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chapter

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Industry Profile

Introduction

Channel Strategy Channel Organization

Intermediaries

Channel Management

Building Customer Value in Channel

Systems

Franchising Franchisee

Franchisor

Summary of Chapter Objectives

Key Terms and Concepts

Questions for Review and Discussion

Case Study: The Wing Shack

Chapter Objectives

After studying this chapter, you should be able to:

1. Outline the importance of distribution systems in hospitality

and travel marketing.

2. Describe several models of distribution channel organization.

3. List distribution intermediaries in the hospitality and

tourism industry.

4. Describe several options for managing distribution channels.

5. Explain how channel distribution systems can affect

customer value.

6. Define franchising and list advantages and disadvantages of

franchisee/franchisor arrangements.

Marketing Channels

Chapter Outline

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316 chapter 9 marketing channels in

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Anthony Medina Account Executive and Tournament Coordinator Golf San Antonio, Valero Texas Open • San Antonio, Texas

1. What are the major components or duties associated with your current position?

I serve as account executive for the Valero Texas Open, Golf San Antonio’s

official PGA tour event. My major duty/responsibility is to work within our

community to increase fundraising dollars for the VTO. Through B2B, cold

calls, and various networking opportunities we reach out to local, regional,

and national corporations to get involved and sponsor our event.

Since Valero Energy Corporation has been our title sponsor, the VTO has

raised over $33 million! The 2007 Valero Texas Open and the Benefit for

Children Golf Classic raised more than $8 million for over 300 charities across

Texas.

2. What are the components of your position that bring you the most satisfaction? What about your position causes you frustration?

Satisfaction—when I’m closing sales for my job, I know I’m part of a bigger

picture and that I have a role in my organization that is to bring in revenue.

And also knowing that I’m helping another business reach their sales objec-

tives through being involved with the Valero Texas Open.

Frustration—I know it’s against the rules, but I tend to take business

decisions personally. So, when a prospect decides not to participate, for what-

ever reason, I immediately start looking at myself and what I could have

done better.

3. What are the most challenging aspects that you face? Finding the disposable entertainment/sponsorship dollar from companies in

this current economic trend.

4. What major trends do you see for your segment of the hospitality and tourism industry?

The largest trend our industry sees is replicated in all entertainment indus-

tries presently. The major trend we see is the necessity to compete for the

disposable entertainment dollar. We also experience the need to keep our

product uncluttered despite the need to increase the number of sponsorships

sold.

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industry profile 317 in d u stry p

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5. What role does marketing play within your company? Because we have several target audiences, it is necessary for us to utilize mar-

keting to attract spectators, recruit PGA tour players into our field, sell spon-

sorships and event solicit involvement from charities that will benefit from

our strong charitable success . . . and that is just for one arm of our business.

Marketing is also key in helping us garner capital from the community to sup-

port our free program at the First Tee of San Antonio and to entice partici-

pants to register for one or more of our many city amateur championship

tournaments.

6. If you could offer one piece of advice to an individual preparing for a career in the hospitality and tourism industry, what would you suggest?

Be open to new things. Network, be outgoing and persistent. Be willing to

move to a new city or willing to accept any position to get your foot in the

door.

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318 chapter 9 marketing channels

INTRODUCTION

Distribution is an important element of the marketing mix, but it is often dif-

ficult to understand its role in services marketing. Service channels are usu-

ally not traditional in the sense that there is a manufacturer, a wholesaler, and

a retailer. Often, one firm performs all of the channel functions because there

is no physical transportation of a product, and the production and consump-

tion of the service occur simultaneously. However, service firms in industries

like hospitality and tourism must still make decisions regarding channel orga-

nization and channel management.

One of the decisions that must be made by hotel and tourism firms con-

cerns the use of intermediaries. Intermediaries, like wholesalers and retailers,

may be valuable to service firms because of their expertise and ability to spe-

cialize in certain channel functions. Also, government organizations such as

travel bureaus exist to help promote and distribute travel services to individ-

uals and groups for their constituents.

The fastest-growing distribution alternative involves electronic commerce

over the Internet. Hospitality and tourism firms use this outlet to promote their

services and offer a direct channel to consumers. This form of commerce is

efficient and provides other advantages that will be discussed in this chapter.

CHANNEL STRATEGY

A firm’s channel strategy must be consistent with the other elements of its

marketing mix in order to be successful. The overall position of the firm in

the marketplace is established by many factors, including price levels, prod-

uct–service mix characteristics, and distribution. The promotion strategy is

used to convey this positioning strategy to potential users of the firm’s prod-

uct or service. The delivery of products or services is intertwined with these

other decisions.

For example, consumers would not associate gourmet-quality food with

an establishment that is part of a food court in a shopping mall. Similarly,

consumers would not expect to pay high prices for food purchased through

this type of outlet.

The main objective of the distribution function is to get products and

services to consumers where, when, and how they prefer them. A good dis-

tribution system will result in a smooth flow of products and services to con-

sumers while at the same time achieving the firm’s goals concerning market

Intermediaries

Intermediaries specialize in certain functions in the service delivery process and can add value to the service with their knowledge and expertise (e.g., travel agents, meeting planners, tour wholesalers and operators, and travel bureaus).

Electronic commerce (e-commerce)

A term used to describe the buying and selling process obtained through electronic means such as the Internet.

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coverage, sales, and profitability. Firms have limited resources and must deter-

mine the most efficient and effective way to distribute their products and ser-

vices. Some of the necessary activities associated with distribution include:

• Communicating and negotiating

• Facilitating transactions

• Storing and moving physical goods

• Installing products and providing service

Channel Organization

Channel design decisions must be made with regard to channel width (i.e.,

desired market coverage) and channel length (i.e., number of intermediaries).

