Marketing Channels & Channel Conflicts - Aditya Dasgupta

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A Research Project on
MARKETING CHANNELS & CHANNEL CONFLICTS
By Aditya Dasgupta
For Total Package Project Associates
Mumbai

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Index
Topics:
Sl. No. Name of the topic Page no
A Keywords 5
B Abstract 5
1 Introduction to the topic 5
1.1 Project Background 5
1.2 Project objective and limitations 7
1.3 Research problem 7
2. Marketing Channel 9
2.1 Multiple marketing channels 11
2.2 Marketing Channel Strategies 14
2.3 Factors That Affect a Product’s Intensity of Distribution 16
2.4 Marketing Channels versus Supply Chains 18
2.5 Channel choice 19
2.6 Channel Dynamics 24
3.1 Channel conflict 26
3.2. Managing channel conflict 30
3.3. Channel power 31
3.4. Strategic implications of channel decisions 33
3.5 Organisational implications 35
3.6 Channel Integration: Vertical and Horizontal Marketing
Systems
37
4 Methodology 38
4.1. Research methodology 38
4.1.1 Research purpose 38
4.1.2 Research approach 38
4.1.3. Research methodology II 39
4.1.4. Data collection method 40
4.2 Case study 41
4.2.1 Detail 41
4.2.2 Nature of setup 42
4.2.3 Research technique 42
4.2.4 Line of business 43
4.2.5 Positioning strategy 46
4.2.6 Big Bazaar VS Kirana Store 47
4.2.7 Big Bazaar and five forces 48

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Figures:
4.2.8 Kirana shops and five forces 48
4.2.9 4 ps’ of Marketing 49
4.2.10 Profitability 54
4.3 Reasons for the failure of www.futurebazaar.com 58
4.4 10 Steps to fix the online retail servicing channel conflict 61
5 Research realiability 66
5.1 Objective 66
5.2 Research question 66
5.3 Research questions relating to the circumstances for creating a
direct marketing channel strategy
66
5.4 Research questions relating to how to implement a direct
marketing channel strategy
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5.5 Management capacity 69
6 Conclusion and Recommendation 71
6.1 Conclusion 71
6.2 Recommendation 72
7 Bibliography 73
Sl. No. Name of the topic Page no
1 Marketing channels 9
2 Schematic representation of direct and indirect
channels and channel members
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3 Alternate Channel Arrangements 12
4 Channel switch 20
5 Channel choice 21
6 Product life cycle and distribution method 22
7 Direct marketing channel drivers and barriers 23
8 The long tail 24
9 Model of the five competitive forces that shape
strategy
33
10 Channel conflict strategy matrix 35
11 Cash flow 45
12 Place oriented positioning 46
13 Competitive Rivalry 47
14 Futurebazaar Vs Cromaretail 56
15 Solution 61

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A. Keywords:
• Direct marketing channel
• Marketing channels
• Channel conflict
• Integrated strategy
• Management capacity
B. Abstract:
Due to fear of channel conflict, manufacturers of business to consumer goods are cautious to
get involved with a direct marketing channel. This management project is exploring the
circumstances under which a manufacturer can develop a direct marketing channel strategy
next to their existing channels and how to implement this strategy. Channel conflict can be
monitored, assessed, and managed; therefore other circumstances appear to have more
influence on a direct marketing channel strategy by manufacturers.
A direct marketing channel would be most successful if it was developed as an integral part
of corporate strategy and the organizational structure, however difficult that may be to
achieve. Therefore, management capacity is the most important prerequisite to provide the
strategy, resources, structure, procedures, and commitment required for successful
implementation of an integrated direct marketing channel by a manufacturer of business to
consumer goods.
1. Introduction to the topic
This chapter will serve as an introduction to the topic of this Management Project, which is to
explore how and under which circumstances a business to Consumer manufacturer can
implement a successful direct marketing channel Strategy.

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1.1 Project background
Since the mid 1990’s, the Internet became an accepted medium by the general public,
providing the modernised world tremendous opportunities and challenges, for individuals,
(local) businesses and (multi)-national corporations.Because of the Internet, new business
models are being explored, new markets have become available, marketing as a whole has
changed, worldwide networks and connections are made, and the end-consumer has received
a powerful voice. The Internet has made it possible to reach a large audience without the
requirements of a physical presence, making location and time irrelevant for both seller and
buyer. These factors are combined in a unique platform for buying and selling, named e-
commerce. E-commerce can be described as the process of buying, selling, or exchanging
goods, services and information via the Internet.
Although direct sales has always been around, not requiring a physical presence to reach a
large audience and the potential and benefits of e-commerce provide additional ingredients
for (incumbent) manufacturers of business to consumer goods to get involved with selling
direct to their end consumers. Additionally, e-commerce and the Internet include some
unique characteristics that provide additional benefits for direct selling: the ability to
inexpensively store, search, organize, and disseminate vast amounts of information;
combined with interactivity and superior customer experience (compared to printed
catalogues).
Once a manufacturer has decided to add direct selling to its portfolio of distribution channels,
there is the potential of (additional) channel conflict as the distributor and retailer feel the
manufacturer will act as a direct competitor. Channel conflict as a result of a direct sales
channel has been around since direct selling itself, and is not a new phenomenon because of
the emergence of e-commerce. However, the relative low entry and set-up cost of e-
commerce has made the direct sales channel a renewed strategic option for manufacturers
which subsequently has resulted in renewed interest in channel conflict
A marketing channel is defined as a system involved with the task of,either directly or
indirectly, making anything of value available for use orconsumption.
Next to channel conflict, there are other challenges a manufacturer must overcome by
operating both direct and indirect marketing channels. Additionally,knowledge about the

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Internet medium, potential internal conflicts, product and company positioning; all have an
influence on how a direct marketing channel strategy can be developed and implemented.
Consider Microsoft’s digital encyclopedia, Encarta, which was first sold on CD and via
online subscription in the early 1990s. Encarta nearly destroyed Encyclopedia Britannica, a
firm that had dominated the print encyclopedia business for literally centuries. Ironically,
Microsoft had actually tried to partner with Encyclopedia Britannica to use its encyclopedia
information to make Encarta but was turned down.
But today, Encarta no longer exists. It’s been put out of business by the free online
encyclopedia Wikipedia. The point is that products and their marketing channels are
constantly evolving. Consequently, you and your company have to be ready to evolve, too.
1.2 Project objective and limitations
This report, written as the final paper of the Wellingkar College DLP MBA program, will
provide insight to managers of business to consumer manufacturers who are contemplating a
direct marketing channel, by exploring under which circumstances a manufacturer can
develop a direct marketing channel strategy and how this strategy can be successfully
implemented. ‘
 The term direct marketing channel in this Management Project refers to a direct
marketing channel using the Internet and e-commerce.
This Management Project will assist both stakeholders in identifying a variety of aspects that
could be taken into account when developing and implementing a direct marketing channel.
The limitations of this Management Project are in the generalization of the problem, available
time and the project guidelines.
1.3 Research problem
As described in the project background, the Internet offers great opportunities for
manufacturers. However, actually developing and implementing a (successful) strategy for a
direct marketing channel is reluctantly done by (incumbent) business to consumer
manufacturers as they fear channel conflict with their existing marketing channels will do
more harm than good.Manufacturers create the brand and carry out the research and
development required to innovate existing products, develop new technologies and
products.They invest marketing funds in their brand to create (global) awareness and

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stimulate demand for their products. However, a manufacturer is reliant on its distribution
channel to get the coverage required to sell their goods. These intermediaries provide
amongst others the geographical coverage required to present the manufacturer’s products to
as many potential customers as possible.
The Internet will never fully replace brick and mortar retail, and retailers themselves are
looking into ways of combining e-commerce into a multichannel strategy. However, if a
manufacturer is keen to start a direct marketing channel next to their existing marketing
channels, their traditional distribution channel threatens to act. This paradigm limits the
manufacturer to pursue strategic opportunities, like a direct marketing channel. Although
there has been extensive research on how to deal with channel conflict, most manufacturers
are influenced by the prospect of channel conflict, which prevents them from starting a direct
marketing channel. The uncertainty of both the impact of the channel conflict on the regular
business and the success of the direct marketing channel paralyses the manufacturers.It might
be that (incumbent) manufacturers use channel conflict as an excuse not to get involved with
a direct marketing channel. By not getting involved, manufacturers miss out on the benefits,
potential and, most important; ignore their end-consumers wants and desires. There are some
manufacturers who are successful in combining their direct and indirect marketing channels,
for instance Apple, albeit they too have channel conflict issues.
In order to provide guidance for manufacturers to add a direct marketing channel, this
Management
Project will revolve around the following research problem:
Under which circumstances can a direct marketing channel strategy becreated by business to
consumer manufacturers?
Not only the circumstances are of interest in this Management Project, but also how the
strategy can be implemented, which is therefore the second part of the research problem:
How can the created direct marketing channel strategy are successfullyimplemented?

