Briefly describe a situation where?

Ch ap

ter 16

In This Chapter, We Will Address the Following Questions

1. What major types of marketing intermediaries occupy this sector?

2. What marketing decisions do these marketing intermediaries make?

3. What are the major trends with marketing intermediaries?

4. What does the future hold for private label brands?

Cofounder Tony Hsieh has ensured that a

strong customer-service culture is at the

heart of operations at Zappos, the online

footwear and accessories retailer.

446 PART 6 DELIVERING VALUE

In the previous chapter, we examined marketing intermediaries from the viewpoint of manufacturers who wanted to build and manage marketing channels. In this chapter, we view these intermediaries—retailers, wholesalers, and logistical organizations—as requiring and forging their own marketing strategies in a rapidly changing world. Intermediaries also strive for marketing excellence and can reap the benefits like any other type of company.

Online footwear retailer Zappos was co-founded by Tony Hsieh in 1999 with superior customer service and an improved customer experience at the core of its corporate cul- ture. With free shipping and returns, 24/7 customer service, and fast turnaround on a wide selection of 200,000 shoe styles from 1,200 makers, Zappos finds that three- fourths of purchases during any one day are by repeat customers. Unlike many other

companies, Zappos has not outsourced its call centers; Hsieh sees that function as too important. In fact, Zappos empowers its customer service reps to solve problems. When a customer called to com- plain that a pair of boots was leaking after a year of use, the customer service rep sent out a new pair even though the company’s policy is that only unworn shoes are returnable. Every employee has a chance each year to contribute a passage to the firm’s Culture Book, about life at Zappos, and how each department implements superior customer service from selling to warehousing and delivery, to pricing and billing. Half the interview process for potential new hires is devoted to finding out whether they are sufficiently outgoing, open-minded, and creative to be a good cultural fit for the company. Bought by Amazon.com in 2009 for a reported $850 million but still run separately, the company now also sells clothing, handbags, and accessories. Thanks to its success, it even offers two-day, $4,000 seminars to busi- ness executives eager to learn about the secrets behind Zappos’s unique corporate culture and approach to customer service.1

Managing Retailing, Wholesaling, and Logistics

447

While innovative retailers such as Zappos, Sweden’s H&M, Spain’s Zara and Mango, and Britain’s Topshop have thrived in recent years, others such as former U.S. stalwarts Gap, Home Depot, and Kmart have struggled. The more successful intermediaries use strategic planning, advanced information systems, and sophisticated marketing tools. They segment their markets, improve their market targeting and positioning, and aggressively pursue market expansion and diversification strategies. In this chapter, we consider marketing excellence in retailing, wholesaling, and logistics.

Retailing Retailing includes all the activities in selling goods or services directly to final consumers for per- sonal, nonbusiness use. A retailer or retail store is any business enterprise whose sales volume comes primarily from retailing.

Any organization selling to final consumers—whether it is a manufacturer, wholesaler, or retailer—is doing retailing. It doesn’t matter how the goods or services are sold (in person, by mail, telephone, vending machine, or on the Internet) or where (in a store, on the street, or in the con- sumer’s home).

After reviewing the different types of retailers and the new retail marketing environment, we ex- amine the marketing decisions retailers make. The following are four examples of innovative retail organizations that have experienced market success in recent years.

448 PART 6 DELIVERING VALUE

Innovative Retail Organizations Panera Bread. The $2.6 billion Panera Bread restaurant chain targets “food people who understand and respond to food or those on the verge of that” by selling fresh “real” food–and lots of warm bread—at full prices that customers are more than willing to pay. An unpreten-

tious atmosphere—no table service, but no time limit—encourages customers to linger. The brand is seen as family-oriented but also sophis- ticated, offering an appealing combination of fresh, customizable, convenient, and affordable food.

GameStop. Video game and entertainment software retailer GameStop has over 6,000 locations in malls and shopping strips all over the United States, making it highly convenient for customers. Staffed by hard-core gamers who like to connect with customers, GameStop boasts a trade-in policy that gives customers credit for an old game traded in for a new one.

Lumber Liquidators. Lumber Liquidators buys excess wood directly from lumber mills at a discount and stocks almost 350 kinds of hardwood flooring, about the same as Lowe’s and Home Depot. It sells at lower prices because it keeps operating costs down by cutting out the middle- men and locating stores in inexpensive locations. Lumber Liquidators also

knows a lot about its customers, such as the fact that shoppers who request product samples have a 30 percent likelihood of buying within a month, and that most tend to renovate one room at a time, not the entire home at once.

Net-a-Porter. London-based Net-a-Porter is an online luxury clothing and accessories retailer whose Web site combines the style of a fashion magazine with the thrill of shopping at a chic boutique. Seen by its loyal customers as an authoritative fashion voice, Net-a-Porter stocks over 300 interna- tional brands, such as Jimmy Choo, Alexander McQueen, Stella McCartney, Givenchy, Marc Jacobs, and others. The company ships to 170 countries and offers same-day delivery in London and Manhattan; the average order is $250.

Sources: Kate Rockwood, “Rising Dough, Fast Company, October 2009, pp. 69–71; Devin Leonard, “GameStop Racks Up the Points,” Fortune, June 9, 2008, pp. 109–22; Helen Coster, “Hardwood Hero,” Forbes, November 30, 2009, pp. 60–62; John Brodie, “The Amazon of Fashion,” Fortune, September 14, 2009, pp. 86–95.

Types of Retailers Consumers today can shop for goods and services at store retailers, nonstore retailers, and retail organizations.

STORE RETAILERS Perhaps the best-known type of store retailer is the department store. Japanese department stores such as Takashimaya and Mitsukoshi attract millions of shoppers each year and feature art galleries, restaurants, cooking classes, fitness clubs, and children’s playgrounds. The most important types of major store retailers are summarized in Table 16.1.

Different formats of store retailers will have different competitive and price dynamics. Discount stores, for example, compete much more intensely with each other than other formats.2 Retailers also meet widely different consumer preferences for service levels and specific services. Specifically, they position themselves as offering one of four levels of service:

1. Self-service—Self-service is the cornerstone of all discount operations. Many customers are willing to carry out their own “locate-compare-select” process to save money.

2. Self-selection—Customers find their own goods, although they can ask for assistance. 3. Limited service—These retailers carry more shopping goods and services such as credit and

merchandise-return privileges. Customers need more information and assistance. 4. Full service—Salespeople are ready to assist in every phase of the “locate-compare-select”

process. Customers who like to be waited on prefer this type of store. The high staffing cost, along with the higher proportion of specialty goods and slower-moving items and the many services, result in high-cost retailing.

Panera Bread appeals to food lovers of all kinds.

MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 449

NONSTORE RETAILING Although the overwhelming bulk of goods and services— 97 percent—is sold through stores, nonstore retailing has been growing much faster than store retailing. Nonstore retailing falls into four major categories: direct selling, direct marketing (which includes telemarketing and Internet selling), automatic vending, and buying services:

1. Direct selling, also called multilevel selling and network marketing, is a multibillion-dollar industry, with hundreds of companies selling door-to-door or at home sales parties. Well-known in one-to-one selling are Avon, Electrolux, and Southwestern Company of Nashville (Bibles). Tupperware and Mary Kay Cosmetics are sold one-to-many: A salesperson goes to the home of a host who has invited friends; the salesperson demonstrates the products and takes orders. Pioneered by Amway, the multilevel (network) marketing sales system works by recruiting independent businesspeople who act as distributors. The distributor’s compen- sation includes a percentage of sales made by those he or she recruits, as well as earnings on direct sales to customers. These direct-selling firms, now finding fewer consumers at home, are developing multidistribution strategies.

2. Direct marketing has roots in direct-mail and catalog marketing (Lands’ End, L.L.Bean); it includes telemarketing (1-800-FLOWERS), television direct-response marketing (HSN, QVC), and electronic shopping (Amazon.com, Autobytel.com). As people become more accustomed to shopping on the Internet, they are ordering a greater variety of goods and services from a wider range of Web sites. In the United States, online sales were estimated to be $210 billion in 2009, with travel being the biggest category ($80 billion).3

3. Automatic vending offers a variety of merchandise, including impulse goods such as soft drinks, coffee, candy, newspapers, magazines, and other products such as hosiery, cosmetics, hot food, and paperbacks. Vending machines are found in factories, offices, large retail stores, gasoline stations, hotels, restaurants, and many other places. They offer 24-hour selling, self-service, and merchandise that is stocked to be fresh. Japan has the most vending machines per person—Coca-Cola has over 1 million machines there and annual vending sales of $50 billion—twice its U.S. figures.

4. Buying service is a storeless retailer serving a specific clientele—usually employees of large organizations—who are entitled to buy from a list of retailers that have agreed to give dis- counts in return for membership.

TABLE 16.1 Major Types of Store Retailers

Specialty store: Narrow product line. The Limited, The Body Shop.

Department store: Several product lines. JCPenney, Bloomingdale’s.

Supermarket: Large, low-cost, low-margin, high-volume, self-service store designed to meet total needs for food and household products. Kroger, Safeway.

Convenience store: Small store in residential area, often open 24/7, limited line of high-turnover convenience products plus takeout. 7-Eleven, Circle K.

Drug store: Prescription and pharmacies, health and beauty aids, other personal care, small durable, miscellaneous items. CVS, Walgreens.

Discount store: Standard or specialty merchandise; low-price, low-margin, high-volume stores. Walmart, Kmart.

Extreme value or hard-discount store: A more restricted merchandise mix than discount stores but at even lower prices. Aldi, Lidl, Dollar General, Family Dollar.

Off-price retailer: Leftover goods, overruns, irregular merchandise sold at less than retail. Factory outlets; independent off-price retailers such as TJ Maxx; warehouse clubs such as Costco.

Superstore: Huge selling space, routinely purchased food and household items, plus services (laundry, shoe repair, dry cleaning, check cashing). Category killer (deep assortment in one category) such as Staples; combination store such as Jewel-Osco; hypermarket (huge stores that combine supermarket, discount, and warehouse retailing) such as Carrefour in France and Meijer in the Netherlands.

Catalog showroom: Broad selection of high-markup, fast-moving, brand-name goods sold by catalog at a discount. Customers pick up merchandise at the store. Inside Edge Ski and Bike.

Source: Data from www.privatelabelmag.com.

450 PART 6 DELIVERING VALUE

CORPORATE RETAILING AND FRANCHISING Although many retail stores are independently owned, an increasing number are part of a corporate retailing organization. These organizations achieve economies of scale, greater purchasing power, wider brand recognition, and better-trained employees than independent stores can usually gain alone. The major types of corporate retailing—corporate chain stores, voluntary chains, retailer and consumer cooperatives, franchises, and merchandising conglomerates—are described in Table 16.2.

Franchise businesses such as Subway, Jiffy-Lube, Holiday Inn, Supercuts, and 7-Eleven account for more than $1 trillion of annual U.S. sales and roughly 40 percent of all retail transactions. One of every 12 U.S. retail businesses is a franchise establishment; these firms employ 1 in every 16 workers in the country.4

In a franchising system, individual franchisees are a tightly knit group of enterprises whose sys- tematic operations are planned, directed, and controlled by the operation’s innovator, called a franchisor. Franchises are distinguished by three characteristics:

1. The franchisor owns a trade or service mark and licenses it to franchisees in return for royalty payments.

2. The franchisee pays for the right to be part of the system. Start-up costs include rental and lease equipment and fixtures, and usually a regular license fee. McDonald’s franchisees may in- vest as much as $1.6 million in total start-up costs and fees. The franchisee then pays McDonald’s a certain percentage of sales plus a monthly rent.

3. The franchisor provides its franchisees with a system for doing business. McDonald’s requires franchisees to attend “Hamburger University” in Oak Brook, Illinois, for two weeks to learn how to manage the business. Franchisees must follow certain procedures in buying materials.

Franchising benefits both franchisor and franchisee. Franchisors gain the motivation and hard work of employees who are entrepreneurs rather than “hired hands,” the franchisees’ familiarity with local communities and conditions, and the enormous purchasing power of being a franchisor. Franchisees benefit from buying into a business with a well-known and accepted brand name. They find it easier to borrow money for their business from financial institutions, and they receive support in areas ranging from marketing and advertising to site selection and staffing.

Franchisees do walk a fine line between independence and loyalty to the franchisor. Some fran- chisors are giving their franchisees freedom to run their own operations, from personalizing store names to adjusting offerings and price. Beef ‘O’ Brady’s sports pub franchisees are allowed to set prices to reflect their local markets. Great Harvest Bread believes in a “freedom franchise” approach that encourages its franchisee bakers to create new items for their store menus and to share with other franchisees if they are successful.5

TABLE 16.2 Major Types of Corporate Retail Organizations

Corporate chain store: Two or more outlets owned and controlled, employing central buying and merchandising, and selling similar lines of merchandise. Gap, Pottery Barn.

Voluntary chain: A wholesaler-sponsored group of independent retailers engaged in bulk buying and common merchandising. Independent Grocers Alliance (IGA).

Retailer cooperative: Independent retailers using a central buying organization and joint promotion efforts. Associated Grocers, ACE Hardware.

Consumer cooperative: A retail firm owned by its customers. Members contribute money to open their own store, vote on its policies, elect a group to manage it, and receive dividends. Local coopera- tive grocery stores can be found in many markets.

Franchise organization: Contractual association between a franchisor and franchisees, popular in a number of product and service areas. McDonald’s, Subway, Pizza Hut, Jiffy Lube, 7-Eleven.

Merchandising conglomerate: A corporation that combines several diversified retailing lines and forms under central ownership, with some integration of distribution and management. Federated Department Stores renamed itself after one of its best-known retailers, Macy’s, but also owns other retailers such as Bloomingdale’s.

MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 451

As part of their franchise agreement, new McDonald’s franchisors must attend the company’s Hamburger University for two weeks to learn how to properly manage their restaurants.

The New Retail Environment With the onset of the recession in 2008, many retailers had to fundamentally reassess virtually everything they did. Some adopted a cautious, defensive response, cutting stock levels, slowing ex- pansion, and discounting deeply. Others were more creative about managing inventory, adjusting product lines, and carefully avoiding overpromoting. For example, JCPenney held back 60 percent of inventory for the fall 2009 holiday season, compared to its usual 20 percent, to avoid having empty shelves and stock-outs on one hand and overflowing shelves and heavy discounting on the other hand. Some firms, such as the Container Store and Saks, lowered average prices; others, such as Gilt.com and Neiman Marcus, introduced selective and very short-term deep discounts. Restoration Hardware chose to move its furniture product lines more upscale.6

Although many of these short-term adjustments were likely to remain longer-term, a number of other long-term trends are also evident in the retail marketing environment. Here are some that are changing the way consumers buy and manufacturers and retailers compete (see Table 16.3 for a summary).

• New Retail Forms and Combinations. To better satisfy customers’ need for convenience, a variety of new retail forms have emerged. Bookstores feature coffee shops. Gas stations in- clude food stores. Loblaw’s Supermarkets have fitness clubs. Shopping malls and bus and train stations have peddlers’ carts in their aisles. Retailers are also experimenting with lim- ited-time “pop-up” stores that let them promote brands to seasonal shoppers for a few weeks

TABLE 16.3 Recent Retail Developments

• New Retail Forms and Combinations

• Growth of Intertype Competition

• Competition between Store-Based and Nonstore-Based Retailing

• Growth of Giant Retailers

• Decline of Middle-Market Retailers

• Growing Investment in Technology

• Global Profile of Major Retailers

• Growth of Shopper Marketing

452 PART 6 DELIVERING VALUE

in busy areas and create buzz. For the 2009 holiday season, Toys “R” Us set up 350 temporary stores and toy boutiques, in many cases taking over vacant retail space in shopping centers and malls.7

• Growth of Intertype Competition. Department stores can’t worry just about other depart- ment stores—discount chains such as Walmart and Tesco are expanding into product areas such as clothing, health, beauty, and electrical appliances. Different types of stores—discount stores, catalog showrooms, department stores—all compete for the same consumers by carry- ing the same type of merchandise.

• Competition between Store-Based and Nonstore-Based Retailing. Consumers now receive sales offers through direct-mail letters and catalogs, television, cell phones, and the Internet. The nonstore-based retailers making these offers are taking business away from store-based retailers. Store-based retailers have responded by increasing their Web presence and finding different ways to sell online, including through their own Web sites, as well as creating more involving and engaging experiences in their stores. Store-based retailers want their stores to be destinations where consumers enjoy rich experiences that captivate all their senses. Sophisticated lighting, use of appropriate scents, and inviting, intimate designs are all being increasingly employed.8

• Growth of Giant Retailers. Through their superior information systems, logistical systems, and buying power, giant retailers such as Walmart are able to deliver good service and im- mense volumes of product to masses of consumers at appealing prices. They are crowding out smaller manufacturers that cannot deliver enough quantity and often dictate to the most pow- erful manufacturers what to make, how to price and promote, when and how to ship, and even how to improve production and management. Manufacturers need these accounts; otherwise they would lose 10 percent to 30 percent of the market. Some giant retailers are category killers that concentrate on one product category, such as pet food (PETCO), home improvement (Home Depot), or office supplies (Staples). Others are supercenters that combine grocery items with a huge selection of nonfood merchandise (Walmart).

• Decline of Middle-Market Retailers. We can characterize the retail market today as hourglass or dog-bone shaped: Growth seems to be centered at the top (with luxury offerings from re- tailers such as Nordstrom and Neiman Marcus) and at the bottom (with discount pricing from retailers such as Target and Walmart). As discount retailers improve their quality and im- age, consumers have been willing to trade down. Target offers Proenza Schouler designs and Kmart sells an extensive line of Joe Boxer underwear and sleepwear. At the other end of the spectrum, Coach recently converted 40 of its nearly 300 stores to a more upscale format that offers higher-priced bags and concierge services. Opportunities are scarcer in the middle where one-time successful retailers such as Sears, CompUSA, and Montgomery Ward have struggled or even gone out of business.9

Kohl’s has found some success going after middle-market consumers by bringing in trendy names such as Lauren Conrad, Vera Wang, Daisy Fuentes, and Tony Hawk. In addition to of- fering more up-market merchandise, Kohl’s also adapted the stores themselves to make the shopping experience more convenient and pleasant.10 Marks & Spencer in the United Kingdom features in-house brands and has built a strong retail brand image. Although these stores tend to have high operating costs, they command high margins if their in-house brands are both fashionable and popular.11

• Growing Investment in Technology. Almost all retailers now use technology to produce better forecasts, control inventory costs, and order electronically from suppliers. Technology is also af- fecting what happens inside the store. In-store programming on plasma TVs can run continual demonstrations or promotional messages. After encountering problems measuring store traffic up and down aisles—GPS on shopping carts didn’t work because consumers tended to aban- don their carts at times during trips and thermal imaging couldn’t tell the difference between turkeys and babies during tests—bidirectional infrared sensors sitting on store shelves have been successfully introduced. Electronic shelf labeling allows retailers to change price levels instantaneously at any time of the day or week. Retailers are also introducing features to help customers as they shop. Some supermarkets are employing “smart” shopping carts or mobile phones that help customers locate items in the store, find out about sales and special offers, and pay for items more easily. As exciting as these new technologies are, their cost and unproven effectiveness in many cases can create significant drawbacks.12

MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 453

• Global Profile of Major Retailers. Retailers with unique formats and strong brand positioning are increasingly appearing in other countries. U.S. retailers such as The Limited and the Gap have become globally prominent. Walmart operates over 3,600 stores abroad where it does 25 percent of its business. Dutch retailer Ahold and Belgian retailer Delhaize earn almost two-thirds and four-fifths of their sales, respectively, in nondomestic mar- kets. Among foreign-based global retailers in the United States are Italy’s Benetton, Sweden’s IKEA home furnishings stores, and Japan’s UNIQLO casual apparel retailer and Yaohan supermarkets.

• Growth of Shopper Marketing. Buoyed by research suggesting that as much as 70 percent to 80 percent of purchase decisions are made inside the retail store, firms are increasingly recognizing the importance of influ- encing consumers at the point of purchase.13 Where and how a product is displayed and sold can have a significant effect on sales.14 More communi- cation options are available through in-store advertising such as Walmart TV.15 Some employ goggle-like devices that record what test customers see by projecting an infrared beam onto the wearer’s retina. One finding was that many shoppers ignored products at eye level—the optimum location was between waist and chest level.16

Marketing Decisions With this new retail environment as a backdrop, we will examine retailers’ mar- keting decisions in the areas of target market, channels, product assortment, procurement, prices, services and store atmosphere, store activities and experi- ences, communications, and location. We discuss the important topic of private labels for retailers in the next section.