It is also possible to use a single channel to distribute a firm’s products and

services or multiple channels of various widths and lengths. Channel decisions

are affected by product–service mix characteristics, market characteristics, and

environmental characteristics. Obviously, the intangible nature of services

tends to minimize the length of the channel of distribution. As discussed

earlier, the service delivery process often requires consumers to be present

during the production process. This eliminates the need for the storage and

movement of a physical product. However, distribution is still an important

consideration in the delivery of services. Some firms use a variety of channels

depending upon the desired market coverage, the positioning of different ser-

vices or brands, and the existence of different markets.

CHANNEL WIDTH. The channel width decision is based on the desired amount of market coverage. In other words, larger widths would be associ-

ated with more market coverage. Basically, three channel-width strategies are

employed by firms: (1) exclusive distribution, (2) selective distribution, and (3)

intensive distribution. The width of the channel ranges from exclusive dis-

tribution (one outlet) to intensive distribution (as many outlets as possible). As

mentioned earlier, this decision must be consistent with the firm’s other mar-

keting mix strategies.

The narrowest channel width is exclusive distribution, where a firm lim-

its the availability of its products or services to a particular outlet. This is com-

mon among independent operators in the hospitality industry. Le Cirque 2000

restaurant in New York City is a single-unit operation, and it is the only place

consumers can purchase and experience this firm’s product. This is also true

of independent hotels such as the Palace Hotel in New York City and resorts

such as The Greenbrier in West Virginia or The Homestead in Virginia.

channel strategy 319

Channel width

Channel width represents the number of distribution channel partners required to provide the desired market coverage.

Exclusive distribution

The narrowest channel width where a firm limits the availability of its products or services to a particular outlet. This is common among independent operators in the hospitality industry.

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320 chapter 9 marketing channels

Many single-unit restaurants and lodging facilities offer a personal touch and

a one-of-a-kind experience. However, this individual attention comes at the

expense of market coverage and the cost economies associated with high-

volume business.

The middle channel width is referred to as selective distribution, where

a firm uses more than one outlet but restricts availability of the product or

service to a limited number of outlets. In the hospitality industry, many firms

limit market coverage based on geographic segmentation. Some multiunit

operations are strictly local, but some are regional or national with a limited

number of outlets. Restaurant chains such as Hard Rock Cafe and ESPN

Zone limit themselves to large cities. In contrast, Bertucci’s Brick Oven

Pizzeria, based in Somerville, Massachusetts, limits itself to the Northeast

and recently expanded to the mid-Atlantic region. Many other multiunit

restaurant operations are family-owned and stay within a very confined

area. Some hotel chains, such as Omni Hotels and Four Seasons, have a

limited number of hotels that are found in large cities, while others operate

in limited regions. This distribution strategy is also popular among many

travel agents, noncommercial foodservice firms, and certain airlines, such

as Jet Blue.

Finally, the widest channel strategy is intensive distribution, where firms

attempt to make products and services available through as many outlets as

possible. This is a common approach among franchise operations that use

mass advertising and realize economies of scale. These firms, such as

McDonald’s and Marriott International, try to standardize their services so

that consumers can expect a consistent experience at any of the firm’s outlets.

Corporate-owned chains like Applebee’s also use an intensive distribution

strategy by adding units in as many suitable locations as possible. Consumers

are more concerned with familiarity and consistency than with a one-of-a-

kind experience. However, these firms do their best to provide consumers

with a personal touch. Most airlines and car rental agencies use this distri-

bution strategy as well.

Foxwoods Resort Casino uses an exclusive distribution strategy by having only one location. Courtesy of Foxwoods Resort Casino.

Selective distribution

Selective distribution refers to the middle channel width, where a firm uses more than one outlet but restricts availability of the product or service to a limited number of outlets.

Intensive distribution

The widest channel strategy is intensive distribution, where firms attempt to make products and services available through as many outlets as possible. This is a common approach among franchise operations that use mass advertising and realize economies of scale.

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CHANNEL LENGTH. The channel length decision is based on the number of intermediaries between the manufacturer and the final consumer. In the case

of services, the channel is usually very short because of simultaneous produc-

tion and consumption. In other words, consumers must be present to consume

a service such as airline transportation, a meal, or an overnight stay in a hotel.

A channel can be either direct, from the manufacturer to the consumer, or

indirect, with intermediaries performing some of the necessary channel func-

tions (see Figure 9.1).

A direct channel is the most popular for hospitality and tourism firms, as

well as for most other service industries. The manufacturer sells directly to

the consumer, and the manufacturer performs all of the channel functions. In

product firms, this choice is made either because there are no qualified inter-

mediaries or because the manufacturer feels it can do a better job. In service

firms, there is often no choice because the service must be performed while

the consumer is present. The direct channel enables the firm to have close

contact with the final consumer and the ability to react quickly to changes in

the market. For example, hotels use central reservation systems (CRS) and

call centers to make the direct channel more accessible and to operate more

efficiently.

channel strategy 321

Channel length

The channel length equals the number of intermediaries between the manufacturer and the final consumer.

Manufacturers

Customers

Direct channels Indirect channels

Retailers

Direct sales

Online marketing

Reps/ agents

Wholesalers

figure 9.1 • Alternative channel systems.

Direct channel

The manufacturer sells directly to the consumer, and the manufacturer performs all of the channel functions.

Central reservation systems (CRS)

These are systems designed to improve the efficiency and effectiveness of the reservations function by providing a central point of contact for handling customers’ requests in a timely fashion.

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Hotels allow direct assess to booking rooms through the property, call cen-

ters, hotel Web site, or property-to-property. An indirect channel involves at

least one intermediary that is responsible for one or more channel functions.

This type of channel can exist in many forms, but it is not very common in

service industries. Service firms are normally both producers and retailers.

