers and retailers often feel like they are competing for the same customers when they shouldn’t have to. Likewise, manufacturers often feel slighted when retailers dedicate more shelf space to their own store brands. Store brands are products retailers produce themselves or pay manufacturers to produce for them. Dr. Thunder is Walmart’s store-brand equivalent of Dr. Pepper, for example. Because a retailer doesn’t have to promote its store brands to get them on its own shelves like a “regular” manufacturer would, store brands are often priced more cheaply. And some retailers sell their store brands to other retailers, creating competition for manufacturers. Some manufacturers want to capture online markets for their brands but do not want to create conflicts with their other distribution channels. The Census Bureau of the U.S. Department of Commerce reported that online sales in 2005 grew 24.6 percent over 2004 to reach $86.3 billion dollars. By comparison, total retail sales in 2005 grew 7.2 percent from 2004. These numbers made the online marketplace attractive to manufacturers, but raised the question of how to participate without harming existing channel relationships. According to Forrester Research and Gartner from 2007, despite the rapid growth of online commerce, an estimated 90 percent of manufacturers did not sell their products online. Of these, 66 percent identified channel conflict as their single biggest issue. However, results from a survey show that click-and-mortar businesses have an 80% greater chance of
  27. 27. 27 sustaining a business model during a three-year period than those operating just in one of the two channels. E-commerce is the most popular second distribution channel because of its low overhead expenses and communication costs. This advantage is also a disadvantage, since consumers can also communicate less expensively and more easily with one another in the online marketplace. Therefore, price and product differentiation is more challenging in online markets. Channel conflict can also occur when there has been over production. This results in a surplus of products. Newer versions of products, changes in trends, insolvency of wholesalers and retailers and the distribution of damaged goods also affect channel conflict. In this connection, a company's stock clearance strategy is important. To avoid a channel conflict in a click-and-mortar business, it is necessary to ensure that both traditional and online channels are fully integrated. This reduces possible confusion with customers while providing the business benefits of a dual channel. Manufacturers today sell their products through a broad array of channels. Since most manufacturers sell through several channels simultaneously, channels sometimes find themselves competing to reach the same set of customers. When this happens, channel conflict is virtually guaranteed. In turn, such conflict almost invariably finds its way back to the manufacturer. This can also be termed as a situation when a producer or supplier bypasses the normal channel of distribution and sells directly to the end user. Selling over the Internet while maintaining a physical distribution network is an example of channel conflict. Channel conflict comes in many forms. Some are mild, merely the necessary friction of a competitive business environment. Some are actually positive for the manufacturer, forcing out-of-date or uneconomic players to adapt or decline. Other conflicts, however, can undermine the manufacturer's business model. Such high-risk conflicts generally occur when one channel targets customer segments already served by an existing channel. This leads to such a deterioration of channel economics that the threatened channel either retaliates against the manufacturer or simply stops selling its product. The result is disintermediation, in which the manufacturer suffers. The two main disintermediation causes are finance and internet.
  28. 28. 28  Finance Elimination of financial intermediaries (banks, brokers) between the suppliers of funds (savers/investors) and the users of funds (borrowers/investees). Disintermediation occurs when inflation rates are high but bank interest rates are stagnant and the bank depositors can get better returns by investing in mutual funds or in securities.  Internet Elimination (by the online sources) of the traditional middleman the intermediary between the seller and the buyer (such as an agent, broker, or reseller), or between the source and the recipient of information (such as an agency, official, or gate keeper). Type of channel conflicts Channel conflict is of three types.  Vertical channel conflicts,  Horizontal channel conflicts,  Multilevel channel conflicts According to Goldkuhl (2005), channel conflict ‘exists within the channel if one channel member perceives another channel member to be engaged in behaviour that prevents or impedes from attaining its goal(s)’.Channel conflict is not a new phenomenon because of the introduction of the Internet. It has been suggested that conflict is virtually inevitable in marketing channels, as this is due to the functional interdependence between channel members. Channel conflict can occur horizontally and vertically.Horizontal channel conflict exists when there is conflict between channel members at the same level within the channel. Vertical channel conflict exists when there is conflict between different levels within the same channel, which will be the case if a manufacturer adds a direct marketing channel next to existing marketing channels. According to Wilkinson (1973) conflict arises in channels as members have incompatible goals and differing perceptions of reality. Etgar (1979) describes the causes of channel conflict to be of attitudinal or structural nature. Attitudinalcauses are associated with disagreements about channel roles, expectations,perceptions, and channel communications. Structural causes consist of three sets of factors: goal divergence, competition for scarce
  29. 29. 29 resources and drive forAutonomy. Conflict appears to be primarily generated by attitudinal factors (ibid.). If the role of the channel member has not been well defined, conflict may occur. Differences in information availability, information processing capacities, or experience among channel members can result in varying expectations. Channel members can also have different perceptions of the channel and its market conditions. Within a marketing channel there has to be constant communication between the manufacturer and the channel members (vice versa) about new products, promotions, market conditions, and stock levels. If that flow of communication is not working properly, misunderstandings will occur, incorrect strategies will be implemented, and mutual feelings of frustration will arise. Goal divergence is a result of different strategic objectives between channel members and the manufacturer. They both want to maximise profits, which may lead to a conflict of interest.In reality, however, it is not goal divergence itself that is fuel for conflict, but the perception that the goals diverge. Competition for scarce resources occurs when the demand in a channel exceeds the available supply, e.g. if there is limited availability of a new product. Drive for autonomy means that one party tries to exercise control of another party; which is similar to the definition of power. Magrath& Hardy (1989) describe the following four variables within channel design and channel mix that affect channel conflict: channel length, channelvariety, channel density, and channel autonomy. Channel length refers to the number of channel members between the manufacturer and the end-consumer, whereby short channels are least associated with conflict for manufacturers. Channel Variety refers to different types of channels used. Conflict appears to be least likely with either very low or very high channel variety. Channel Density refers to the amount of channels used and can either be exclusive, selective, or intense. Channel density tends to have a relation with the product life cycle, however, channel members prefer less channel density at increased product life, while manufacturers prefer to increase density at that stage. Channel Autonomy refers to the independence of the channel members to each other. The more independent the channel members are, the more conflict is likely to occur (as a result of goal divergence). By adding the Internet to the marketing channel mix, Webb (2002) found that pricing is the single most important generator of channel conflict. Conflicting channels put emphasis on price as a differentiation between channels. Wide price dispersion could be the result of the