TARGET MARKET Until it defines and profiles the target market, the retailer cannot make consistent decisions about product assortment, store decor, advertising messages and media, price, and service levels. Ann Taylor has used a panel of 3,000 customers to provide feedback on its merchandise and even its marketing campaign. The firm also solicits employees’ input.17 Whole Foods has found success by offering a unique shopping experience to a customer base interested in organic and natural foods.

Whole Foods Market In 284 stores in North America and the United Kingdom, Whole Foods creates celebrations of food. The markets are bright and well staffed, and food displays are bountiful and seductive. Whole Foods is the largest organic and natural foods grocer in the country, offering more than 2,400 items in four lines of private-label prod- ucts that add up to 11 percent of sales: the premium Whole Foods Market, Whole Kitchen, and

Whole Market lines and the low-priced 365 Everyday Value line. Whole Foods also offers lots of informa- tion about its food. If you want to know, for instance, whether the chicken in the display case lived a happy, free-roaming life, you can get a 16-page booklet and an invitation to visit the farm in Pennsylvania where it was raised. If you can’t find the information you need, you have only to ask a well-trained and knowl- edgeable employee. Whole Foods’ approach is working, especially for consumers who view organic and artisanal food as an affordable luxury. From 1991–2009, sales grew at a 28 percent compounded annual growth rate (CAGR).18

Mistakes in choosing or switching target markets can be costly. When historically mass- market jeweler Zales decided to chase upscale customers, it replaced one-third of its merchan- dise, dropping inexpensive, low-quality diamond jewelry for high-margin, fashionable 14-karat gold and silver pieces and shifting its ad campaign in the process. The move was a disaster. Zales lost many of its traditional customers without winning over the new customers it had hoped to attract.19

W h o le

F o o d s

M a rk

e t

High-tech shopping carts allow customers to keep track of their total expenditures, search for products, find out what is on sale, and even pay without waiting in line.

454 PART 6 DELIVERING VALUE

To better hit their targets, retailers are slicing the market into ever-finer segments and introduc- ing new lines of stores to exploit niche markets with more relevant offerings: Gymboree launched Janie and Jack, selling apparel and gifts for babies and toddlers; Hot Topic introduced Torrid, selling fashions for plus-sized teen girls; and Limited Brand’s Tween Brands sells lower-priced fashion to tween girls.

Channels Based on a target market analysis and other considerations we reviewed in Chapter 15, retailers must decide which channels to employ to reach their customers. Increasingly, the answer is multi- ple channels. Staples sells through its traditional retail channel, a direct-response Internet site, vir- tual malls, and thousands of links on affiliated sites.

As Chapter 15 explained, channels should be designed to work together effectively. Century- old department store chain JCPenney has ensured that its Internet, store, and catalog businesses are fully intertwined. It sells a vast variety of goods online; has made Internet access available at its 35,000 checkout registers; and allows online shoppers to pick up and return orders at stores and check which clothes are in stock there. These strategies—as well as the introduction of a.n.a., a stylish line of women’s clothing—have helped give JCPenney a younger, more up- scale image.20

Although some experts predicted otherwise, catalogs have actually grown in an Internet world as more firms use them as branding devices. Victoria’s Secret’s integrated multichannel approach of retail stores, catalog, and Internet has played a key role in its brand development.

Victoria’s Secret Limited Brands founder Leslie Wexner felt U.S. women would relish the opportunity to have a European-style lingerie shopping experience. “Women need underwear, but women want lingerie,” he observed. Wexner’s assumption proved cor- rect: A little more than a decade after he bought the business in 1982, Victoria’s Secret’s average customer was buying 8 to 10 bras per year, compared with the national average of

two. To enhance its upscale reputation and glamorous appeal, the brand is endorsed by high-profile super- models in ads and fashion shows. To expand its accessibility and offer privacy, the company began to sell directly to consumers. Victoria’s Secret used a comprehensive marketing strategy to connect its retail, catalog, and Web sales. Wexner sought to make it: “stand [out] as an integrated world-class brand. Across all channels—catalogue, stores, Internet—the same products are launched at the same time, in exactly the same way, with the same quality, and same positioning.” Since 1985, Victoria’s Secret has delivered 25 percent annual sales growth, selling through its 1,000-plus stores, catalogs, and company Web site, posting $5.6 billion in revenues in 2009. Victoria’s Secret ships 400 million catalogs a year, or 1.33 for every U.S. citizen, and catalog and online orders account for nearly 28 percent of its overall revenue, grow- ing at double the rate of sales from its stores.21

PRODUCT ASSORTMENT The retailer’s product assortment must match the target market’s shopping expectations in breadth and depth. A restaurant can offer a narrow and shallow assortment (small lunch counters), a narrow and deep assortment (delicatessen), a broad and shallow assortment (cafeteria), or a broad and deep assortment (large restaurant).

Identifying the right product assortment can be especially challenging in fast-moving industries such as technology or fashion. Urban Outfitters ran into trouble when it strayed from its “hip, but not too hip” formula, moving to embrace new styles too quickly. Sales fell over 25 percent during 2006.22 On the other hand, active and casual apparel retailer Aéropostale has found success by care- fully matching its product assortment to its young teen target market’s needs.

Aéropostale Aéropostale has chosen to embrace a key reality of its target market: 11- to 18-year-olds, especially those on the young end, often want to look like other teens. So while Abercrombie and American Eagle might reduce the number of cargo pants on the sales floor, Aéropostale will keep an ample supply on hand at an affordable price. Staying on top of the right

V ic

to ri

a ’s

S e c re

t

MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 455

trends isn’t easy, but Aéropostale is among the most diligent of teen retailers when it comes to consumer research. In addition to running high school focus groups and in-store product tests, the company launched an Internet-based program that seeks online shoppers’ input in creat- ing new styles. It targets 10,000 of its best customers and averages 3,500 participants in each of 20 tests a year.Aéropostale has gone from being a lackluster performer with only 100 stores to a powerhouse with 914 total stores in the United States, Puerto Rico, and Canada. Net sales were up 19 percent in 2008 to $1.9 billion, and net sales from e-commerce business in- creased 85 percent to $79 million.23

The real challenge begins after defining the store’s product assortment, and that is to develop a product-differentiation strategy. To better differentiate themselves and generate consumer interest, some luxury retailers are making their stores and mer- chandise more varied. Chanel has expanded its “ultralux” goods, including $26,000 alligator bags, while ensuring an ample supply of “must-haves” that are consistently strong sellers.24 Here are some other possibilities:

• Feature exclusive national brands that are not available at competing retailers. Saks might get exclusive rights to carry the dresses of a well-known international designer.

• Feature mostly private-label merchandise. Benetton and Gap design most of the clothes carried in their stores. Many supermarket and drug chains carry pri- vate-label merchandise.

• Feature blockbuster distinctive merchandise events. Bloomingdale’s ran a month-long celebration for the Barbie doll’s 50th anniversary in March 2009.

• Feature surprise or ever-changing merchandise. Off-price apparel retailer TJ Maxx offers surprise assortments of distress merchandise (goods the owner must sell immediately because it needs cash), overstocks, and closeouts, totaling 10,000 new items each week at prices 20 per- cent to 60 percent below department and specialty store regular prices.

• Feature the latest or newest merchandise first. Zara excels in and profits from being first-to- market with appealing new looks and designs.

• Offer merchandise-customizing services. Harrods of London will make custom-tailored suits, shirts, and ties for customers, in addition to ready-made menswear.

• Offer a highly targeted assortment. Lane Bryant carries goods for the larger woman. Brookstone offers unusual tools and gadgets for the person who wants to shop in a “toy store for grown-ups.”

Merchandise may vary by geographical market. Electronics superstore Best Buy reviewed each of its 25,000 SKUs to adjust its merchandise according to income level and buying habits of shoppers. It also puts different store formats and staffs in different areas—a location with computer sophisticates gets a different store treatment than one with less technically sophisticated shoppers.25 Macy’s and Ross Stores employ micro-merchandising and let managers select a significant percentage of store assortments.26

PROCUREMENT After deciding on the product-assortment strategy, the retailer must establish merchandise sources, policies, and practices. In the corporate headquarters of a supermarket chain, specialist buyers (sometimes called merchandise managers) are responsible for developing brand assortments and listening to salespersons’ presentations.

Retailers are rapidly improving their skills in demand forecasting, merchandise selection, stock control, space allocation, and display. They use computers to track inventory, compute economic order quantities, order goods, and analyze dollars spent on vendors and products. Supermarket chains use scanner data to manage their merchandise mix on a store-by-store basis.

Some stores are experimenting with radio frequency identification (RFID) systems made up of “smart” tags—microchips attached to tiny radio antennas—and electronic readers. The smart tags can be embedded on products or stuck on labels, and when the tag is near a reader, it transmits a unique identifying number to its computer database. The use of RFIDs has been steadily increas- ing. Coca-Cola and Gillette use them to monitor inventory and track goods in real time as they move from factories to supermarkets to shopping baskets.27

When retailers do study the economics of buying and selling individual products, they typically find that a third of their square footage is tied up in products that don’t make an economic profit

Aéropostale’s “Teens for Jeans” cause marketing campaign encour- ages its customers to donate used jeans for homeless teens in North America.

456 PART 6 DELIVERING VALUE

for them (profit above the cost of capital). Another third is typically allocated to product categories that break even. The final third of the space creates the vast majority of the economic profit, yet many retailers are unaware which third of their products generate it.28

Stores are using direct product profitability (DPP) to measure a product’s handling costs (re- ceiving, moving to storage, paperwork, selecting, checking, loading, and space cost) from the time it reaches the warehouse until a customer buys it in the retail store. They learn to their surprise that the gross margin on a product often bears little relation to the direct product profit. Some high- volume products may have such high handling costs that they are less profitable and deserve less shelf space than low-volume products.

Trader Joe’s has differentiated itself on its innovative procurement strategy.

Trader Joe’s Los Angeles–based Trader Joe’s has carved out a special niche as a “gourmet food outlet discount warehouse hybrid,” selling a constantly rotating assortment of upscale specialty food and wine at lower-than-average prices. Roughly 80 percent of what it stocks sells under private labels (compared to only 16 percent at most supermarkets), many with a strong environmentally friendly message. For procurement, Trader Joe’s has adopted a

“less is more” philosophy. Every store carries about 3,000 products, compared to 55,000 at a conventional supermarket, and only what it can buy and sell at a good price, even if that means changing stock weekly. Its 18 expert buyers go directly to hundreds of suppliers, not to intermediaries, and 20 percent to 25 percent of its suppliers are overseas. With thousands of vendor relationships all around the world, Trader Joe’s has a success formula that’s difficult to copy. In addition, a product finds a space on the shelf only if it’s approved by a tasting panel; there is one on each coast to satisfy regional tastes. The company introduces as many as 20 products a week to replace unpopular items.29

PRICES Prices are a key positioning factor and must be set in relationship to the target market, product-and-service assortment mix, and competition.30 All retailers would like high turns × earns (high volumes and high gross margins), but the two don’t usually go together. Most retailers fall into the high-markup, lower-volume group (fine specialty stores) or the low-markup, higher-volume group (mass merchandisers and discount stores). Within each of these groups are further gradations. Bijan on Rodeo Drive in Beverly Hills prices suits starting at $1,000 and shoes at $400. At the other end, Target has skillfully combined a hip image with discount prices to offer customers a strong value proposition.

Target In the mid-1980s, Kmart was the dominant mass retailer, and Walmart was growing rapidly. Sensing a gap in the market for “cheap chic” retail, Target strove to set itself apart from the other big-box retailers by enhancing the design quality of its product selection, fo- cusing on merchandise that was contemporary and unique. The company’s team of merchandis- ers traveled the world looking for the next hot items and trends to bring to the shelves.Target also

differentiated its merchandising layout, using low shelves, halogen and track lighting, and wider aisles and avoiding “visual clutter” in stores. With the slogan “Expect More, Pay Less,” Target seeks to build an up-market ca- chet for its brand without losing price-conscious consumers. It introduced a line of products from world-renowned designers such as Michael Graves, Isaac Mizrahi, Mossimo Giannulli, and Liz Lange and has kept innovating with its merchandising model. In 2006, it introduced U.S. consumers to the concept of “fast fashion,” already popular in Europe, to help keep the prod- uct selection fresh, which in turn led to more frequent shopper visits.31

Most retailers will put low prices on some items to serve as traffic builders or loss leaders or to signal their pricing policies.32 They will run storewide sales. They will plan markdowns on slower-moving mer- chandise. Shoe retailers, for example, expect to sell 50 percent of their shoes at the normal markup, 25 percent at a 40 percent markup, and the remaining 25 percent at cost.

Tr a d e r

J o e ’s

As part of its “cheap chic” retail strategy, Target sells products from famous designers, such as the Harlem Design Series from New York fashion visionary Stephen Burrows.

MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 457

As Chapter 14 noted, some retailers such as Walmart have abandoned “sales pricing” in favor of everyday low pricing (EDLP). EDLP can lead to lower advertising costs, greater pricing stability, a stronger image of fairness and reliability, and higher retail profits. Supermarket chains practicing everyday low pricing can be more profitable than those practicing high–low sale pricing, but only in certain circumstances.33

SERVICES Retailers must decide on the services mix to offer customers:

• Prepurchase services include accepting telephone and mail orders, advertising, window and interior display, fitting rooms, shopping hours, fashion shows, and trade-ins.

• Postpurchase services include shipping and delivery, gift wrapping, adjustments and returns, alterations and tailoring, installations, and engraving.

• Ancillary services include general information, check cashing, parking, restaurants, repairs, interior decorating, credit, rest rooms, and baby-attendant service.

Another differentiator is unerringly reliable customer service, whether face-to-face, across phone lines, or via online chat. Barnes & Noble hires clean-cut people with a passion for customer service and a general love of books; Borders employees are more likely to be tattooed or have multiple body piercings. The company prides itself on the diversity of its employees and hires people who radiate excitement about particular books and music, rather than simply finding a book for a customer.34

Whatever retailers do to enhance customer service, they must keep women in mind. Approximately 85 percent of everything sold in the United States is bought or influenced by a woman, and women are fed up with the decline in customer service. They are finding every possible way to get around the system, from ordering online to resisting fake sales to just doing without.35

And when they do shop, they want well-organized layouts, helpful staff, and speedy checkouts.36

STORE ATMOSPHERE Atmosphere is another element in the store arsenal. Every store has a look, and a physical layout that makes it hard or easy to move around (see “Marketing Memo: Helping Stores to Sell”). Kohl’s floor plan is modeled after a racetrack loop and is designed to convey customers smoothly past all the merchandise in the store. It includes a middle aisle that hurried shoppers can use as a shortcut and yields higher spending levels than many competitors.37

Retailers must consider all the senses in shaping the customer’s experience. Varying the tempo of music affects average time and dollars spent in the supermarket. Sony Style stores are seasoned with a subtle vanilla and mandarin orange fragrance, and every surface, from countertops to paneling, is designed to be touchable. Bloomingdale’s uses different essences in different departments: baby powder in the baby store; suntan lotion in the bathing suit area; lilacs in lingerie; and cinnamon and pine scent during the holiday season.38

STORE ACTIVITIES AND EXPERIENCES The growth of e-commerce has forced traditional brick-and-mortar retailers to respond. In addition to their natural advantages, such as products that shoppers can actually see, touch, and test; real-life customer service; and no delivery lag time for most purchases, stores also provide a shopping experience as a strong differentiator.39

The store atmosphere should match shoppers’ basic motivations — if customers are likely to be in a task-oriented and functional mind- set, then a simpler, more restrained in-store environment may be better.40 On the other hand, some retailers of experiential products are creating in-store entertainment to attract customers who want fun and excitement.41 REI, seller of outdoor gear and clothing products, allows consumers to test climbing equipment on 25-foot or even 65-foot walls in the store and to try GORE-TEX raincoats under a simulated rain shower. Bass Pro Shops, a retailer of outdoor sports equipment, features giant aquariums, waterfalls, trout ponds, archery and rifle ranges, fly-tying demonstrations and some with an outdoor pond to test equipment, indoor driving range and putting greens, and classes in everything from ice fishing to conservation—all free. Its first and largest showroom in Missouri is the number one tourist destination in the state.

Bass Pro Shops sells its outdoor sports equipment in an experien- tial retail environment conducive to product demos and tests.

Sources: Paco Underhill, Call of the Mall: The Geography of Shopping (New York: Simon & Schuster, 2004); Paco Underhill, Why We Buy: The Science of Shopping (New York: Simon & Schuster, 1999). See also, Kenneth Hein, “Shopping Guru Sees Death of Detergent Aisle,” Brandweek, March 27, 2006, p. 11; Bob Parks, “5 Rules of Great Design,” Business 2.0 (March 2003): 47–49; Russell Boniface, “I Spy a Shopper!” AIArchitect, June 2006; Susan Berfield, “Getting the Most Out of Every Shopper, BusinessWeek, February 9, 2009, pp. 45–46; www.envirosell.com.

458 PART 6 DELIVERING VALUE

COMMUNICATIONS Retailers use a wide range of communication tools to generate traffic and purchases. They place ads, run special sales, issue money-saving coupons, and run frequent- shopper-reward programs, in-store food sampling, and coupons on shelves or at checkout points. They work with manufacturers to design point-of-sale materials that reflect both their images.42

Upscale retailers place tasteful, full-page ads in magazines such as Vogue, Vanity Fair, or Esquire and carefully train salespeople to greet customers, interpret their needs, and handle complaints. Off-price retailers will arrange their merchandise to promote bargains and savings, while conserving on service and sales assistance. Retailers are also using interactive and social media to pass on information and create communities around their brands.43 Casual dining chain Houlihan’s created a social network site, HQ, to gain honest, immediate feedback from 10,500 invitation-only “Houlifan” customers in return for insider information.

LOCATION The three keys to retail success are often said to be “location, location, and location.” Department store chains, oil companies, and fast-food franchisers exercise great care in selecting regions of the country in which to open outlets, then particular cities, and then particular sites. Retailers can place their stores in the following locations:

• Central business districts. The oldest and most heavily trafficked city areas, often known as “downtown”

m a r k e t i n g

Memo Helping Stores to Sell In pursuit of higher sales volume, retailers are studying their store environ- ments for ways to improve the shopper experience. Paco Underhill is man- aging director of the retail consultant Envirosell, whose clients include McDonald’s, Starbucks, Estée Lauder, Blockbuster, Citibank, Gap, Burger King, CVS, and Wells Fargo. Using a combination of in-store video recording and observation, Underhill and his colleagues study 50,000 people each year as they shop. He offers the following advice for fine-tuning retail space:

• Attract shoppers and keep them in the store. The amount of time shoppers spend in a store is perhaps the single most important factor in determining how much they buy. To increase shopping time, give shoppers a sense of community; recognize them in some way; give them ways to deal with their accessories, such as chairs in convenient locations for boyfriends, husbands, children, or bags; and make the environment both familiar and fresh each time they come in.

• Honor the “transition zone.” On entering a store, people need to slow down and sort out the stimuli, which means they will likely be moving too fast to respond positively to signs, merchandise, or sales clerks in the zone they cross before making that transition. Make sure there are clear sight lines. Create a focal point for information within the store. Most right-handed people turn right upon entering a store.

• Avoid overdesign. Store fixtures, point-of-sales information, packaging, signage, and flat-screen televisions can combine to create a visual cacoph- ony. Use crisp and clear signage—“Our Best Seller” or “Our Best Student Computer”—where people feel comfortable stopping and facing the right way.Window signs, displays, and mannequins communicate best when an- gled 10 to 15 degrees to face the direction that people are moving.

• Don’t make them hunt. Put the most popular products up front to reward busy shoppers and encourage leisurely shoppers to look more. At Staples, ink cartridges are one of the first products shoppers encounter after entering.

• Make merchandise available to the reach and touch. It is hard to overemphasize the importance of customers’ hands. A store can offer the finest, cheapest, sexiest goods, but if the shopper cannot reach or pick them up, much of their appeal can be lost.

• Make kids welcome. If kids feel welcome, parents will follow. Take a three-year-old’s perspective and make sure there are engaging sights at eye level. A virtual hopscotch pattern or dinosaur on the floor can turn a boring shopping trip for a child into a friendly experience.

• Note that men do not ask questions. Men always move faster than women do through a store’s aisles. In many settings, it is hard to get them to look at anything they had not intended to buy. Men also do not like asking where things are. If a man cannot find the section he is look- ing for, he will wheel about once or twice, then leave the store without ever asking for help.

• Remember women need space. A shopper, especially a woman, is far less likely to buy an item if her derriere is brushed, even lightly, by an- other customer when she is looking at a display. Keeping aisles wide and clear is crucial.