There are a few indirect channels in the hospitality and tourism indus-

tries, but they seem to be more prevalent in the travel industry or in business

markets that involve large-volume purchases. For example, tour operators

(i.e., wholesalers) work directly with travel service firms such as hotels and

airlines to combine services to market as a package to travel agents, who, in

turn, market to the final consumers. Another example of an indirect channel

is the meetings market. Hotel salespeople market their properties to meeting

planners who purchase the hotel product on behalf of a group of final con-

sumers. The various intermediaries will be discussed in more detail in the

next section.

Most hospitality and travel firms use a combination of direct and indirect

channels to reach as many consumers as possible. Global distribution systems

(GDS) are used by airlines and hotels to coordinate their distribution activi-

ties and provide linkages to intermediaries. A GDS provides distribution

channels that give customers the ability to easily search for hospitality and

travel services and to conduct the transaction immediately. The system serves

many roles, ranging from those that are transaction-based to those that are

strategic in nature. In other words, a GDS is used for inventory control and

rate management, storing data and disseminating information, revenue gen-

eration, and strategic positioning. Nyheim, McFadden, and Connolly (2005)

provide a thorough discussion of global distribution systems and other hospi-

tality technologies in their book.1

Intermediaries

Many of the distribution channels in service industries tend to be direct in

nature, eliminating the need for intermediaries. However, the hospitality

and tourism industries do have their share of valuable intermediaries that

are responsible for volume business for hotels, airlines, and cruise ships.

Intermediaries specialize in certain functions in the service delivery process,

and they can add value to the service with their knowledge and expertise.

This specialization results in more efficient production and distribution of

services, as well as lower prices for consumers. Table 9.1 contains a list of

the most common intermediaries in hospitality and tourism distribution

channels.

322 chapter 9 marketing channels

Indirect channel

An indirect channel involves at least one intermediary that is responsible for one or more channel functions. This type of channel can exist in many forms, but it is not as common in service industries.

Global distribution systems (GDS)

Systems used by hospitality and travel firms to facilitate transactions within the distribution channel.

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TRAVEL AGENTS. Travel agents are responsible for a large volume of book- ings for airlines, hotels, car rentals, and cruises. In addition, travel agents sell

admissions to tourist attractions and special events. Although most of this vol-

ume comes from leisure travelers, corporate travelers can also account for a

sizable amount of a travel agent’s business. Some firms choose to use travel

agents who specialize in corporate business rather than operate their own cor-

porate travel departments. The benefit of using a travel agent is that agents

specialize in finding and securing good rates for their customers. Another rea-

son that travelers use travel agents is because of their extensive knowledge

regarding travel products. Most agents have traveled to many popular cities

and destinations, and they have access to informative promotional materials.

It is important for travel agents to provide some additional value or they will

cease to exist. Consumers will make their own travel arrangements via the

Internet or through direct contact with the service providers.

The travel agent’s expertise and access to valuable markets can be useful

to hotels, car rental agencies, airlines, and cruise operators. It is virtually

impossible for any of these firms to operate their normal business while keep-

ing abreast of the many market segments and having access to all of their

potential customers’ preferred methods for purchasing travel products.

Travel agents and hospitality and tourism firms seek to form relationships

that will be mutually beneficial. Hospitality and tourism firms are looking

for more volume, but they want consumers who will fit their overall cus-

tomer mix. The current trend is for consumers to use Internet travel agen-

cies like Expedia, Travelocity, and Orbitz. This process is more cost-effective

for the agency and the consumers because much of the process is automated

and consumers take part in the search process. Some of the online travel

channel strategy 323

travel agents

Tour wholesalers and operators

Meeting planners

Hotel representatives

Travel bureaus

Concierge

table 9.1 • Most Common Intermediaries in Hospitality and Tourism.

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agencies like Priceline offer an “opaque” service where consumers bid on

travel products like in an auction without knowing the brand in order to get

a lower price.

TOUR WHOLESALERS AND OPERATORS. Tour wholesalers and operators contract with hospitality and tourism firms to obtain services that can be com-

bined in a package and offered to the leisure market. These packages can

contain any combination of lodging, transportation, event or attraction tickets,

and meals. These packages are marketed to travel agents and sometimes to

consumers via the Internet or some other direct source. Tour wholesalers

exist because they have access to the various suppliers and they specialize in

packaging travel products, but they rely on travel agents to get the product

to the mass market. This packaging concept appeals to consumers because

of the convenience and the idea that the package can be purchased for a lower

price than the components purchased individually. Once again, there is some

value added to the services.

The package concept is particularly appealing to people engaged in inter-

national travel, senior citizens, groups, and novice travelers. There is some

degree of risk associated with traveling to a new or foreign destination, but

it is reduced by intermediaries such as tour wholesalers and travel agents.

Tour wholesalers are able to sort services from suppliers into like grade and

quality, package them, and offer them to retailers. This is a more efficient

way to sell travel products to large volumes of leisure customers. Each of the

channel members has a specialty that improves the service delivery process as

well as the overall value of the final product.

324 chapter 9 marketing channels

Consumers often use Internet travel agencies such as Travelocity to plan their trips. Courtesy of Travelocity.

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MEETING PLANNERS. Large organizations such as corporations and trade associations have individuals or departments that are responsible for the travel

plans of its members. These meeting planners negotiate with hotels, airlines,

and other travel firms on behalf of their members for guest rooms and meet-

ing space. There are also independent meeting planners and event planners

who will work for organizations on a contract basis. As organizations seek to

reduce overhead, outsourcing services such as meeting planning will become

more common. Meeting planners are similar to travel agents in that they are

familiar with many popular destinations. They have some expertise in areas

such as negotiating, site selection, budgeting, and promotion, but it varies

depending on whether they plan meetings for corporations, associations, or

incentive groups. Each of these markets will be explained in more detail in

Chapter 14, “Personal Selling.”