  30. 30. 30 immaturity of the direct marketing channel, as businesses are not yet capable of adding value through their direct marketing channel. This ‘constant price undercutting can damage brand equity and erode profit margins. Meanwhile, customers develop low expectations and become disengaged’.Kraus & Pinto (2009) also argue that added value should be offered in order not to ‘squander years’ worth of brand equity for a few quarters of sales’. As markets evolve and mature, manufacturers are required to add new, lower cost channels to cover all major market segments. Magrath& Hardy (1989) also found that when a manufacturer uses both direct and indirect marketing channels (dual-distribution), conflict is a likely result, as the perception is that the manufacturer is competing with his traditional marketing channels for the same customer. 3.2. Managing channel conflict Channel leaders like Walmart usually have a great deal of say when it comes to how channel conflicts are handled, which is to say that they usually get what they want. But even the most powerful channel leaders strive for cooperation. A manufacturer with channel power still needs good retailers to sell its products; a retailer with channel power still needs good suppliers from which to buy products. One member of a channel can’t squeeze all the profits out of the other channel members and still hope to function well. Moreover, because each of the channel partners is responsible for promoting a product through its channel, to some extent they are all in the same boat. Each one of them has a vested interest in promoting the product, and the success or failure of any one of them can affect that of the others. Flash back to Walmart and how it managed to solve the conflict among its telephone suppliers: Because the different brands of landline telephones were so similar, Walmart decided it could consolidate and use fewer suppliers. It then divided its phone products into market segments—inexpensive phones with basic functions, midpriced phones with more features, and high-priced phones with many features. The suppliers chosen were asked to provide products for one of the three segments. This gave Walmart’s customers the variety they sought. And because the suppliers selected were able to sell more phones and compete for different types of customers, they stopped undercutting each other’s prices. In order to manage channel conflict, it is required to validate the reality of the conflict, otherwise it stays a perception. Therefore a diagnosis of the true level of conflict is essential. Magrath& Hardy (1989) state that conflict can be measured by the frequency and intensity of disagreements, weighted by the importance of the issue. By keeping track of reported issues,
  31. 31. 31 management can create insight into the existence of channel conflict. Management needs to establish which level of conflict is acceptable. Perceived conflict can also become real conflict if it is not managed properly. If channel conflict has been established to be real, the destructiveness of the conflict can be assessed. In principle some level of conflict will always exist and conflict is not immediately destructive. Destructive conflict becomes evident through market share and price erosion, harming the manufacturer’s brand. Channel conflict can be managed by a combination of economics and structural controls. Economics are used to motivate the channel to avoidconflict, i.e. compensation schemes. Structural controls relate to the channeldesign and the terms of the channel agreement. Structural controls are onlyeffective if enforced (ibid.).Both Goldkuhl (2005) and Coughlan et al. (2006) have established thatcommunication about the chosen distribution strategy between themanufacturer and the channel members is key to minimising conflict.Kotler (2005) states that perhaps the most important mechanism to managechannel conflict is the adoption of superordinate goals, i.e. appeal to mutualgoals relating to survival, market or customer satisfaction.Working together to develop joint solutions is another option to manage channelConflict. Weiss (2000) also states that it is important that manufacturers work together with their channels to resolve the resulting channel conflicts and to create a superior value-delivery network. 3.3. Channel power Drive for autonomy is one of the structural causes of channel conflict according to Etgar (1979) and resembles power. Power can be described as the ability to get someone to do something he/she would not have done otherwise.The power holder is the party that can influence the other party (ibid.). Most research acknowledges that there is a causal relationship between power and conflict between channel members and that it can, and does, proceed in either direction. Wilkinson (1973) states that ‘in order to prevail in the struggle for survival, a firm must act in such a way as to promote the power to act’.Shervani et al. (2007) State that power is commonly accepted to provide its holder the ability to achieve a high level of influence or control on the behaviour of others he has contact with. According to Gaski (1984) it appears that the nature and sources of the power possessed by a channel member may affect the presence and level of conflict within that channel. Power sources for a manufacturer are for example a strong brand name, market intelligence, substantial financial and marketing resources, and market power. Market power could vary
  32. 32. 32 between various product-markets served as market power is based upon market position (market share) and level of product differentiation. The extent to which end-customers are aware of individual brands and their preference for those is critical to the channel member. Channel members will go out of their way to keep manufacturer brands with high market share as that helps to obtain their financial goals. Leading brands are easier for channel members to market and sell because of the end- customer’s perceived value of these products. Leading brands are typically heavily advertised, employ premium pricing strategies and frequent new product line introductions. Brands in this group are frequently described as market leaders and/or pioneers. Incumbent manufacturers should take advantage of their established brand name and value. For channel members, market power is for instance based on geographical coverage, high volume and low cost structure to make most use of economies of scale. Surprisingly, there is little evidence to support a strong relationship between power and dependence in marketing channels. However, bargaining power of buyers is one of the five competitive forces that shape strategy. Buyer power is the impact that the buyers (channel members) have on the producing industry (manufacturers). Buyer power can be regarded strong if buyers are concentrated or purchase a significant proportion of the produced output (ibid.). Buyer power can be regarded weak if buyers are fragmented (i.e. many, different buyers); the buyers don’t have any particular influence on product or price. This appears to be the case for most consumer products, allowing forward integration or a direct marketing channel as a strategic option (ibid.).
