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Marketing local products:
Short and long distribution channels

[ Summary ]

Section II
Collectively marketing local
products via long distribution channels

 

Chapter 4
Marketing channels

 


 


4.2 Entering mass retailing

 

Until a short time ago, in many countries mass retailing was considered to be a marketing channel that was inaccessible to small traditional and farm-based food production units (and indeed many people still share this view). The main basis of this premise rested on quantities that were impossible to supply, unreasonable purchasing terms and the deteriorating image of quality products.

Be that as it may, nowadays mass retailers are business associates that are difficult to ignore.

Organised mass retailing, which is strongly established in France (46.7% of the entire retail trade in 1994) and in northern Europe generally, is now expanding rapidly in southern European countries like Spain, Portugal and Italy. This has meant that, in the space of a little over ten years, Italy has experienced very strong growth in the number of supermarkets and hypermarkets. If the figures of the marketing firm Nielsen are to be believed, the number of supermarkets in Italy grew from 2,030 to 5,433 during the period 1985-1995 (an increase of 168.6%) and this rising trend has continued over the subsequent three years (+7.3%). During this same period, an even sharper increase was recorded in the number of hypermarkets (+431% between 1985 and 1995 and +42.8% between 1995 and 1998).

Taking advantage of the enormous quantities of products they can shift, mass retailers impose inflexible sales conditions on their suppliers, demanding very low basic tariffs, to which they add supplementary conditions. So, every time the distributor “so much as moves a finger”, the supplier has to pay for this service, and every infringement of the stipulated agreement is subject to further penalties. Under such circumstances, the net selling price is never a known quantity for the supplier and can only be ascertained after analysing the net balance, which must take into account not only the basic price and volumes sold, but also costs relating to unsold articles, services provided, promotion (on a case-by-case or annual basis), end-of-year discounts on turnover, and so forth.

In many cases this is tantamount to a “price erosion” policy that can easily slip out of the supplier’s control and may yield negative results in terms of profit margins. In a business relationship with a purchase centre, for example, it is usual to have the following type of charges:

 

Type of supplementary costs/percentage impact on turnover
Admission fee 3 - 5%
Logistics (delivery to sorting or multimodal centres) 3 - 4%
Single invoicing 0,5 - 1%
Promotion of peripheral sites 3 - 4%
Total 9,5 - 14%

 

In the above table, the scale of expenditure is represented in the form of the estimated impact on annual sales volume, but in actual fact sometimes a lump sum is established and some of these charges, such as the admission fee, may not be covered by any guarantee as to future sales volumes or the duration of the business relationship. In the words of Jean-Philippe Arvert, director of Saveurs des Pyrenées: “Mass retailers have a short memory...”

 

Negotiating a path through mass retailing


Mass retailing cannot be represented as a single model. It is more akin to a constantly shifting network of marketing channels in which marketing policies (the types of consumer they target change, for example), the size and, consequently, the volumes specific to each point of sale (hypermarkets, supermarkets, etc.), as well as the internal organisation and purchasing system, differ:

  • major groups running HYPERMARKETS - which extend throughout the country and abroad and within which the role and power of purchase centres is growing. This means that it is becoming increasingly important to maintain good relations with such purchase centres, even if this causes obvious difficulties (e.g. with available volumes);

  • medium-sized sites - rural supermarkets, which have some freedom when it comes to making purchasing decisions and almost always tend towards a policy of characterisation and identification with the area;

  • small regional stores.

Each of these retail chains adopts a very different commercial approach, and such differences naturally have a considerable impact on the nature of the relationship with producers and the latter’s strategy options. In countries where mass retailing has grown significantly, it is, however, possible to encounter a common disruptive element. In their frantic bid to interpret the slightest nuances of customer demand and consumer lifestyles, the marketing managers of major chains are often completely at a loss to account for an enormous “black hole” which in France is described as the phenomenon of “consumer zapping”.


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European
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Agriculture
Directorate-General