HOTEL REPRESENTATIVES. Large hotels have sales staffs that are responsi- ble for selling guest rooms and meeting space to groups. These salespeople

negotiate with meeting planners, tour operators, and travel agents in an effort

to fill the hotel. Unfortunately, smaller hotels may not be able to justify the

hiring of full-time salespeople, either because they don’t have enough demand

for the service or because they cannot afford to hire them. In this case, it may

be in the hotel’s best interest to hire an independent hotel representative to

market the hotel to chosen market segments. Even large hotels may hire these

independent representatives to take advantage of their access to certain mar-

kets. Much like travel agents, hotel representatives are able to deal with a wide

array of consumers. Hotel representatives may not be as familiar with the

hotel product as an in-house sales staff, but they may have more knowledge

regarding the consumers that the hotel is targeting. Also, the hotel represen-

tatives may have better access to the targeted consumers.

DESTINATION MARKETING ORGANIZATIONS. Each tourism city, state, or region has some form of destination marketing organization (DMO) that is

responsible for promoting the long-term development and marketing of a des-

tination, focusing on convention sales, tourism marketing, and service. In the

United States, each state has its own office for travel and tourism. These agen-

cies, or bureaus, are responsible for promoting the state as a travel destination

and securing major events. They are funded by the government and work in

cooperation with the state’s hospitality and tourism firms. In addition, each

major city or region within a state will have a convention and visitors bureau

(CVB) that is responsible for promoting that city or region. Convention and

visitors bureaus work with local hospitality and travel firms to secure con-

ventions, meetings, and special events for the region. Convention and visitors

bureaus can receive funding from various sources such as the government,

channel strategy 325

Destination marketing organization (DMO)

An organization that promotes the long-term development and marketing of a destination, focusing on convention sales, tourism marketing and service.

Convention and visitors bureau (CVB)

Each major city or region within a state has a convention and visitors bureau (CVB) that is responsible for promoting that city or region. Convention and visitors bureaus work with local hospitality and tourism firms to secure conventions, meetings, and special events for the city or region.

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membership fees, hotel taxes, and fees for services. CVBs also promote leisure

travel to tour operators and travel agents, as well as the mass market of poten-

tial travelers. A CVB serves as a cooperative, representing hotels, motels,

restaurants, convention facilities, tour operators, tourist attractions, trans-

portation carriers, and other retail establishments that support tourists (see

Figure 9.2). Most countries have a similar system focusing on regional, state,

province, and city tourism destinations. These organizations are discussed in

more detail in Chapter 16.

DESTINATION MANAGEMENT COMPANIES. These companies specialize in the organization of meetings, incentives, and events. In addition, destination

management companies (DMCs) arrange social activities and programs for

meeting attendees and their companions. Other special services include cater-

ing, dinners, and entertainment. Finally, a DMC can also make hotel reser-

vations, arrange transportation and provide travel management, guides and

hostesses. Destination Management Companies remain behind the scenes

while ensuring that everything runs according to plan. DMCs are able to tai-

lor their services to meet an organization’s particular needs by using their

many contacts and partners in the destination area. A list of destination man-

agement companies and suppliers/vendors is often available through destina-

tion marketing organizations on their Web sites.

CONCIERGE. Many full-service hotels employ an individual to help guests with local arrangements for restaurants and visitor attractions. In this sense,

the concierge is an intermediary for the restaurants and local attractions. She

will send business to retail operators with whom she has a good working

326 chapter 9 marketing channels

CVB

Convention facilities

Tour operators

Lodging facilities

Tourist attractions

Transportation Restaurants

figure 9.2 • Convention and visitors bureau constituencies.

Destination management company (DMC)

A local firm that arranges activities and programs for meeting and event planners who are not familiar with the specific location or the local suppliers.

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relationship. As a result, it is in the best interest of the local restaurants and

visitor attractions to introduce themselves to the hotel concierge and give her

a tour of the facility. The quality of the guest’s experience with the recom-

mended restaurant or visitor attraction will reflect directly on the concierge

and the hotel. Therefore, the retail establishments must assure the concierge

that the consumer will be satisfied.

Channel Management

Once a channel is developed, it becomes an ongoing task to manage it over

time. Many conflicts and problems can occur that will require the cooper-

ation of the members of the channel. It is also important to note that the

same company can be a part of more than one channel and occupy a dif-

ferent position in each channel. For example, a restaurant would be a con-

sumer in the channel for bulk food items and napkins, but a producer in

the market for meals and dining. Similarly, hotels purchase many products

and services, ranging from pens and soap to linens and pool chemicals.

Therefore, a problem in one channel will affect the performance of the other

channels in which the firm is a member. The Ritz-Carlton chain, a past

recipient of the Malcolm Baldrige National Quality Award, recognizes the

critical nature of these relationships and makes a special effort to recruit

suppliers who understand and agree with its philosophy of customer service

and quality.

There will always be conflicts between parties engaged in some form of

negotiation over issues such as price, quantity, quality, and availability. Rather

than attempt to eliminate these conflicts, it is better to find ways to manage

them. In competitive markets, it is necessary to create fair exchanges so that

both parties are satisfied. This mutual satisfaction can be the cornerstone of

a loyal relationship that will benefit both parties in the future. Otherwise, it

is in a firm’s best interest to find a more equitable arrangement with other

suppliers or retailers. Approaches to managing channel conflict can be behav-

ioral (channel power and channel leadership) or contractual (vertical market-

ing systems).

CHANNEL POWER. This can be defined as the ability of one channel mem- ber to influence the behavior of other channel members in such a way as to

get them to do things that they normally would not do. The most common

forms of channel power are reward, coercive, expert, legitimate, and refer-

ent.2 The balance of power depends on which channel member uses the bases

of power most effectively. Any one of the channel members could conceiv-

ably have access to any of the forms of power.

channel strategy 327

Channel power

The ability of one channel member to influence the behavior of other channel members in such a way as to get them to do things that they normally would not do. The most common forms of power are reward, coercive, expert, legitimate, and referent.