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2. Marketing channel
Figure 1
Before the Internet, manufacturers made products, which were advertised through mass
media and sold through a network of distributors and retailers to get the products available to
as many potential customers as possible. The importance of distribution is evident: customers
must have access to the products in order to purchase them.
This network of distributors and retailers can be described as a marketing channel, as they
perform more tasks than just distribution and sales. Goldkuhl (2005) has defined a marketing
channel as ‘a system involved with the task of, eitherdirectly or indirectly, making anything of
value available for use or consumption’.
The current economic downturn has deliberately been unmentioned as that has a (relatively)
short term impact on customer behaviour. An indirect marketing channel consists of various

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channel members, such as distributors and retailers, whereby each member adds value in their
own right. Most manufacturers choose to use indirect marketing channels that already sell
into specific markets to provide the geographical coverage and additional services required to
present the manufacturer’s products to as many potential customers as possible. In a direct
marketing channel, the manufacturer engages in direct contact with his end customer, which
can be achieved through telephone, sales force, catalogue, or the Internet. Additionally, a
direct marketing channel attracts customers with a different buying behavior.
Figure 2 :Schematic representation of direct and indirect channels and channel
members
Channel members are in the business of acquiring and selling manufacturer products,
whatever the underlying conditions, and are in principle not exclusive to only one
manufacturer. Resellers will primarily stock only those products that will help them obtain
their financial goals.
From here on the term channel member will be used to describe any indirect marketing
channel member, i.e. importer, distributor, reseller, or any other intermediary. This means
that, unless a manufacturer has a (very) limited product range, per definition not all products
offered by a manufacturer (or brand) will be available through the channel members.

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Channel members perform a number of activities that are difficult to duplicate by
manufacturers, such as warehousing, providing immediate availability, offering assortments
constituted from different manufacturers that allow ones top shopping and providing services,
including personal assistance, dressing rooms and repair and return services.
2.1. Multiple marketing channels
Multiple marketing channels are defined as using more than one channel to reach the
customer. Multiple marketing channels are used as different customers, with different buying
behaviours, will flexibly use the channel that best serves their needs (ibid.).Offering multiple
marketing channels to consumers may have both competitive and complementary efforts:
competitive as it might lead to channel preference, complementary as it might lead to higher
customer satisfaction.
According to Wilkinson (1973), channels require to operate as an integrated whole to attain
efficiency, which can only be accomplished with effective co-operation and coordination
between members. Technological change, new products introduced, and the changing nature
of the environment are the forces that make cooperation and coordination important (ibid.).
Channel integration, for instance, allows a customer to gather product information through
the online channel, purchase in a physical outlet, and obtain service again online. Channel
integration is most likely to occur within one channel member’s domain, i.e. if a retailer uses
various physical shops, aimed at different customer segments, or even in combination with an
Internet store. However, a manufacturer can also integrate with his indirect marketing
channel, for instance by providing detailed product information and availability at a certain
channel member. Alternatively, a manufacturer can also integrate forward, meaning a
reduction in channel members between the manufacturer and the end-customer. Although an
integrated channel can provide a superior customer experience, highly integrated channels are
costly to establish and operate in terms of investments in personnel, equipment, facilities,
software, and inventory.
Look at the channels in Figure 3"AlternateChannel Arrangements". Notice how in some
situations, a wholesaler will sell to brokers, who then sell to retailers and consumers. In other
situations, a wholesaler will sell straight to retailers or straight to consumers. Manufacturers

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also sell straight to consumers, and, as we explained, sell straight to large retailers like
Target.
Figure 3: Alternate Channel Arrangements
The point is that firms can and do utilize multiple channels. Take Levi’s, for example. You
can buy a pair of Levi’s from a retailer such as Kohl’s, or you can buy a pair directly from
Levi’s at one of the outlet stores it owns around the country. You can also buy a pair from the
Levi’s Web site.
The key is understanding the different target markets for your product and designing the best
channel to meet the needs of customers in each. Is there a group of buyers who would
purchase your product if they could shop online from the convenience of their homes?
Perhaps there is a group of customers interested in your product but they do not want to pay
full price. The ideal way to reach these people might be with an outlet store and low prices.
Each group then needs to be marketed to accordingly. Many people regularly interact with
companies via numerous channels before making buying decisions.

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Using multiple channels can be effective. At least one study has shown that the more
marketing channels your customers utilize, the more loyal they are likely to be to your
products. Companies work hard to try to integrate their selling channels so users get a
consistent experience. For example, QVC’s TV channel, Web site, and mobile service—
whichsends alerts to customers and allows them to buy products via their cell phones—all
have the same look and feel.
A company can also use a marketing channel to set itself apart from the crowd. Jones Soda
Co. initially placed its own funky-looking soda coolers in skate and surf shops, tattoo and
piercing parlors, individual fashion stores, and national retail clothing and music stores. The
company then began an up-and-down-the-street “attack,” placing product in convenience and
food stores. Finally, the company was able to sell its drinks to bigger companies like
Starbucks, Barnes & Noble, Safeway, Target, and 7-Eleven stores.
Would you like to purchase gold from a vending machine? Soon you will be able to—in
Germany. Germans like to purchase gold because it’s considered a safe alternative to paper
money, which can become devalued during a period of hyperinflation. So, in addition to
selling gold the usual way, TG-Gold-Super-Markt company is planning to install “gold to go”
machines in five hundred locations in German-speaking countries. The gold is dispensed in
metal boxes, and cameras on the machine monitor the transactions to prevent money
laundering.
 All in All, the Marketing Channels can be summarized as follows :
A. Conventional Channel or Non- Integrated Channel
1. Manufacturer to Consumer In this channel there is no intermediary. Manufacturer makes
the goods and directly distributes to consumers.
2. Manufacturer to Retailer to Consumer Retailer is the intermediary between manufacturer
and consumer. He purchases goods from manufacturer and sells to consumer.
3. Manufacturer to Wholesaler to Retailer to Consumer In this channel, there are two option,
one is wholesaler and other is retailer. Wholesaler buys large scale and sells to retailer and
the retailer sells to consumer.
4. Manufacturer to Wholesaler to Consumer Consumer can buy easily and directly from
wholesaler. So, in this channel there is only one intermediary and he is wholesaler.
5. Manufacturer to agent to wholesaler to retailer to consumer

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B. Integrated Channel or Non conventional channels Integrated channel are modern channel
for distribution of goods. These channel can be divided into two parts.
1. Vertical Channel Vertical channel is that corporate channel which are useful for the flow of
products which are capital nature. In this, if one company contracts with other manufacturers
who will convert the capital product into most usable shape and sell it to the dealers. Then it
will be vertical channel.
2. Horizontal Channel Two companies join together for marketing of any product
for reducing competition and excess capacity.
2.2. Marketing Channel Strategies
i. Channel Selection Factors
Selecting the best marketing channel is critical because it can mean the success or failure of
your product. One of the reasons the Internet has been so successful as a marketing channel is
because customers get to make some of the channel decisions themselves. They can shop
virtually for any product in the world when and where they want to, as long as they can
connect to the Web. They can also choose how the product is shipped.
ii. Type of Customer
The Internet isn’t necessarily the best channel for every product, though. For example, do you
want to closely examine the fruits and vegetables you buy to make sure they are ripe enough
or not overripe? Then online grocery shopping might not be for you. Clearly, how your
customers want to buy products will have an impact on the channel you select. In fact, it
should be your prime consideration.
First of all, are you selling to a consumer or a business customer? Generally, these two
groups want to be sold to differently. Most consumers are willing to go to a grocery or
convenience store to purchase toilet paper. The manager of a hospital trying to replenish its
supplies would not. The hospital manager would also be buying a lot more toilet paper than
an individual consumer and would expect to be called upon by a distributor, but perhaps only
semiregularly. Thereafter, the manager might want the toilet paper delivered on a regular

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basis and billed to the hospital via automatic systems. Likewise, when businesses buy
expensive products such as machinery and computers or products that have to be customized,
they generally expect to be sold to personally via salespeople. And often they expect special
payment terms.
iii. Type of Product
The type of product you’re selling will also affect your marketing channel choices. Perishable
products often have to be sold through shorter marketing channels than products with longer
shelf lives. For example, a yellowfin tuna bound for the sushi market will likely be flown
overnight to its destination and handled by few intermediaries. By contrast, canned tuna can
be shipped by “slow boat” and handled by more intermediaries. Valuable and fragile products
also tend to have shorter marketing channels. Automakers generally sell their cars straight to
car dealers (retailers) rather than through wholesalers. The makers of corporate jets often sell
them straight to corporations, which demand they be customized to certain specifications.
iv. Channel Partner Capabilities
Your ability versus the ability of other types of organizations that operate in marketing
channels can affect your channel choices. If you are a massage therapist, you are quite
capable of delivering your product straight to your client. If you produce downloadable
products like digital books or recordings, you can sell your products straight to customers on
the Internet. Hypnotic World, a UK producer of self-hypnosis recordings, is a company such
as this. If you want to stop smoking or lose weight, you can pay for and download a recording
to help you do this at http://www.hypnoticworld.com.
v. Competing Products’ Marketing Channels
How your competitors sell their products can also affect your marketing channels. As we
explained, Dell now sells computers to firms like Best Buy so the computers can compete
with other brands on store shelves.
You don’t always have to choose the channels your competitors rely on, though. Netflix is an
example. Netflix turned the video rental business on its head by coming up with a new
marketing channel that better meets the needs of many consumers. Maybelline and L’Oréal
products are sold primarily in retail stores. However, Mary Kay and Avon use salespeople to
personally sell their products to consumers.

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vi. The Business Environment and Technology
The general business environment, such as the economy, can also affect the marketing
channels chosen for products. For example, think about what happens when the value of the
dollar declines relative to the currencies of other countries. When the dollar falls, products
imported from other countries cost more to buy relative to products produced and sold in the
United States. Products “made in China” become less attractive because they have gotten
more expensive. As a result, some companies then look closer to home for their products and
channel partners.
Technological changes affect marketing channels, too, of course. We explained how the
Internet has changed how products are bought and sold. Many companies like selling
products on the Internet as much as consumers like buying them. For one, an Internet sales
channel gives companies more control over how their products are sold and at what prices
than if they leave the job to another channel partner such as a retailer. Plus, a company selling
on the Internet has a digital footprint, or record, of what shoppers look at, or click on, at its
site. As a result, it can recommend products they appear to be interested in and target them
with special offers and even prices. [1]
Some sites let customers tailor products to their liking. On the Domino’s Web site, you can
pick your pizza ingredients and then watch them as they fall onto your virtual pizza. The site
then lets you know who is baking your pizza, how long it’s taking to cook, and who’s
delivering it. Even though interaction is digital, it somehow feels a lot more personal than a
basic phone order. Developing customer relationships is what today’s marketing is about. The
Internet is helping companies do this.
2.3. Factors That Affect a Product’s Intensity of Distribution
Firms that choose an intensive distribution strategy try to sell their products in as many
outlets as possible. Intensive distribution strategies are often used for convenience
offerings—products customers purchase on the spot without much shopping around. Soft
drinks and newspapers are an example. You see them sold in all kinds of different places.
Redbox, which rents DVDs out of vending machines, has made headway using a distribution
strategy that’s more intensive than Blockbuster’s: the machines are located in fast-food
restaurants, grocery stores, and other places people go frequently.