• Make checkout easy. Be sure to have the right high-margin goods near cash registers to satisfy impulse shoppers. People love to buy candy when they check out—so satisfy their sweet tooth.

TABLE 16.4 Top 10 Private Label Categories–2009 (billions of dollars)

• Milk ($8.1)

• Bread & Baked Good ($4.2)

• Cheese ($3.5)

• Medications/Remedies/Vitamins ($3.4)

• Paper Products ($2.6)

• Eggs—Fresh ($1.9)

• Fresh Produce ($1.5)

• Packaged Meat ($1.5)

• Pet Food ($1.5)

• Unprepared Meat/Frozen Seafood ($1.4)

Source: Data from www.privatelabelmag.com. December 9, 2010. Used with permission.

MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 459

• Regional shopping centers. Large suburban malls containing 40 to 200 stores, typically fea- turing one or two nationally known anchor stores, such as Macy’s or Lord & Taylor or a com- bination of big-box stores such as PETCO, Payless Shoes, Borders, or Bed Bath & Beyond, and a great number of smaller stores, many under franchise operation44

• Community shopping centers. Smaller malls with one anchor store and 20 to 40 smaller stores • Shopping strips. A cluster of stores, usually in one long building, serving a neighborhood’s

needs for groceries, hardware, laundry, shoe repair, and dry cleaning • A location within a larger store. Certain well-known retailers—McDonald’s, Starbucks,

Nathan’s, Dunkin’ Donuts—locate new, smaller units as concession space within larger stores or operations, such as airports, schools, or department stores.

• Stand-alone stores. Some retailers such as Kohl’s and JCPenney are avoiding malls and shop- ping centers to locate new stores in free-standing sites on streets, so they are not connected directly to other retail stores.

In view of the relationship between high traffic and high rents, retailers must decide on the most advantageous locations for their outlets, using traffic counts, surveys of consumer shopping habits, and analysis of competitive locations.

Private Labels A private label brand (also called a reseller, store, house, or distributor brand) is a brand that retailers and wholesalers develop. Benetton, The Body Shop, and Marks & Spencer carry mostly own-brand merchandise. In grocery stores in Europe and Canada, store brands account for as much as 40 percent of the items sold. In Britain, the largest food chains, roughly half of what Sainsbury and Tesco sell is store-label goods.

For many manufacturers, retailers are both collaborators and competitors. According to the Private Label Manufacturers’ Association, store brands now account for one of every four items sold in U.S. supermarkets, drug chains, and mass merchandisers, up from 19 percent in 1999. In one study, seven of ten shoppers believed the private label products they bought were as good as, if not better than, their national brand. Setting aside beverages, private labels account for roughly 30 percent of all food served in U.S. homes, and virtually every household purchases private label brands from time to time.45

Private labels are rapidly gaining ascendance in a way that has many manufacturers of name brands running scared. Some experts believe though that 50 percent is the natural limit for volume of private labels to carry because (1) consumers prefer certain national brands, and (2) many prod- uct categories are not feasible or attractive on a private-label basis.46 Table 16.4 displays the product categories that have the highest private-label sales.

460 PART 6 DELIVERING VALUE

Role of Private Labels Why do intermediaries sponsor their own brands?47 First, these brands can be more profitable. Intermediaries search for manufacturers with excess capacity that will produce private label goods at low cost. Other costs, such as research and development, advertising, sales promotion, and phys- ical distribution, are also much lower, so private labels can generate a higher profit margin. Retailers also develop exclusive store brands to differentiate themselves from competitors. Many price-sensitive consumers prefer store brands in certain categories. These preferences give retailers increased bargaining power with marketers of national brands.

Private label or store brands should be distinguished from generics. Generics are unbranded, plainly packaged, less expensive versions of common products such as spaghetti, paper towels, and canned peaches. They offer standard or lower quality at a price that may be as much as 20 percent to 40 percent lower than nationally advertised brands and 10 percent to 20 percent lower than the retailer’s private-label brands. The lower price is made possible by lower-cost labeling and packag- ing and minimal advertising, and sometimes lower-quality ingredients. Generics can be found in a wide range of different products, even medicines.

Generic Drugs Generic drugs have become big business. Branded drug sales actually declined for the first time in 2009. By making knockoffs faster and in larger quantities, Israel’s Teva has become the world’s biggest generic drugmaker, with revenue of $14 billion. Pharma giant Novartis is one of the world’s top five makers of branded drugs, with such suc-

cesses as Diovan for high blood pressure and Gleevec for cancer, but it has also become the world’s second-largest maker of generic drugs following its acquisition of Sandoz, HEXAL, Eon Labs, and others. Other pharmaceu- tical companies such as Sanofi-Aventis and GlaxoSmithKline have entered the generic drug market not in the United States but in emerging markets in Eastern Europe, Latin America, and Asia, where some consumers cannot afford expensive brand-name drugs but worry about counterfeit or low-quality drugs. These consumers are willing to pay at least a small pre- mium for a drug backed by a trusted company.48

Private-Label Success Factors In the confrontation between manufacturers’ and private labels, retail- ers have many advantages and increasing market power.49 Because shelf

space is scarce, many supermarkets charge a slotting fee for accepting a new brand, to cover the cost of listing and stocking it. Retailers also charge for special display space and in-store advertising space. They typically give more prominent display to their own brands and make sure they are well stocked.

Retailers are building better quality into their store brands. Supermarket retailers are adding premium store-brand items like organics or creating new products without direct competition, such as three-minute microwaveable snack pizzas. They are also emphasizing attractive, innovative packaging. Some are even advertising aggressively: Safeway ran a $100 million integrated commu- nication program that featured TV and print ads, touting the store brand’s quality.50

Loblaw Since 1984, when its President’s Choice line of foods made its debut, the term private label has brought Loblaw instantly to mind. Toronto-based Loblaw’s Decadent Chocolate Chip Cookie quickly became a Canadian leader and showed how innovative store brands could compete effectively with national brands by matching or even exceeding their quality. A finely tuned brand strategy for its premium President’s Choice line and its no-frills, yellow-labeled No Name line

(which the company relaunched with a vengeance during the recent recession) has helped differentiate its stores and built Loblaw into a powerhouse in Canada and the United States.The President’s Choice line of products has become so successful that Loblaw is licensing it to noncompetitive retailers in other countries. In 2010, Loblaw introduced a new tier of low-priced store brands, priced slightly above the No Name line, to be made available at its chain of 175 No Frills “hard discount” grocery stores.51

Generic drugs have become big business as a means to lower health care costs.

L o b la

w

MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 461

Although retailers get credit for the success of private labels, the growing power of store brands has also benefited from the weakening of national brands. Many consumers have become more price sensitive, a trend reinforced by the continuous barrage of coupons and price specials that has trained a generation to buy on price. Competing manufacturers and national retailers copy and duplicate the quality and features of the best brands in a category, reducing physical product differentiation. Moreover, by cutting marketing communication budgets, some firms have made it harder to create any intangible differences in brand image. A steady stream of brand extensions and line extensions has blurred brand identity at times and led to a confusing amount of product proliferation.

Bucking these trends, many manufacturers or national brands are fighting back. “Marketing Insight: Manufacturer’s Respond to the Private Label Threat,” describes the strategies and tactics being taken to compete more effectively with private labels.

Wholesaling Wholesaling includes all the activities in selling goods or services to those who buy for resale or business use. It excludes manufacturers and farmers because they are engaged primarily in produc- tion, and it excludes retailers. The major types of wholesalers are described in Table 16.5.

Wholesalers (also called distributors) differ from retailers in a number of ways. First, wholesalers pay less attention to promotion, atmosphere, and location because they are dealing with business customers rather than final consumers. Second, wholesale transactions are usually larger than retail

Marketing InsightMarketing Insight

Manufacturer’s Response to the Private Label Threat To maintain their marketplace power, leading brand marketers are in- vesting significantly in R&D to bring out new brands, line extensions, features, and quality improvements to stay a step ahead of the store brands. They are also investing in strong “pull” advertising programs to maintain high consumer brand recognition and preference and over- come the in-store marketing advantage that private labels can enjoy. Top-brand marketers also are seeking to partner with major mass dis- tributors in a joint search for logistical economies and competitive strategies that produce savings for both sides. Cutting all unnecessary costs allows national brands to command a price premium, although it can’t exceed the value perceptions of consumers.

University of North Carolina’s Jan-Benedict E. M. Steenkamp and London Business School’s Nirmalya Kumar offer four strategic recom- mendations for manufacturers to compete against or collaborate with private labels.

• Fight selectively where manufacturers can win against private la- bels and add value for consumers, retailers, and shareholders. This is typically where the brand is one or two in the category or occu- pying a premium niche position. Procter & Gamble rationalized its

portfolio, selling off various brands such as Sunny Delight juice drink, Jif peanut butter, and Crisco shortening, in part so it could concentrate on strengthening its 20+ brands with more than $1 billion in sales.

• Partner effectively by seeking win-win relationships with retailers through strategies that complement the retailer’s private labels. Estée Lauder created four brands (American Beauty, Flirt, Good Skin, and Grassroots) exclusively for Kohl’s, to help the retailer generate volume and protect its more prestigious brands in the process. Manufacturers selling through hard discounters such as Lidl and Aldi have increased sales by finding new customers who have not previously bought the brand.

• Innovate brilliantly with new products to help beat private labels. Continuously launching incremental new products keeps the manufacturer brands looking fresh, but the firm must also periodically launch radical new products and protect the intellectual property of all brands. Kraft doubled its number of patent lawyers to make sure its innovations were legally protected as much as possible.

• Create winning value propositions by imbuing brands with symbolic imagery as well as functional quality that beats private labels. Too many manufacturer brands have let private labels equal and some- times better them on functional quality. In addition, to have a win- ning value proposition, marketers need to monitor pricing and ensure that perceived benefits equal the price premium.

Sources: James A. Narus and James C. Anderson, “Contributing as a Distributor to Partnerships with Manufacturers,” Business Horizons (September–October 1987); Nirmalya Kumar and Jan-Benedict E. M. Steenkamp, Private Label Strategy: How to Meet the Store-Brand Challenge (Boston: Harvard Business School Press, 2007); Nirmalya Kumar, “The Right Way to Fight for Shelf Domination,” Advertising Age, January 22, 2007; Jan-Benedict E. M. Steenkamp and Nirmalya Kumar, “Don’t Be Undersold, Harvard Business Review, December 2009, p. 91.

462 PART 6 DELIVERING VALUE

transactions, and wholesalers usually cover a larger trade area than retailers. Third, the government deals with wholesalers and retailers differently in terms of legal regulations and taxes.

Why do manufacturers not sell directly to retailers or final consumers? Why are wholesalers used at all? In general, wholesalers are more efficient in performing one or more of the following functions:

• Selling and promoting. Wholesalers’ sales forces help manufacturers reach many small busi- ness customers at a relatively low cost. They have more contacts, and buyers often trust them more than they trust a distant manufacturer.

• Buying and assortment building. Wholesalers are able to select items and build the assort- ments their customers need, saving them considerable work.

• Bulk breaking. Wholesalers achieve savings for their customers by buying large carload lots and breaking the bulk into smaller units.

• Warehousing. Wholesalers hold inventories, thereby reducing inventory costs and risks to suppliers and customers.

• Transportation. Wholesalers can often provide quicker delivery to buyers because they are closer to the buyers.

• Financing. Wholesalers finance customers by granting credit, and finance suppliers by order- ing early and paying bills on time.

• Risk bearing. Wholesalers absorb some risk by taking title and bearing the cost of theft, dam- age, spoilage, and obsolescence.

• Market information. Wholesalers supply information to suppliers and customers regarding competitors’ activities, new products, price developments, and so on.

TABLE 16.5 Major Wholesaler Types

Merchant wholesalers: Independently owned businesses that take title to the merchandise they handle. They are full-service and limited-service jobbers, distributors, and mill supply houses.

Full-service wholesalers: Carry stock, maintain a sales force, offer credit, make deliveries, provide management assistance. Wholesale merchants sell primarily to retailers: Some carry several merchan- dise lines, some carry one or two lines, others carry only part of a line. Industrial distributors sell to manufacturers and also provide services such as credit and delivery.

Limited-service wholesalers: Cash and carry wholesalers sell a limited line of fast-moving goods to small retailers for cash. Truck wholesalers sell and deliver a limited line of semiperishable goods to supermarkets, grocery stores, hospitals, restaurants, hotels. Drop shippers serve bulk industries such as coal, lumber, and heavy equipment. They assume title and risk from the time an order is accepted to its delivery. Rack jobbers serve grocery retailers in nonfood items. Delivery people set up displays, price goods, and keep inventory records; they retain title to goods and bill retailers only for goods sold to the end of the year. Producers’ cooperatives assemble farm produce to sell in local markets. Mail-order wholesalers send catalogs to retail, industrial, and institutional customers; orders are filled and sent by mail, rail, plane, or truck.

Brokers and agents: Facilitate buying and selling, on commission of 2 percent to 6 percent of the selling price; limited functions; generally specialize by product line or customer type. Brokers bring buyers and sellers together and assist in negotiation; they are paid by the party hiring them—food bro- kers, real estate brokers, insurance brokers. Agents represent buyers or sellers on a more permanent basis. Most manufacturers’ agents are small businesses with a few skilled salespeople: Selling agents have contractual authority to sell a manufacturer’s entire output; purchasing agents make purchases for buyers and often receive, inspect, warehouse, and ship merchandise; commission merchants take physical possession of products and negotiate sales.

Manufacturers’ and retailers’ branches and offices: Wholesaling operations conducted by sellers or buyers themselves rather than through independent wholesalers. Separate branches and offices are dedicated to sales or purchasing. Many retailers set up purchasing offices in major market centers.

Specialized wholesalers: Agricultural assemblers (buy the agricultural output of many farms), petro- leum bulk plants and terminals (consolidate the output of many wells), and auction companies (auction cars, equipment, etc., to dealers and other businesses).

MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 463

• Management services and counseling. Wholesalers often help retailers improve their opera- tions by training sales clerks, helping with store layouts and displays, and setting up account- ing and inventory-control systems. They may help industrial customers by offering training and technical services.

Trends in Wholesaling Wholesaler-distributors have faced mounting pressures in recent years from new sources of com- petition, demanding customers, new technologies, and more direct-buying programs by large industrial, institutional, and retail buyers. Manufacturers’ major complaints against wholesalers are: They don’t aggressively promote the manufacturer’s product line and they act more like order takers; they don’t carry enough inventory and therefore don’t fill customers’ orders fast enough; they don’t supply the manufacturer with up-to-date market, customer, and competitive informa- tion; they don’t attract high-caliber managers to bring down their own costs; and they charge too much for their services.

Savvy wholesalers have rallied to the challenge and adapted their services to meet their suppli- ers’ and target customers’ changing needs. They recognize that they must add value to the channel.

Arrow Electronics Arrow Electronics is a global provider of products, services, and solutions to the electronic component and computer product industries. It serves as a supply channel partner for more than 900 suppliers and 125,000 original equipment manufacturers, contract manufacturers, and commercial customers through a global network of 310 locations in 51 countries and territories. With huge contract manufacturers buying

more parts directly from suppliers, distributors such as Arrow are being squeezed out. To better compete, Arrow has embraced services, providing financing, on-site inventory management, parts-tracking software, and chip programming. Services helped quadruple Arrow’s share price in five years, and the company approached $15 billion in sales in 2009.52

Wholesalers have worked to increase asset productivity by managing inventories and receivables better. They’re also reducing operating costs by investing in more advanced materials-handling tech- nology, information systems, and the Internet. Finally, they’re improving their strategic decisions about target markets, product assortment and services, price, communications, and distribution.

Narus and Anderson interviewed leading industrial distributors and identified four ways they strengthened their relationships with manufacturers:

1. They sought a clear agreement with their manufacturers about their expected functions in the marketing channel.

2. They gained insight into the manufacturers’ requirements by visiting their plants and attend- ing manufacturer association conventions and trade shows.

3. They fulfilled their commitments to the manufacturer by meeting the volume targets, paying bills promptly, and feeding back customer information to their manufacturers.

4. They identified and offered value-added services to help their suppliers.53

The wholesaling industry remains vulnerable to one of the most enduring trends—fierce resist- ance to price increases and the winnowing out of suppliers based on cost and quality. The trend to- ward vertical integration, in which manufacturers try to control or own their intermediaries, is still strong. One firm that succeeds in the wholesaling business is W.W. Grainger.

W.W. Grainger W.W. Grainger is the leading supplier of facilities mainte- nance products that help 1.8 million businesses and institutions stay up and running. Sales for 2008 were $6.9 billion. Grainger serves customers through a network of over 600 branches in North America and China, 18 distribution centers, numerous catalogs and direct-mail pieces, and four Web sites to guarantee product availability and quick service. Its 4,000-plus-

page catalog features 138,000 products, such as motors, lighting, material handlers, fasteners, tools, and

A rr

o w

E le

c tr

o n ic

s W

.W .

G ra

in g e r

464 PART 6 DELIVERING VALUE

safety supplies, and customers can purchase over 300,000 products at Grainger.com. The distribution centers are linked by satellite network, which has reduced customer-response time and boosted sales. Helped by more than 3,000 suppliers, Grainger offers customers a total of more than 900,000 supplies and repair parts in all.54

Market Logistics Physical distribution starts at the factory. Managers choose a set of warehouses (stocking points) and transportation carriers that will deliver the goods to final destinations in the desired time or at the lowest total cost. Physical distribution has now been expanded into the broader concept of supply chain management (SCM). Supply chain management starts before physical distribution and means strategically procuring the right inputs (raw materials, components, and capital equipment), converting them efficiently into finished products, and dispatching them to the fi- nal destinations. An even broader perspective looks at how the company’s suppliers themselves obtain their inputs.

The supply chain perspective can help a company identify superior suppliers and distributors and help them improve productivity and reduce costs. Consumer goods manufacturers admired for their supply chain management include P&G, Kraft, General Mills, PepsiCo, and Nestlé; note- worthy retailers include Walmart, Target, Publix, Costco, Kroger, and Meijer.55

Firms are also striving to improve the environmental impact and sustainability of their supply chain by shrinking their carbon footprint and using recyclable packaging. Johnson & Johnson switched to Forest Stewardship Council (FSC)–certified paperboard for its BAND-AID brand boxes. As one executive noted, “Johnson & Johnson and its operating companies are positioned to make paper and packaging procurement decisions that could help influence responsible forest management.”56

Market logistics includes planning the infrastructure to meet demand, then implementing and controlling the physical flows of materials and final goods from points of origin to points of use, to meet customer requirements at a profit. Market logistics planning has four steps:57

1. Deciding on the company’s value proposition to its customers. (What on-time delivery stan- dard should we offer? What levels should we attain in ordering and billing accuracy?)

2. Selecting the best channel design and network strategy for reaching the customers. (Should the company serve customers directly or through intermediaries? What products should we source from which manufacturing facilities? How many warehouses should we maintain and where should we locate them?)

3. Developing operational excellence in sales forecasting, warehouse management, transporta- tion management, and materials management

4. Implementing the solution with the best information systems, equipment, policies, and procedures

Studying market logistics leads managers to find the most efficient way to deliver value. For ex- ample, a software company might traditionally produce and package software disks and manuals, ship them to wholesalers, which ship them to retailers, which sell them to customers, who bring them home to download onto their PCs. Market logistics offers two superior delivery systems. The first lets the customer download the software directly onto his or her computer. The second allows the computer manufacturer to download the software onto its products. Both solutions eliminate the need for printing, packaging, shipping, and stocking millions of disks and manuals.

Integrated Logistics Systems The market logistics task calls for integrated logistics systems (ILS), which include materials man- agement, material flow systems, and physical distribution, aided by information technology (IT). Information systems play a critical role in managing market logistics, especially via computers, point-of-sale terminals, uniform product bar codes, satellite tracking, electronic data interchange (EDI), and electronic funds transfer (EFT). These developments have shortened the order-cycle time, reduced clerical labor, reduced errors, and provided improved control of operations. They have enabled companies to promise “the product will be at dock 25 at 10:00 AM tomorrow,” and deliver on that promise.

MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 465

Market logistics encompass several activities. The first is sales forecasting, on the basis of which the company schedules distribution, production, and inventory levels. Production plans indicate the materials the purchasing department must order. These materials arrive through inbound transportation, enter the receiving area, and are stored in raw-material inventory. Raw materials are converted into finished goods. Finished-goods inventory is the link between customer orders and manufacturing activity. Customers’ orders draw down the finished-goods inventory level, and manufacturing activity builds it up. Finished goods flow off the assembly line and pass through packaging, in-plant warehousing, shipping-room processing, outbound transportation, field ware- housing, and customer delivery and servicing.