  33. 33. 33 Figure 9: Model of the five competitive forces that shape strategy However, consumer product retailers are becoming larger and thus more powerful. Distribution access to these key retailers becomes critical for a manufacturer’s survival: if market share is lost because one of these main retailers, this will have a direct impact on the strategic options open to such manufacturer and will determine a certain course of action. On the other hand, although providing extensive choice to the consumer, these large retailers appear to compete mostly on price while service and product knowledge is deteriorating. 3.4. Strategic implications of channel decisions To have success in any business environment strategy must have continuity, but the environment can change. The mix of marketing channels used and their level of integration are factors that need to be adapted to the changing environment. The channel mix is a vital part of a manufacturer’s strategic position and it can help to create competitive advantages. Also according to Kotler (2005), marketing channel decisions are among the most important management face. Porter (1996) describes strategy as the creation of a unique and valuable position, involving different sets of activities. Strategy is about combining those activities into a sustainable and valuable position. The activities need to fit and reinforce one another, become integrated, whereby the whole matters more than any individual part. Product life cycle and industry life cycle are determinants to an integrated strategy. The benefits of integration overwhelm the advantages of separation.
  34. 34. 34 The entire system of activities, including channel design and channel mix, cancreate competitive advantage. As the essence of strategic positioning is to choose activities that are different from rivals, a manufacturer that chooses to integrate a direct marketing channel into its strategy and channel mix can therefore create an advantage over its rivals, as this is currently not common practice. Porter (1996) argues that a sustainable strategic position requires trade-offs, which is a result of incompatible activities. Trade-offs occur because of inconsistencies in image or reputation arises from the activities themselves (inability to do something else) and limitations on internal coordination and control. Conventional wisdom within an industry is often strong; the channel member is regarded as the customer, not the end-consumer, with the manufacturer responding to every request from the channel member. With this practice, there is no focus on what the real customer – the end-consumer - wants and how this fits with the manufacturer’s reputation. Managers of manufacturers become focused on meeting tight operational targets, that experimentation that leads to attractive new products, services and processes is often avoided. Operational excellence, however important, is not a strategy. Gulati&Garino (2000) also state that the very nature of traditional business (protectiveness over current customers, fear of cannibalisation and general myopia) will smother any new initiative, like a direct marketing channel. However, these new initiatives can improve the competitive position if they are related to the existing business. Manufacturers need to reconnect with strategy and focus on those customers, channels or purchase occasions that are the most profitable. The challenge for a manufacturer is to recover its distinctiveness; standardisation has become commoditised, resulting in low growth and profitability which deteriorates their company value. Manufacturers will need to develop and implement a wide range of new strategies to deal with the collapsing value of their existing business, where by the (marketing) strategies and channel mix will have to reflect changes in consumer behaviour. Bendix et al. (2001b) have developed a channel conflict strategy matrix. The matrix uses market power and channel
  35. 35. 35 value to determine which of four core strategies, compete, forward integrate, lead and cooperate, can be adopted to determine channel mix strategy. Figure 10: Channel conflict strategy matrix (Bendix et al., 2001a) Competition is a strategy when the channel adds low value and the manufacturer controls the customer, for instance with standardised services like commoditised insurance types or airline tickets. Forward integration as a strategy is suitable when the channel adds low value, yet hold considerable market power. The manufacturer can then create offerings that are difficult to duplicate by the channel to minimise conflict. A manufacturer can take a lead strategy if channel value is high, but market power is low; a result of a fragmented channel. The manufacturer can force change on its channel members. Cooperation is the strategy to choose when both market value and market power are strong within the channel, the situation which potentially leads to most conflict. Compromises can be found on new customer segments that do not conflict with the traditional channel members, for instance by offering a selection or customisable products in the direct channel. 3.5. Organisational implications Most manufacturers employ a one-size-fits-all organisation strategy, whereby organisational processes and organisational values are the same for each business unit, with a focus on
  36. 36. 36 operational excellence. Markides (2009) and Brown et al. (2006) argue that any organisation or business unit should be organised according to suit what they are doing. Manufacturers sell their products to channel members, which is therefore a business to business approach, even though they manufacture business to consumer products. A business to business environment has different requirements with regards to procurement, invoicing, systems, support and market approach than a business to consumer environment; selling 1.000 items to 1 business client is not the same as selling 1.000 items to 1.000 consumer clients. Adding a direct marketing channel for a manufacturer has therefore significant organisational implications. Large companies introduce less change in their marketing channel mix than small companies; increased company size can lead to organisational rigidities. Sophisticated products require a more carefully crafted distribution channel, and this seems to exacerbate the rigidities associated with firm size (ibid.). The phase of the company life cycle, as well as the organisational structure must have an influence on these decisions. An incumbent manufacturer with a global headquarters and sales country organisations is less flexible then a start-up company. Autonomy to decide on channel mix is the key determinant in that respect. Preserving the status quo becomes a natural obstacle to adding a new channel; the real issue is not whether a new channel is needed, but how it can be achieved with minimal loss to the traditional base. The further away the business is strategically developing from its status quo, the more management capacity in terms of change, ingenuity and entrepreneurship is required. Although there are similarities between the physical and virtual worlds, managing a direct marketing channel requires specific skills and knowledge. Parting Unilever CMO Mr. Clift has expressed his fear for a’ lost generation’ of marketers as those over 40 ’don’t understand and don’t dare the Internet’. Changes to the channel mix is a matter of resources and can only be realised with sound backing in terms of management commitment, staff and financial resources. The addition of a direct marketing channel can also create internal conflict regarding allocation of resources, sales and objectives. Those companies who will have a cohesive and aligned management team with a clear strategy will be the companies that will survive. It is therefore important that the right people are available, those who are not only able to develop an integrated indirect and direct strategy, but who are also capable of implementing and managing this strategy (ibid.).