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Reward power is the ability of one channel member to influence the

behavior of another member through the use of incentives. These incentives

can be in the form of discounts, trade promotions, or some other form of

promotional support. Airlines often reward travel agents by offering special

commissions on certain flights. A related form of power is coercive power,

or the ability to influence a channel member’s behavior through the use of

threats.

These threats could be in the form of restricted availability of products,

or other unfavorable terms such as price or discounts. In this case, a travel

agency may limit its association with an airline because the commission is

too low. Expert power is the result of the superior knowledge of one chan-

nel member relative to another. Some hotels agree to pay commissions and

employ independent hotel representatives because of their expertise in deal-

ing with certain market segments. Legitimate power is obtained through

contractual arrangements that specify the parties’ expected behaviors. The

most common form of legitimate power in the hospitality industry is

franchising, which will be discussed in detail in the section on franchising.

Finally, referent power occurs when a channel member has a certain

prestige or image that would benefit another member as a result of their

association.

CHANNEL LEADERSHIP. At some point, one of the channel members should take a leadership role. The leader can then organize the other channel mem-

bers and strive toward common goals and objectives. The channel leader can

be a manufacturer, an intermediary, or a retailer. However, the leader will

normally be large and have a sustainable, competitive advantage in its indus-

try because of financial resources, marketing skills, or some other factor. These

competitive advantages will enable firms to obtain channel power and lead-

ership. It is often beneficial for other channel members to associate themselves

with successful companies.

Manufacturers can obtain a power base and take on a leadership role if

they maintain ample resources or control a product that is in short supply and

in great demand among consumers. For example, a popular resort such as

Walt Disney World can exercise power and leadership over travel agents, car

rental companies, and airlines. Intermediaries such as wholesalers and retail-

ers can gain control over a channel if they have the ability to group compo-

nents from various manufacturers and create an attractive product or if they

have access to important markets. Tour wholesalers combine travel products

into packages that are marketed to travel agents, who are retailers that have

access to important markets and specialize in dealing with the various mar-

ket segments.

328 chapter 9 marketing channels

Reward power

The ability of one channel member to influence the behavior of another member through the use of incentives. These incentives can be in the form of discounts, trade promotions, or some other form of promotional support.

Coercive power

The ability to influence a channel member’s behavior through the use of threats. Threats could include restricted availability or access to products, or other unfavorable terms such as price or discounts, for example.

Expert power

Expert power is the result of the superior knowledge of one channel member relative to another. Some hotels agree to pay commissions and employ independent hotel representatives because of their expertise in dealing with certain market segments.

Legitimate power

Legitimate power is obtained through contractual arrangements that specify the members’ expected behaviors. The most common form of legitimate power in the hospitality industry is franchising.

Referent power

Referent power occurs when a channel member has a certain prestige or image that would benefit another member as a result of their association.

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VERTICAL MARKETING SYSTEMS. One approach to reducing channel con- flict and uncertainty is the vertical marketing system. In a vertical marketing

system, channel members work together as if they were one organization.

Channel members work together to achieve a higher degree of efficiency,

thereby reducing the overall costs of providing products and services. Vertical

marketing systems offer a unified approach to channel management and can

be corporate, administered, or contractual.

In a corporate vertical marketing system, all of the participants are actually

members of the same organization. In this case, the original firm either devel-

ops or purchases other firms at the various levels in the channel. McDonald’s

operates its own food distributors in an effort to control price fluctuations and

availability of its food supplies. A corporate system can be developed through

backward integration (toward the manufacturer or supplier) or forward inte-

gration (toward the retailer or distributor). An example of forward integration

would be a food distributor that decides to start a catering operation.

An administered vertical marketing system is one in which a manufac-

turer or supplier attempts to control the flow of goods or services through the

channel. This is usually associated with expert power in that distributors and

retailers are willing to relinquish some of their control in order to benefit from

the producer’s knowledge and background. Event management companies

may have this type of arrangement with ticket agents who market and sell

their events. This arrangement is similar to a conventional channel, but a

greater degree of cooperation and sharing of information is necessary for a

successful operation.

A contractual vertical marketing system unifies the channel members by

means of a legal and binding contract. The firms agree to abide by the terms

of the contract, the goal of which is to realize cost economies that would not

be possible if the firms operated independently. This approach is similar to a

corporate system, but it may be preferable when firms do not have the

resources or expertise to develop operations at all channel levels. The firms

benefit from pooling resources for functions such as advertising and research.

Franchising is one example of a contractual distribution system.

CHANNEL MEMBER SELECTION AND RETENTION. It is important that firms exercise good judgment when choosing channel members. Intermediaries must

demonstrate the ability and willingness to perform the desired tasks. In addi-

tion, prospective channel members must buy in to the philosophy of the ser-

vice provider. The service provider should determine the characteristics that

it feels are critical in a channel member and then evaluate potential members

on the basis of these characteristics. Once a firm is selected, it is necessary to

retain the firm through the use of financial and nonfinancial motivators.

channel strategy 329

Vertical marketing system

In a vertical marketing system, channel members work together as if they were one organization. Channel members work together to achieve a higher degree of efficiency, thereby reducing the overall costs of providing products and services.

Corporate vertical marketing system

All of the participants are actually members of the same organization. The original firm either develops or purchases other firms at the various levels in the channel.

Administered vertical marketing system

A manufacturer or supplier attempts to control the flow of goods or services through the channel. This is usually associated with expert power in that distributors and retailers are willing to relinquish some of their control in order to benefit from the producer’s knowledge and background.

Contractual vertical marketing system

A contractual vertical marketing system unifies the channel members by means of a legal and binding contract. The firms agree to abide by the terms of the agreement, the goal of which is to realize cost economies that would not be possible if the firms operated independently.