Management has become concerned about the total cost of market logistics, which can amount to as much as 30 percent to 40 percent of the product’s cost. In the U.S. grocery busi- ness, waste or “shrink” affects 8 percent to 10 percent of perishable goods, costing $20 billion an- nually. To reduce shrink, grocery retailer Stop & Shop looked across its entire fresh-food supply chain and reduced everything from the size of suppliers’ boxes to the number of products on display. With these changes, the supermarket chain cut shrink by almost a third, saving over $50 million and eliminating 36,000 pounds of rotten food, improving customer satisfaction at the same time.58

Many experts call market logistics “the last frontier for cost economies,” and firms are deter- mined to wring every unnecessary cost out of the system: In 1982, logistics represented 14.5 percent of U.S. GDP; by 2007, the share had dropped to about 10 percent.59 Lower market-logistics costs will permit lower prices, yield higher profit margins, or both. Even though the cost of market logis- tics can be high, a well-planned program can be a potent tool in competitive marketing.

Many firms are embracing lean manufacturing, originally pioneered by Japanese firms such as Toyota, to produce goods with minimal waste of time, materials, and money. CONMED’s dispos- able devices are used by a hospital somewhere in the world every 90 seconds to insert and remove fluid around joints during orthoscopic surgery,

ConMed To streamline production, medical manufacturer ConMed set out to link its operations as closely as possible to the ultimate buyer of its products. Rather than moving manufacturing to China, which might have lowered labor costs but could have also risked long lead times, inventory buildup, and unanticipated delays, the firm put new production

processes into place to assemble its disposable products only after hospi- tals placed orders. Some 80 percent of orders were predictable enough that demand forecasts updated every few months could set hourly produc- tion targets. As proof of the firm’s new efficiency, the assembly area for fluid-injection devices went from covering 3,300 square feet and stocking $93,000 worth of parts to 650 square feet and $6,000 worth of parts. Output per worker increased 21 percent.60

Lean manufacturing must be implemented thoughtfully and mon- itored closely. Toyota’s recent crisis in product safety that resulted in extensive product recalls has been attributed in part to the fact that some aspects of the lean manufacturing approach—eliminating overlap by using common parts and designs across multiple product lines, and reducing the number of suppliers to procure parts in greater scale—can backfire when quality-control issues arise.61

Market-Logistics Objectives Many companies state their market-logistics objective as “getting the right goods to the right places at the right time for the least cost.” Unfortunately, this objective provides little practical guidance. No system can simultaneously maximize customer service and minimize distribution cost. Maximum customer service implies large inventories, premium transportation, and multiple ware- houses, all of which raise market-logistics costs.

By redesigning its production assembly, medical manufacturer ConMed significantly increased productivity.

466 PART 6 DELIVERING VALUE

Nor can a company achieve market-logistics efficiency by asking each market-logistics manager to minimize his or her own logistics costs. Market-logistics costs interact and are often negatively related. For example:

• The traffic manager favors rail shipment over air shipment because rail costs less. However, be- cause the railroads are slower, rail shipment ties up working capital longer, delays customer payment, and might cause customers to buy from competitors who offer faster service.

• The shipping department uses cheap containers to minimize shipping costs. Cheaper contain- ers lead to a higher rate of damaged goods and customer ill will.

• The inventory manager favors low inventories. This increases stock-outs, back orders, paper- work, special production runs, and high-cost, fast-freight shipments.

Given that market-logistics activities require strong trade-offs, managers must make decisions on a total-system basis. The starting point is to study what customers require and what competitors are offering. Customers are interested in on-time delivery, supplier willingness to meet emergency needs, careful handling of merchandise, and supplier willingness to take back defective goods and resupply them quickly.

The company must then research the relative importance of these service outputs. For example, service-repair time is very important to buyers of copying equipment. Xerox developed a service delivery standard that “can put a disabled machine anywhere in the continental United States back into operation within three hours after receiving the service request.” It then designed a service division of personnel, parts, and locations to deliver on this promise.

The company must also consider competitors’ service standards. It will normally want to match or exceed the competitors’ service level, but the objective is to maximize profits, not sales. Some companies offer less service and charge a lower price; other companies offer more service and charge a premium price.

The company ultimately must establish some promise it makes to the market. Coca-Cola wants to “put Coke within an arm’s length of desire.” Lands’ End, the giant clothing retailer, aims to respond to every phone call within 20 seconds and to ship every order within 24 hours of receipt. Some companies define standards for each service factor. One appliance manufacturer has estab- lished the following service standards: to deliver at least 95 percent of the dealer’s orders within seven days of order receipt, to fill them with 99 percent accuracy, to answer dealer inquiries on order status within three hours, and to ensure that merchandise damaged in transit does not exceed 1 percent.

Given the market-logistics objectives, the company must design a system that will minimize the cost of achieving these objectives. Each possible market-logistics system will lead to the following cost:

M � T � FW � VW � S

where M = total market-logistics cost of proposed system

T � total freight cost of proposed system FW � total fixed warehouse cost of proposed system VW � total variable warehouse costs (including inventory) of proposed system

S � total cost of lost sales due to average delivery delay under proposed system

Choosing a market-logistics system calls for examining the total cost (M) associated with differ- ent proposed systems and selecting the system that minimizes it. If it is hard to measure S, the com- pany should aim to minimize T � FW � VW for a target level of customer service.

Market-Logistics Decisions The firm must make four major decisions about its market logistics: (1) How should we handle or- ders (order processing)? (2) Where should we locate our stock (warehousing)? (3) How much stock should we hold (inventory)? and (4) How should we ship goods (transportation)?

ORDER PROCESSING Most companies today are trying to shorten the order-to-payment cycle—that is, the elapsed time between an order’s receipt, delivery, and payment. This cycle has many steps, including order transmission by the salesperson, order entry and customer credit check, inventory and production scheduling, order and invoice shipment, and receipt of

MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 467

payment. The longer this cycle takes, the lower the customer’s satisfaction and the lower the company’s profits.

WAREHOUSING Every company must store finished goods until they are sold, because production and consumption cycles rarely match. Consumer-packaged-goods companies have been reducing their number of stocking locations from 10 to 15 to about 5 to 7, and pharmaceutical and medical distributors have cut theirs from 90 to about 45. On the one hand, more stocking locations mean goods can be delivered to customers more quickly, but warehousing and inventory costs are higher. To reduce these costs, the company might centralize its inventory in one place and use fast transportation to fill orders.

Some inventory is kept at or near the plant, and the rest in warehouses in other locations. The company might own private warehouses and also rent space in public warehouses. Storage ware- houses store goods for moderate to long periods of time. Distribution warehouses receive goods from various company plants and suppliers and move them out as soon as possible. Automated warehouses employ advanced materials-handling systems under the control of a central computer and are increasingly becoming the norm.

Some warehouses are now taking on activities formerly done in the plant. These include assem- bly, packaging, and constructing promotional displays. Postponing finalization of the offering to the warehouse can achieve savings in costs and finer matching of offerings to demand.

INVENTORY Salespeople would like their companies to carry enough stock to fill all customer orders immediately. However, this is not cost-effective. Inventory cost increases at an accelerating rate as the customer-service level approaches 100 percent. Management needs to know how much sales and profits would increase as a result of carrying larger inventories and promising faster order fulfillment times, and then make a decision.

As inventory draws down, management must know at what stock level to place a new order. This stock level is called the order (or reorder) point. An order point of 20 means reordering when the stock falls to 20 units. The order point should balance the risks of stock-out against the costs of overstock. The other decision is how much to order. The larger the quantity ordered, the less fre- quently an order needs to be placed. The company needs to balance order-processing costs and inventory-carrying costs. Order-processing costs for a manufacturer consist of setup costs and running costs (operating costs when production is running) for the item. If setup costs are low, the manufacturer can produce the item often, and the average cost per item is stable and equal to the running costs. If setup costs are high, however, the manufacturer can reduce the average cost per unit by producing a long run and carrying more inventory.

Order-processing costs must be compared with inventory-carrying costs. The larger the average stock carried, the higher the inventory-carrying costs. These carrying costs include storage charges, cost of capital, taxes and insurance, and depreciation and obsolescence. Carrying costs might run as high as 30 percent of inventory value. This means that marketing managers who want their compa- nies to carry larger inventories need to show that the larger inventories would produce incremental gross profits to exceed incremental carrying costs.

We can determine the optimal order quantity by observing how order-processing costs and inventory- carrying costs sum up at different order levels. Figure 16.1 shows that the order-processing

Total cost per unit

Inventory-carrying cost per unit

Order-processing cost per unit

Order Quantity

Co st

p er

U ni

t ( do

lla rs

)

Q*

|Fig. 16.1|

Determining Optimal Order Quantity

468 PART 6 DELIVERING VALUE

cost per unit decreases with the number of units ordered because the order costs are spread over more units. Inventory-carrying charges per unit increase with the number of units ordered, because each unit remains longer in inventory. We sum the two cost curves vertically into a total-cost curve and project the lowest point of the total-cost curve on the horizontal axis to find the optimal order quantity Q*.62

Companies are reducing their inventory costs by treating inventory items differently, position- ing them according to risk and opportunity. They distinguish between bottleneck items (high risk, low opportunity), critical items (high risk, high opportunity), commodities (low risk, high oppor- tunity), and nuisance items (low risk, low opportunity).63 They are also keeping slow-moving items in a central location and carrying fast-moving items in warehouses closer to customers. All these strategies give them more flexibility should anything go wrong, as it often does, be it a dock strike in California, a typhoon in Taiwan, a tsunami in Asia, or a hurricane in New Orleans.64

The ultimate answer to carrying near-zero inventory is to build for order, not for stock. Sony calls it SOMO, “Sell one, make one.” Dell’s inventory strategy for years has been to get the customer to order a computer and pay for it in advance. Then Dell uses the customer’s money to pay suppliers to ship the necessary components. As long as customers do not need the item immediately, every- one can save money. Some retailers are unloading excess inventory on eBay where, by cutting out the traditional liquidator middleman, they can make 60 to 80 cents on the dollar as opposed to 10 cents.65 And some suppliers are snapping up excess inventory to create opportunity.

Cameron Hughes “If a winery has an eight-barrel lot, it may only use five barrels for its customers,” says Cameron Hughes, a wine “négociant” who buys the excess juice from high-end wineries and wine brokers and combines it to make limited edition, premium blends that taste much more expensive than their price tags. Négociants have been around a long time, first as middlemen who sold or shipped wine as wholesalers, but the profession has

expanded as opportunists such as Hughes became more involved in effectively making their own wines. Hughes doesn’t own any grapes, bottling machines, or trucks. He outsources the bottling, and he sells directly to retailers such as Costco, Sam’s Club, and Safeway, eliminat- ing middlemen and multiple markups. Hughes never knows which or how many excess lots of wine he will have, but he’s turned it to his advantage—he creates a new product with every batch. This rapid turnover is part of Costco’s appeal for him. The discount store’s customers love the idea of finding a rare bargain, and Hughes promotes his wines through in-store wine tastings and insider e-mails that alert Costco customers to upcoming numbered lots. Because lots sell out quickly, fans subscribe to Cameron’s e-mail alerts at chwine.com that tell them when a new lot will be sold.66

TRANSPORTATION Transportation choices affect product pricing, on-time delivery performance, and the condition of the goods when they arrive, all of which affect customer satisfaction.

In shipping goods to its warehouses, dealers, and customers, the company can choose rail, air, truck, waterway, or pipeline. Shippers consider such criteria as speed, frequency, dependability, capability, availability, traceability, and cost. For speed, air, rail, and truck are the prime contenders. If the goal is low cost, then the choice is wa- ter or pipeline.

Shippers are increasingly combining two or more transportation modes, thanks to containeriza- tion. Containerization consists of putting the goods in boxes or trailers that are easy to transfer be- tween two transportation modes. Piggyback describes the use of rail and trucks; fishyback, water and trucks; trainship, water and rail; and airtruck, air and trucks. Each coordinated mode offers specific advantages. For example, piggyback is cheaper than trucking alone yet provides flexibility and convenience.

Shippers can choose private, contract, or common carriers. If the shipper owns its own truck or air fleet, it becomes a private carrier. A contract carrier is an independent organization selling trans- portation services to others on a contract basis. A common carrier provides services between prede- termined points on a scheduled basis and is available to all shippers at standard rates.

To reduce costly handing at arrival, some firms are putting items into shelf-ready packaging so they don’t need to be unpacked from a box and placed on a shelf individually. In Europe, P&G uses

Cameron Hughes has grown a thriving business by using excess lots of wine as input to his limited- edition premium wines.

MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 469

a three-tier logistic system to schedule deliveries of fast- and slow-moving goods, bulky items, and small items in the most efficient way.67 To reduce damage in shipping, the size, weight, and fragility of the item must be reflected in the crating technique used, the density of foam cushioning, etc.68

Organizational Lessons Market-logistics strategies must be derived from business strategies, rather than solely from cost considerations. The logistics system must be information-intensive and establish electronic links among all the significant parties. Finally, the company should set its logistics goals to match or exceed competitors’ service standards and should involve members of all relevant teams in the planning process.

Today’s stronger demands for logistical support from large customers will increase suppliers’ costs. Customers want more frequent deliveries so they don’t have to carry as much inventory. They want shorter order-cycle times, which means suppliers must have high in-stock availability. Customers often want direct store delivery rather than shipments to distribution centers. They want mixed pallets rather than separate pallets. They want tighter promised delivery times. They may want custom packaging, price tagging, and display building.

Suppliers can’t say “no” to many of these requests, but at least they can set up different logistical programs with different service levels and customer charges. Smart companies will adjust their of- ferings to each major customer’s requirements. The company’s trade group will set up differentiated distribution by offering different bundled service programs for different customers.

Summary

1. Retailing includes all the activities involved in selling goods or services directly to final consumers for per- sonal, nonbusiness use. Retailers can be understood in terms of store retailing, nonstore retailing, and retail organizations.

2. Like products, retail-store types pass through stages of growth and decline. As existing stores offer more ser- vices to remain competitive, costs and prices go up, which opens the door to new retail forms that offer a mix of merchandise and services at lower prices. The major types of retail stores are specialty stores, department stores, supermarkets, convenience stores, discount stores, extreme value or hard-discount store, off-price retailers, superstores, and catalog showrooms.

3. Although most goods and services are sold through stores, nonstore retailing has been growing. The major types of nonstore retailing are direct selling (one-to-one selling, one-to-many party selling, and multilevel net- work marketing), direct marketing (which includes e- commerce and Internet retailing), automatic vending, and buying services.

4. Although many retail stores are independently owned, an increasing number are falling under some form of corporate retailing. Retail organizations achieve many economies of scale, greater purchasing power, wider brand recognition, and better-trained employees. The major types of corporate retailing are corporate chain stores, voluntary chains, retailer cooperatives,

consumer cooperatives, franchise organizations, and merchandising conglomerates.

5. The retail environment has changed considerably in re- cent years; as new retail forms have emerged, intertype and store-based versus nonstore-based competition has increased, the rise of giant retailers has been matched by the decline of middle-market retailers, investment in technology and global expansion has grown, and shop- per marketing inside stores has become a priority.

6. Like all marketers, retailers must prepare marketing plans that include decisions on target markets, chan- nels, product assortment and procurement, prices, services, store atmosphere, store activities and experi- ences, communications, and location.

7. Wholesaling includes all the activities in selling goods or services to those who buy for resale or business use. Wholesalers can perform functions better and more cost-effectively than the manufacturer can. These functions include selling and promoting, buying and assortment building, bulk breaking, warehousing, transportation, financing, risk bearing, dissemination of market information, and provision of management services and consulting.

8. There are four types of wholesalers: merchant whole- salers; brokers and agents; manufacturers’ and retailers’ sales branches, sales offices, and purchasing offices; and miscellaneous wholesalers such as agricultural assemblers and auction companies.

470 PART 6 DELIVERING VALUE

9. Like retailers, wholesalers must decide on target mar- kets, product assortment and services, price, promo- tion, and place. The most successful wholesalers are those who adapt their services to meet suppliers’ and target customers’ needs.

10. Producers of physical products and services must de- cide on market logistics—the best way to store and

move goods and services to market destinations; to co- ordinate the activities of suppliers, purchasing agents, manufacturers, marketers, channel members, and cus- tomers. Major gains in logistical efficiency have come from advances in information technology.

Applications Marketing Debate Should National-Brand Manufacturers Also Supply Private-Label Brands? Ralston-Purina, Borden, ConAgra, and Heinz have all admit- ted to supplying products—sometimes lower in quality—to be used for private labels. Other marketers, however, criticize this “if you can’t beat them, join them” strategy, maintaining that these actions, if revealed, may create confusion or even reinforce a perception by consumers that all brands in a category are essentially the same.

Take a position: Manufacturers should feel free to sell private labels as a source of revenue versus National manufacturers should never get involved with private labels.

Marketing Discussion Retail Customer Loyalty Think of your favorite stores. What do they do that encour- ages your loyalty? What do you like about the in-store expe- rience? What further improvements could they make?

Marketing Excellence

>>Zara

Spain’s Zara has become Europe’s leading apparel retailer, pro-

viding consumers with current, high fashion styles at reason- able prices. With over $8.7 billion in sales and more than 1,500 stores, the company’s success has come from break- ing virtually every traditional rule in the retailing industry.

The first Zara store opened in 1975. By the 1980s, Zara’s founder, Amancio Ortega, was working with

computer programmers to develop a new distribution model that would revolutionize the clothing industry. This new model takes several strategic steps to reduce the lead time from design to distribution to just two weeks—a signif- icant difference from the industry average of six to nine months. As a result, the company makes approximately 20,000 different items a year, about triple what Gap or H&M make in a year. By reducing lead times to a fraction of its competitors, Zara has been able to provide “fast fashion” for its consumers at affordable prices. The company’s suc- cess lies within four key strategic elements:

Design and Production. Zara employs hundreds of designers at its headquarters in Spain. Thus, new styles are constantly being created and put into pro- duction while others are tweaked with new colors or patterns. The firm enforces the speed at which it puts these designs into production by locating half its pro- duction facilities nearby in Spain, Portugal, and Morocco. Zara produces only a small quantity of each collection and is willing to experience occasional shortages to preserve an image of exclusivity. Clothes with a longer shelf life, like T-shirts, are outsourced to lower-cost suppliers in Asia and Turkey. With tight control on its manufacturing process, Zara can move

MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 471

more rapidly than any of its competitors and contin- ues to deliver fresh styles to its stores every week.

Logistics. Zara distributes all its merchandise, regard- less of origin, from Spain. Its distribution process is designed so that the time from receipt of an order to delivery in the store averages 24 hours in Europe and 48 hours in the United States and Asia. Having 50 per- cent of its production facilities nearby is key to the success of this model. All Zara stores receive new shipments twice a week, and the small quantities of each collection not only bring consumers back into Zara stores over and over but also entice them to make purchases more quickly. While an average shopper in Spain visits a high street (or main street) store three times a year, shoppers average 17 trips to Zara stores. Some Zara fans know exactly when new shipments arrive and show up early that day to be the first in line for the latest fashions. These practices keep sales strong throughout the year and help the company sell more products at full price—85 percent of its mer- chandise versus the industry average of 60 percent.

Customers. Everything revolves around Zara’s cus- tomers. The retailer reacts to customers’ changing needs, trends, and tastes with daily reports from Zara shop managers about which products and styles have sold and which haven’t. With up to 70 percent of their salaries coming from commission, managers have a strong incentive to stay on top of things. Zara’s designers don’t have to predict what fashion trends will be in the future. They react to customer feedback—good and bad—and if something fails, the line is withdrawn immediately. Zara cuts its losses and the impact is minimal due to the low quantities of each style produced.

Stores. Zara has never run an advertising campaign. The stores, 90 percent of which it owns, are the key advertising element and are located in prestigious high-traffic locations around the world. Zara spends significant time and effort regularly changing store windows to help lure customers in. In comparison to other retailers, which spend 3 percent to 4 percent of revenues on big brand-building campaigns, Zara spends just 0.3 percent.

The company’s success comes from having com- plete control over all the parts of its business— design, production, and distribution. Louis Vuitton’s fash- ion director, Daniel Piette, described Zara as “possibly the most innovative and devastating retailer in the world.” Now, as Zara continues to expand into new markets and countries, it risks losing some of its speed and will have to work hard to continue providing the same “newness”’ all over the world that it does so well in Europe. It is also making a somewhat belated major push online that will need to work within its existing business model.