  37. 37. 37 3.6. Channel Integration: Vertical and Horizontal Marketing Systems Another way to foster cooperation in a channel is to establish a vertical marketing system. In a vertical marketing system, channel members formally agree to closely cooperate with one another. (You have probably heard the saying, “If you can’t beat ’em, join ’em.”) A vertical marketing system can also be created by one channel member taking over the functions of another member. Procter & Gamble (P&G) has traditionally been a manufacturer of household products, not a retailer of them. But the company’s long-term strategy is to compete in every personal-care channel, including salons, where the men’s business is underdeveloped. In 2009, P&G purchased The Art of Shaving, a seller of pricey men’s shaving products located in upscale shopping malls. P&G also runs retail boutiques around the globe that sell its prestigious SK- II skin-care line. Franchises are another type of vertical marketing system. They are used not only to lessen channel conflicts but also to penetrate markets. Recall that a franchise gives a person or group the right to market a company’s goods or services within a certain territory or location. McDonald’s sells meat, bread, ice cream, and other products to its franchises, along with the right to own and operate the stores. And each of the owners of the stores signs a contract with McDonald’s agreeing to do business in a certain way. By contrast, in a conventional marketing system the channel members have no affiliation with one another. All the members operate independently. If the sale or the purchase of a product seems like a good deal at the time, an organization pursues it. But there is no expectation among the channel members that they have to work with one another in the future. A horizontal marketing system is one in which two companies at the same channel level— say, two manufacturers, two wholesalers, or two retailers—agree to cooperate with another to sell their products or to make the most of their marketing opportunities. The Internet phone service Skype and the mobile-phone maker Nokia created a horizontal marketing system by teaming up to put Skype’s service on Nokia’s phones. Skype hopes it will reach a new market (mobile phone users) this way. And Nokia hopes to sell its phones to people who like to use Skype on their personal computers (PCs). [8]
  38. 38. 38 Similarly, Via Technologies, a computer-chip maker that competes with Intel, has teamed up with a number of Chinese companies with no PC-manufacturing experience to produce $200 netbooks. Via Technologies predicts that the new, cheaper netbooks the Chinese companies sell will quickly capture 20 percent of the market. [9] Of course, the more of them that are sold, the more computer chips Via Technologies sells 4. Methodology This chapter will describe the methodology used in order to answer the research problem and will end with detailed research questions. 4.1 Research methodology Research methodology determines how the research problem and questions are answered. The methodology consists of research purpose, approach, strategy, data collection, and reliability. 4.1.1 Research purpose Marshall &Rossman (1999) describe the purpose of research as being exploratory, descriptive or explanatory. Exploratory research is used to formulate problems more precisely, establish priorities or clarify concepts. Descriptive research is used to describe characteristics of certain groups, make estimates about behaviour of a proportion of people, or make specific predictions. Explanatory research is used to provide evidence of causal relationships between variables. This Management Project is about clarifying concepts relating to the introduction of a direct marketing channel by a manufacturer. Additionally, the research provides evidence of causal relationships between variables. Therefore the research purpose is both exploratory and explanatory. 4.1.2 Research approach According to Easter by-Smith et al. (2002), research has a deductive or inductive nature. Deductive research is based on methods from natural science and develops hypotheses on existing theory. Data is collected through surveys, questionnaires, or observation. Deductive research develops theory through confirmed or rejected hypothesis and results are generally replicable. Inductive research is about understanding a new or unknown phenomenon, whereby the data
  39. 39. 39 is collected through for instance interviews. The analysis has a more holistic approach, is about pattern recognition, and tends to be subjective. Theory is developed through induction of the collected data. Inductive research is more difficult to replicate (ibid.). Data collection for research can either be of quantitative or qualitative nature. Quantitative data collection involves measurements, numbers, or counts and is most suitable for statistical analysis used within deductive research (ibid.). However, for inductive research qualitative data collection is best used, as there is no statistical analysis required, and thoughts and ideas are gathered through interviews. Applied research is about (improved) understanding of a particular business or management problem, whereby the findings result in solutions to the problem and are of practical relevance to managers. The phenomenon of channel conflict has regularly been topic of research, as well as channel conflict as a result of a direct internet marketing channel, although most research on channel conflict is from a retailer’s perspective and not from a manufacturer’s perspective. There is also research and (academic) literature available about power balance within a marketing channel, development and implementation of strategy and the impact of the Internet on consumer behaviour;. However, none of these studies combine these factors to present a general overview applicable to manufacturers of business to consumer goods. By providing a holistic view on this problem within this Management Project, a practical solution to a business problem is provided. The research approach for this Management Project can therefore be assessed as inductive, qualitative, and applied research. 4.1.3 Research Methodology II: Research methodology is considered as the nerve of the project. Without a proper well- organized research plan, it is impossible to complete the project and reach to any conclusion. The project was based on the survey plan. The main objective of survey was to collect appropriate data, which work as a base for drawing conclusion and getting result. Therefore, research methodology is the way to systematically solve the research problem. Research methodology not only talks of the methods but also logic behind the methods used in the context of a research study and it explains why a particular method has been used in the preference of the other methods.
  40. 40. 40 Research design: Research design is important primarily because of the increased complexity in the market as well as marketing approaches available to the researchers. In fact, it is the key to the evolution of successful marketing strategies and programmers. It is an important tool to study buyer’s behavior, consumption pattern, brand loyalty, and focus market changes. A research design specifies the methods and procedures for conducting a particular study. According to Kerlinger, “Research Design is a plan, conceptual structure, and strategy of investigation conceived as to obtain answers to research questions and to control variance. 4.1.4. Data collection methods: After the research problem, we have to identify and select which type of data is to research. At this stage; we have to organize a field survey to collect the data. One of the important tools for conducting market research is the availability of necessary and useful data.  Primary data: For primary data collection, we have to plan the following four important aspects. Sampling Research Instrument  Secondary Data: The Company’s profile, journals and various literature studies are important sources of secondary data. Data analysis and interpretation, Questionnaires and Pie chart and Bar chart.  Questionnaires: This is the most popular tool for the data collection. A questionnaire contains question that the researcher wishes to ask his respondents which is always guided by the objective of the survey.  Pie chart: This is very useful diagram to represent data, which are divided into a number of categories. This diagram consists of a circle of divided into a number of sectors, which are proportional to the values they represent. The total value is represented by the full create. The diagram bar chart can make comparison among the various components or between a part and a whole of data.