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Because installing a vending machine is less expensive than opening a retail outlet, redbox
has been able to locate its DVD vending machines in more places than Blockbuster can its
stores.
By contrast, selective distribution involves selling products at select outlets in specific
locations. For instance, Sony TVs can be purchased at a number of outlets such as Circuit
City, Best Buy, or Walmart, but the same models are generally not sold at all the outlets. By
selling different models with different features and price points at different outlets, a
manufacturer can appeal to different target markets.
Exclusive distribution involves selling products through one or very few outlets. For
instance, supermodel Cindy Crawford’s line of furniture is sold exclusively at the furniture
company Rooms To Go. Designer Michael Graves has a line of products sold exclusively at
Target. To purchase those items you need to go to one of those retailers. TV series are
distributed exclusively. A company that produces a TV series will sign an exclusive deal with
a network like ABC, CBS, or Showtime, and the series will initially appear only on that
network. Later, reruns of the shows are often distributed selectively to other networks.
To control the image of their products and the prices at which they are sold, the makers of
upscale products often prefer to distribute their products more exclusively. Expensive
perfumes and designer purses are an example. During the economic downturn, the makers of

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some of these products were disappointed to see retailers had slashed the products’ prices,
“cheapening” their prestigious brands.
Selecting the best marketing channel is critical because it can mean the success or failure of
your product. The type of customer you’re selling to will have an impact on the channel you
select. In fact, this should be your prime consideration. The type of product, your
organization’s capabilities versus those of other channel members, the way competing
products are marketed, and changes in the business environment and technology can also
affect your marketing channel decisions. Various factors affect a company’s decisions about
the intensity of a product’s distribution. An intensive distribution strategy involves selling a
product in as many outlets as possible. Selective distribution involves selling a product at
select outlets in specific locations. Exclusive distribution involves selling a product through
one or very few outlets.
2.4. Marketing Channels versus Supply Chains
In the past few decades, organizations have begun taking a more holistic look at their
marketing channels. Instead of looking at only the firms that sell and promote their products,
they have begun looking at all the organizations that figure into any part of the process of
producing, promoting, and delivering an offering to its user. All these organizations are
considered part of the offering’s supply chain.
For instance, the supply chain includes producers of the raw materials that go into a product.
If it’s a food product, the supply chain extends back through the distributors all the way to the
farmers who grew the ingredients and the companies from which the farmers purchased the
seeds, fertilizer, or animals. A product’s supply chain also includes transportation companies
such as railroads that help physically move the product and companies that build Web sites
for other companies. If a software maker hires a company in India to help it write a computer
program, the Indian company is part of the partner’s supply chain. These types of firms aren’t
considered channel partners because it’s not their job to actively sell the products being
produced. Nonetheless, they all contribute to a product’s success or failure.
Firms are constantly monitoring their supply chains and tinkering with them so they’re as
efficient as possible. This process is called supply chain management. Supply chain
management is challenging. Done well, it’s practically an art. We’ll talk more about supply

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chains in the next chapter and what companies can do to improve them to better satisfy
customers and gain a competitive edge.
2.5. Channel choice
Nelson (1970) contrasted search good and experience good. A search good is a product or
service with features easily evaluated before purchase and is more subject to substitution and
price competition by nature. Branding and detailed product specifications are characteristics
of a search good. An experience good on the other hand, is difficult to compare before
purchase. Characteristics are reputation and lower price elasticity5 then a search good (ibid.).
The internet has made it easier to source and compare products, resulting in price as the
prime differentiator for search goods. Although it is thought that consumers go to a shop for
information and then go back home to purchase the same item for a lower price online,
Blauw Research (2009) has found that actually the reverse is true. The number of consumers
who switch from store orientation to Internet purchase is far lower the other way around.
Price appears not to be the greatest denominator for online shopping; availability is.
5 Price elasticity refers to influence price has on sales volume. High elasticity means that a
lower price means more units sold, while with a low elasticity price itself has less influence
on the number of units sold. The end customer’s choice for a channel depends on the
following factors: consumer factors (e.g. shopping orientations, life style, past behaviour),
retailfactors (e.g. trust and reputation, service), product factors (e.g. complexity, product
risk), channel factors (e.g. ease of use, service) and situational factors (e.g. time availability,
weather, mood).

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Figure 4: Channel switch (adapted from Blauw Research, 2009)
Blauw Research (2009) has also found that the prime channel choice for purchase remains the
physical location, although the Internet has become a significant channel of choice for
consumers. Buying direct from manufacturers is not significant channel choice; possibly
because not all manufacturers offer or promote a direct marketing channel.

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Figure 5:Channel choice
Channel members using one particular channel are perceived as similar to others in terms of
their offerings; building more outlets offering the same inventory has been tapped out as a
strategy and has resulted in (fierce) price competition. The end-customer does not necessarily
experience a difference between the purchased product and the place of purchase. To remain
competitive, manufacturers must develop new channel opportunities. End-customer’s needs
change with the product life cycle and maturity of the market. This requires a change of
channel mix. Direct is the norm for new technology. Growth levels off in a maturing market
as potential buying segments and applications become saturated (ibid.). In maturity and
declining stages of the product life cycle, online offerings are likely to
cannibalise sales through existing channels according to Webb (2002).

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Figure 6: Product life cycle and distribution method.
In mature markets, heavy competition has a commoditising effect which fixates consumers
on price, diminishes the difference between offerings, and creates consumers who will be less
receptive to innovation and marketing. The type of product can strongly influence the
preference for a channel, even though it might be in a mature market. Products that are more
expensive, risky, and complex require physical examination and are more suited to be sold
through the offline channel.
The Internet is particularly preferred for relatively commoditised products and repeat
purchases (ibid.), which Blauw Research (2009) has presented in the following figure: Figure
5 Product category and channel choice. The marketing channel mix used by a manufacturer
should be changed accordingly to fit the requirements of the market. Manufacturers should
determine for each of their offerings whether exclusive, selective, or wide distribution is most
suitable for their products.

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Figure 7: Direct marketing channel drivers and barriers
Incumbent manufacturers have become dependent on their indirect marketing channel to
offer (a selection of) their products. The Internet provides the opportunity to directly engage
with and sell to end-customers; not only for channel members, but also for manufacturers.
Indirect marketing channels have benefits which cannot be easily copied by manufacturers
themselves or any direct marketing channel. It is therefore unlikely that direct marketing
channels will be a complete substitute for indirect channels.
However, the potential benefits for any business to get involved with an Internet marketing
channel (e-commerce) are: a reduction of costs, improved supply chain operation, increased
customer service, obtain customer knowledge, find new markets and take advantage of the
‘long tail’. Through physical outlets, only a small concentrated inventory is available,
whereby usually 20% of products are responsible for 80% of revenue. As shelf space is not
limited on the Internet, an unlimited inventory is possible, providing unlimited choice to
consumers. This unlimited inventory is described as the ‘long tail’ (ibid.). The potential total
value of the ‘long tail’ is assumed to be larger than the ‘head’ (ibid.)

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Figure 8: The long tail
From the more than 1 million items that Amazon.com lists, 95% is sold at least once a
month.Channel members are exploring the Internet as a direct marketing channel as that
enables them to offer a wider range of products and the potential of integrated channels,
thereby serving (other) customer’s needs. Multi-channel retailing has become an essential
strategy for success. Informed customers are not willing to pay more for commodities, but are
willing
to pay premium for what they really want.Customers also value customised products more
than standard products, which results in a higher purchase intention and justifies premium
pricing. Customisation and personalisation is usually not offered through indirect channels
and thus a great differentiator from the indirect channels.Manufacturers are likely to increase
their use of direct channels whenDistribution costs in serving end users are relatively low.
However, manufacturers are reluctant to get involved with a direct marketing channel, if they
fear for channel conflict.
2.6.Channel Dynamics
 Channel Power
Strong channel partners often wield what’s called channel power and are referred to as
channel leaders, or channel captains. In the past, big manufacturers like Procter & Gamble
and Dell were often channel captains. But that is changing. More often today, big retailers
like Walmart and Target are commanding more channel power. They have millions of
customers and are bombarded with products wholesalers and manufacturers want them to

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sell. As a result, these retailers increasingly are able to call the shots. In other words, they get
what they want.
Category killers are in a similar position. Consumers like you are gaining marketing channel
power, too. Regardless of what one manufacturer produces or what a local retailer has
available, you can use the Internet to find whatever product you want at the best price
available and have it delivered when, where, and how you want.