Questions

1. Would Zara’s model work for other retailers? Why or why not?

2. How is Zara going to expand successfully all over the world with the same level of speed and instant fashion?

Sources: Rachel Tiplady, “Zara: Taking the Lead in Fast-Fashion.” BusinessWeek, April 4, 2006; enotes.com, Inditex overview; “Zara: A Spanish Success Story.” CNN, June 15, 2001; “Fashion Conquistador,” BusinessWeek, September 4, 2006; Caroline Raux, “The Reign of Spain.” The Guardian, October 28, 2002; Kerry Capell, “Zara Thrives by Breaking All the Rules,” BusinessWeek, October 20, 2008, p. 66; Christopher Bjork, “Zara Is to Get Big Online Push,” Wall Street Journal, September 17, 2009, p. B8.

Marketing Excellence

>>Best Buy

Best Buy is the world’s largest consumer electronics re- tailer, with $34.2 billion in sales in fiscal 2009. Sales boomed in the 1980s as Best Buy expanded nationally and made some risky business decisions, like putting its sales staff on salary instead of commission pay. This deci- sion created a more consumer-friendly, low-pressure shopping atmosphere and resulted in an instant spike in overall revenues. In the 1990s, Best Buy ramped up its computer product offerings and, by 1995, was the biggest seller of home PCs, a powerful position during the Internet boom.

At the turn of the century, Best Buy faced new com- petitors like Costco and Walmart, which started ramping up their electronics divisions and product offerings. Best Buy believed the best way to differentiate itself was to in- crease its focus on customer service by selling product warranties and offering personal services like installation and at-home delivery. Its purchase of Geek Squad, a

472 PART 6 DELIVERING VALUE

24-hour computer service company, proved extremely profitable and strategic as home and small office networks became more complex and the need for personal comput- ing attention increased. By 2004, Best Buy had placed a Geek Squad station in each of its stores, providing con- sumers with personal computing services in the stores, online, on the phone, and at home.

Today, Best Buy has adopted a corporate strategy it calls Customer-Centricity. It has segmented its broad cus- tomer base into a handful of specific targets such as the affluent tech geek, the busy suburban mom, the young gadget enthusiast, and the price-conscious family dad. Next, it uses extensive research and analysis to determine which segments are the most abundant and lucrative in each market. Finally, it configures its stores and trains its employees to target those shoppers and encourage them to keep coming back again and again. For example, stores targeting affluent tech geeks have separate home theatre departments with knowledgeable salespeople who can spend time discussing all the different product options. Stores with a high volume of suburban mom shoppers of- fer personal shopping assistants to help mom get in and out as quickly as possible with the exact items she needs.

Sometimes a store will experience a new type of lu- crative shopper. In the coastal town of Baytown, Texas, the local Best Buy observed frequent visits from Eastern

European workers coming off cargo ships and oil tankers. These men and women were using their precious free time to race over to Best Buy and search the aisles for Apple’s iPods and laptops, which are cheaper in the United States than in Europe. To cater to this unique con- sumer, the local Best Buy rearranged its store, moved iPods, MacBooks, and their accessories from the back of the store to the front, and added signage in simple English. The result: sales from these European workers increased 67 percent.

This local ingenuity paired with the ability to cater to each market and segment’s needs have helped Best Buy survive the electronics storm while competitors like CompUSA and Circuit City have failed. The business is tough, with thin profit margins and continuously evolving products. However, with over 1,300 stores, including loca- tions in Canada, Mexico, China, and Turkey, Best Buy has a 19 percent market share and a trusted, consumer- friendly brand.

Questions

1. What are the keys to Best Buy’s success? What are the risks going forward?

2. How else can Best Buy compete against new com- petitors like Walmart and online companies?

This page intentionally left blank

Ch ap

ter 17

In This Chapter, We Will Address the Following Questions

1. What is the role of marketing communications?

2. How do marketing communications work?

3. What are the major steps in developing effective communications?

4. What is the communications mix, and how should it be set?

5. What is an integrated marketing communications program?

Ocean Spray has revitalized its brand

through extensive new product develop-

ment and a thoroughly integrated modern

marketing communications program.

PART 7 Communicating Value

Chapter 17 | Designing and Managing Integrated Marketing Communications Chapter 18 | Managing Mass Communications: Advertising, Sales Promotions, Events and Experiences, and Public Relations Chapter 19 | Managing Personal Communications: Direct and Interactive Marketing, Word of Mouth, and Personal Selling

Modern marketing calls for more than developing a good product, pricing it attractively, and making it accessible. Companies must also communicate with their present and potential stakeholders and the general public. For most marketers, therefore, the question is not whether to communicate but rather what to say, how and when to say it, to whom, and how often. Consumers can turn to hundreds of cable and satellite TV channels, thousands of magazines and newspapers, and millions of Internet pages. They are taking a more active role in deciding what communications they want to receive as well as how they want to communicate to others about the products and services they use. To effectively reach and influence target markets, holistic marketers are creatively employing multiple forms of communications. Ocean Spray—an agricultural cooperative of cranberry growers—has used a variety of communication vehicles to turn its sales fortunes around.

Facing stiff competition, a number of adverse consumer trends, and nearly a decade of declining sales, Ocean Spray COO Ken Romanzi and Arnold Worldwide decided to “reintroduce the cranberry to America” as the “surprisingly versatile little fruit that supplies modern-day benefits,” through a true 360-degree campaign that used all facets of marketing communications to reach consumers in a variety of settings. The

intent was to support the full range of products—cranberry sauce, fruit juices, and dried cranberries in different forms—and leverage the fact that the brand was born in the cranberry bogs and remained there still. The agency decided to tell an authentic, honest, and perhaps surprising story dubbed “Straight from the Bog.” The campaign was designed to also reinforce two key brand bene- fits—that Ocean Spray products tasted good and were good for you. PR played a crucial role. Miniature bogs were brought to Manhattan and featured on an NBC Today morning segment. A “Bogs across America Tour” brought the experience to Los Angeles, Chicago, and even London. Television and print advertising featured two growers (depicted by actors) standing waist-deep in a bog and talking, often humorously, about what they did. The campaign also included a Web site, in-store displays, and events for consumers as well as for members of the growers’ cooperative itself. Product inno- vation was crucial, too; new flavor blends were introduced, along with a line of 100 percent juice drinks, diet and light versions, and Craisins sweetened dried cranberries. The campaign hit the mark, lifting sales an average of 10 percent each year from 2005 to 2009 despite continued decline in the fruit juice category.1

Designing and Managing Integrated Marketing

Communications

475

Done right, marketing communications can have a huge payoff. This chapter describes how communications work and what marketing communications can do for a company. It also addresses how holistic marketers combine and integrate marketing communications. Chapter 18 examines mass (nonpersonal) communications (advertising, sales promotion, events and experiences, and public relations and publicity); Chapter 19 examines personal communications (direct and interactive marketing, word-of- mouth marketing, and personal selling).

476 PART 7 COMMUNICATING VALUE

The Role of Marketing Communications Marketing communications are the means by which firms attempt to inform, persuade, and remind consumers—directly or indirectly—about the products and brands they sell. In a sense, marketing communications represent the voice of the company and its brands; they are a means by which the firm can establish a dialogue and build relationships with consumers. By strengthening customer loyalty, marketing communications can contribute to customer equity.

Marketing communications also work for consumers when they show how and why a product is used, by whom, where, and when. Consumers can learn who makes the product and what the com- pany and brand stand for, and they can get an incentive for trial or use. Marketing communications allow companies to link their brands to other people, places, events, brands, experiences, feelings, and things. They can contribute to brand equity—by establishing the brand in memory and creat- ing a brand image—as well as drive sales and even affect shareholder value.2

The Changing Marketing Communications Environment Technology and other factors have profoundly changed the way consumers process communica- tions, and even whether they choose to process them at all. The rapid diffusion of multipurpose smart phones, broadband and wireless Internet connections, and ad-skipping digital video recorders (DVRs) have eroded the effectiveness of the mass media. In 1960, a company could reach 80 percent of U.S. women with one 30-second commercial aired simultaneously on three TV net- works: ABC, CBS, and NBC. Today, the same ad would have to run on 100 channels or more to achieve this marketing feat. Consumers not only have more choices of media, they can also decide whether and how they want to receive commercial content. “Marketing Insight: Don’t Touch That Remote” describes developments in television advertising.

Marketing InsightMarketing Insight

Don’t Touch That Remote That consumers are more in charge in the marketplace is perhaps nowhere more evident than in television broadcasting, where DVRs allow consumers to skip past ads with a push of the fast-forward button. Estimates had DVRs in 34 percent of U.S. households at the end of 2009, and of viewers who use them, between 60 percent and 70 percent fast-forward through commercials (the others either like ads, don’t mind them, or can’t be bothered).

Is that all bad? Surprisingly, research shows that while focusing on an ad in order to fast-forward through it, consumers actually retain and recall a fair amount of information. The most successful ads in “fast- forward mode” were those consumers had already seen, that used familiar characters, and that didn’t have lots of scenes. It also helped to

have brand-related information in the center of the screen, where viewers’ eyes focus while skipping through. Although consumers are still more likely to recall an ad the next day if they’ve watched it live, some brand recall occurs even after an ad was deliberately zapped.

Another challenge marketers have faced for a long time is viewers’ tendency to switch channels during commercial breaks. Recently, how- ever, Nielsen, which handles television program ratings, has begun to offer ratings for specific ads. Before, advertisers had to pay based on the rating of the program, even if as many as 5 percent to 15 percent of consumers temporarily tuned away. Now they can pay based on the actual commercial audience available when their ad is shown. To increase viewership during commercial breaks, the major broadcast and cable networks are shortening breaks and delaying them until viewers are more likely to be engaged in a program.

Sources: Andrew O’Connell, “Advertisers: Learn to Love the DVR,” Harvard Business Review, April 2010, p. 22; Erik du Plesis, “Digital Video Recorders and Inadvertent Advertising Exposure,” Journal of Advertising Research 49 (June 2009); S. Adam Brasel and James Gips, “Breaking Through Fast-Forwarding: Brand Information and Visual Attention,” Journal of Marketing 72 (November 2008), pp. 31–48; “Watching the Watchers,” Economist, November 15, 2008, p. 77; Stephanie Kang, “Why DVR Viewers Recall Some TV Spots,” Wall Street Journal, February 26, 2008; Kenneth C. Wilbur, “How Digital Video Recorder Changes Traditional Television Advertising,” Journal of Advertising 37 (Summer 2008), pp. 143–49; Burt Helm, “Cable Takes a Ratings Hit,” BusinessWeek, September 24, 2007.

DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 477

Ads are appearing everywhere— even on eggs for this popular CBS television show.

But as some marketers flee traditional media, they still encounter challenges. Commercial clut- ter is rampant. The average city dweller is exposed to an estimated 3,000 to 5,000 ad messages a day. Short-form video content and ads appear at gas stations, grocery stores, doctors’ offices, and big-box retailers. Supermarket eggs have been stamped with the name of CBS programs; subway turnstiles carry GEICO’s name; Chinese food cartons promote Continental Airlines; and US Airways has sold ads on its motion sickness bags. Dubai sold corporate branding rights to 23 of the 47 stops and two metro lines in its new mass transit rail system.3

Marketing communications in almost every medium and form have been on the rise, and some consumers feel they are increasingly invasive. Marketers must be creative in using technology but not intrude in consumers’ lives. Consider what Motorola did to solve that problem.4

Motorola At Hong Kong International Airport, Motorola’s special promotion enabled loved ones to “Say Goodbye” via photos and messages sent from their phones to digital billboards in the departure area. When they checked into the gate area, travelers saw photos of the friends and family who had just dropped them off as part of a digital billboard in the image of a giant Motorola mobile phone. The company also offered departing travelers special instructions

for using their phones to send a Motorola-branded good-bye video to friends and families, featuring soccer star David Beckham and Asian pop star Jay Chou.

Motorola’s high-tech promotion creatively allowed passengers and those left behind to say one last good-bye with digital billboards.

478 PART 7 COMMUNICATING VALUE

Marketing Communications, Brand Equity, and Sales In this new communication environment, although advertising is often a central element of a marketing communications program, it is usually not the only one—or even the most important one—for sales and building brand and customer equity. Like many other firms, over a five-year period from 2004 to 2008, Kimberly-Clark cut the percentage of its marketing budget spent on TV from 60 percent to a little over 40 percent as it invested more heavily in Internet and experiential marketing.5 Consider Gap’s effort in launching a new line of jeans.6

Gap By 2009, with sales slumping, Gap decided to celebrate the 40th anniversary of the opening of its first Gap store by introducing the “Born to Fit” 1969 Premium Jeans line. For its launch, Gap moved away from its typical media-intensive ad campaign, as exemplified by its popular 1998 “Khakis Swing” holiday ads. The campaign featured newer communications elements such as a Facebook page, video clips, a realistic online fashion show on a virtual

catwalk, and a StyleMixer iPhone app. The app enabled users to mix and match clothes and organize outfits, get feedback from Facebook friends, and receive discounts when near a Gap store. Simultaneous in-store acoustic shows across 700 locations and temporary pop-up denim stores in major urban locations added to the buzz.

MARKETING COMMUNICATIONS MIX The marketing communications mix consists of eight major modes of communication:7

1. Advertising—Any paid form of nonpersonal presentation and promotion of ideas, goods, or services by an identified sponsor via print media (newspapers and magazines), broadcast media (radio and television), network media (telephone, cable, satellite, wireless), electronic media (audiotape, videotape, videodisk, CD-ROM, Web page), and display media (billboards, signs, posters).

2. Sales promotion—A variety of short-term incentives to encourage trial or purchase of a prod- uct or service including consumer promotions (such as samples, coupons, and premiums), trade promotions (such as advertising and display allowances), and business and sales force promotions (contests for sales reps).

3. Events and experiences—Company-sponsored activities and programs designed to create daily or special brand-related interactions with consumers, including sports, arts, entertain- ment, and cause events as well as less formal activities.

4. Public relations and publicity—A variety of programs directed internally to employees of the company or externally to consumers, other firms, the government, and media to promote or protect a company’s image or its individual product communications.

5. Direct marketing—Use of mail, telephone, fax, e-mail, or Internet to communicate directly with or solicit response or dialogue from specific customers and prospects.

6. Interactive marketing—Online activities and programs designed to engage customers or prospects and directly or indirectly raise awareness, improve image, or elicit sales of products and services.

7. Word-of-mouth marketing—People-to-people oral, written, or electronic communications that relate to the merits or experiences of purchasing or using products or services.

8. Personal selling—Face-to-face interaction with one or more prospective purchasers for the purpose of making presentations, answering questions, and procuring orders.

Table 17.1 lists numerous communication platforms. Company communication goes beyond these. The product’s styling and price, the shape and color of the package, the salesperson’s manner and dress, the store décor, the company’s stationery—all communicate something to buy- ers. Every brand contact delivers an impression that can strengthen or weaken a customer’s view of a company.8

Marketing communication activities contribute to brand equity and drive sales in many ways: by creating brand awareness, forging brand image in consumers’ memories, eliciting positive brand judgments or feelings, and strengthening consumer loyalty.

G a p

DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 479

TABLE 17.1 Common Communication Platforms

Advertising Sales Promotion Events and Experiences

Public Relations and Publicity

Direct and Interactive Marketing

Word-of-Mouth Marketing Personal Selling

Print and broadcast ads

Packaging–outer

Packaging inserts

Cinema

Brochures and booklets

Posters and leaflets

Directories

Reprints of ads

Billboards

Display signs

Point-of-purchase displays

DVDs

Contests, games, sweepstakes, lotteries

Premiums and gifts

Sampling

Fairs and trade shows

Exhibits

Demonstrations

Coupons

Rebates

Low-interest financing

Trade-in allowances

Continuity programs

Tie-ins

Sports

Entertainment

Festivals

Arts

Causes

Factory tours

Company museums

Street activities

Press kits

Speeches

Seminars

Annual reports

Charitable donations

Publications

Community relations

Lobbying

Identity media

Company magazine

Catalogs

Mailings

Telemarketing

Electronic shopping

TV shopping

Fax

E-mail

Voice mail

Company blogs

Web sites

Person-to-person

Chat rooms

Blogs

Sales presentations

Sales meetings

Incentive programs

Samples

Fairs and trade shows

MARKETING COMMUNICATION EFFECTS The way brand associations are formed does not matter. In other words, whether a consumer has an equally strong, favorable, and unique brand association of Subaru with the concepts “outdoors,” “active,” and “rugged” because of exposure to a TV ad that shows the car driving over rugged terrain at different times of the year, or because Subaru sponsors ski, kayak, and mountain bike events, the impact in terms of Subaru’s brand equity should be identical.

But these marketing communications activities must be integrated to deliver a consistent message and achieve the strategic positioning. The starting point in planning marketing commu- nications is a communication audit that profiles all interactions customers in the target market may have with the company and all its products and services. For example, someone interested in purchasing a new laptop computer might talk to others, see television ads, read articles, look for information on the Internet, and look at laptops in a store.

To implement the right communications programs and allocate dollars efficiently, marketers need to assess which experiences and impressions will have the most influence at each stage of the buying process. Armed with these insights, they can judge marketing communications according to their ability to affect experiences and impressions, build customer loyalty and brand equity, and drive sales. For example, how well does a proposed ad campaign contribute to awareness or to cre- ating, maintaining, or strengthening brand associations? Does a sponsorship improve consumers’ brand judgments and feelings? Does a promotion encourage consumers to buy more of a product? At what price premium?

In building brand equity, marketers should be “media neutral” and evaluate all communication options on effectiveness (how well does it work?) and efficiency (how much does it cost?). Personal financial Web site Mint challenged market leader Intuit—and was eventually acquired by the company—on a marketing budget a fraction of what companies typically spend. A well-read blog, a popular Facebook page, and other social media—combined with extensive PR—helped attract the younger crowd the Mint brand was after.9 Philips also took another tack in launching a new product.10

480 PART 7 COMMUNICATING VALUE

Philips Carousel When Dutch electronics leader Philips wanted to demon- strate the quality of the “world’s first cinema proportion” TV, it chose to create Carousel, an interactive, long-form Internet film. In this Cannes Grand Prix award-winning effort, online viewers could control the story of a botched robbery while seeing the benefits of the new

$3,999 home cinema TV. The film showed an epic “frozen moment” cops and robbers shootout sequence that included clowns, explosions, a decimated hospital, and lots of broken glass, bullet casings, and money. By clicking hot spots in the video, viewers could toggle between the new set’s 21:9 display proportion and a conventional flat screen’s 16:9, as well as activate the set’s signature Ambilight backlighting. The success of the campaign led Phillips to launch a “Parallel Lines” campaign with five short films from famed director Ridley Scott’s shop, promoting its whole range of home cinema TVs.

The Communications Process Models Marketers should understand the fundamental elements of effective communications. Two models are useful: a macromodel and a micromodel.

MACROMODEL OF THE COMMUNICATIONS PROCESS Figure 17.1 shows a macromodel with nine key factors in effective communication. Two represent the major parties— sender and receiver. Two represent the major tools—message and media. Four represent major communication functions—encoding, decoding, response, and feedback. The last element in the system is noise, random and competing messages that may interfere with the intended communication.11

Senders must know what audiences they want to reach and what responses they want to get. They must encode their messages so the target audience can decode them. They must transmit the message through media that reach the target audience and develop feedback channels to monitor the responses. The more the sender’s field of experience overlaps that of the receiver, the more effective the message is likely to be. Note that selective attention, distortion, and retention processes—concepts first introduced in Chapter 6—may be operating during communication.

MICROMODEL OF CONSUMER RESPONSES Micromodels of marketing communications concentrate on consumers’ specific responses to communications. Figure 17.2 summarizes four classic response hierarchy models.

All these models assume the buyer passes through cognitive, affective, and behavioral stages, in that order. This “learn-feel-do” sequence is appropriate when the audience has high involvement with a product category perceived to have high differentiation, such as an automobile or house. An alternative sequence, “do-feel-learn,” is relevant when the audience has high involvement but per- ceives little or no differentiation within the product category, such as an airline ticket or personal

SENDER Encoding Decoding

ResponseFeedback

Noise

RECEIVERMessage

Media

|Fig. 17.1|

Elements in the Communications Process

The runaway success of the inter- active, long-form Internet film Carousel for its new Home Cinema TV model led Philips to launch an even more extensive follow-up campaign.

DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 481

Stages AIDA

Modela Hierarchy-of-Effects

Modelb Innovation-Adoption

Modelc

Models

Communications Modeld

Cognitive Stage Attention

Awareness

Awareness

Exposure

Knowledge Cognitive response

Reception

Affective Stage

Liking Attitude

Conviction

Interest

Desire Intention

Preference

Interest

Evaluation

Behavior Stage

BehaviorPurchaseAction

Trial

Adoption

|Fig. 17.2|

Response Hierarchy Models Sources: aE. K. Strong, The Psychology of Selling (New York: McGraw-Hill, 1925), p. 9; bRobert J. Lavidge and Gary A. Steiner, “A Model for Predictive Measurements of Advertising Effectiveness,” Journal of Marketing (October 1961), p. 61; cEverett M. Rogers, Diffusion of Innovation (New York: Free Press, 1962), pp. 79–86; dvarious sources.

computer. A third sequence,“learn-do-feel,” is relevant when the audience has low involvement and perceives little differentiation, such as with salt or batteries. By choosing the right sequence, the marketer can do a better job of planning communications.12

Let’s assume the buyer has high involvement with the product category and perceives high differentiation within it. We will illustrate the hierarchy-of-effects model (the second column of Figure 17.2) in the context of a marketing communications campaign for a small Iowa college named Pottsville:

• Awareness. If most of the target audience is unaware of the object, the communicator’s task is to build awareness. Suppose Pottsville seeks applicants from Nebraska but has no name recog- nition there, although 30,000 Nebraska high school juniors and seniors could be interested in it. The college might set the objective of making 70 percent of these students aware of its name within one year.

• Knowledge. The target audience might have brand awareness but not know much more. Pottsville may want its target audience to know it is a private four-year college with excellent programs in English, foreign languages, and history. It needs to learn how many people in the target audience have little, some, or much knowledge about Pottsville. If knowledge is weak, Pottsville may select brand knowledge as its communications objective.

• Liking. Given target members know the brand, how do they feel about it? If the audience looks unfavorably on Pottsville College, the communicator needs to find out why. In the case of real problems, Pottsville will need to fix these and then communicate its renewed quality. Good public relations calls for “good deeds followed by good words.”

• Preference. The target audience might like the product but not prefer it to others. The communicator must then try to build consumer preference by comparing quality, value, performance, and other features to those of likely competitors.

• Conviction. A target audience might prefer a particular product but not develop a conviction about buying it. The communicator’s job is to build conviction and intent to apply among stu- dents interested in Pottsville College.

• Purchase. Finally, some members of the target audience might have conviction but not quite get around to making the purchase. The communicator must lead these consumers to take the final step, perhaps by offering the product at a low price, offering a premium, or letting them try it out. Pottsville might invite selected high school students to visit the campus and attend some classes, or it might offer partial scholarships to deserving students.

482 PART 7 COMMUNICATING VALUE

To see how fragile the communication process is, assume the probability of each of the six steps being successfully accomplished is 50 percent. The laws of probability suggest that the likelihood of all six steps occurring successfully, assuming they are independent events, is .5 × .5 × .5 × .5 × .5 × .5, which equals 1.5625 percent. If the probability of each step’s occurring were, on average, a more moderate 10 percent, then the joint probability of all six events occurring is .0001 percent—or only 1 chance in 1,000,000!

To increase the odds for a successful marketing communications campaign, marketers must attempt to increase the likelihood that each step occurs. For example, the ideal ad campaign would ensure that:

1. The right consumer is exposed to the right message at the right place and at the right time. 2. The ad causes the consumer to pay attention but does not distract from the intended message. 3. The ad properly reflects the consumer’s level of understanding of and behaviors with the

product and the brand. 4. The ad correctly positions the brand in terms of desirable and deliverable points-of-difference

and points-of-parity. 5. The ad motivates consumers to consider purchase of the brand. 6. The ad creates strong brand associations with all these stored communications effects so they

can have an impact when consumers are considering making a purchase.

The challenges in achieving success with communications necessitates careful planning, a topic we turn to next.

Developing Effective Communications

Figure 17.3 shows the eight steps in developing effective communications. We begin with the basics: identifying the target audience, determining the objectives, designing the communications, selecting the channels, and establishing the budget.

Identify the Target Audience The process must start with a clear target audience in mind: potential buyers of the company’s products, current users, deciders, or influencers, and individuals, groups, particular publics, or the general public. The target audience is a critical influence on the communicator’s decisions about what to say, how, when, where, and to whom.

Though we can profile the target audience in terms of any of the market segments identified in Chapter 8, it’s often useful to do so in terms of usage and loyalty. Is the target new to the category or a current user? Is the target loyal to the brand, loyal to a competitor, or someone who switches between brands? If a brand user, is he or she a heavy or light user? Communication strategy will dif- fer depending on the answers. We can also conduct image analysis by profiling the target audience in terms of brand knowledge.

Determine the Communications Objectives As we showed with Pottsville College, marketers can set communications objectives at any level of the hi- erarchy-of-effects model. John R. Rossiter and Larry Percy identify four possible objectives, as follows:13

1. Category Need—Establishing a product or service category as necessary to remove or satisfy a perceived discrepancy between a current motivational state and a desired motivational state. A new-to-the-world product such as electric cars will always begin with a communications objective of establishing category need.

2. Brand Awareness—Fostering the consumer’s ability to recognize or recall the brand within the category, in sufficient detail to make a purchase. Recognition is easier to achieve than recall—consumers asked to think of a brand of frozen entrées are more likely to recognize Stouffer’s distinctive orange packages than to recall the brand. Brand recall is important outside the store; brand recognition is important inside the store. Brand awareness provides a foundation for brand equity.

Manage integrated marketing

communications

Measure results

Decide on media mix

Establish budget

Select channels

Design communications

Determine objectives

Identify target audience

|Fig. 17.3|

Steps in Developing Effective Communications

DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 483

3. Brand Attitude—Helping consumers evaluate the brand’s perceived ability to meet a cur- rently relevant need. Relevant brand needs may be negatively oriented (problem removal, problem avoidance, incomplete satisfaction, normal depletion) or positively oriented (sen- sory gratification, intellectual stimulation, or social approval). Household cleaning products often use problem solution; food products, on the other hand, often use sensory-oriented ads emphasizing appetite appeal.

4. Brand Purchase Intention—Moving consumers to decide to purchase the brand or take purchase-related action. Promotional offers like coupons or two-for-one deals encourage consumers to make a mental commitment to buy. But many consumers do not have an expressed category need and may not be in the market when exposed to an ad, so they are unlikely to form buy intentions. In any given week, only about 20 percent of adults may be planning to buy detergent, only 2 percent to buy a carpet cleaner, and only 0.25 percent to buy a car.

The most effective communications can achieve multiple objectives. To promote its Smart Grid technology program, GE pushed a number of buttons.14

GE Smart Grid The vision of GE’s Smart Grid program is to fundamentally overhaul the United States’ power grid, making it more efficient and sustainable and able also to deliver renewable-source energy such as wind and solar. An integrated campaign of print, TV, and online ads and an online augmented-reality demo was designed to increase understanding and support of the Smart Grid and GE’s leadership in solving technological problems. GE and its

agency partner BBDO chose to employ engaging creative and familiar cultural references to address the tech- nical issues involved. In its 2009 Super Bowl launch TV spot, the famous scarecrow character from The Wizard of Oz was shown bouncing along the top of a transmission tower singing, “If I Only Had a Brain.” A narrator voiced over the key communication message, “Smart Grid makes the way we distribute electricity more efficient simply by making it more intelligent.” One online ad used a flock of birds on electrical wires chirping and flapping their wings in synchronized rhythm to Rossini’s “Barber of Seville.” Another showed power lines becoming banjo strings for electrical pylons to play “O Susannah.” After drawing the audience in, the ads lay out the basic intent of the Smart Grid with links to more information. The augmented-reality GE microsite PlugIntoTheSmartGrid.com allowed users to create a digital hologram of Smart Grid technology us- ing computer peripherals and 3D graphics.

GE’s Smart Grid campaign has accomplished several different objectives for the GE brand, including strengthening the company’s reputation as innovative.

484 PART 7 COMMUNICATING VALUE

Design the Communications Formulating the communications to achieve the desired response requires solving three problems: what to say (message strategy), how to say it (creative strategy), and who should say it (message source).

MESSAGE STRATEGY In determining message strategy, management searches for appeals, themes, or ideas that will tie in to the brand positioning and help establish points-of-parity or points-of-difference. Some of these may be related directly to product or service performance (the quality, economy, or value of the brand), whereas others may relate to more extrinsic considerations (the brand as being contemporary, popular, or traditional).

Researcher John C. Maloney felt buyers expected one of four types of reward from a product: rational, sensory, social, or ego satisfaction.15 Buyers might visualize these rewards from results- of-use experience, product-in-use experience, or incidental-to-use experience. Crossing the four types of rewards with the three types of experience generates 12 types of messages. For example, the appeal “gets clothes cleaner” is a rational-reward promise following results-of-use experi- ence. The phrase “real beer taste in a great light beer” is a sensory-reward promise connected with product-in-use experience.

CREATIVE STRATEGY Communications effectiveness depends on how a message is being expressed, as well as on its content. If a communication is ineffective, it may mean the wrong message was used, or the right one was poorly expressed. Creative strategies are the way marketers translate their messages into a specific communication. We can broadly classify them as either informational or transformational appeals.16

Informational Appeals An informational appeal elaborates on product or service attributes or benefits. Examples in advertising are problem solution ads (Excedrin stops the toughest headache pain), product demonstration ads (Thompson Water Seal can withstand intense rain, snow, and heat), product comparison ads (DIRECTV offers better HD options than cable or other satellite operators), and testimonials from unknown or celebrity endorsers (NBA phenomenon LeBron James pitching Nike, Sprite, and McDonald’s). Informational appeals assume strictly rational processing of the communication on the consumer’s part. Logic and reason rule.

Carl Hovland’s research at Yale has shed much light on informational appeals and their rela- tionship to such issues as conclusion drawing, one-sided versus two-sided arguments, and order of argument presentation. Some early experiments supported stating conclusions for the audi- ence. Subsequent research, however, indicates that the best ads ask questions and allow readers and viewers to form their own conclusions.17 If Honda had hammered away that the Element was for young people, this strong definition might have blocked older drivers from buying it. Some stimulus ambiguity can lead to a broader market definition and more spontaneous purchases.

You might expect one-sided presentations that praise a product to be more effective than two-sided arguments that also mention shortcomings. Yet two-sided messages may be more appropriate, especially when negative associations must be overcome.18 Two-sided messages are more effective with more educated audiences and those who are initially opposed.19 Chapter 6

described how Domino’s took the drastic step of admitting its pizza’s taste problems to try to change the minds of consumers with negative perceptions.

Finally, the order in which arguments are presented is impor- tant.20 In a one-sided message, presenting the strongest argument first arouses attention and interest, important in media where the audience often does not attend to the whole message. With a captive audience, a climactic presentation might be more effective. For a two-sided message, if the audience is initially opposed, the commu- nicator might start with the other side’s argument and conclude with his or her strongest argument.21

Transformational Appeals A transformational appeal elaborates on a nonproduct-related benefit or image. It might depict what kind of person uses a brand (VW advertised to active, youthful people with its famed “Drivers Wanted” campaign) or what kind of experience results from use (Pringles advertised “Once You Pop, the

Pringles capitalized on the popping sound that occurs when its pack- age is opened to develop a highly successful ad campaign.

DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 485

Fun Don’t Stop” for years). Transformational appeals often attempt to stir up emotions that will motivate purchase.

Communicators use negative appeals such as fear, guilt, and shame to get people to do things (brush their teeth, have an annual health checkup) or stop doing things (smoking, abusing alcohol, overeating). Fear appeals work best when they are not too strong, when source credibility is high, and when the communication promises, in a believable and efficient way, to relieve the fear it arouses. Messages are most persuasive when moderately discrepant with audience beliefs. Stating only what the audience already believes at best just reinforces beliefs, and if the messages are too discrepant, audiences will counterargue and disbelieve them.22

Communicators also use positive emotional appeals such as humor, love, pride, and joy. Motivational or “borrowed interest” devices—such as the presence of cute babies, frisky puppies, popular music, or provocative sex appeals—are often employed to attract attention and raise in- volvement with an ad. These techniques are thought necessary in the tough new media environ- ment characterized by low-involvement consumer processing and competing ad and programming clutter. Attention-getting tactics are often too effective. They may also detract from comprehension, wear out their welcome fast, and overshadow the product.23 Thus, one challenge is figuring out how to “break through the clutter” and deliver the intended message.

Even highly entertaining and creative means of expression must still keep the appropriate consumer perspective. Toyota was sued in Los Angeles for a promotional campaign designed to create buzz for its youth-targeted Toyota Matrix. The online effort featured a series of e-mails to customers from a fictitious drunken British soccer hooligan, Sebastian Bowler. In his e-mails, he announced that he knew the recipient and was coming to stay with his pit bull, Trigger, to “avoid the cops.” In her suit, the plaintiff said she was so convinced that “a disturbed and aggressive” stranger was headed to her house that she slept with a machete next to her in bed.24

The magic of advertising is to bring concepts on a piece of paper to life in the minds of the consumer target. In a print ad, the communicator must decide on headline, copy, illustration, and color.25 For a radio message, the communicator must choose words, voice qualities, and vocalizations. The sound of an announcer promoting a used automobile should be different from one promoting a new Cadillac. If the message is to be carried on television or in person, all these elements plus body language must be planned. For the message to go online, layout, fonts, graphics, and other visual and verbal information must be laid out.

MESSAGE SOURCE Messages delivered by attractive or popular sources can achieve higher attention and recall, which is why advertisers often use celebrities as spokespeople.

Celebrities are likely to be effective when they are credible or personify a key product attribute. Statesman-like Dennis Haysbert for State Farm insurance, rugged Brett Favre for Wrangler jeans, and one-time television sweetheart Valerie Bertinelli for Jenny Craig weight loss program have all been praised by consumers as good fits. Celine Dion, however, failed to add glamour—or sales—to Chrysler, and even though she was locked into a three-year, $14 million deal, she was let go. Ozzy Osbourne would seem an odd choice to advertise “I Can’t Believe It’s Not Butter” given his seem- ingly perpetual confusion.

What is important is the spokesperson’s credibility. The three most often identified sources of credibility are expertise, trustworthiness, and likability.26 Expertise is the specialized knowledge the communicator possesses to back the claim. Trustworthiness describes how objective and honest the source is perceived to be. Friends are trusted more than strangers or salespeople, and people who are not paid to endorse a product are viewed as more trustworthy than people who are paid.27

Likability describes the source’s attractiveness. Qualities such as candor, humor, and naturalness make a source more likable.

The most highly credible source would score high on all three dimensions—expertise, trust- worthiness, and likability. Pharmaceutical companies want doctors to testify about product benefits because doctors have high credibility. Charles Schwab became the centerpiece of ads for his $4 billion-plus discount brokerage firm via the “Talk to Chuck” corporate advertising campaign. Another credible pitchman was boxer George Foreman and his multimillion-selling Lean, Mean, Fat-Reducing Grilling Machine. “Marketing Insight: Celebrity Endorsements as a Strategy” focuses on the use of testimonials.

If a person has a positive attitude toward a source and a message, or a negative attitude toward both, a state of congruity is said to exist. But what happens if a consumer hears a likable celebrity praise a brand she dislikes? Charles Osgood and Percy Tannenbaum believe attitude change will take

486 PART 7 COMMUNICATING VALUE

place in the direction of increasing the amount of congruity between the two evaluations.28 The consumer will end up respecting the celebrity somewhat less or the brand somewhat more. If she encounters the same celebrity praising other disliked brands, she will eventually develop a negative view of the celebrity and maintain negative attitudes toward the brands. The principle of congruity implies that communicators can use their good image to reduce some negative feelings toward a brand but in the process might lose some esteem with the audience.

Select the Communications Channels Selecting an efficient means to carry the message becomes more difficult as channels of communi- cation become more fragmented and cluttered. Communications channels may be personal and nonpersonal. Within each are many subchannels.

PERSONAL COMMUNICATIONS CHANNELS Personal communications channels let two or more persons communicate face-to-face or person-to-audience through a phone, surface

Marketing InsightMarketing Insight

Celebrity Endorsements as a Strategy A well-chosen celebrity can draw attention to a product or brand—as Priceline found when it picked Star Trek icon William Shatner to star in campy ads to reinforce its low-price image. The quirky campaigns have run over a decade, and Shatner’s decision to receive compensation in the form of stock options reportedly allowed him to net over $600 mil- lion for his work. The right celebrity can also lend his or her image to a brand. To reinforce its high status and prestige image, American Express has used movie legends Robert De Niro and Martin Scorsese in ads.

The choice of celebrity is critical. The person should have high recognition, high positive affect, and high appropriateness or “fit” with the product. Paris Hilton, Howard Stern, and Donald Trump have high recognition but negative affect among many groups. Johnny Depp has high recognition and high positive affect but might not seem relevant, for example, for advertising a new financial service. Tom Hanks and Oprah Winfrey could successfully advertise a large number of products because they have extremely high ratings for familiarity and likability (known as the Q factor in the entertainment industry).

Celebrities can play a more fundamentally strategic role for their brands, not only endorsing a product but also helping to design, posi- tion, and sell merchandise and services. Believing elite athletes have unique insights into sports performance, Nike often brings its athletic endorsers in on product design. Tiger Woods, Paul Casey, and Stewart Cink have helped to design, prototype, and test new golf clubs and balls at Nike Golf’s Research & Development facility dubbed “The Oven.”

Some celebrities lend their talents to brands without directly using their fame. A host of movie and TV stars—including Kiefer Sutherland (Bank of America), Alec Baldwin (Blockbuster), Patrick Dempsey (State Farm), Lauren Graham (Special K), and Regina King (Always)—do un- credited commercial voice-overs. Although advertisers assume some viewers will recognize the voices, the basic rationale for uncredited celebrity voice-overs is the incomparable voice talents and skills they bring from their acting careers.

Using celebrities poses certain risks. The celebrity might hold out for a larger fee at contract renewal or withdraw. And just like movies and album releases, celebrity campaigns can be expensive flops. The celebrity might lose popularity or, even worse, get caught in a scandal or embarrassing situation, as did Tiger Woods in a heavily publicized 2009 episode. Besides carefully checking endorsers’ backgrounds, some marketers are choosing to use more than one to lessen their brand’s exposure to any single person’s flaws.

Another solution is for marketers to create their own brand celebri- ties. Dos Equis beer, imported from Mexico, grew U.S. sales by over 20 percent during the recent recession by riding on the popularity of its “Most Interesting Man in the World” ad campaign. Suave, debonair, with an exotic accent and a silver beard, the character has hundreds of thou- sands of Facebook friends despite being, of course, completely ficti- tious. Videos of his exploits log millions of views on YouTube. He even served as the basis of The Most Interesting Show in the World tour of the brand’s 14 biggest urban markets, which featured one-of-a-kind circus-type performers such as a flaming bowling-ball-juggling stunt comedian, a robot-inspired break dancer, and a contortionist who shoots arrows with her feet. Through a combination of advertising and media coverage, almost 100 million media impressions were achieved on the tour.

Sources: Scott Huver, “Here’s the Pitch!,” TV Guide, May 23, 2010; Linda Massarella, “Shatner’s Singing a Happy Tune,” Toronto Sun, May 2, 2010; “Nike Golf Celebrates Achievements and Successes of Past Year,” www.worldgolf.com, January 2, 2009; Piet Levy, “Keeping It Interesting,” Marketing News, October 30, 2009, p. 8; Keith Naughton, “The Soft Sell,” Newsweek, February 2, 2004, pp. 46–47; Irving Rein, Philip Kotler, and Martin Scoller, The Making and Marketing of Professionals into Celebrities (Chicago: NTC Business Books, 1997).

DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 487

mail, or e-mail. They derive their effectiveness from individualized presentation and feedback and include direct and interactive marketing, word-of-mouth marketing, and personal selling.

We can draw a further distinction between advocate, expert, and social communications channels. Advocate chan- nels consist of company salespeople contacting buyers in the target market. Expert channels consist of independent ex- perts making statements to target buyers. Social channels consist of neighbors, friends, family members, and associ- ates talking to target buyers.

A study by Burson-Marsteller and Roper Starch Worldwide found that one influential person’s word of mouth tends to affect the buying attitudes of two other people, on average. That circle of influence, however, jumps to eight online. Word about good companies travels fast; word about bad companies travels even faster. Reaching the right people is key.

