Marketing Planet

Distribution channels performance and brand image influence

According to the international marketing theory, the channel performance of an exporting firm is due to its style of channel management. Indeed, what is important in every kind of business is the relationship management.

When it comes to sizeable companies and brand strategy, in what extent the power of brand image has a noticeable influence on the performance of their distribution channels? One of the best examples is L’Oreal, the French world leader in cosmetics. Our analysis will deal with its distribution channel in the Balkans.

L’Oreal’s Distribution Channel in the Balkans

With 290 subsidiaries, more than 100 distributors off-group and 42 plants, all spread out in about 130 countries, L’Oreal is the leader of the cosmetic industry. The group has begun its internationalisation in 1912 by following three steps:

  • first, commercialisation of professional shampoos to hair-dressers via distributors in near Europe (Spain, Italy, Great Britain, Germany and Poland) and in the Americas – “first landing [1];
  • second, local firms are taken over for example in the USA (Redken 1993, Maybelline 1996 etc.), in Argentina (Miss Ylang 2000) – “go native";
  • third, subsidiaries (production, research and development) are directly created (Greenfield investment) without any first passage via distribution. It is the case in Asia (Japan and Hong Kong) – “globalisation”.

As the cosmetics market holds five particularities [2], the group has to face harsh competition and new stakes like diversify its product segments (baby-boomers which become “mammy-boomers”; American, French and Japanese young with specific tastes; and men), exploit new means of distribution (like on line sales) and finally, take advantage before the competitors, of new emerging markets like Asia, India, Latin America, Africa and East European countries.

For our analysis on distribution channel performance, we will focus on the Balkans [3] region where the group detains its highest number of distributors as well as no subsidiary [4] Furthermore, these countries are future new comers in the European Union and such a particular presence in this region is no doubt linked to L’Oreal internationalisation strategy.
Distributors, in this area, buy products directly to the headquarters and are provided thanks to the Hungarian subsidiary.

Performance Evaluation

Several criteria, extracted from the Marketing literature [5] enable to evaluate L’Oreal export channel performance. These criteria are divided into four main categories (see schema 1):

  • 1. Selection of foreign intermediaries is the first criterion to examine: what has determined the choice of one distributor better than one another? Indeed, if choice is not well considered, performance tends to be altered. “An ineffective foreign distributor can set you back in years; it is almost better to have no distributor than a bad one in a major market” [6]. In the case of L’Oreal, the choice of a distributor comes from three options: recommendations from business contacts, prospecting or direct requests by the distributor himself. In all cases, a deep audit of the would-be distributor is undertaken [7] (financial strengths, commercial force, know-how, etc. ...). Obviously, the chosen distributor does not sell direct rival products nor any other cosmetics products. The distributor seems to have a great interest to cooperate to this rule otherwise they lose the opportunity to sell the famous brand.
  • 2. Monitoring: such as reporting, control of selling places, frequency of visits and type of contract, is said to be necessary in order to reduce information asymmetry that undergoes the exporter. All types of monitoring are part of the process control [8]. In the group, a monitoring system has been set up in order to obtain regular information at a fixed term on sales, prices and selling places. This reporting enables also the group to follow the evolution of the stock levels by its distributors, which are also controlled at a fixed regularity. Such a system is imposed to distributors: they have to adapt, if they want to enter in a long-term relationship with the group.
  • 3. Relational Dimension: relationship management is important. Communication is primordial. By L’Oreal, it seems to be permanent concerning the marketing strategy, the objectives definition and problems solving. Shared values sound to be “respect”, “common interest” and “integrity”. These values are the basis of L’Oreal channel distribution good performance and success. This is conveyed by the “win-win relation” between partners. However, in theory, socialization and joint decision are keys to a bilateral governance and thus, to a good performance of the channel. By L’Oreal, we have just seen that the group seems to impose its marketing and commercial vision to distributors.
  • 4. Control of the marketing mix, such as price, promotion, distribution and product. According to ARNOLD’s article [9], an international group must keep control on its marketing mix. It is an important criterion to evaluate the performance of an export channel. Indeed, wanting to increase its short term sales, the distributor may damage the group’s image. L’Oreal is known for its strong control of promotion, place, price and packaging strategy, which is decided from the headquarters. For these points, only minor product adaptations are made in different countries (such as labels’ languages) [10]. Overall, in-the-field-controls are very frequent to check if prices and selling places comply with the group marketing strategy.

Schema 1 - Channel Performance criteria, by V. Vinas:

PNG - 71.8 kb

L’Oreal visibility on those markets in terms of adverts, or even physical products presence, is the undeniable proof of its channel distribution success. But does not the weight of the group’s brand image play a major role on such a performance?