26
3. Channel conflict
Channel conflict occurs when manufacturers (brands) disintermediate their channel partners,
such as distributors, retailers, dealers, and sales representatives, by selling their products
directly to consumers through general marketing methods and/or over the Internet.
Channel conflicts are common. Part of the reason for this is that each channel member has its
own goals, which are unlike those of any other channel member. The relationship among
them is not unlike the relationship between you and your boss (assuming you have a job).
Both of you want to serve your organization’s customers well. However, your goals are
different. Your boss might want you to work on the weekend, but you might not want to
because you need to study for a Monday test.
All channel members want to have low inventory levels but immediate access to more
products. Who should bear the cost of holding the inventory? What if consumers don’t
purchase the products? Can they be returned to other channel members, or is the organization
in possession of the products responsible for disposing of them? Channel members try to
spell out details such as these in their contracts. Channel conflicts can also occur when
manufacturers sell their products online. When they do, wholesalers and retailers often feel
like they are competing for the same customers when they shouldn’t have to. Likewise,
manufacturers often feel slighted when retailers dedicate more shelf space to their own store
brands. Store brands are products retailers produce themselves or pay manufacturers to
produce for them. Dr. Thunder is Walmart’s store-brand equivalent of Dr. Pepper, for
example. Because a retailer doesn’t have to promote its store brands to get them on its own
shelves like a “regular” manufacturer would, store brands are often priced more cheaply. And
some retailers sell their store brands to other retailers, creating competition for manufacturers.
Some manufacturers want to capture online markets for their brands but do not want to create
conflicts with their other distribution channels. The Census Bureau of the U.S. Department of
Commerce reported that online sales in 2005 grew 24.6 percent over 2004 to reach $86.3
billion dollars. By comparison, total retail sales in 2005 grew 7.2 percent from 2004. These
numbers made the online marketplace attractive to manufacturers, but raised the question of
how to participate without harming existing channel relationships.
According to Forrester Research and Gartner from 2007, despite the rapid growth of online
commerce, an estimated 90 percent of manufacturers did not sell their products online. Of
these, 66 percent identified channel conflict as their single biggest issue. However, results
from a survey show that click-and-mortar businesses have an 80% greater chance of

27
sustaining a business model during a three-year period than those operating just in one of the
two channels.
E-commerce is the most popular second distribution channel because of its low overhead
expenses and communication costs. This advantage is also a disadvantage, since consumers
can also communicate less expensively and more easily with one another in the online
marketplace. Therefore, price and product differentiation is more challenging in online
markets.
Channel conflict can also occur when there has been over production. This results in a surplus
of products. Newer versions of products, changes in trends, insolvency of wholesalers and
retailers and the distribution of damaged goods also affect channel conflict. In this
connection, a company's stock clearance strategy is important.
To avoid a channel conflict in a click-and-mortar business, it is necessary to ensure that both
traditional and online channels are fully integrated. This reduces possible confusion with
customers while providing the business benefits of a dual channel.
Manufacturers today sell their products through a broad array of channels. Since most
manufacturers sell through several channels simultaneously, channels sometimes find
themselves competing to reach the same set of customers. When this happens, channel
conflict is virtually guaranteed. In turn, such conflict almost invariably finds its way back to
the manufacturer.
This can also be termed as a situation when a producer or supplier bypasses the normal
channel of distribution and sells directly to the end user. Selling over the Internet while
maintaining a physical distribution network is an example of channel conflict.
Channel conflict comes in many forms. Some are mild, merely the necessary friction of a
competitive business environment. Some are actually positive for the manufacturer, forcing
out-of-date or uneconomic players to adapt or decline. Other conflicts, however, can
undermine the manufacturer's business model. Such high-risk conflicts generally occur when
one channel targets customer segments already served by an existing channel. This leads to
such a deterioration of channel economics that the threatened channel either retaliates against
the manufacturer or simply stops selling its product. The result is disintermediation, in which
the manufacturer suffers.
The two main disintermediation causes are finance and internet.

28
 Finance
Elimination of financial intermediaries (banks, brokers) between the suppliers of funds
(savers/investors) and the users of funds (borrowers/investees). Disintermediation occurs
when inflation rates are high but bank interest rates are stagnant and the bank depositors can
get better returns by investing in mutual funds or in securities.
 Internet
Elimination (by the online sources) of the traditional middleman the intermediary between
the seller and the buyer (such as an agent, broker, or reseller), or between the source and the
recipient of information (such as an agency, official, or gate keeper).
Type of channel conflicts
Channel conflict is of three types.
 Vertical channel conflicts,
 Horizontal channel conflicts,
 Multilevel channel conflicts
According to Goldkuhl (2005), channel conflict ‘exists within the channel if one channel
member perceives another channel member to be engaged in behaviour that prevents or
impedes from attaining its goal(s)’.Channel conflict is not a new phenomenon because of the
introduction of the Internet. It has been suggested that conflict is virtually inevitable in
marketing channels, as this is due to the functional interdependence between channel
members.
Channel conflict can occur horizontally and vertically.Horizontal channel conflict exists
when there is conflict between channel members at the same level within the channel.
Vertical channel conflict exists when there is conflict between different levels within the
same channel, which will be the case if a manufacturer adds a direct marketing channel next
to existing marketing channels.
According to Wilkinson (1973) conflict arises in channels as members have incompatible
goals and differing perceptions of reality. Etgar (1979) describes the causes of channel
conflict to be of attitudinal or structural nature. Attitudinalcauses are associated with
disagreements about channel roles, expectations,perceptions, and channel communications.
Structural causes consist of three sets of factors: goal divergence, competition for scarce

29
resources and drive forAutonomy. Conflict appears to be primarily generated by attitudinal
factors (ibid.). If the role of the channel member has not been well defined, conflict may
occur. Differences in information availability, information processing capacities, or
experience among channel members can result in varying expectations. Channel members
can also have different perceptions of the channel and its market conditions. Within a
marketing channel there has to be constant communication between the manufacturer and the
channel members (vice versa) about new products, promotions, market conditions, and stock
levels. If that flow of communication is not working properly, misunderstandings will occur,
incorrect strategies will be implemented, and mutual feelings of frustration will arise. Goal
divergence is a result of different strategic objectives between channel members and the
manufacturer. They both want to maximise profits, which may lead to a conflict of interest.In
reality, however, it is not goal divergence itself that is fuel for conflict, but the perception that
the goals diverge.
Competition for scarce resources occurs when the demand in a channel exceeds the available
supply, e.g. if there is limited availability of a new product. Drive for autonomy means that
one party tries to exercise control of another party; which is similar to the definition of
power. Magrath& Hardy (1989) describe the following four variables within channel design
and channel mix that affect channel conflict: channel length, channelvariety, channel density,
and channel autonomy. Channel length refers to the number of channel members between the
manufacturer and the end-consumer, whereby short channels are least associated with conflict
for manufacturers.
Channel Variety refers to different types of channels used. Conflict appears to be least likely
with either very low or very high channel variety. Channel Density refers to the amount of
channels used and can either be exclusive, selective, or intense. Channel density tends to have
a relation with the product life cycle, however, channel members prefer less channel density
at increased product life, while manufacturers prefer to increase density at that stage. Channel
Autonomy refers to the independence of the channel members to each other. The more
independent the channel members are, the more conflict is likely to occur (as a result of goal
divergence).
By adding the Internet to the marketing channel mix, Webb (2002) found that pricing is the
single most important generator of channel conflict. Conflicting channels put emphasis on
price as a differentiation between channels. Wide price dispersion could be the result of the

30
immaturity of the direct marketing channel, as businesses are not yet capable of adding value
through their direct marketing channel. This ‘constant price undercutting can damage brand
equity and erode profit margins. Meanwhile, customers develop low expectations and
become disengaged’.Kraus & Pinto (2009) also argue that added value should be offered in
order not to ‘squander years’ worth of brand equity for a few quarters of sales’. As markets
evolve and mature, manufacturers are required to add new, lower cost channels to cover all
major market segments. Magrath& Hardy (1989) also found that when a manufacturer uses
both direct and indirect marketing channels (dual-distribution), conflict is a likely result, as
the perception is that the manufacturer is competing with his traditional marketing channels
for the same customer.
3.2. Managing channel conflict
Channel leaders like Walmart usually have a great deal of say when it comes to how channel
conflicts are handled, which is to say that they usually get what they want. But even the most
powerful channel leaders strive for cooperation. A manufacturer with channel power still
needs good retailers to sell its products; a retailer with channel power still needs good
suppliers from which to buy products. One member of a channel can’t squeeze all the profits
out of the other channel members and still hope to function well. Moreover, because each of
the channel partners is responsible for promoting a product through its channel, to some
extent they are all in the same boat. Each one of them has a vested interest in promoting the
product, and the success or failure of any one of them can affect that of the others.
Flash back to Walmart and how it managed to solve the conflict among its telephone
suppliers: Because the different brands of landline telephones were so similar, Walmart
decided it could consolidate and use fewer suppliers. It then divided its phone products into
market segments—inexpensive phones with basic functions, midpriced phones with more
features, and high-priced phones with many features. The suppliers chosen were asked to
provide products for one of the three segments. This gave Walmart’s customers the variety
they sought. And because the suppliers selected were able to sell more phones and compete
for different types of customers, they stopped undercutting each other’s prices.
In order to manage channel conflict, it is required to validate the reality of the conflict,
otherwise it stays a perception. Therefore a diagnosis of the true level of conflict is essential.
Magrath& Hardy (1989) state that conflict can be measured by the frequency and intensity of
disagreements, weighted by the importance of the issue. By keeping track of reported issues,