More advertisers now seek greater earned media—unso- licited professional commentary, personal blog entries, so- cial network discussion—as a result of their paid media marketing efforts. Kimberly-Clark ran a 30-second TV spot prior to the Academy Awards in March 2010 for its Poise brand, which fea- tured Whoopi Goldberg portraying famous women in history who may have suffered from incon- tinence. The goal was to get people talking, and talk they did! A social media avalanche followed, culminating in a Saturday Night Live spoof, which eventually added up to 200 million PR impres- sions in total.29

Personal influence carries especially great weight (1) when products are expensive, risky, or pur- chased infrequently, and (2) when products suggest something about the user’s status or taste. People often ask others to recommend a doctor, plumber, hotel, lawyer, accountant, architect, in- surance agent, interior decorator, or financial consultant. If we have confidence in the recommen- dation, we normally act on the referral. Service providers clearly have a strong interest in building referral sources.

Even business-to-business marketers can benefit from strong word of mouth. Here is how John Deere created anticipation and excitement when introducing its 764 High Speed Dozer, the cate- gory’s first launch in 25 years.30

John Deere Leading up to the unveiling of its high-speed dozer at the industry’s largest CONEXPO trade show, John Deere created an extensive PR campaign. First, e-mail an- nouncements were sent to all trade show registrants with images of the dozer covered in a tarp and teasing headlines, such as “Just a Few Years Ahead of the Competition” and “The Shape of Things to Come.” Editors received an invitation to attend a closed-door press conference where

they were given a VIP pass and admittance to a special viewing area at the CONEXPO show. Finally, editors were told they could also register for a special, invitation-only press conference with John Deere senior executives, including its CEO. Approximately 2,000 people attended the trade show for a rock-star unveiling of the dozer, with about 80 editors present. Customers at the event who declared their desire for the machine helped Deere staff secure more leads. Press reaction was also extremely positive, including several trade magazine cover stories on the dozer and three segments on CNBC. The integrated effort on behalf of John Deere, which included print ads in trade publications, took home the Grand CEBA Award in American Business Media’s annual awards competition.

NONPERSONAL (MASS) COMMUNICATIONS CHANNELS Nonpersonal channels are communications directed to more than one person and include advertising, sales promotions, events and experiences, and public relations. Much recent growth has taken place through events and experiences. Events marketers who once favored sports events are now using other venues such as art museums, zoos, and ice shows to entertain clients and employees. AT&T and IBM sponsor

William Shatner has become the quirky but beloved spokesperson for Priceline in its advertising.

488 PART 7 COMMUNICATING VALUE

symphony performances and art exhibits, Visa is an active sponsor of the Olympics, and Harley-Davidson sponsors annual motorcycle rallies.

Companies are searching for better ways to quantify the benefits of sponsorship and demanding greater accountability from event owners and organizers. They are

also creating events designed to surprise the public and create a buzz. Many efforts amount to guer- rilla marketing tactics. As part of a $100 million global advertising and marketing campaign for its line of televisions, LG Electronics developed an elaborate promotion for a fake new TV series, Scarlet, including a heavily promoted Hollywood world premiere. Inside, attendees found a new se- ries of actual LG TVs with a red back panel. Teaser TV and online commercials and extensive PR backed the effort.31

Events can create attention, although whether they have a lasting effect on brand awareness, knowledge, or preference will vary considerably depending on the quality of the product, the event itself, and its execution.

INTEGRATION OF COMMUNICATIONS CHANNELS Although personal communi- cation is often more effective than mass communication, mass media might be the major means of stimulating personal communication. Mass communications affect personal attitudes and behavior through a two-step process. Ideas often flow from radio, television, and print to opinion leaders, and from these to less media-involved population groups.

This two-step flow has several implications. First, the influence of mass media on public opin- ion is not as direct, powerful, and automatic as marketers have supposed. It is mediated by opinion leaders, people whose opinions others seek or who carry their opinions to others. Second, the two- step flow challenges the notion that consumption styles are primarily influenced by a “trickle- down” or “trickle-up” effect from mass media. People interact primarily within their own social groups and acquire ideas from opinion leaders in their groups. Third, two-step communication suggests that mass communicators should direct messages specifically to opinion leaders and let them carry the message to others.

Establish the Total Marketing Communications Budget One of the most difficult marketing decisions is determining how much to spend on marketing communications. John Wanamaker, the department store magnate, once said, “I know that half of my advertising is wasted, but I don’t know which half.”

Industries and companies vary considerably in how much they spend on marketing communi- cations. Expenditures might be 40 percent to 45 percent of sales in the cosmetics industry, but only

Through its print ad and trade show efforts, John Deere created buzz and much word of mouth in anticipation of the launch of its new high-speed dozer.

DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 489

5 percent to 10 percent in the industrial-equipment industry. Within a given indus- try, there are low- and high-spending companies.

How do companies decide on the communication budget? We will describe four common methods: the affordable method, the percentage-of-sales method, the com- petitive-parity method, and the objective-and-task method.

AFFORDABLE METHOD Some companies set the communication budget at what they think the company can afford. The affordable method completely ignores the role of promotion as an investment and the immediate impact of promotion on sales volume. It leads to an uncertain annual budget, which makes long-range planning difficult.

PERCENTAGE-OF-SALES METHOD Some companies set communication expenditures at a specified percentage of current or anticipated sales or of the sales price. Automobile companies typically budget a fixed percentage based on the planned car price. Oil companies appropriate a fraction of a cent for each gallon of gasoline sold under their own label.

Supporters of the percentage-of-sales method see a number of advantages. First, communication expenditures will vary with what the company can afford. This satisfies financial managers, who believe expenses should be closely related to the movement of corporate sales over the business cycle. Second, it encourages manage- ment to think of the relationship among communication cost, selling price, and profit per unit. Third, it encourages stability when competing firms spend approxi- mately the same percentage of their sales on communications.

In spite of these advantages, the percentage-of-sales method has little to justify it. It views sales as the determiner of communications rather than as the result. It leads to a budget set by the availability of funds rather than by market opportunities. It discourages experimentation with countercyclical communication or aggressive spending. Dependence on year-to-year sales fluctuations interferes with long-range planning. There is no logical basis for choosing the specific percentage, except what has been done in the past or what competitors are doing. Finally, it does not encour- age building the communication budget by determining what each product and territory deserves.

COMPETITIVE-PARITY METHOD Some companies set their communication budget to achieve share-of-voice parity with competitors. There are two supporting arguments: that competitors’ expenditures represent the collective wisdom of the industry, and that maintaining competitive parity prevents communication wars. Neither argument is valid. There are no grounds for believing competitors know better. Company reputations, resources, opportunities, and objectives differ so much that communication budgets are hardly a guide. And there is no evidence that budgets based on competitive parity discourage communication wars.

OBJECTIVE-AND-TASK METHOD The objective-and-task method calls upon marketers to develop communication budgets by defining specific objectives, determining the tasks that must be performed to achieve these objectives, and estimating the costs of performing them. The sum of these costs is the proposed communication budget.

Suppose Dr. Pepper Snapple Group wants to introduce a new natural energy drink, called Sunburst, for the casual athlete.32 Its objectives might be as follows:

1. Establish the market share goal. The company estimates 50 million potential users and sets a target of attracting 8 percent of the market—that is, 4 million users.

2. Determine the percentage of the market that should be reached by advertising. The adver- tiser hopes to reach 80 percent (40 million prospects) with its advertising message.

3. Determine the percentage of aware prospects that should be persuaded to try the brand. The advertiser would be pleased if 25 percent of aware prospects (10 million) tried Sunburst. It estimates that 40 percent of all triers, or 4 million people, will become loyal users. This is the market goal.

To promote its new line of televi- sions, LG pretended to launch a fake new TV series, even holding a heavily promoted premiere.

490 PART 7 COMMUNICATING VALUE

4. Determine the number of advertising impressions per 1 percent trial rate. The advertiser es- timates that 40 advertising impressions (exposures) for every 1 percent of the population will bring about a 25 percent trial rate.

5. Determine the number of gross rating points that would have to be purchased. A gross rating point is one exposure to 1 percent of the target population. Because the company wants to achieve 40 exposures to 80 percent of the population, it will want to buy 3,200 gross rating points.

6. Determine the necessary advertising budget on the basis of the average cost of buying a gross rating point. To expose 1 percent of the target population to one impression costs an average of $3,277. Therefore, 3,200 gross rating points will cost $10,486,400 (= $3,277 × 3,200) in the introductory year.

The objective-and-task method has the advantage of requiring management to spell out its as- sumptions about the relationship among dollars spent, exposure levels, trial rates, and regular usage.

COMMUNICATION BUDGET TRADE-OFFS A major question is how much weight marketing communications should receive in relationship to alternatives such as product improvement, lower prices, or better service. The answer depends on where the company’s products are in their life cycles, whether they are commodities or highly differentiable products, whether they are routinely needed or must be “sold,” and other considerations. Marketing communications budgets tend to be higher when there is low channel support, much change in the marketing program over time, many hard-to-reach customers, more complex customer decision making, differentiated products and nonhomogeneous customer needs, and frequent product purchases in small quantities.33

In theory, marketers should establish the total communications budget so the marginal profit from the last communication dollar just equals the marginal profit from the last dollar in the best noncommunication use. Implementing this principle, however, is not easy.

Deciding on the Marketing Communications Mix Companies must allocate the marketing communications budget over the eight major modes of com- munication—advertising, sales promotion, public relations and publicity, events and experiences, direct marketing, interactive marketing, word-of-mouth marketing, and the sales force. Within the same industry, companies can differ considerably in their media and channel choices. Avon concen- trates its promotional funds on personal selling, whereas Revlon spends heavily on advertising. Electrolux spent heavily on a door-to-door sales force for years, whereas Hoover has relied more on advertising. Table 17.2 breaks down spending on some major forms of communication.

Companies are always searching for ways to gain efficiency by substituting one communications tool for others. Many are replacing some field sales activity with ads, direct mail, and telemarketing. One auto dealer dismissed his five salespeople and cut prices, and sales exploded. The substitutabil- ity among communications tools explains why marketing functions need to be coordinated.

Characteristics of the Marketing Communications Mix Each communication tool has its own unique characteristics and costs. We briefly review them here and discuss them in more detail in Chapters 18 and 19.

ADVERTISING Advertising reaches geographically dispersed buyers. It can build up a long-term image for a product (Coca-Cola ads) or trigger quick sales (a Macy’s ad for a weekend sale). Certain forms of advertising such as TV can require a large budget, whereas other forms such as newspaper do not. The mere presence of advertising might have an effect on sales: Consumers might believe a heavily advertised brand must offer “good value.”34 Because of the many forms and uses of advertising, it’s difficult to make generalizations about it.35 Yet a few observations are worthwhile:

1. Pervasiveness—Advertising permits the seller to repeat a message many times. It also allows the buyer to receive and compare the messages of various competitors. Large-scale advertising says something positive about the seller’s size, power, and success.

DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 491

2. Amplified expressiveness—Advertising provides opportunities for dramatizing the company and its brands and products through the artful use of print, sound, and color.

3. Control—The advertiser can choose the aspects of the brand and product on which to focus communications.

SALES PROMOTION Companies use sales promotion tools—coupons, contests, premiums, and the like—to draw a stronger and quicker buyer response, including short-run effects such as highlighting product offers and boosting sagging sales. Sales promotion tools offer three distinctive benefits:

1. Ability to be attention-getting—They draw attention and may lead the consumer to the product. 2. Incentive—They incorporate some concession, inducement, or contribution that gives value

to the consumer. 3. Invitation—They include a distinct invitation to engage in the transaction now.

PUBLIC RELATIONS AND PUBLICITY Marketers tend to underuse public relations, yet a well-thought-out program coordinated with the other communications-mix elements can be extremely effective, especially if a company needs to challenge consumers’ misconceptions. The appeal of public relations and publicity is based on three distinctive qualities:

1. High credibility—News stories and features are more authentic and credible to readers than ads. 2. Ability to reach hard-to-find buyers—Public relations can reach prospects who prefer to

avoid mass media and targeted promotions. 3. Dramatization—Public relations can tell the story behind a company, brand, or product.

TABLE 17.2 Advertising and Digital Marketing Communications Forecast for 2010

Global Advertising Spend Projections 2009–2010 % Change 2010 $ (billions)

Cinema 2.0% 2.23

Internet 12.0% 60.35

Magazines �4.0% 43.10

Newspapers �4.0% 97.85

Outdoor 2.0% 29.61

Radio �2.0% 33.10

Television 2.0% 174.94

Total 0.9% 441.19 Source: ZenithOptimedia, December 2009.

Digital Marketing Communications

Display Advertising 7% 8.40

Email Marketing 8% 1.36

Mobile Marketing 44% 0.56

Search Marketing 15% 17.80

Social Media 31% 0.94

Total 13% 29.01 Source: Data from Figure 4 in US Interactive Marketing Forecast 2009 to 2014. Forester Reseach, Inc. July, 2009.

Source: Table from Piet Levy, “The Oscar-Contending Drama: Finding the Right Marketing Mix,” Marketing News, January 30, 2009, p. 15.

492 PART 7 COMMUNICATING VALUE

EVENTS AND EXPERIENCES There are many advantages to events and experiences as long as they have the following characteristics:

1. Relevant—A well-chosen event or experience can be seen as highly relevant because the consumer is often personally invested in the outcome.

2. Engaging—Given their live, real-time quality, events and experiences are more actively engag- ing for consumers.

3. Implicit—Events are typically an indirect “soft sell.”

DIRECT AND INTERACTIVE MARKETING Direct and interactive marketing messages take many forms—over the phone, online, or in person. They share three characteristics:

1. Customized—The message can be prepared to appeal to the addressed individual. 2. Up-to-date—A message can be prepared very quickly. 3. Interactive—The message can be changed depending on the person’s response.

WORD-OF-MOUTH MARKETING Word of mouth also takes many forms both online or offline. Three noteworthy characteristics are:

1. Influential—Because people trust others they know and respect, word of mouth can be highly influential.

2. Personal—Word of mouth can be a very intimate dialogue that reflects personal facts, opinions, and experiences.

3. Timely—Word of mouth occurs when people want it to and are most interested, and it often follows noteworthy or meaningful events or experiences.

PERSONAL SELLING Personal selling is the most effective tool at later stages of the buying process, particularly in building up buyer preference, conviction, and action. Personal selling has three notable qualities:

1. Personal interaction—Personal selling creates an immediate and interactive episode between two or more persons. Each is able to observe the other’s reactions.

2. Cultivation—Personal selling also permits all kinds of relationships to spring up, ranging from a matter-of-fact selling relationship to a deep personal friendship.

3. Response—The buyer is often given personal choices and encouraged to directly respond.

Factors in Setting the Marketing Communications Mix Companies must consider several factors in developing their communications mix: type of product market, consumer readiness to make a purchase, and stage in the product life cycle.

TYPE OF PRODUCT MARKET Communications-mix allocations vary between consumer and business markets. Consumer marketers tend to spend comparatively more on sales promotion and advertising; business marketers tend to spend comparatively more on personal selling. In general, personal selling is used more with complex, expensive, and risky goods and in markets with fewer and larger sellers (hence, business markets).

Although marketers rely more on sales calls in business markets, advertising still plays a signifi- cant role:

• Advertising can provide an introduction to the company and its products. • If the product has new features, advertising can explain them. • Reminder advertising is more economical than sales calls. • Advertisements offering brochures and carrying the company’s phone number or Web address

are an effective way to generate leads for sales representatives. • Sales representatives can use copies of the company’s ads to legitimize their company and products. • Advertising can remind customers how to use the product and reassure them about their purchase.

Advertising combined with personal selling can increase sales over personal selling alone. Corporate advertising can improve a company’s reputation and improve the sales force’s chances of getting a favorable first hearing and early adoption of the product.36 IBM’s corporate marketing effort is a notable success in recent years.37

DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 493

IBM Smarter Planet Working with long-time ad agency Ogilvy & Mather, IBM launched “Smarter Planet” in 2008 as a business strategy and multiplatform communications program to promote the way in which IBM technology and expertise helps industry, government, transportation, energy, education, health care, cities, and other businesses work better and “smarter.” The point was that technology has evolved so far that many of the world’s problems are

now fixable. Emphasizing the United States, the United Kingdom, Germany, and China, the campaign began in- ternally to inform and inspire IBM employees about how they could contribute to building a “Smarter Planet.”An unconventional “Mandate for Change” series offered long-form, content-rich print ads in the business world’s top newspapers outlining how IBM would address 25 key issues to make the world work better. Targeted TV ads and detailed online interactive ads pro- vided more support and substance. A “Smarter Cities” tour hosted major events at which IBM and other experts discussed and debated challenges all cities face: transportation, energy, health care, education, and public safety. The success of the overall “Smarter Planet” campaign was evident in the sig- nificant improvements in IBM’s image as a company “making the world bet- ter” and “known for solving its clients’ most challenging problems.” Despite a recession, significant increases occurred in new business opportunities and the number of companies interested in doing business with IBM.

On the flip side, personal selling can also make a strong contribu- tion in consumer-goods marketing. Some consumer marketers use the sales force mainly to collect weekly orders from dealers and to see that sufficient stock is on the shelf. Yet an effectively trained com- pany sales force can make four important contributions:

1. Increase stock position. Sales reps can persuade dealers to take more stock and devote more shelf space to the company’s brand.

2. Build enthusiasm. Sales reps can build dealer enthusiasm by dramatizing planned advertising and communications support for the company’s brand.

3. Conduct missionary selling. Sales reps can sign up more dealers.

4. Manage key accounts. Sales reps can take responsibility for growing business with the most important accounts.

BUYER-READINESS STAGE Communication tools vary in cost- effectiveness at different stages of buyer readiness. Figure 17.4 shows the relative cost-effectiveness of three communication tools. Advertising and publicity play the most important roles in the awareness-building stage. Customer comprehension is primarily affected by advertising and personal selling. Customer conviction is influenced mostly by personal selling. Closing the sale is influenced mostly by personal selling and sales promotion. Reordering is also affected mostly by personal selling and sales promotion, and somewhat by reminder advertising.

PRODUCT LIFE-CYCLE STAGE In the introduction stage of the product life cycle, advertising, events and experiences, and publicity have the highest cost-effectiveness, followed by personal selling to gain distribution coverage and sales promotion and direct marketing to induce trial. In the growth stage, demand has its own momentum through word of mouth and interactive marketing. Advertising, events and experiences, and personal selling all become more important in the maturity stage. In the decline stage, sales promotion continues strong, other communication tools are reduced, and salespeople give the product only minimal attention.

IBM’s “Smarter Planet” corporate brand campaign, which has met with great success, sometimes breaks the rules, as with this text-heavy print ad.

494 PART 7 COMMUNICATING VALUE

Measuring Communication Results Senior managers want to know the outcomes and revenues resulting from their communications invest- ments. Too often, however, their communications directors supply only inputs and expenses: press clip- ping counts, numbers of ads placed, media costs. In fairness, communications directors try to translate inputs into intermediate outputs such as reach and frequency (the percentage of target market exposed to a communication and the number of exposures), recall and recognition scores, persuasion changes, and cost-per-thousand calculations. Ultimately, behavior-change measures capture the real payoff.

After implementing the communications plan, the communications director must measure its impact. Members of the target audience are asked whether they recognize or recall the message, how many times they saw it, what points they recall, how they felt about the message, and what are their previous and current attitudes toward the product and the company. The communicator should also collect behavioral measures of audience response, such as how many people bought the product, liked it, and talked to others about it.

Figure 17.5 provides an example of good feedback measurement. We find 80 percent of the consumers in the total market are aware of brand A, 60 percent have tried it, and only 20 percent who tried it are satisfied. This indicates that the communications program is effective in creating awareness, but the product fails to meet consumer expectations. In contrast, 40 percent of the consumers in the total market are aware of brand B and only 30 percent have tried it, but 80 percent of them are satisfied. In this case, the communications program needs to be strengthened to take advantage of the brand’s potential power.

Managing the Integrated Marketing Communications Process Many companies still rely on only one or two communication tools. This practice persists in spite of the fragmenting of mass markets into a multitude of minimarkets, each requiring its own ap- proach; the proliferation of new types of media; and the growing sophistication of consumers. The

Stages of Buyer Readiness

Co st

E ffe

ct iv

en es

s

Awareness

Advertising and publicity Sales promotion Personal selling

Comprehension Conviction Order Reorder

|Fig. 17.4|

Cost-Effectiveness of Three Different Communication Tools at Different Buyer- Readiness Stages

100% market

100% market80%

aware 60% tried

80% disappointed

Total Awareness Brand Trial

Satisfaction Total Awareness Brand Trial

Satisfaction

20% not aware

40% did not

try

60% not aware

40% aware

80% satisfied

20% satisfied

20% disappointed

30% tried

70% did not try

Brand A Brand B|Fig. 17.5|

Current Consumer States for Two Brands

DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 495

wide range of communication tools, messages, and audiences makes it imperative that companies move toward integrated marketing communications. Companies must adopt a “360-degree view” of consumers to fully understand all the different ways that communications can affect consumer behavior in their daily lives.38

The American Marketing Association defines integrated marketing communications (IMC) as “a planning process designed to assure that all brand contacts received by a customer or prospect for a prod- uct, service, or organization are relevant to that person and consistent over time.” This planning process evaluates the strategic roles of a variety of communications disciplines—for example, general advertis- ing, direct response, sales promotion, and public relations—and skillfully combines these disciplines to provide clarity, consistency, and maximum impact through the seamless integration of messages.