  41. 41. 41  Bar chart: This is another way of representing data graphically. As the name implies, it consist of a number of whispered bar, which originate from a common base line and are equal widths. The lengths of the bards are proportional to the value they represent.  Sampling Methodology: No. of questions in questionnaires for customer: 18 Sampling size: 5 4.2. Our selected Company is: BIG BAZAAR:- 4.2.1. Details about the Founder & Origin of the Company: Mr. Kishore Biyani, Managing Director Kishore Biyani is the Managing Director of Pantaloon Retail (India) Limited and the Group Chief Executive Officer of Future Group. A quintessentially Indian experience, it doesn’t promise more than it delivers. Basic worth allied with reasonable pricing is their USP. The store itself and the products it stocks may not be on the cutting edge of technology or sometimes even retail but the customer can be assured that he/she is getting their money’s worth. Their first store opened in Calcutta in 2001, on VIP Road, in the ground floor of a residential building. This was the first departmental store that offered regulated parking services, apparel, steel vessels and electronics under one roof, and all at the most competitive prices! The format got bigger and better with the introduction of fresh food and vegetables.  The Logo, Statement attached with Logo and their meanings:- It is market where customers can buy the best goods at cheapest price & also all the goods under one roof.
  42. 42. 42 4.2.2. Nature of the set up:- Head Quarter = Jogeshwari Mumbai 8 TOP CITIES TIER ONE AND TWO TOWNS Mumbai Sangali Delhi Durgapur Kolkata Bhubaneswar Chennai Nashik Bangalore Nagpur Pune Vizag Ahmadabad Thissur Hyderabad Kochi Surat Calicut Mangalore Mysore, Hubli Belgaum and many more 4.2.3. RESEARCH TECHNIQUE: Data was collected using two approaches: 1. Observational research Observations were made in the Big Bazaar store regarding the customer groups present there, retail formats adopted by the store, various verticals inside the store for each category of product, ambience, services provided to buyers and discount techniques 2. Survey research Questionnaire was prepared for the customers at Big Bazaar which included several open- ended and close-ended questions aimed at knowing the following:  Why Big Bazaar  Loyalty level  Effect of 4Ps of marketing
  43. 43. 43 Short questionnaire was prepared for Kirana store owners to obtain some facts like revenue, area of shop and their response to marketing mix.  Pantaloon Retail:- Pantaloon Retail (India) Limited, is India’s leading retailer that operates multiple retail formats in both the value and lifestyle segment of the Indian consumer market. Big Bazaar is not just another hypermarket. It caters to every need of a family. Where Big Bazaar scores over other stores is its value for money proposition for the Indian customers. At Big Bazaar, one can get the best products at the best prices – that is what they guarantee. With the ever increasing array of private labels, it has opened the doors into the world of fashion and general merchandise including home furnishings, utensils, crockery, cutlery, sports goods and much more at prices that will surprise you. And this is just the beginning. Big Bazaar plans to add much more to complete the shopping experience. Food is the main shopped for category in this store. 4.2.4. LINES OF BUSINESS OF BIG BAZAAR:-  Food  Fashion  Home Solution  General Merchandise  Leisure and Entertainment  Wellness and Beauty  Books and Music Presence:- The company has stores in nearly 30 cities across the country, constituting over 2.7 million square feet of retail space. The company has also signed close to 10 million sq. ft. of retail space to be operational by end 2009, which represents 20-30 % of all modern retail space
  44. 44. 44 coming up in the next three years. Over 200 million footfalls are expected in our stores by 2007-08. BIG BAZAAR FOR THE GREAT INDIAN MIDDLE CLASS It is a unit of Pantaloon Retail (India) Ltd and caters to the Great Indian Middle Class. It was started as a hypermarket format in Mumbai with approx. 50,000 sqft of space. Its values and missions are to be the best in Value Retailing by providing the cheapest prices and hence go the tag-line “Is se sasta aur achcha kahin nahin” It sells variety of merchandise at affordable rates, the prices of which it claims are lowest in the city but the level of services offered is also very low. Usually the items are clubbed together for offers as on the lines of Wal-mart and Carrefour and it also offers weekend discounts. It currently operates out of 64 stores and top 15 stores register a cumulative footfall of 27 lakh a month on an average. The following graph shows the retail life cycle and we can say that Big Bazaar is currently at the Growth Stage.