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Financial motivators are aimed at improving the channel member’s profit.

A service provider can improve a channel member’s profit by offering more

discounts or promotions related to desired outcomes, reducing prices, or increas-

ing promotional support. Although financial motivators are effective, nonfi-

nancial motivators should also be considered. Some nonfinancial motivators that

could be used are training or improving products and services. For example,

tour operators and tourism bureaus often invite travel agents on trips to the des-

tination in order to familiarize the agents with the product. These trips are free

of charge and allow travel agents to get a firsthand look at the destination so

that they can relay the information to their customers. Hotels use a similar prac-

tice with meeting planners considering properties for their groups.

Building Customer Value in Channel Systems

When choosing a channel system to reach target customers, it is important for

a firm to enhance customer value by increasing customer benefits (i.e., improve

quality) and/or decreasing the customer’s cost of purchase (i.e., lower the price).3

INCREASING CUSTOMER BENEFITS. Customer benefits can be increased by choosing a channel system that delivers more product benefits, delivers more

service benefits, builds brand image, and/or builds company benefits:

• Delivering product benefits. Product benefits can come in the form of

product quality, product assortment, and product form. In hospitality and

tourism, it is critical to meet customer quality expectations and provide

consistent service. Direct channels provide the firm with the best oppor-

tunity to control quality, while indirect channels require a firm to place

its trust in an intermediary. For example, tour operators rely on travel

agents to sell their products to the final consumer. The channel system

must also provide the range of products necessary to achieve a desired

level of customer appeal. Travel bureaus need the full support of all busi-

nesses in the region to promote their tourism products to travelers.

• Delivering service benefits. Service benefits can come in the form of after-

sale service, availability and delivery, and transaction services. After-sale

service can be crucial in achieving customer satisfaction in the event of a

service failure. For example, there are many stories of students going

through tour operators or travel agents to purchase spring break package

vacations, only to arrive in foreign cities and not have a room. Then when

they try to contact the company that sold them the trip, it is often impos-

sible to get through to someone. This reflects on all of the brands involved

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in the package, as well as the destination. Intermediaries are also used in

indirect channels to make products more readily available. Internet travel

companies such as Priceline and Expedia exist for this purpose. Customers

get the best prices in a short period of time without having to search the

alternatives. These intermediaries also facilitate the transaction and deliv-

ery of the hospitality or travel product. For example, tour wholesalers or

operators can package the hospitality products and obtain one payment

from the customer.

• Building brand image. One of the major issues facing hotels is the image

that using Internet travel firms may convey. These companies tend to be

viewed as discounters offering great values (i.e., low prices). It is relatively

easy for hotels in the economy and budget categories to choose this chan-

nel, but higher-priced hotels have a much more difficult decision. Upscale

and luxury hotels may diminish their brands by using Internet travel com-

panies. Another problem is that some Internet travel companies sell hotel

rooms at higher prices than the customer could get by going directly

through the hotel. When customers become aware of this, it will reflect

poorly on the hotel. Another common intermediary for hotels is the hotel

sales representative who sells to groups and represents the hotel. The hotel

loses some control over the message and the way the property is conveyed.

Finally, building brand image is also an issue when franchising—the fran-

chisor loses some control over brand image and must rely on the fran-

chisees to adhere to the business system.

• Building company benefits. This form of benefit is related to brand image.

The use of intermediaries such as hotel representatives and travel agents

can actually benefit the firm because of the personal attention that cus-

tomers get from qualified professionals. These types of intermediaries

have good product knowledge and experience. They are experts in deal-

ing with their respective target markets and provide a valuable asset in

their use of relationship marketing with customers. Franchising is also a

way to benefit from the relationships local owners already have with cus-

tomers in the area, rather than opening a new restaurant without having

any previous ties in the community.

IMPROVING COST EFFICIENCY. One of the other ways to increase customer value is to lower the cost of purchase, both actual and perceived. For instance,

the cost of planning and purchasing a vacation may be higher when the

customer has to contact hotels, car rental agencies, airlines, and tourist attrac-

tions to purchase each component separately. Meanwhile, tour operators

package these same vacation components and offer them directly, or through

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travel agents for one price that is lower, or at least perceived to be lower,

than if purchased separately. Convention and visitors bureaus serve as clear-

inghouses for travelers and reduce the number of transactions. Figures 9.3a

and 9.3b illustrate the importance of this function in regard to meetings and

conventions.

Assume there are five different meeting planners looking for a conference

hotel in which to hold a meeting. If there are five conference hotels in a city,

each of the meeting planners would have to contact all five hotels and send

332 chapter 9 marketing channels

Meeting planner

Conference hotel

figure 9.3a • Channel system without an intermediary.

Meeting planner

Conference hotel

Convention bureau

Conference hotel

figure 9.3b • Channel system with an intermediary.

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requests for proposal (RFP). With five hotels and five meeting planners, this

would result in a total of 25 contacts or communications (see Figure 9.3a).

Consider this same situation with a convention bureau to act as an inter-

mediary, or clearinghouse for the two groups. Each of the meeting planners

would send an RFP to the CVB, which would then forward the RFP to the

conference hotels. This would result in a total of ten contacts or communica-

tions between the meeting planners and the conference hotels (see Figure 9.3b).

This example is simplistic; however, it does demonstrate the value of using

an indirect channel system with an intermediary. The number of contacts was

reduced from 25 to 10 with just five customers (i.e., meeting planners) and

five service providers (i.e., hotels). As the number of customers and service

providers increases, the number of contacts or transactions will increase expo-

nentially. Therefore, it is necessary to weigh the benefits and costs of adding

channel members and make a decision that is best for a particular service

provider.