Media companies and ad agencies are expanding their capabilities to offer multiplatform deals for marketers. These expanded capabilities make it easier for marketers to assemble various media properties—as well as related marketing services—in an integrated communication program.

Table 17.3 displays the different lines of businesses for marketing and advertising services giant WPP.

Coordinating Media Media coordination can occur across and within media types, but marketers should combine personal and nonpersonal communications channels through multiple-vehicle, multiple-stage campaigns to achieve maximum impact and increase message reach and impact.

Promotions can be more effective when combined with advertising, for example.39 The aware- ness and attitudes created by advertising campaigns can increase the success of more direct sales

TABLE 17.3 WPP’s Lines of Businesses

Advertising

Global, national and specialist advertising services from a range of top international and specialist agencies, amongst them Grey, JWT, Ogilvy & Mather, United Network and Y&R

Media Investment Management

Above- and below-the-line media planning and buying and specialist sponsorship and branded entertainment services from GroupM companies MediaCom, Mediaedge:cia, Mindshare, Maxus and others

Consumer Insight

WPP’s Kantar companies, including TNS, Millward Brown, The Futures Company and many other specialists in brand, consumer, media and marketplace insight, work with clients to generate and apply great insights

Public Relations & Public Affairs

Corporate, consumer, financial and brand-building services from PR and lobbying firms Burson-Marsteller, Cohn & Wolfe, Hill & Knowlton, Ogilvy Public Relations Worldwide and others

Branding & Identity

Consumer, corporate and employee branding and design services, covering identity, packaging, literature, events, training and architecture from Addison, The Brand Union, Fitch, Lambie-Nairn, Landor Associates, The Partners and others

Direct, Promotion & Relationship Marketing

The full range of general and specialist customer, channel, direct, field, retail, promotional and point-of-sale services from Bridge Worldwide, G2, OgilvyOne, OgilvyAction, RTC Relationship Marketing, VML, Wunderman and others.

Healthcare Communications

CommonHealth, GCI Health, ghg, Ogilvy Healthworld, Sudler & Hennessey and others provide integrated healthcare marketing solutions from advertising to medical education and online marketing

Specialist Communications

A comprehensive range of specialist services, from custom media and multicultural marketing to event, sports, youth and entertainment marketing; corporate and business-to-business; media, technology and production services

WPP Digital

Through WPP Digital, WPP companies and their clients have access to a portfolio of digital experts including 24/7 Real Media, Schematic and BLUE Source: Adapted from WPP, “What We Do,” www.wpp.com/wpp/about/whatwedo/ (as at 1 October 2010). Used with permission.

Source: Adapted from Kevin Lane Keller, Strategic Brand Management, 3rd ed. (Upper Saddle River, NJ: Prentice Hall, 2008).

496 PART 7 COMMUNICATING VALUE

pitches. Advertising can convey the positioning of a brand and benefit from online display advertis- ing or search engine marketing that offers a stronger call to action.40

Many companies are coordinating their online and offline communications activities. Web addresses in ads (especially print ads) and on packages allow people to more fully explore a com- pany’s products, find store locations, and get more product or service information. Even if con- sumers don’t order online, marketers can use Web sites in ways that drive them into stores to buy.

Implementing IMC In recent years, large ad agencies have substantially improved their integrated offerings. To facilitate one-stop shopping, these agencies have acquired promotion agencies, public relations firms, package- design consultancies, Web site developers, and direct-mail houses. They are redefining themselves as communications companies that assist clients to improve their overall communications effectiveness by offering strategic and practical advice on many forms of communication.41 Many international clients such as IBM (Ogilvy), Colgate (Young & Rubicam), and GE (BBDO) have opted to put a sub- stantial portion of their communications work through one full-service agency. The result is inte- grated and more effective marketing communications at a much lower total communications cost.

Integrated marketing communications can produce stronger message consistency and help build brand equity and create greater sales impact.42 It forces management to think about every way the customer comes in contact with the company, how the company communicates its posi- tioning, the relative importance of each vehicle, and timing issues. It gives someone the responsibility— where none existed before—to unify the company’s brand images and messages as they come through thousands of company activities. IMC should improve the company’s ability to reach the right customers with the right messages at the right time and in the right place.43 “Marketing Memo: How Integrated Is Your IMC Program?” provides some guidelines.

m a r k e t i n g

Memo How Integrated Is Your IMC Program? In assessing the collective impact of an IMC program, the marketer’s over- riding goal is to create the most effective and efficient communications program possible. The following six criteria can help determine whether communications are truly integrated.

• Coverage. Coverage is the proportion of the audience reached by each communication option employed, as well as how much overlap exists among communication options. In other words, to what extent do different communication options reach the designated target market and the same or different consumers making up that market?

• Contribution. Contribution is the inherent ability of a marketing communication to create the desired response and communication effects from consumers in the absence of exposure to any other communication option. How much does a communication affect consumer processing and build awareness, enhance image, elicit responses, and induce sales?

• Commonality. Commonality is the extent to which common associa- tions are reinforced across communication options; that is, the extent to which information conveyed by different communication options share meaning. The consistency and cohesiveness of the brand image is important because it determines how easily existing associations and responses can be recalled and how easily additional associations and responses can become linked to the brand in memory.

• Complementarity. Communication options are often more effective when used in tandem. Complementarity relates to the extent to which different associations and linkages are emphasized across communication options. Different brand associations may be most effectively established by capi- talizing on those marketing communication options best suited to eliciting a particular consumer response or establishing a particular type of brand association. Many of the TV ads during the Super Bowl—America’s biggest media event—are designed to create curiosity and interest so that consumers go online and engage in social media and word of mouth to experience and find more detailed information.44 A 2010 Super Bowl spot for Snickers candy bar featuring legendary TV comedienne Betty White resulted in over 3.5 million visits to the brand’s Web site after it was run.

• Versatility. In any integrated communication program, when consumers are exposed to a particular marketing communication, some will have already been exposed to other marketing communications for the brand, and some will not have had any prior exposure. Versatility refers to the extent to which a marketing communication option is robust and “works” for different groups of consumers.The ability of a marketing communication to work at two levels—effectively communicating to consumers who have or have not seen other communications—is critically important.

• Cost. Marketers must weigh evaluations of marketing communications on all these criteria against their cost to arrive at the most effective and efficient communications program.

DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 497

Summary

1. Modern marketing calls for more than developing a good product, pricing it attractively, and making it accessible to target customers. Companies must also communicate with present and potential stakeholders and with the general public.

2. The marketing communications mix consists of eight major modes of communication: advertising, sales promotion, public relations and publicity, events and experiences, direct marketing, interactive marketing, word-of-mouth marketing, and personal selling.

3. The communications process consists of nine elements: sender, receiver, message, media, encoding, decoding, response, feedback, and noise. To get their messages through, marketers must encode their messages in a way that takes into account how the target audience usually decodes messages. They must also transmit the message through efficient media that reach the target audience and develop feedback channels to monitor response to the message.

4. Developing effective communications requires eight steps: (1) Identify the target audience, (2) determine the communications objectives, (3) design the communica- tions, (4) select the communications channels, (5) es- tablish the total communications budget, (6) decide on the communications mix, (7) measure the communica- tions results, and (8) manage the integrated marketing communications process.

5. In identifying the target audience, the marketer needs to close any gap that exists between current public per- ception and the image sought. Communications objec- tives can be to create category need, brand awareness, brand attitude, or brand purchase intention.

6. Designing the communication requires solving three problems: what to say (message strategy), how to say it (creative strategy), and who should say it (message source). Communications channels can be personal (advocate, expert, and social channels) or nonpersonal (media, atmospheres, and events).

7. Although other methods exist, the objective-and-task method of setting the communications budget, which calls upon marketers to develop their budgets by defining specific objectives, is typically most desirable.

8. In choosing the marketing communications mix, mar- keters must examine the distinct advantages and costs of each communication tool and the company’s market rank. They must also consider the type of product market in which they are selling, how ready consumers are to make a purchase, and the product’s stage in the company, brand, and product.

9. Measuring the effectiveness of the marketing communi- cations mix requires asking members of the target audience whether they recognize or recall the commu- nication, how many times they saw it, what points they recall, how they felt about the communication, and what are their previous and current attitudes toward the company, brand, and product.

10. Managing and coordinating the entire communications process calls for integrated marketing communications (IMC): marketing communications planning that recog- nizes the added value of a comprehensive plan to eval- uate the strategic roles of a variety of communications disciplines, and that combines these disciplines to provide clarity, consistency, and maximum impact through the seamless integration of discrete messages.

Applications

Marketing Debate Has TV Advertising Lost Its Power? Long deemed the most successful marketing medium, tele- vision advertising is increasingly criticized for being too ex- pensive and, even worse, no longer as effective as it once was. Critics maintain that consumers tune out too many ads by zipping and zapping and that it is difficult to make a strong impression. The future, claim some, is with online advertising. Supporters of TV advertising disagree, contend- ing that the multisensory impact of TV is unsurpassed and that no other media option offers the same potential impact.

Take a position: TV advertising has faded in impor- tance versus TV advertising is still the most powerful advertising medium.

Marketing Discussion Communications Audit Pick a brand and go to its Web site. Locate as many forms of communication as you can find. Conduct an informal communications audit. What do you notice? How consis- tent are the different communications?

498 PART 7 COMMUNICATING VALUE

Marketing Excellence

>>Red Bull

Red Bull’s integrated marketing communica-

tions mix has been so successful that the company has created an entirely new drink category—functional en- ergy drinks—and has become a multibillion-dollar brand among competition from beverage kings like Coca-Cola and Pepsi. In less than 20 years, Red Bull has become the energy drink market leader by skillfully connecting with the global youth. Dietrich Mateschitz founded Red Bull in Austria and introduced the energy drink into Hungary, its first foreign market, in 1992. Today, Red Bull sells 4 billion cans of energy drinks each year in over 160 countries.

So how does Red Bull do it? The answer: differently than others. For years, Red Bull offered just one product, Red Bull Energy Drink, in one size—a slick silver 250 ml. (8.3 oz.) can with a European look and feel. Red Bull’s ingredients—amino acid taurine, B-complex vitamins, caffeine, and carbohydrates—mean it’s highly caffeinated and energizing, so fans have called it “liquid cocaine” and “speed in a can.” Over the last decade, Red Bull has intro- duced three additional products: Red Bull Sugarfree, Red Bull Energy Shots, and Red Bull Cola—each slight varia- tions of the original energy drink.

Since its beginning, Red Bull has used little traditional advertising and no print, billboards, banner ads, or Super Bowl spots. While the company runs minimal television commercials, the animated spots and tagline “Red Bull Gives You Wiiings” are meant to amuse its young audi- ence and connect in a nontraditional, nonpushy manner.

Red Bull builds buzz about the product through grassroots, viral marketing tactics, starting with its “seed- ing program” that microtargets trendy shops, clubs, bars, and stores. As one Red Bull executive explained, “We go to on-premise accounts first, because the product gets a lot of visibility and attention. It goes faster to deal with individual accounts, not big chains and their authorization

process.” Red Bull is easily accepted at clubs because “in clubs, people are open to new things.”

Once Red Bull has gained some momentum in the bars, it next moves into convenience stores located near colleges, gyms, health-food stores, and supermarkets, prime locations for its target audience of men and women aged 16 to 29. Red Bull has also been known to target college students directly by providing them with free cases of Red Bull and encouraging them to throw a party. Eventually, Red Bull moves into restaurants and finally, into supermarkets.

Red Bull’s marketing efforts strive to build its brand image of authenticity, originality, and community in several ways. First, Red Bull targets opinion leaders by sampling its product, a lot. Free Red Bull energy drinks are available at sports competitions, in limos before award shows, and at exclusive after-parties. Free samples are passed out on college campuses and city streets, given to those who look like they need a lift.

Next, Red Bull aligns itself with a wide variety of ex- treme sports, athletes, teams, events, and artists (in music, dance, and film). From motor sports to mountain biking, snowboarding to surfing, dancing to extreme sailing, there is no limit to the craziness of a Red Bull event or sponsorship. A few have become notorious for taking originality and extreme sporting to the limit, in- cluding the annual Flugtag. At Flugtag, contestants build homemade flying machines that must weigh less than 450 pounds, including the pilot. Teams then launch their contraptions off a specially designed Red Bull branded ramp, 30 feet above a body of water. Crowds of up to 300,000 young consumers cheer on as the contestants and their “planes” stay true to the brand’s slogan: “Red Bull gives you wings!”

Another annual event, the Red Bull Air Race, tests the limits of sanity. Twelve of the world’s top aerobatic stunt pilots compete in a 3.5 mile course through a low-level aerial racetrack made up of air-filled Red Bull branded py- lons 33 feet apart and reaching 65 feet in height. In other words, pilots fly planes with a 26-foot wingspan through a gap of 33 feet at 230 mph. These Red Bull–branded planes crash occasionally, but to date no fatalities have ever occurred.

Red Bull’s Web site provides consumers with infor- mation about how to find Red Bull events, videos of and interviews with Red Bull–sponsored athletes, and clips of amazing feats that will be tested next. For example, Bull Stratos is a mission one man is undertaking to free-fall from 120,000 feet, or 23 miles high. The jump will be at- tempted from the edge of space and, if successful, it will mark the first time a human being has reached supersonic speeds in a free fall.

Red Bull buys traditional advertising once the market is mature and the company needs to reinforce

DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 499

the brand to its consumers. As one Red Bull executive explained, “Media is not a tool that we use to estab- lish the market. It is a critical part. It’s just later in the development.”

Red Bull’s “anti-marketing” IMC strategy has been extremely successful connecting with its young con- sumers. It falls directly in line with the company’s mission to be seen as unique, original, and rebellious—just as its Generation Y consumers want to be viewed.

Questions

1. What are Red Bull’s greatest strengths and risks as more companies (like Coca-Cola, Pepsi, and Monster)

enter the energy drink category and gain market share?

2. Should Red Bull do more traditional advertising? Why or why not?

3. Discuss the effectiveness of Red Bull’s sponsorships, for example, Bull Stratos. Is this a good use of Red Bull’s marketing budget? Where should the company draw the line?

Sources: Kevin Lane Keller, “Red Bull: Managing a High-Growth Brand,” Best Practice Cases in Branding, 3rd ed. (Upper Saddle River, NJ: Prentice Hall, 2008); Peter Ha, “Red Bull Stratos: Man Will Freefall from Earth’s Stratosphere,” Time, January 22, 2010; Red Bull, www.redbull.com.

Marketing Excellence

>>Target

Like other dis- count retailers, Target sells a wide variety of

products, including clothing, jewelry, sporting goods, household supplies, toys, electronics, and health and beauty products. However, since its founding in 1962, Target has focused on differentiating itself from the com- petition. This became evident in the mid-1980s when Kmart dominated the mass retail industry and Walmart was growing rapidly. Kmart and Walmart’s marketing messages communicated their low price promise, but their merchandise was perceived as cheap and low- quality. Target sensed a gap in the market for “cheap chic” retail and set out to distinguish itself from the other big- box retailers.

Target planned to build an up-market cachet for its brand without losing its relevance for price-conscious consumers. It positioned itself as a high-fashion brand with trendy styles and quality merchandise at affordable low prices. To fulfill this brand promise, Target’s teams of merchandisers travel the world looking for the next hot items. Next, Target brings these trends to the shelves faster than its competitors.

Many styles are sold exclusively at Target through partnerships with world-renowned designers, such as Mossimo Giannulli, Jean Paul Gaultier, and Liz Lange in clothes; Anya Hindmarch in handbags; Sigerson Morrison

in shoes; Michael Graves in home goods; and Pixi by Petra Strand in beauty. They are either staples in Target stores or part of the Go International line, a special design collection available for only a few months. In 2006, Target introduced U.S. consumers to the concept of “fast fash- ion,” already popular in Europe, to help keep the product selection fresh, which in turn led to more frequent shop- per visits.

Target’s designer line collections are just one unique part of its entire integrated marketing communications mix. The company uses a variety of tactics to communi- cate its “cheap chic” positioning, beginning with its slo- gan, “Expect More, Pay Less.” In its stores, Target uses strategically placed low shelves, halogen and track light- ing, cleaner fixtures, and wider aisles to avoid visual clutter. Signage features contemporary imagery but is printed on less expensive materials. Target even catches the eye of consumers in the air by painting its signature red bull’s eye on the roof of stores located near busy airports.

Target uses a wide range of traditional advertising such as television ads, direct mailers, print ads, radio, and circulars. Its messages feature hip young customers, a variety of strong name-brand products, and a lighthearted tone—all which have helped make Target’s bull’s eye logo well recognized. Target also aligns itself with a variety of events, sports, athletes, and museums through corporate sponsorships. From Target Field, the home of the Minnesota Twins in Minneapolis, to Target NASCAR and Indy racing teams and contemporary athletes like Olympic snowboarder Shaun White, sponsorships help Target pinpoint specific consumers, interests, attitudes, and demographics. Target also advertises on and sponsors major awards shows such as the Oscars, Emmys, Grammys, and the Golden Globes.

Target has a strong online presence and uses Target.com as a critical component in its retail and

500 PART 7 COMMUNICATING VALUE

communications strategy. Target.com is able to gain in- sight into consumers’ shopping preferences, which ulti- mately allows for more targeted direct marketing efforts. The site also features in-store items alongside Web-only items in hopes of driving traffic into the stores. On social Web sites such as Twitter and Facebook, Target builds loyalty and encourages young consumers to share their experiences, discounts, and great finds with each other.

Target reinforces its positive brand image by contribut- ing significantly to surrounding communities. The com- pany donates 5 percent of its annual income, or more than $3 million a week, to programs that focus on education, the arts, social service, and volunteerism. Target donated more than 16 million pounds of food in 2008 to Feed America, the nation’s food bank network. Target also sponsors discounted or free days at art museums around the country, including the Museum of Modern Art in New York and the Museum of Contemporary Art in Chicago.

As a result of its integrated marketing plan, Target has attracted many shoppers who would not otherwise shop at a discount retailer. Its customers are younger, more affluent, and more educated than its competitors attract. The median age of Target shoppers is 41 and the median household income is $63,000. Three-quarters of Target consumers are female and 45 percent have children at home. In addition, 97 percent of U.S. consumers recog- nize the Target bull’s eye logo.

While Target’s marketing communication mix has effectively communicated its “cheap chic” message over the years, this strategy hurt sales during the recession in 2008–2009. During that time, consumers significantly cut their spending and shopped mostly for necessities at low- cost Walmart instead of for discretionary items, which make up about three-fifths of sales at Target.

As a result, Target tweaked its marketing message and merchandise profile. The company added perish- ables to its inventory—a necessity in slow economic times—and cut back on discretionary items such as clothing and home accessories. Target’s marketing mes- sage remains focused on offering consumers high style and unique brand names but emphasizes value more, using phrases such as “fresh for less” and “new way to save.”

Today, Target is the second-largest discount retailer in the United States, with $65.4 billion in sales in 2009, and ranks number 28 on the Fortune 500 list. Its successful in- tegrated marketing mix has worked so well that con- sumers often jokingly pronounce the company’s name as if it were an upscale boutique, “Tar-ZHAY.”

Questions

1. What has Target done well over the years in terms of its integrated marketing communications strategy? What should it do going forward?

2. How does Target compete against mammoth Walmart? What are the distinct differences in their IMC strategies?

3. Did Target do the right thing by tweaking its message to focus more on value and less on trends? Why or why not?

Sources: “Value for Money Is Back—Target Does Marketing Right,” The Marketing Doctor, October 2, 2006; Ben Steverman, “Target vs. Wal-Mart: The Next Phase,” BusinessWeek, August 18, 2009; Ann Zimmerman, “Staying on Target,” Wall Street Journal, May 7, 2007; Mya Frazier, “The Latest European Import: Fast Fashion,” Advertising Age, January 9, 2006, p. 6; Julie Schlosser, “How Target Does It,” Fortune, October 18, 2004, p. 100; Michelle Conlin, “Look Who’s Stalking Wal-Mart,” BusinessWeek, December 7, 2009, pp. 30–36; Wikinvest, www.wikinvest.com; Target, www.target.com.