31
management can create insight into the existence of channel conflict. Management needs to
establish which level of conflict is acceptable. Perceived conflict can also become real
conflict if it is not managed properly. If channel conflict has been established to be real, the
destructiveness of the conflict can be assessed. In principle some level of conflict will always
exist and conflict is not immediately destructive. Destructive conflict becomes evident
through market share and price erosion, harming the manufacturer’s brand.
Channel conflict can be managed by a combination of economics and structural controls.
Economics are used to motivate the channel to avoidconflict, i.e. compensation schemes.
Structural controls relate to the channeldesign and the terms of the channel agreement.
Structural controls are onlyeffective if enforced (ibid.).Both Goldkuhl (2005) and Coughlan
et al. (2006) have established thatcommunication about the chosen distribution strategy
between themanufacturer and the channel members is key to minimising conflict.Kotler
(2005) states that perhaps the most important mechanism to managechannel conflict is the
adoption of superordinate goals, i.e. appeal to mutualgoals relating to survival, market or
customer satisfaction.Working together to develop joint solutions is another option to manage
channelConflict. Weiss (2000) also states that it is important that manufacturers work
together with their channels to resolve the resulting channel conflicts and to create a superior
value-delivery network.
3.3. Channel power
Drive for autonomy is one of the structural causes of channel conflict according to Etgar
(1979) and resembles power. Power can be described as the ability to get someone to do
something he/she would not have done otherwise.The power holder is the party that can
influence the other party (ibid.). Most research acknowledges that there is a causal
relationship between power and conflict between channel members and that it can, and does,
proceed in either direction. Wilkinson (1973) states that ‘in order to prevail in the struggle for
survival, a firm must act in such a way as to promote the power to act’.Shervani et al. (2007)
State that power is commonly accepted to provide its holder the ability to achieve a high level
of influence or control on the behaviour of others he has contact with. According to Gaski
(1984) it appears that the nature and sources of the power possessed by a channel member
may affect the presence and level of conflict within that channel.
Power sources for a manufacturer are for example a strong brand name, market intelligence,
substantial financial and marketing resources, and market power. Market power could vary

32
between various product-markets served as market power is based upon market position
(market share) and level of product differentiation.
The extent to which end-customers are aware of individual brands and their preference for
those is critical to the channel member. Channel members will go out of their way to keep
manufacturer brands with high market share as that helps to obtain their financial goals.
Leading brands are easier for channel members to market and sell because of the end-
customer’s perceived value of these products. Leading brands are typically heavily
advertised, employ premium pricing strategies and frequent new product line introductions.
Brands in this group are frequently described as market leaders and/or pioneers. Incumbent
manufacturers should take advantage of their established brand name and value.
For channel members, market power is for instance based on geographical coverage, high
volume and low cost structure to make most use of economies of scale. Surprisingly, there is
little evidence to support a strong relationship between power and dependence in marketing
channels.
However, bargaining power of buyers is one of the five competitive forces that shape
strategy. Buyer power is the impact that the buyers (channel members) have on the producing
industry (manufacturers). Buyer power can be regarded strong if buyers are concentrated or
purchase a significant proportion of the produced output (ibid.). Buyer power can be regarded
weak if buyers are fragmented (i.e. many, different buyers); the buyers don’t have any
particular influence on product or price. This appears to be the case for most consumer
products, allowing forward integration or a direct marketing channel as a strategic option
(ibid.).

33
Figure 9: Model of the five competitive forces that shape strategy
However, consumer product retailers are becoming larger and thus more powerful.
Distribution access to these key retailers becomes critical for a manufacturer’s survival: if
market share is lost because one of these main retailers, this will have a direct impact on the
strategic options open to such manufacturer and will determine a certain course of action. On
the other hand, although providing extensive choice to the consumer, these large retailers
appear to compete mostly on price while service and product knowledge is deteriorating.
3.4. Strategic implications of channel decisions
To have success in any business environment strategy must have continuity, but the
environment can change. The mix of marketing channels used and their level of integration
are factors that need to be adapted to the changing environment. The channel mix is a vital
part of a manufacturer’s strategic position and it can help to create competitive advantages.
Also according to Kotler (2005), marketing channel decisions are among the most important
management face. Porter (1996) describes strategy as the creation of a unique and valuable
position, involving different sets of activities. Strategy is about combining those activities
into a sustainable and valuable position. The activities need to fit and reinforce one another,
become integrated, whereby the whole matters more than any individual part. Product life
cycle and industry life cycle are determinants to an integrated strategy. The benefits of
integration overwhelm the advantages of separation.

34
The entire system of activities, including channel design and channel mix, cancreate
competitive advantage. As the essence of strategic positioning is to choose activities that are
different from rivals, a manufacturer that chooses to integrate a direct marketing channel into
its strategy and channel mix can therefore create an advantage over its rivals, as this is
currently not common practice.
Porter (1996) argues that a sustainable strategic position requires trade-offs, which is a result
of incompatible activities. Trade-offs occur because of inconsistencies in image or reputation
arises from the activities themselves (inability to do something else) and limitations on
internal coordination and control. Conventional wisdom within an industry is often strong;
the channel
member is regarded as the customer, not the end-consumer, with the manufacturer responding
to every request from the channel member. With this practice, there is no focus on what the
real customer – the end-consumer - wants and how this fits with the manufacturer’s
reputation.
Managers of manufacturers become focused on meeting tight operational targets, that
experimentation that leads to attractive new products, services and processes is often avoided.
Operational excellence, however important, is not a strategy.
Gulati&Garino (2000) also state that the very nature of traditional business (protectiveness
over current customers, fear of cannibalisation and general myopia) will smother any new
initiative, like a direct marketing channel. However, these new initiatives can improve the
competitive position if they are related to the existing business. Manufacturers need to
reconnect with strategy and focus on those customers, channels or purchase occasions that are
the most profitable.
The challenge for a manufacturer is to recover its distinctiveness; standardisation has become
commoditised, resulting in low growth and profitability which deteriorates their company
value.
Manufacturers will need to develop and implement a wide range of new strategies to deal
with the collapsing value of their existing business, where by the (marketing) strategies and
channel mix will have to reflect changes in consumer behaviour. Bendix et al. (2001b) have
developed a channel conflict strategy matrix. The matrix uses market power and channel

35
value to determine which of four core strategies, compete, forward integrate, lead and
cooperate, can be adopted to determine channel mix strategy.
Figure 10: Channel conflict strategy matrix (Bendix et al., 2001a)
Competition is a strategy when the channel adds low value and the manufacturer controls the
customer, for instance with standardised services like commoditised insurance types or airline
tickets.
Forward integration as a strategy is suitable when the channel adds low value, yet hold
considerable market power. The manufacturer can then create offerings that are difficult to
duplicate by the channel to minimise conflict. A manufacturer can take a lead strategy if
channel value is high, but market power is low; a result of a fragmented channel. The
manufacturer can force change on its channel members. Cooperation is the strategy to choose
when both market value and market power are strong within the channel, the situation which
potentially leads to most conflict. Compromises can be found on new customer segments that
do not conflict with the traditional channel members, for instance by offering a selection or
customisable products in the direct channel.
3.5. Organisational implications
Most manufacturers employ a one-size-fits-all organisation strategy, whereby organisational
processes and organisational values are the same for each business unit, with a focus on

36
operational excellence. Markides (2009) and Brown et al. (2006) argue that any organisation
or business unit should be organised according to suit what they are doing. Manufacturers sell
their products to channel members, which is therefore a business to business approach, even
though they manufacture business to consumer products. A business to business environment
has different requirements with regards to procurement, invoicing, systems, support and
market approach than a business to consumer environment; selling 1.000 items to 1 business
client is not the same as selling 1.000 items to 1.000 consumer clients. Adding a direct
marketing channel for a manufacturer has therefore significant organisational implications.
Large companies introduce less change in their marketing channel mix than small companies;
increased company size can lead to organisational rigidities. Sophisticated products require a
more carefully crafted distribution channel, and this seems to exacerbate the rigidities
associated with firm size (ibid.). The phase of the company life cycle, as well as the
organisational structure must have an influence on these decisions. An incumbent
manufacturer with a global headquarters and sales country organisations is less flexible then a
start-up company. Autonomy to decide on channel mix is the key determinant in that respect.
Preserving the status quo becomes a natural obstacle to adding a new channel; the real issue
is not whether a new channel is needed, but how it can be achieved with minimal loss to the
traditional base.
The further away the business is strategically developing from its status quo, the more
management capacity in terms of change, ingenuity and entrepreneurship is required.
Although there are similarities between the physical and virtual worlds, managing a direct
marketing channel requires specific skills and knowledge. Parting Unilever CMO Mr. Clift
has expressed his fear for a’ lost generation’ of marketers as those over 40 ’don’t understand
and don’t dare the Internet’. Changes to the channel mix is a matter of resources and can only
be realised with sound backing in terms of management commitment, staff and financial
resources. The addition of a direct marketing channel can also create internal conflict
regarding allocation of resources, sales and objectives. Those companies who will have a
cohesive and aligned management team with a clear strategy will be the companies that will
survive.
It is therefore important that the right people are available, those who are not only able to
develop an integrated indirect and direct strategy, but who are also capable of implementing
and managing this strategy (ibid.).