  45. 45. 45 Figure 11: Cash Flow  OBSERVATION:  Verticals inside the store relates to each category of product o Food Bazaar o Depot- books o M-bazaar o Electronic Bazaar o Furniture Bazaar o Footwear Bazaar  Trolleys are not easily available, especially on other than ground floor.  Little attention to cleanliness. Dust on shelves as well as some product items.  In-house packaging not efficiently done.  Crowded store interiors. Items are arranged in a cluttered way. Tried to stock maximum number in limited area.  Sign boards are not prominent. Lack of direction creates confusion.  Family crowd is evident. Youth comprises of only around 10% of the crowd.  Food Bazaar very efficiently managed. It is a bit over-staffed but layout is very good. Shelf space is used very well to stock products with clear distinction. Introduction Growth Maturity Decline Time Cash flow Flows
  46. 46. 46 4.2.5. POSITIONING STRATEGY Figure 12: Place Oriented Positioning High Service Low Price Low service Hig h Pri High Value position Price Oriented position Service Oriented position Poor Value Position
  47. 47. 47 4.2.6. BIG BAZAAR vs. KIRANA STORES Both the retail formats can be studied on the basis of the marketing techniques that are used to attract customers. But first we will compare their standing in the industry using Porter’s 5 Forces model. Figure 13: Competitive Rivalry
  48. 48. 48 4.2.7. BIG BAZAAR AND 5 FORCES: RIVAL INTENSITY THREAT OF ENTRANTS THREAT OF SUBSTITUTES POWER OF BUYERS POWER OF SUPPLIERS HIGH HIGH LOW HIGH LOW We can get an idea about how competitive this retail sector is, by looking at the degree of 5 forces. Threat of substitute is minimal and supplier bargaining power is also less, but the rest of the forces are deciding factor in the company’s marketing strategy. They being ‘high’, means degree of competitiveness is also high. Big Bazaar is involved in bulk purchases so bargaining power of suppliers is low. The retail chain will not accept very low margins. 4.2.8: KIRANA SHOPS AND 5 FORCES: RIVAL INTENSITY THREAT OF ENTRANTS THREAT OF SUBSTITUTES POWER OF BUYERS POWER OF SUPPLIERS HIGH HIGH HIGH HIGH HIGH The intensity of each and every force of Porter’s model is ‘high.’ This means that the shop owner is struggling with very less control over his own operations and his strategies are affected by external factors. Again the competitiveness in this market is very high and market share for each shop is low due to high number of stores. This gives more bargaining power to both buyers and suppliers. It is a very easy market to enter, therefore threats of entrants is high too.
  49. 49. 49 4.2.9. 4Ps OF MARKETING Marketing mix is a deciding factor in formulating marketing techniques for the success of a particular brand, commodity, or company. The components of marketing mix are:  Product  Price  Promotion  Place The survey which was conducted gives the effect of each and every component of the 4Ps on the consumer’s mind. These components have a huge bearing on the retail battle between Big Bazaar and Kirana stores. 1) PRODUCT:  Big Bazaar Big Bazaar offers the maximum variety for each category of product and this is cited by the customers as one of the main reasons why they like shopping at the hypermarket. The product is the same in every store in the city but the brand options are more in Big Bazaar. Also, the quantity for each product is not limited to large packs only. Observations also revealed that local brands of popular commodities, like diapers, sugar, wheat flour garments etc, are very popular in Big Bazaar stores. These products are never advertised but offer huge margin on sales. In this way lower middle class customers are targeted well. The commodities sold by the retail chain also includes its “own products” which get a ready distribution network. The own products of Big Bazaar include My World fashion magazine which is not available anywhere else. So costs are low for such products.  Kirana stores Products at kirana stores are limited. Actually they have very less shelf space. The store owner does not have many options regarding the range of products that can be sold because area of the shop is also not very large. There is not much variety in each product i.e. the brand choice available to customers is low. Kirana stores usually avoid keeping expensive products which cost more than Rs. 200 and they limit themselves to cheaper and daily use items.
  50. 50. 50 Conclusion:  Big Bazaar scores high on the product part of marketing mix.  Customer has more choices of brand in Big Bazaar rather than kirana store.  Customers like touching the product and selecting it themselves before buying.  The customers trust retail chains with quality of the product. They feel food products of Big Bazaar will have no adulteration. This quality is not assured in a kirana store.  Cheap and local brands are heavily stocked in Big Bazaar which make it easier to attract lower-middle class category of customers. 2) PRICE: Big Bazaar Price is the critical point in a competitive industry. Big Bazaar works on a low cost model. It considers its discounted price as its USP. There is an average discount of 7-8% on all items in respect to their MRP. Prices of products are low because it is able to secure stock directly from the manufacturer. There are huge synergies in terms of bulk purchasing, central warehousing and transportation. These all factors help the retailer to keep low prices. Survey indicated that low prices were the biggest factor in customers’ mind while coming to Big Bazaar. It has never focused on giving great services, but laid emphasis only on low prices to attract crowd. Kirana stores Price is a very biased issue in a kirana store. Interview with some store owners revealed that general policy regarding prices in a store is to give ready discount to its regular customers but to charge the MRP from new customers. Departmental stores generally work on tight margins of 6-7%. Change in prices is directly passed on to the customers. Conclusion:  Almost everything has some kind of discount in Big Bazaar.  It clubs small quantities to make bigger packs and then lower prices which kirana stores are unable to do.  It considers price to be the biggest attraction for all customers.
  51. 51. 51  Consumers accept the fact that they come from faraway places because it is cheap in Big Bazaar for bulk shopping.  It is not possible for kirana stores to give hefty discounts on all items.  Customers feel same price for all customers as a plus point of Big Bazaar as compared to differential price policy of kirana stores.  Some customers feel cash discount is fine but bulk offer deals are of no use because you end up getting more than you want which is a waste. 3) PROMOTION: Big Bazaar Big Bazaar has huge promotion budgets. The biggest idea behind all advertisements is to make people do bulk shopping. After talking to the store manager I found out that there are 2 types of promotional strategies. One is the holistic advertisement which promotes the brand and creates awareness among people. It is not targeted at promoting each store but only creates an image of Big Bazaar as low-cost shopping option. The store has advertised through TV, road shows and also started reality show-typed promotional campaign “The Big Bazaar Challenge.” Promotions like “SabseSasta Din” are a very successful strategy to get footfall. Other type of promotion is the particular store oriented promotion which includes speaking on the loudspeaker in nearby blocks. Leaflets are given in local newspaper. There are promotional efforts even inside the store. During the survey, it was noticed that Buy 2 Get 1 Free type of promotions are very common. Original prices are cut down and new prices are shown, of which customer takes quick notice. There are loyalty schemes which reward regular clients. Promotion is also done through co-branded credit cards with ICICI bank. Kirana Stores Kirana stores are involved in almost negligible promotion activity. They rely mainly on advertisement from the manufacturer of goods to pull in customers. They promote certain brands by putting names on shelves etc but they do not advertise themselves as preferred store for local people. One reason can be they work on tight budgets which have no scope for advertisements. Leaflet promotion maybe done once while inaugurating new store, but not during the course of existence.