FRANCHISING

Franchising is a contractual arrangement whereby one firm (the franchisor)

licenses a number of other firms (each firm is a franchisee) to use the fran-

chisor’s name and business practices. In other words, franchising is a network

of interdependent business relationships that allows a number of operators to

share a brand identification and a successful method of doing business (i.e., a

proven marketing and distribution system). As a franchisee, you own the assets

of your company, but you are licensed to operate someone else’s business sys-

tem. In 2003, there were over 2,500 franchise systems in the United States with

more than 534,000 franchise units. This represents 3.2 percent of all businesses,

controlling over 35 percent of all retail and service revenue in the U.S. econ-

omy.4 Franchising opportunities can be found for a variety of industries,

including hospitality and travel, through Internet sites like Franchising.com,

FranchisingOpportunities.com, and Entrepreneur.com.

As a method of distribution, franchising provides many opportunities for

growth and profitability. However, when considering a franchising relation-

ship, both parties should carefully evaluate the alternative forms of owner-

ship and operation. The individual goals and objectives of each party have to

be weighed against the trade-offs of a franchisor-franchisee relationship. In

essence, franchising is a strategic alliance between groups of people who have

contractual responsibilities and a common goal. By choosing to invest in a

franchise operation, an owner is expressing the belief that he or she will be

franchising 333

Franchising

A contractual arrangement whereby one firm licenses a number of other firms to use the franchisor’s name and business practices.

Franchisor

The firm that licenses other firms to use its name and business practices.

Franchisee

A firm that obtains a license from another firm to use its name and business practices.

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more successful using someone else’s business system rather than investing his

or her money in an independent operation and developing his or her own

business system. Table 9.2 summarizes the advantages and disadvantages asso-

ciated with franchising.

Franchisee

ADVANTAGES. There are many advantages to joining an existing operation rather than starting from the beginning. First, there is an established product

or service with a brand name and an identity in the marketplace. It is nor-

mally very costly and time consuming to build a brand image. Trying to start

a new pizza business would be much more cumbersome than opening a

Domino’s Pizza. Second, franchisees receive technical and managerial assis-

tance from the franchisor. This assistance could be in the form of recruitment

and training of employees, or in the design of the facility. Franchisors transfer

the knowledge they have accumulated as they progressed through the learn-

ing curve, thereby accelerating the process for franchisees. Third, the fran-

chisee benefits from the quality standards that are already in place for the

franchise. There is a system of controls that guide the operations and provide

for a certain level of quality and consistency. Fourth, there is often less of a

capital requirement for opening a franchise unit relative to the start-up costs

for an independent operation. Franchises have a track record that can be used

334 chapter 9 marketing channels

advantages disadvantages

franchisee Established product/service Additional fees/expenses

Technical/managerial assistance Loss of control

Quality standards Difficult to terminate

Less operating capital Pooled performance

Opportunities for growth

Cooperative advertising

franchisor Rapid expansion Loss of control

Diversified risk Reduced profits

Cost economics Legal issues

Cooperative advertising Recruitment

Employee issues

table 9.2 • Franchising advantages and disadvantages.

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to estimate demand, design the facility, schedule employees, and order inven-

tory. Fifth, there are opportunities to expand the business within the operat-

ing region. Franchisees are usually given some form of territorial rights to

add units based on demand. Finally, the sixth advantage is that the franchisee

benefits from the pooled resources of the many participants in advertising and

promoting the product. The use of cooperative advertising results in a more

efficient and effective means of communicating with customers. An inde-

pendent restaurant would not be able to afford to place advertisements in

major magazines or during prime-time television shows.

DISADVANTAGES. There are also some disadvantages to becoming a fran- chisee. First, there are franchise fees and royalties that must be borne by the

franchisee in return for the benefits just described. These expenses are

normally a percentage of sales and result in a decrease in the profit margin.

Second, the franchisee must adhere to the standards and procedures as set

forth in the agreement. This restricts the franchisee’s ability to control the

entire operation in that certain requirements regarding products, price ranges,

and expansion are imposed by the franchisor. Third, it may be difficult to ter-

minate the agreement if the franchisee would like to change brands or sell the

business. Finally, the brand image is the result of the pooled performance of

all corporate-owned and franchised units. The franchise’s reputation and

image can be negatively affected by the performance of individual units.

Franchisor

ADVANTAGES. Many companies are choosing to expand their operations using the franchise approach because of its advantages. Companies can expe-

rience more rapid expansion, since franchisees provide additional investment

capital and access to untapped markets. By limiting the investment and adding

“partners,” the franchisor is able to diversify the risk of doing business. A

byproduct of this rapid expansion is the realization of cost economies from

operating at a higher level of volume. The organization will get better prices

on supplies and be able to allocate fixed costs over a larger number of units,

bringing down the cost per unit. A related issue is the use of cooperative adver-

tising. As mentioned before, this is an advantage for both the franchisor and

the franchisees. Finally, certain human resources and management tasks are

simplified by franchising. The franchisees play an important role in the selec-

tion and retention of employees. Plus, owners are very careful to monitor the

performance of the franchise because they benefit directly from the prof-

itability of the unit.

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DISADVANTAGES. There are also a few disadvantages associated with being a franchisor. First, there is a reduction in control of the operation. Having

many owners or managers will have an effect on the overall performance of

the franchise. Even though operating standards and procedures are written

into the agreement, they are not always followed. Second, there is a trade-off

between risk and return. The sharing of risk and ownership results in the

sharing of profits as well. Third, the size and visibility of franchises exposes

them to more potential litigation. They are easy targets for legal actions such

as antitrust suits and class-action suits. Also, injury claims are prevalent in

many service industries.

For example, McDonald’s was once sued by an elderly woman who spilled

coffee in her lap while driving her car, and has been sued by obese people

who accused the fast-food restaurant of causing their weight problems.

Finally, it is difficult to find qualified prospects to be franchisees. Although

many investors have the necessary capital, they may lack the necessary knowl-

edge and experience to run a successful franchise unit in the product or ser-

vice category.