37
3.6. Channel Integration: Vertical and Horizontal Marketing Systems
Another way to foster cooperation in a channel is to establish a vertical marketing system. In
a vertical marketing system, channel members formally agree to closely cooperate with one
another. (You have probably heard the saying, “If you can’t beat ’em, join ’em.”) A vertical
marketing system can also be created by one channel member taking over the functions of
another member.
Procter & Gamble (P&G) has traditionally been a manufacturer of household products, not a
retailer of them. But the company’s long-term strategy is to compete in every personal-care
channel, including salons, where the men’s business is underdeveloped. In 2009, P&G
purchased The Art of Shaving, a seller of pricey men’s shaving products located in upscale
shopping malls. P&G also runs retail boutiques around the globe that sell its prestigious SK-
II skin-care line.
Franchises are another type of vertical marketing system. They are used not only to lessen
channel conflicts but also to penetrate markets. Recall that a franchise gives a person or group
the right to market a company’s goods or services within a certain territory or location.
McDonald’s sells meat, bread, ice cream, and other products to its franchises, along with the
right to own and operate the stores. And each of the owners of the stores signs a contract with
McDonald’s agreeing to do business in a certain way.
By contrast, in a conventional marketing system the channel members have no affiliation
with one another. All the members operate independently. If the sale or the purchase of a
product seems like a good deal at the time, an organization pursues it. But there is no
expectation among the channel members that they have to work with one another in the
future.
A horizontal marketing system is one in which two companies at the same channel level—
say, two manufacturers, two wholesalers, or two retailers—agree to cooperate with another to
sell their products or to make the most of their marketing opportunities. The Internet phone
service Skype and the mobile-phone maker Nokia created a horizontal marketing system by
teaming up to put Skype’s service on Nokia’s phones. Skype hopes it will reach a new market
(mobile phone users) this way. And Nokia hopes to sell its phones to people who like to use
Skype on their personal computers (PCs). [8]

38
Similarly, Via Technologies, a computer-chip maker that competes with Intel, has teamed up
with a number of Chinese companies with no PC-manufacturing experience to produce $200
netbooks. Via Technologies predicts that the new, cheaper netbooks the Chinese companies
sell will quickly capture 20 percent of the market. [9] Of course, the more of them that are
sold, the more computer chips Via Technologies sells
4. Methodology
This chapter will describe the methodology used in order to answer the research problem and
will end with detailed research questions.
4.1 Research methodology
Research methodology determines how the research problem and questions are answered.
The methodology consists of research purpose, approach, strategy, data collection, and
reliability.
4.1.1 Research purpose
Marshall &Rossman (1999) describe the purpose of research as being exploratory, descriptive
or explanatory. Exploratory research is used to formulate problems more precisely, establish
priorities or clarify concepts. Descriptive research is used to describe characteristics of
certain groups, make estimates about behaviour of a proportion of people, or make specific
predictions. Explanatory research is used to provide evidence of causal relationships between
variables.
This Management Project is about clarifying concepts relating to the introduction of a direct
marketing channel by a manufacturer. Additionally, the research provides evidence of causal
relationships between variables. Therefore the research purpose is both exploratory and
explanatory.
4.1.2 Research approach
According to Easter by-Smith et al. (2002), research has a deductive or inductive nature.
Deductive research is based on methods from natural science and develops hypotheses on
existing theory.
Data is collected through surveys, questionnaires, or observation. Deductive research
develops theory through confirmed or rejected hypothesis and results are generally replicable.
Inductive research is about understanding a new or unknown phenomenon, whereby the data

39
is collected through for instance interviews. The analysis has a more holistic approach, is
about pattern recognition, and tends to be subjective. Theory is developed through induction
of the collected data. Inductive research is more difficult to replicate (ibid.).
Data collection for research can either be of quantitative or qualitative nature. Quantitative
data collection involves measurements, numbers, or counts and is most suitable for statistical
analysis used within deductive research (ibid.). However, for inductive research qualitative
data collection is best used, as there is no statistical analysis required, and thoughts and ideas
are gathered through interviews.
Applied research is about (improved) understanding of a particular business or management
problem, whereby the findings result in solutions to the problem and are of practical
relevance to managers.
The phenomenon of channel conflict has regularly been topic of research, as well as channel
conflict as a result of a direct internet marketing channel, although most research on channel
conflict is from a retailer’s perspective and not from a manufacturer’s perspective. There is
also research and (academic) literature available about power balance within a marketing
channel, development and implementation of strategy and the impact of the Internet on
consumer behaviour;. However, none of these studies combine these factors to present a
general overview applicable to manufacturers of business to consumer goods. By providing a
holistic view on this problem within this Management Project, a practical solution to a
business problem is provided. The research approach for this Management Project can
therefore be assessed as inductive, qualitative, and applied research.
4.1.3 Research Methodology II:
Research methodology is considered as the nerve of the project. Without a proper well-
organized research plan, it is impossible to complete the project and reach to any conclusion.
The project was based on the survey plan. The main objective of survey was to collect
appropriate data, which work as a base for drawing conclusion and getting result.
Therefore, research methodology is the way to systematically solve the research problem.
Research methodology not only talks of the methods but also logic behind the methods used
in the context of a research study and it explains why a particular method has been used in the
preference of the other methods.

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Research design:
Research design is important primarily because of the increased complexity in the market as
well as marketing approaches available to the researchers. In fact, it is the key to the
evolution of successful marketing strategies and programmers. It is an important tool to study
buyer’s behavior, consumption pattern, brand loyalty, and focus market changes. A research
design specifies the methods and procedures for conducting a particular study. According to
Kerlinger, “Research Design is a plan, conceptual structure, and strategy of investigation
conceived as to obtain answers to research questions and to control variance.
4.1.4. Data collection methods:
After the research problem, we have to identify and select which type of data is to research.
At this stage; we have to organize a field survey to collect the data. One of the important
tools for conducting market research is the availability of necessary and useful data.
 Primary data: For primary data collection, we have to plan the following four
important aspects. Sampling Research Instrument
 Secondary Data: The Company’s profile, journals and various literature studies are
important sources of secondary data. Data analysis and interpretation, Questionnaires
and Pie chart and Bar chart.
 Questionnaires:
This is the most popular tool for the data collection. A questionnaire contains question that
the researcher wishes to ask his respondents which is always guided by the objective of the
survey.
 Pie chart:
This is very useful diagram to represent data, which are divided into a number of categories.
This diagram consists of a circle of divided into a number of sectors, which are proportional
to the values they represent. The total value is represented by the full create. The diagram bar
chart can make comparison among the various components or between a part and a whole of
data.

41
 Bar chart:
This is another way of representing data graphically. As the name implies, it consist of a
number of whispered bar, which originate from a common base line and are equal widths.
The lengths of the bards are proportional to the value they represent.
 Sampling Methodology:
No. of questions in questionnaires for customer: 18
Sampling size: 5
4.2. Our selected Company is:
BIG BAZAAR:-
4.2.1. Details about the Founder & Origin of the Company:
Mr. Kishore Biyani, Managing Director
Kishore Biyani is the Managing Director of Pantaloon Retail (India) Limited and the Group
Chief
Executive Officer of Future Group. A quintessentially Indian experience, it doesn’t promise
more than it delivers. Basic worth allied with reasonable pricing is their USP. The store itself
and the products it stocks may not be on the cutting edge of technology or sometimes even
retail but the customer can be assured that he/she is getting their money’s worth.
Their first store opened in Calcutta in 2001, on VIP Road, in the ground floor of a residential
building. This was the first departmental store that offered regulated parking services,
apparel, steel vessels and electronics under one roof, and all at the most competitive prices!
The format got bigger and better with the introduction of fresh food and vegetables.
 The Logo, Statement attached with Logo and their meanings:-
It is market where customers can buy the best goods at cheapest price & also all the goods
under one roof.

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4.2.2. Nature of the set up:-
Head Quarter = Jogeshwari Mumbai
8 TOP CITIES TIER ONE AND TWO TOWNS
Mumbai Sangali
Delhi Durgapur
Kolkata Bhubaneswar
Chennai Nashik
Bangalore Nagpur
Pune Vizag
Ahmadabad Thissur
Hyderabad Kochi
Surat
Calicut
Mangalore
Mysore, Hubli
Belgaum and many more
4.2.3. RESEARCH TECHNIQUE:
Data was collected using two approaches:
1. Observational research
Observations were made in the Big Bazaar store regarding the customer groups present there,
retail formats adopted by the store, various verticals inside the store for each category of
product, ambience, services provided to buyers and discount techniques
2. Survey research
Questionnaire was prepared for the customers at Big Bazaar which included several open-
ended and close-ended questions aimed at knowing the following:
 Why Big Bazaar
 Loyalty level
 Effect of 4Ps of marketing

43
Short questionnaire was prepared for Kirana store owners to obtain some facts like revenue,
area of shop and their response to marketing mix.
 Pantaloon Retail:-
Pantaloon Retail (India) Limited, is India’s leading retailer that operates multiple retail
formats in both the value and lifestyle segment of the Indian consumer market.
Big Bazaar is not just another hypermarket. It caters to every need of a family. Where Big
Bazaar scores over other stores is its value for money proposition for the Indian customers.
At Big Bazaar, one can get the best products at the best prices – that is what they guarantee.
With the ever increasing array of private labels, it has opened the doors into the world of
fashion and general merchandise including home furnishings, utensils, crockery, cutlery,
sports goods and much more at prices that will surprise you. And this is just the beginning.
Big Bazaar plans to add much more to complete the shopping experience. Food is the main
shopped for category in this store.
4.2.4. LINES OF BUSINESS OF BIG BAZAAR:-
 Food
 Fashion
 Home Solution
 General Merchandise
 Leisure and Entertainment
 Wellness and Beauty
 Books and Music
Presence:-
The company has stores in nearly 30 cities across the country, constituting over 2.7 million
square feet of retail space. The company has also signed close to 10 million sq. ft. of retail
space to be operational by end 2009, which represents 20-30 % of all modern retail space

44
coming up in the next three years. Over 200 million footfalls are expected in our stores by
2007-08.
BIG BAZAAR
FOR THE GREAT INDIAN MIDDLE CLASS
It is a unit of Pantaloon Retail (India) Ltd and caters to the Great Indian Middle Class. It was
started as a hypermarket format in Mumbai with approx. 50,000 sqft of space. Its values and
missions are to be the best in Value Retailing by providing the cheapest prices and hence go
the tag-line
“Is se sasta aur achcha kahin nahin”
It sells variety of merchandise at affordable rates, the prices of which it claims are lowest in
the city but the level of services offered is also very low. Usually the items are clubbed
together for offers as on the lines of Wal-mart and Carrefour and it also offers weekend
discounts. It currently operates out of 64 stores and top 15 stores register a cumulative
footfall of 27 lakh a month on an average.
The following graph shows the retail life cycle and we can say that Big Bazaar is currently at
the Growth Stage.