  52. 52. 52 Conclusion:  Retail chain Big Bazaar cannot survive without promotions on national or regional level.  A big ad budget helps it to get large scale of operations.  Customers accept the fact that advertisement campaign of Big Bazaar did influence them in their buying behavior.  Its Buy 2 Get 1 Free strategy influences the customer mindset a lot once they enter the store.  Customers feel loyalty card schemes make them come again and again to the store.  Promotion of kirana store is a rare event. 4) PLACE: Big Bazaar Place means the location of the business. Big Bazaar has always worked on low-cost locations. It targets semi-urban population with its placement. Its strategy is to find a cheap location and it never goes for hot spots in the city. The talk with the manager revealed that the Teghoria store was opened when it was scarcely populated. Even in Gurgaon, Big Bazaar chose Sahara Mall instead of Metropolitan or City Centre, which are more popular than Sahara Mall. It relied on promotional activities to make up for unattractive locations. The channel of place is company owned stores to have complete control. Another strategy used by Big Bazaar to overcome location disadvantage is use of internet. It has launched a merchandise retailing website which targets high-end customers ready to use credit cards. Therefore Big Bazaar has made headway into a potentially high- yielding sector of online trade. Internet as place has put them in a profitable position because there is minimal expense of maintaining a website. The promotion of this website is done through advertisement on Google. The website is put as sponsored link. Kirana Stores Kirana stores are always placed in crowded market area which is located in each block and sector. On talking to the owners, it was found that some stores were inherited by them from their father, so they had no choice of location. Otherwise it is common practice to find busy street corners to get maximum customers. Location is important because buying decision is on impetus during day-to-day life. So the customer goes on for the nearest store. The store
  53. 53. 53 owners are ready to pay more rent for better locations because their promotion activity is negligible. Conclusion:  Location is something which is permanent. So cautious decisions are taken while selecting place.  Big Bazaar refrains from high-end locations for its business.  Some customers travel from far places to the store. So place factor has less influence on them.  Semi-urban customers still prefer kirana shops, so location of retail chain should be near to them because they will not travel too far.  Kirana shops make sure availability of goods nearest to the residential area.
  54. 54. 54 4.2.10. PROFITABILITY Profit is the basic motive behind the running of any business. Both retail formats have their own budgets, future projections and financial limitations. Profitability measures the efficiency of operations. It also helps us decide the better option amongst the two. Big Bazaar and local departmental stores work on different scales of operation. The deciding factor here is investment capability. Big Bazaar This retail chain is present in all major cities of the country. And this means there is huge requirement of capital. The stores generally occupy 30,000 square feet of space on an average. In the wake of rising real estate prices, “place” component of marketing mix becomes an increasingly important factor in deciding future strategies. The store included in the survey revealed that they have average sales of 8 lacs per day. But they do not disclose their profits for particular store. Big Bazaar is a brand under Pantaloon Retail (India) Ltd. The net worth of the company is Rs 526.88 crores. This includes all the investments made by the promoters and subsequent reserves created during the life of the business. The profit after tax in financial year 2005-06 was 64 crores on revenues of 1871 crores. This means a net profit ratio of 3.42%. this is very low for a national retail chain but it highlights the fact that the sector has a huge potential and will generate more profits once the government policies are in favor of opening up the sector further. Low profit can be attributed to  High cost of research required to study each and every region of the country  The large number of staff needed to manage all the stores  Burgeoning real estate prices which leads to high rentals  Huge promotional activities undertaken to ensure enough footfall Kirana Stores Kirana stores have only one source of income i.e. margins available on selling FMCG products. The store owners revealed that in earlier days, they used to enjoy margins of well over 11% on products from HUL, P&G and Marico. But now the margins have slipped to around 7%. Another thing to be noticed is that credit period given by distributors has also come down significantly, though the shop owners refused to give details on that. Average
  55. 55. 55 daily sales of a Salt Lake kirana shop covering 180 square feet in busy AE block market stands at Rs 6000-7000. Profits made each month are confidential information which none of the owners wanted to give. But considering the margins and overhead expenses, they might be making a daily profit of Rs 350.  Some Gap Findings :  Gap o Customer- driven service Designs & standards Management perception Of customer expectations 1.Poor service design -Unsystematic new service development process Un defefined service designs Failure to connect service design to service positioning 2.Absence of process management to focus on customer Requirements -absence of process management to focus on Customer requirements -absence of formal process for setting service quality goals 3. Inappropriate physical evidence &servicescape Failure to develop tangibles in line with customer expectations -servicescape design that does not meet customer needs - Inadequate maintenance & updating of the servicescape  Service facility o e- purchase facility Relaxed return policy Home delivery T-24 Green card facility Exclusive Sale Preview Exclusive Billing Counters Complimentary Home Delivery Instant Discounts Relaxed Return Policy Complimentary Parking SEND GIFTS TO INDIA Birthday Anniversary Love & Romance Gifts For Him Gifts For Her Flowers Chocolates & More Exquisite Cakes Gift Vouchers Personalized Gifts Spiritual Products Soft Toys Unique Gifts Leather Accessories Skin Care Gifts to U.S.A  Gap – Start Management may understand & know what customer want but fail to translate these expectations into the correct specification  Complains Problem in Alteration Problem in gift voucher to cash Problem in billing in bulk Problem in e- purchasing ( Problem in replacement Problem in wrong billing Sending gifts in India Problem in prepaid card T24  Gap - Reduction strategies that the company is practicing Employee training Taken the help from 3 rd party for survey Made one team for handling this.