Brand Image Influence on Channels Performance

Of course brand image seems to have a noticeable influence on a firm’s channel performance. Indeed, as the article “Seven rules of international distribution” (Harvard Business Review) stresses, a multinational company needs to have power over its marketing strategy in order to supervise the way the distributor reflects the image of the group. This may be at the same time favourable or damaging.

Furthermore, a group notoriety may also facilitate the selection of foreign partner (distributing famous products is always quite an “honour” for a collaborator abroad and the candidates are often numerous.) Finally, the group counts on the “win-win relation” and so, on the involvement of the distributor, that is expected to respect the group’s rules, first for his own interest.

Regarding L’Oreal, on one hand, the group takes advantage of its notoriety in order to impose its own rules to distributors, which have no other choices than accept them; otherwise they might see themselves replaced immediately and without any state of mind. L’Oreal seems to exploit its own image to make the relationship go well and the results optimal.

On the other hand, because of such notoriety, it is undeniable that the group is obliged to edict a strict policy of monitoring, because the distributor may damage easily its reputation.

Brand Image, limits and stakes

To conclude, there is a real power balance between the two partners. First, it seems to be necessary for L’Oreal to maintain its position of leader and take care of its brand image. Then, the distributor has an interest to convey his vision to the one of the group, in order to work as long as possible with it. The clue to the success of its distribution channel management might be found in the principle of the “win-win relation”.

However, the influence of a company’s brand image on its channel distribution management shows some limits or drawbacks. Indeed, by an over-extensive control of the marketing mix strategy, the distributor is not really involved in the creativity. All the more, he is the best to know the market. He could participate in the acculturation of the marketing mix, with a consequence he can transmit to the multinational company some cultural items of his own country. This is called the “joint decision” which we find in a bilateral style of channel management.

Secondly, a distributor might be treated as a long-term partner rather than a temporary “means” to enter in a foreign market. Indeed, the latter could think that the company does not trust in him and this could favour some opportunistic behaviour from his part (non respect of the engagement taken by both parts). This is what we call the “socialisation” of the partner.

The remaining question for L’Oreal future channel management in the Balkans is: will the group go on with its famous “road roller” management style or will it be more flexible with its distributors’ relationship in order to recover its leadership? The leadership position seems indeed currently threatened by rising competitors like Beiersdorf (Nivea) or Procter & Gamble (Head and Shoulders, Pantene, recent takeover of Wella) and by two major uncertainties: an increasing rate of talents’ resignation since 2003 and Lindsey Owen Jones’ succession question [11]

Indeed, the group seems to face a double issue. On one hand, it has to follow a defensive strategy, as being the leader of its sector. It must be rigorous with its distributors, and as a consequence, they can not be original in the sense that they may not accept some marketing mix propositions or “liberties” from its distributors. In addition, the group can not afford to take many risks, given the stakes it has to face, but also given the fact that it is governed by shareholders. On the other hand, in order to gain market shares in such East European countries in front of its major competitors (offensive strategy), it may have to invest more in its relationship with its distributors, by giving them more room to express themselves. L’Oreal could thus benefit from new hidden opportunities, by better knowing the market thanks to its distributors, and improve its results. A story to follow.

Footnotes:

[1Source LEMAIRE (1997) Stratégies d’internationalisation, Dunod.

[2Regulated on products fabrication; Oligopolistic; Mature in Europe but growth in other continents; Constrained by the nature of the product – obliged adaptation to cultural and ethnic specificities – and Unlimited in time – unlimited beauty concepts in irreversible social evolution of people.

[3Albania, Bosnia, Kosovo, Montenegro, Macedonia and Serbia.

[4Source : L’Oreal website

[5Sources: ARNOLD D.(2000) “Seven rules of International distribution ”, Harvard Business Review; ZOU S., STAN S. (1998) “The Determinants of Export Performance: A Review of the Empirical Literature Between 1987 and 1997”, International Marketing Review.

[6Source: CAVUSGIL S.T., YEOH P.L, MITRI M. (1995) “ Selecting foreign intermediaries, an expert system approach”, Industrial Marketing Management

[7Sources: Articles in “FORTUNE”, by Richard Tomlinson, “L’Oreal’s Global Makeover”, Sept. 2002; “L’EXPRESS”, by Corinne Scemama, “La recette russe de L’Oréal”, 6 November1997.

[8Source: BELLO D. C., GILLILAND D.I. (1997) “The Effect of Output Controls, Process Controls, and Flexibility on Export Channel Performance”, Journal of Marketing, 61 (January 1997)

[9Source as mentioned above: ARNOLD D. (2000) “Seven rules of International distribution”, Harvard Business Review

[10Source article in « Les Echos », Industrie, by Valérie Leboucq, « L’Oréal organise la mondialisation de son outil de production », 13 October 1997.

[11Source article in “ENJEUX”, by Anne Feitz, « L’Oréal, Un peu moins belle en son miroir », January 2005.