45
Figure 11: Cash Flow
 OBSERVATION:
 Verticals inside the store relates to each category of product
o Food Bazaar
o Depot- books
o M-bazaar
o Electronic Bazaar
o Furniture Bazaar
o Footwear Bazaar
 Trolleys are not easily available, especially on other than ground floor.
 Little attention to cleanliness. Dust on shelves as well as some product items.
 In-house packaging not efficiently done.
 Crowded store interiors. Items are arranged in a cluttered way. Tried to stock
maximum number in limited area.
 Sign boards are not prominent. Lack of direction creates confusion.
 Family crowd is evident. Youth comprises of only around 10% of the crowd.
 Food Bazaar very efficiently managed. It is a bit over-staffed but layout is very good.
Shelf space is used very well to stock products with clear distinction.
Introduction
Growth
Maturity
Decline
Time
Cash flow
Flows

46
4.2.5. POSITIONING STRATEGY
Figure 12: Place Oriented Positioning
High Service
Low
Price
Low
service
Hig
h
Pri
High
Value
position
Price Oriented
position
Service Oriented
position
Poor Value
Position

47
4.2.6. BIG BAZAAR vs. KIRANA STORES
Both the retail formats can be studied on the basis of the marketing techniques that are used
to attract customers. But first we will compare their standing in the industry using Porter’s 5
Forces model.
Figure 13: Competitive Rivalry

48
4.2.7. BIG BAZAAR AND 5 FORCES:
RIVAL
INTENSITY
THREAT OF
ENTRANTS
THREAT OF
SUBSTITUTES
POWER OF
BUYERS
POWER OF
SUPPLIERS
HIGH HIGH LOW HIGH LOW
We can get an idea about how competitive this retail sector is, by looking at the degree of 5
forces. Threat of substitute is minimal and supplier bargaining power is also less, but the rest
of the forces are deciding factor in the company’s marketing strategy. They being ‘high’,
means degree of competitiveness is also high. Big Bazaar is involved in bulk purchases so
bargaining power of suppliers is low. The retail chain will not accept very low margins.
4.2.8: KIRANA SHOPS AND 5 FORCES:
RIVAL
INTENSITY
THREAT OF
ENTRANTS
THREAT OF
SUBSTITUTES
POWER OF
BUYERS
POWER OF
SUPPLIERS
HIGH HIGH HIGH HIGH HIGH
The intensity of each and every force of Porter’s model is ‘high.’ This means that the shop
owner is struggling with very less control over his own operations and his strategies are
affected by external factors. Again the competitiveness in this market is very high and market
share for each shop is low due to high number of stores. This gives more bargaining power to
both buyers and suppliers. It is a very easy market to enter, therefore threats of entrants is
high too.

49
4.2.9. 4Ps OF MARKETING
Marketing mix is a deciding factor in formulating marketing techniques for the success of a
particular brand, commodity, or company. The components of marketing mix are:
 Product
 Price
 Promotion
 Place
The survey which was conducted gives the effect of each and every component of the 4Ps on
the consumer’s mind. These components have a huge bearing on the retail battle between Big
Bazaar and Kirana stores.
1) PRODUCT:
 Big Bazaar
Big Bazaar offers the maximum variety for each category of product and this is cited by the
customers as one of the main reasons why they like shopping at the hypermarket. The product
is the same in every store in the city but the brand options are more in Big Bazaar. Also, the
quantity for each product is not limited to large packs only. Observations also revealed that
local brands of popular commodities, like diapers, sugar, wheat flour garments etc, are very
popular in Big Bazaar stores. These products are never advertised but offer huge margin on
sales. In this way lower middle class customers are targeted well. The commodities sold by
the retail chain also includes its “own products” which get a ready distribution network. The
own products of Big Bazaar include My World fashion magazine which is not available
anywhere else. So costs are low for such products.
 Kirana stores
Products at kirana stores are limited. Actually they have very less shelf space. The store
owner does not have many options regarding the range of products that can be sold because
area of the shop is also not very large. There is not much variety in each product i.e. the brand
choice available to customers is low. Kirana stores usually avoid keeping expensive products
which cost more than Rs. 200 and they limit themselves to cheaper and daily use items.

50
Conclusion:
 Big Bazaar scores high on the product part of marketing mix.
 Customer has more choices of brand in Big Bazaar rather than kirana store.
 Customers like touching the product and selecting it themselves before buying.
 The customers trust retail chains with quality of the product. They feel food products
of Big Bazaar will have no adulteration. This quality is not assured in a kirana store.
 Cheap and local brands are heavily stocked in Big Bazaar which make it easier to
attract lower-middle class category of customers.
2) PRICE:
Big Bazaar
Price is the critical point in a competitive industry. Big Bazaar works on a low cost model. It
considers its discounted price as its USP. There is an average discount of 7-8% on all items in
respect to their MRP. Prices of products are low because it is able to secure stock directly
from the manufacturer. There are huge synergies in terms of bulk purchasing, central
warehousing and transportation. These all factors help the retailer to keep low prices. Survey
indicated that low prices were the biggest factor in customers’ mind while coming to Big
Bazaar. It has never focused on giving great services, but laid emphasis only on low prices to
attract crowd.
Kirana stores
Price is a very biased issue in a kirana store. Interview with some store owners revealed that
general policy regarding prices in a store is to give ready discount to its regular customers but
to charge the MRP from new customers. Departmental stores generally work on tight margins
of 6-7%. Change in prices is directly passed on to the customers.
Conclusion:
 Almost everything has some kind of discount in Big Bazaar.
 It clubs small quantities to make bigger packs and then lower prices which kirana
stores are unable to do.
 It considers price to be the biggest attraction for all customers.

51
 Consumers accept the fact that they come from faraway places because it is cheap in
Big Bazaar for bulk shopping.
 It is not possible for kirana stores to give hefty discounts on all items.
 Customers feel same price for all customers as a plus point of Big Bazaar as
compared to differential price policy of kirana stores.
 Some customers feel cash discount is fine but bulk offer deals are of no use because
you end up getting more than you want which is a waste.
3) PROMOTION:
Big Bazaar
Big Bazaar has huge promotion budgets. The biggest idea behind all advertisements is to
make people do bulk shopping. After talking to the store manager I found out that there are 2
types of promotional strategies. One is the holistic advertisement which promotes the brand
and creates awareness among people. It is not targeted at promoting each store but only
creates an image of Big Bazaar as low-cost shopping option. The store has advertised through
TV, road shows and also started reality show-typed promotional campaign “The Big Bazaar
Challenge.” Promotions like “SabseSasta Din” are a very successful strategy to get footfall.
Other type of promotion is the particular store oriented promotion which includes speaking
on the loudspeaker in nearby blocks. Leaflets are given in local newspaper. There are
promotional efforts even inside the store. During the survey, it was noticed that Buy 2 Get 1
Free type of promotions are very common. Original prices are cut down and new prices are
shown, of which customer takes quick notice. There are loyalty schemes which reward
regular clients. Promotion is also done through co-branded credit cards with ICICI bank.
Kirana Stores
Kirana stores are involved in almost negligible promotion activity. They rely mainly on
advertisement from the manufacturer of goods to pull in customers. They promote certain
brands by putting names on shelves etc but they do not advertise themselves as preferred
store for local people. One reason can be they work on tight budgets which have no scope for
advertisements. Leaflet promotion maybe done once while inaugurating new store, but not
during the course of existence.

52
Conclusion:
 Retail chain Big Bazaar cannot survive without promotions on national or regional
level.
 A big ad budget helps it to get large scale of operations.
 Customers accept the fact that advertisement campaign of Big Bazaar did influence
them in their buying behavior.
 Its Buy 2 Get 1 Free strategy influences the customer mindset a lot once they enter the
store.
 Customers feel loyalty card schemes make them come again and again to the store.
 Promotion of kirana store is a rare event.
4) PLACE:
Big Bazaar
Place means the location of the business. Big Bazaar has always worked on low-cost
locations. It targets semi-urban population with its placement. Its strategy is to find a cheap
location and it never goes for hot spots in the city. The talk with the manager revealed that
the Teghoria store was opened when it was scarcely populated. Even in Gurgaon, Big Bazaar
chose Sahara Mall instead of Metropolitan or City Centre, which are more popular than
Sahara Mall. It relied on promotional activities to make up for unattractive locations. The
channel of place is company owned stores to have complete control. Another strategy used by
Big Bazaar to overcome location disadvantage is use of internet. It has launched a
merchandise retailing website www.futurebazaar.com which targets high-end customers
ready to use credit cards. Therefore Big Bazaar has made headway into a potentially high-
yielding sector of online trade. Internet as place has put them in a profitable position because
there is minimal expense of maintaining a website. The promotion of this website is done
through advertisement on Google. The website is put as sponsored link.
Kirana Stores
Kirana stores are always placed in crowded market area which is located in each block and
sector. On talking to the owners, it was found that some stores were inherited by them from
their father, so they had no choice of location. Otherwise it is common practice to find busy
street corners to get maximum customers. Location is important because buying decision is
on impetus during day-to-day life. So the customer goes on for the nearest store. The store

53
owners are ready to pay more rent for better locations because their promotion activity is
negligible.
Conclusion:
 Location is something which is permanent. So cautious decisions are taken while
selecting place.
 Big Bazaar refrains from high-end locations for its business.
 Some customers travel from far places to the store. So place factor has less influence
on them.
 Semi-urban customers still prefer kirana shops, so location of retail chain should be
near to them because they will not travel too far.
 Kirana shops make sure availability of goods nearest to the residential area.