  56. 56. 56 Kishore Biyani’s Future group re-launched its e-commerce business in 2010. At the time, the idea was to get to 10% of its overall sales from e-commerce. The plan was to push sales through online properties such as Futurebazaar, Ezoneonline and others.  Since then, much water has flown under the bridge. While Futurebazaar isn’t any close to what it set out to achieve, its traffic is dwindling. Futurebazaar’s traffic started dropping off sometime earlier this year. In the last three months, its global Alexa ranking has dropped over 2000 points. We don’t know if the revenues have taken a hit yet, but it seems likely. Figure 14: Futurebazaar Vs Cromaretail (Source: Alexa)  Much of online businesses’ traffic woes could be linked to sweeping changes at the group, fire fighting to keep over Rs 8000 cr of debt under control.  In the last year or so, the company has sold off many assets to bring down debt. A majority stake in its investment advisory services business Future Capital Holdings was sold to Warburg Pincus last year. It has also sold 22.5% stake in Future Generali (a life Joint Venture) for Rs 300 cr. Pantaloon retail was sold to Kumar Mangalam Birla’s Aditya Birla Nuvo in 2012 for Rs 1600 cr. The online sites of Pantaloon retail (1,2), non starters from the go, have been shut. Another site,, doesn’t sell online.  KashyapDeorah, the president of Futurebazaar quit the company in November last year to launch a mobile payments company called JustChalo, which was acquired by
  57. 57. 57 US online restaurant reservations provider OpenTable in a stock-and-cash deal worth $11 million.  The team from Chaupaati bazaar which came in through the acquisition has moved on to other things, like Toppr.  Kishore Biyani wasn’t any less ambitious about his e-commerce business. In 2010, reports claimed that his target was to notch up Rs 1,000 cr in yearly sales from e- commerce. That seems like a far cry now. Even Flipkart, hailed as India’s largest online retailer is looking at gross sales of $500 mn this year.  By 2011, ambitions had tempered a bit. The company wanted to target a modest Rs 1 cr in daily sales from e-commerce. In other words, over Rs 350 cr a year. Whatever the future of Futurebazaar is, it doesn’t look pretty right now. When there is a fire raging in the brick and mortar store, big retail probably has little time to spare for e- commerce. (source : tense-297//)
  58. 58. 58 4.3. Reasons for the failure of 1. Grocery Shopping Is a Social Experience Families go to the grocery store together to browse the aisles and plan their next week's meals. Single people even visit specific stores in order to attract potential dates. None of these activities are feasible with the online shopping experience. (For related reading, see Tips For Keeping Your Financial Data Safe Online.) 2. Purchasing Produce Is a Tactile Process Shopping for fruits and vegetables online would be as useful as picking out paint colors over the phone. Internet grocers couldn't possibly spend the time and money necessary to take a picture of each actual piece of fruit, but even if they did, you couldn't hold it, shake it or tap it to determine its quality. 3. Fish and Meat Are Best Purchased by Sight While buying a steak, shoppers want to see the cut they are getting. They can determine freshness from the color and the odor. Once again, online pictures, even if feasible, can't communicate the nuances a customer is looking for in a nice cut of meat or piece of fresh fish. 4. Freshness Matters Local supermarkets bake bread each afternoon so that shoppers can return home with a fresh loaf. Shoppers rush home to ensure their ice cream won't melt and their lettuce doesn't wilt. Grocery delivery requires that you stick to a schedule in order to be there when your food arrives. If you can't immediately cool your ice cream or lettuces, this all-important freshness is lost. What is supposed to be a convenient service becomes an inconvenience for many who would rather maintain a flexible schedule. 5. The Right Technology Hasn't Yet Been Applied We can envision a day when supermarket websites show virtual products on shelves that can be visually browsed. But so far, no store has created a more innovative interface than your typical web merchant. Until a grocer makes shopping online faster and easier than browsing the aisles, people will continue to visit the supermarket instead of ordering online. (For
  59. 59. 59 related reading, see Technology Sector Funds.) 6. Grocery Shoppers Do Not Use Recurring Lists Online grocers tout the ability to let customers create a list of items to be purchased on a recurring basis. But that is just not how most people shop. People like to try new things based on the current prices, their changing appetites or just on a whim rather than order the same food over and over again. x` 7. No Cost Advantage The premise behind internet grocers was that shoppers would pay more money for goods delivered to their door. However, the opposite is true. Most shoppers will only order groceries online when they can be assured of saving money. Amazon and other web retailers cut consumer costs by centralizing their products in out-of-state warehouses. This way, they can use national shipping infrastructures, minimize their locations and save consumers the sales tax. In contrast, an internet grocer must have a warehouse in every metro area along with their own fleet of specialized delivery vehicles, all while charging the same sales tax as a competing supermarket. Due to these expenses, grocery delivery services could cost more than food purchased at a local supermarket. (For related reading, see Online Banks: Lower Costs And Little Sacrifice.) 8. Consumers Dislike Delivery Time Windows The last thing anyone wants to do is replace their spontaneous supermarket shopping experience with an ordeal similar to waiting for their cable television service to be installed. Most would much rather make a quick stop at their grocer on the way home from work than be forced to stay home between the hours of 3pm and 5pm in order to meet a delivery truck. 9. Supermarkets Are About Much More Than Just Food When visiting a typical supermarket, it is hard not to notice that less than half the space is occupied by actual food. Supermarkets offer flowers, balloons, greeting cards, event tickets, magazines, books, movie rentals and much more. Other services often located inside or adjacent to a supermarket include banks, photo printers, coffee shops, liquor stores and dry cleaners.
  60. 60. 60 10. Speed Matters In Europe, shoppers typically purchase ingredients for their meals the day they prepare them. While this is a less common practice in the United States, customers often do shop for food at the last minute. This is why grocery stores are always open on Thanksgiving Day. Since the use of a grocery delivery service requires advance planning, it can't accommodate impulse purchases.