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chapter review 337 ch a p te

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w Summary of Chapter Objectives

This chapter discussed the role of marketing channels in planning the mar-

keting strategy for hospitality and tourism services. Decisions must be made

regarding channel width (how many outlets) and channel length (number and

type of intermediaries). If the decision is made to use an indirect channel (at

least one intermediary), then the firm must examine channel management

issues such as channel leadership and channel power. Finally, the extent of

the relationships with other channel members will need to be considered.

Some type of vertical marketing system can be used to provide more cer-

tainty in the relationships. Franchising is probably the most common form of

vertical marketing system.

Intermediaries exist in channels because they perform certain channel

functions more effectively than the other channel members. One advantage

of using intermediaries is the fact that they often have access to markets that

are desired by a manufacturer or producer. Travel agents and tour operators

specialize in packaging trips and selling them to groups and individuals for

pleasure travel, and meeting planners and travel bureaus work more with

business groups for conferences and conventions.

Key Terms and Concepts

Administered vertical marketing system

Central reservation systems (CRS)

Channel length

Channel power

Channel width

Coercive power

Contractual vertical marketing system

Convention and visitors bureau (CVB)

Corporate vertical marketing system

Destination management company (DMC)

Destination marketing organization (DMO)

Direct channel

Electronic commerce

Exclusive distribution

Expert power

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338 chapter 9 marketing channels

ch a p te

r re

vi e w

Franchisee

Franchising

Franchisor

Global distribution system (GDS)

Indirect channel

Intensive distribution

Intermediaries

Legitimate power

Referent power

Reward power

Selective distribution

Vertical marketing system

Questions for Review and Discussion

1. What factors are considered in determining a firm’s channel width and channel length?

2. List and give examples of the intermediaries that exist in the hospitality and tourism industry.

3. List and describe the five forms of channel power.

4. Explain the three types of vertical marketing systems.

5. What are the ways a firm can enhance customer value through channel sys- tems?

6. What is franchising? Why would firms or individuals choose to enter this type of arrangement?

7. If you have ten tour operators and 100 customers, what is the difference in the number of transactions with, and without, a travel agent acting as an

intermediary?

8. Internet exercise: Use the Internet resources for identifying franchise opportunities and put together a proposal for a group of investors who want

to start a restaurant operation in the Midwest. The investors are looking to

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become franchisees with an existing casual dining restaurant chain that will

have a good potential for success. The investors are starting a management

company and pooling their resources, so there shouldn’t be any capital or

net worth restrictions. Choose a franchise operation and justify your decision

based on the Midwest market and the restaurant concept’s potential appeal.

Notes 1 Peter D. Nyheim, Francis M. McFadden, and Daniel J. Connolly, Technology Strategies for the Hospitality Indus-

try (Upper Saddle River, NJ: Prentice-Hall, 2005), pp. 153-186.

2 Jack J. Kasulis and Robert E. Spekman, “A Framework for the Use of Power,” European Journal of Marketing

14 (1980): 183.

3 Roger J. Best, Market-Based Management: Strategies for Growing Customer Value and Profitability, 2nd ed. (Upper

Saddle River, NJ: Prentice-Hall, 2000), pp. 204-207.

4 Robert Gappa, “What Is Franchising?” (2003), available at www.franchising.com.

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340 chapter 9 marketing channels ca

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Case Study The Wing Shack

A couple of college students decided to start a business together after

graduating. The two friends traveled the region in search of the ulti-

mate buffalo chicken wings. After researching these other opera-

tions, the two returned to their town and started to put the wheels in motion

to find a location and develop a business system. The idea was to open a small

restaurant and focus on delivery within the local area, including the college

campus. As luck would have it, a restaurant recently had gone out of busi-

ness in a high-traffic area. The two young men found themselves meeting

with realtors, bankers, accountants, lawyers, and town officials in an attempt

to achieve their dream of opening a restaurant. After many negotiations, the

two began planning for the opening of their restaurant. They decided to call

it the Wing Shack and cater to the college crowd.

The restaurant had a small bar area, a pool table, a few televisions, a juke

box, and 12 tables for dining. The menu consisted of chicken wings (includ-

ing boneless), chicken sandwiches, a few appetizers, and a few sides (e.g.,

french fries). The chicken wings were meatier than those of most restaurants,

and there were 20 flavors to choose from. For beverages, the owners decided

to put 20 beers on tap, showcasing the regional microbrews. Business was slow

at first, but word of mouth quickly spread and the restaurant started to get

more and more customers. One of the early strategies employed by the own-

ers was to have all-you-can-eat wings on the slower nights of the week (Sunday

to Wednesday). Eventually, the restaurant had people waiting in line to get a

table, and the sit-down business was as good as the delivery business.

After three years of successfully running the business and seeing increased

profits, the owners considered expanding. The business system was solid and

the restaurant benefited from a good marketing strategy, including being a

sponsor of the college’s athletic programs. Initially, the owners decided to open

another restaurant in a city about one hour away. This required the owners

to commute on a regular basis and put a strain on their partnership and rela-

tionships. They felt they were spread too thin, and in hindsight they weren’t

sure if this was the best idea. This led the young entrepreneurs to investigate

the possibility of franchising. The profit after taxes for the original restaurant

was approximately 28 percent of revenue. Franchise fees for restaurants in

this category usually run around 3 to 4 percent.

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Case Study Questions and Issues

1. What issues must the owners consider before deciding whether to open more restaurants on their own or to franchise?

2. Assuming the original restaurant is in the Northeast, what cities or towns would you suggest for the next five restaurants?

3. How many franchised units would they have to contract to make the same profit as they do in the original unit (assuming the revenue will

be similar for all units)?

case study 341 ca se

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342 chapter 10 electronic commerce

Courtesy of PhotoDisc, Inc./Getty Images.

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