54
4.2.10. PROFITABILITY
Profit is the basic motive behind the running of any business. Both retail formats have their
own budgets, future projections and financial limitations. Profitability measures the
efficiency of operations. It also helps us decide the better option amongst the two. Big Bazaar
and local departmental stores work on different scales of operation. The deciding factor here
is investment capability.
Big Bazaar
This retail chain is present in all major cities of the country. And this means there is huge
requirement of capital. The stores generally occupy 30,000 square feet of space on an
average. In the wake of rising real estate prices, “place” component of marketing mix
becomes an increasingly important factor in deciding future strategies. The store included in
the survey revealed that they have average sales of 8 lacs per day. But they do not disclose
their profits for particular store. Big Bazaar is a brand under Pantaloon Retail (India) Ltd. The
net worth of the company is Rs 526.88 crores. This includes all the investments made by the
promoters and subsequent reserves created during the life of the business. The profit after tax
in financial year 2005-06 was 64 crores on revenues of 1871 crores. This means a net profit
ratio of 3.42%. this is very low for a national retail chain but it highlights the fact that the
sector has a huge potential and will generate more profits once the government policies are in
favor of opening up the sector further. Low profit can be attributed to
 High cost of research required to study each and every region of the country
 The large number of staff needed to manage all the stores
 Burgeoning real estate prices which leads to high rentals
 Huge promotional activities undertaken to ensure enough footfall
Kirana Stores
Kirana stores have only one source of income i.e. margins available on selling FMCG
products. The store owners revealed that in earlier days, they used to enjoy margins of well
over 11% on products from HUL, P&G and Marico. But now the margins have slipped to
around 7%. Another thing to be noticed is that credit period given by distributors has also
come down significantly, though the shop owners refused to give details on that. Average

55
daily sales of a Salt Lake kirana shop covering 180 square feet in busy AE block market
stands at Rs 6000-7000. Profits made each month are confidential information which none of
the owners wanted to give. But considering the margins and overhead expenses, they might
be making a daily profit of Rs 350.
 Some Gap Findings :
 Gap
o Customer- driven service Designs & standards Management perception Of
customer expectations 1.Poor service design -Unsystematic new service
development process Un defefined service designs Failure to connect service
design to service positioning 2.Absence of process management to focus on
customer Requirements -absence of process management to focus on
Customer requirements -absence of formal process for setting service quality
goals 3. Inappropriate physical evidence &servicescape Failure to develop
tangibles in line with customer expectations -servicescape design that does not
meet customer needs - Inadequate maintenance & updating of the servicescape
 Service facility
o e- purchase facility Relaxed return policy Home delivery T-24 Green card
facility Exclusive Sale Preview Exclusive Billing Counters Complimentary
Home Delivery Instant Discounts Relaxed Return Policy Complimentary
Parking SEND GIFTS TO INDIA Birthday Anniversary Love & Romance
Gifts For Him Gifts For Her Flowers Chocolates & More Exquisite Cakes Gift
Vouchers Personalized Gifts Spiritual Products Soft Toys Unique Gifts
Leather Accessories Skin Care Gifts to U.S.A
 Gap – Start Management may understand & know what customer want but fail to
translate these expectations into the correct specification
 Complains Problem in Alteration Problem in gift voucher to cash Problem in billing
in bulk Problem in e- purchasing (futurebazzar.com) Problem in replacement Problem
in wrong billing Sending gifts in India Problem in prepaid card T24
 Gap - Reduction strategies that the company is practicing Employee training Taken
the help from 3 rd party for survey Made one team for handling this.

56
Kishore Biyani’s Future group re-launched its e-commerce business in 2010. At the time, the
idea was to get to 10% of its overall sales from e-commerce. The plan was to push sales
through online properties such as Futurebazaar, Ezoneonline and others.
 Since then, much water has flown under the bridge. While Futurebazaar isn’t any
close to what it set out to achieve, its traffic is dwindling. Futurebazaar’s traffic
started dropping off sometime earlier this year. In the last three months, its global
Alexa ranking has dropped over 2000 points. We don’t know if the revenues have
taken a hit yet, but it seems likely.
Figure 14: Futurebazaar Vs Cromaretail (Source: Alexa)
 Much of online businesses’ traffic woes could be linked to sweeping changes at the
group, fire fighting to keep over Rs 8000 cr of debt under control.
 In the last year or so, the company has sold off many assets to bring down debt. A
majority stake in its investment advisory services business Future Capital Holdings
was sold to Warburg Pincus last year. It has also sold 22.5% stake in Future Generali
(a life Joint Venture) for Rs 300 cr. Pantaloon retail was sold to Kumar Mangalam
Birla’s Aditya Birla Nuvo in 2012 for Rs 1600 cr. The online sites of Pantaloon retail
(1,2), non starters from the go, have been shut. Another site, Pantaloonfashion.com,
doesn’t sell online.
 KashyapDeorah, the president of Futurebazaar quit the company in November last
year to launch a mobile payments company called JustChalo, which was acquired by

57
US online restaurant reservations provider OpenTable in a stock-and-cash deal worth
$11 million.
 The team from Chaupaati bazaar which came in through the acquisition has moved on
to other things, like Toppr.
 Kishore Biyani wasn’t any less ambitious about his e-commerce business. In 2010,
reports claimed that his target was to notch up Rs 1,000 cr in yearly sales from e-
commerce. That seems like a far cry now. Even Flipkart, hailed as India’s largest
online retailer is looking at gross sales of $500 mn this year.
 By 2011, ambitions had tempered a bit. The company wanted to target a modest Rs 1
cr in daily sales from e-commerce. In other words, over Rs 350 cr a year.
Whatever the future of Futurebazaar is, it doesn’t look pretty right now. When there is a fire
raging in the brick and mortar store, big retail probably has little time to spare for e-
commerce.
(source :http://www.nextbigwhat.com/a-look-at-future-groups-online-foray-present-
tense-297//)

58
4.3. Reasons for the failure of Futurebazaar.com
1. Grocery Shopping Is a Social Experience
Families go to the grocery store together to browse the aisles and plan their next week's
meals. Single people even visit specific stores in order to attract potential dates. None of
these activities are feasible with the online shopping experience. (For related reading,
see Tips For Keeping Your Financial Data Safe Online.)
2. Purchasing Produce Is a Tactile Process
Shopping for fruits and vegetables online would be as useful as picking out paint colors over
the phone. Internet grocers couldn't possibly spend the time and money necessary to take a
picture of each actual piece of fruit, but even if they did, you couldn't hold it, shake it or tap it
to determine its quality.
3. Fish and Meat Are Best Purchased by Sight
While buying a steak, shoppers want to see the cut they are getting. They can determine
freshness from the color and the odor. Once again, online pictures, even if feasible, can't
communicate the nuances a customer is looking for in a nice cut of meat or piece of fresh
fish.
4. Freshness Matters
Local supermarkets bake bread each afternoon so that shoppers can return home with a fresh
loaf. Shoppers rush home to ensure their ice cream won't melt and their lettuce doesn't wilt.
Grocery delivery requires that you stick to a schedule in order to be there when your food
arrives. If you can't immediately cool your ice cream or lettuces, this all-important freshness
is lost. What is supposed to be a convenient service becomes an inconvenience for many who
would rather maintain a flexible schedule.
5. The Right Technology Hasn't Yet Been Applied
We can envision a day when supermarket websites show virtual products on shelves that can
be visually browsed. But so far, no store has created a more innovative interface than your
typical web merchant. Until a grocer makes shopping online faster and easier than browsing
the aisles, people will continue to visit the supermarket instead of ordering online. (For

59
related reading, see Technology Sector Funds.)
6. Grocery Shoppers Do Not Use Recurring Lists
Online grocers tout the ability to let customers create a list of items to be purchased on a
recurring basis. But that is just not how most people shop. People like to try new things based
on the current prices, their changing appetites or just on a whim rather than order the same
food over and over again.
x`
7. No Cost Advantage
The premise behind internet grocers was that shoppers would pay more money for goods
delivered to their door. However, the opposite is true. Most shoppers will only order
groceries online when they can be assured of saving money. Amazon and other web retailers
cut consumer costs by centralizing their products in out-of-state warehouses. This way, they
can use national shipping infrastructures, minimize their locations and save consumers the
sales tax.
In contrast, an internet grocer must have a warehouse in every metro area along with their
own fleet of specialized delivery vehicles, all while charging the same sales tax as a
competing supermarket. Due to these expenses, grocery delivery services could cost more
than food purchased at a local supermarket. (For related reading, see Online Banks: Lower
Costs And Little Sacrifice.)
8. Consumers Dislike Delivery Time Windows
The last thing anyone wants to do is replace their spontaneous supermarket shopping
experience with an ordeal similar to waiting for their cable television service to be installed.
Most would much rather make a quick stop at their grocer on the way home from work than
be forced to stay home between the hours of 3pm and 5pm in order to meet a delivery truck.
9. Supermarkets Are About Much More Than Just Food
When visiting a typical supermarket, it is hard not to notice that less than half the space is
occupied by actual food. Supermarkets offer flowers, balloons, greeting cards, event tickets,
magazines, books, movie rentals and much more. Other services often located inside or
adjacent to a supermarket include banks, photo printers, coffee shops, liquor stores and dry
cleaners.

60
10. Speed Matters
In Europe, shoppers typically purchase ingredients for their meals the day they prepare them.
While this is a less common practice in the United States, customers often do shop for food at
the last minute. This is why grocery stores are always open on Thanksgiving Day. Since the
use of a grocery delivery service requires advance planning, it can't accommodate impulse
purchases.

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