Functions, Formats and Players in RetailingPart I
Case Study: HUGO BOSS
Solution Draft
Question 1
List possible motivations for the implementation of secured distribution activities from a manufacturer’s perspective and apply the insights to HUGO BOSS’ situation in detail.
From an industry perspective, nowadays secured distribution activities play animportant role in the distribution strategy. The emergence of Internet selling opportunities further contribute to vertical integration. But the motivations to do so can vary between manufacturers to a great extent. Tsay/Agrawal (2004, p. 94) provide a list of what motivates manufacturers toimplement secured distribution activities:
resellers carry only small assortments of a manufacturer’s product
direct control of distribution and pricing can lead to higher profit margins
resellers can use their power to extract various concessions from the manufacturers
manufacturers can provide a broader product selection in a better ambiance with higher service in direct outlets
more flexibility in experimenting with product attributes
closer contact with customers
protection from crises faced by resellers.
Companies can define the range of products offered in company-owned channels while this can be influencedincontrolled distribution channelsor in relation with independent retailers rather hardly. Looking atHUGO BOSS, the range of products varies in accordance with its formats and the corresponding sales area. While nearly the full production programme is available in flagship stores, the number of articles is lower in the specialised direct operatedstores. Furthermore, HUGO BOSS can decide about the configuration of products and focus on target groups, e.g. by offering only products of a special line.
Additional, is the possibility to influence the store layout and locationof company-owned channels in accordance with the intention of the store format. Flagship stores can deliver the full brand experience through impressive visual merchandising.HUGO BOSS utilises flagship stores to build brand image and to showcase the manufactured products in a high-quality presentation. But prime locations, merchandising, and the personnel to grant attentive service are expensive. Even though high investments and costs are inevitable, HUGO BOSS’ directly operated storesattract millions of consumers every year thus making an enormous contribution to HUGO BOSSbrand image and brand value respectively. Moreover, other retailers may be attracted to carry the brand in their own stores. On the contrary, HUGO BOSS factory outlet stores are intended to sell overstock and close-out merchandise. The price-orientation makes the store layout less important and investments can be cut down to the minimum necessary.
With secured distribution, manufacturers can protect themselves from crises affecting the resellers. Some of HUGO BOSS’ big global retailershave in the past increased their market share. They even may continue to do so in the future by expanding through acquisitions and by construction of additional stores. The country-dependent tendency to concentration in fashion goods retailing can result in domination by a few large retailers and retail chains with many stores respectively. One cause of risk is constituted in the concentration of credit risk with a relatively small number of retailers. If any of them were to experience a shortage of liquidity, it may increase the risk that outstanding payables may not be paid.
Additionally, HUGO BOSS can experiment with product attributes and derive customer’s needs in a very efficient way.As the company is able to identify customer preferences directly from retail activities, these insights can be taken into consideration in the production process. Because contact is direct and immediate,HUGO BOSS can acquire valuable consumer insights and better adapt the products on what customers really want instead of solely depending on the retailer to provide such information (Hauptkorn/Manget/Rasch 2005).
Question 2
Describe potential channel conflicts for a manufacturer adding a new company-owned retail channel and use HUGO BOSSto illustrate some examples. Please elaborate on ways that are suited to manage channel conflicts.
Vertical integration of retail activities can create a brand platform,i.e., the awareness of the brand is rising due to higher visibility of the brand on the market, and leverage sales in the end.But it can also create a conflict of interest with other retailers a manufacturer supplies. Such a conflict could lead to retailers lowering the intensity of cooperation or to stop cooperating with a manufacturer and consequently, to a lower market penetration in the long run. Hence, a balance has to be found to profit from advantages of secured distribution without cannibalising sales with independent retailers. This calls for treating retail accounts sensitively, keeping their concerns or potential fears in mind. Moreover, adding new distribution channels can lead to conflicts between existing channels. That is why manufacturershave to balance their direct channel mix at the same time. The definition of channel conflicts follows the interpretation of Stern/El-Ansary/Coughlan (1996) who use this term “to broadly describe any sort of conflict of interest across channels”.At first, the manufacturer needs to identify potential channel conflicts to be able to target and solve the problem. As has been deduced, channel conflicts in general can occur between a manufacturer’s and an independent retailer’s channel (inter-company conflicts) or between manufacturers’ channels (intra-company conflicts). Bucklin/Thomas-Graham/Webster (2004) summarise them as follows:
Inter-company channel conflicts:
new channel targets customer segment already served by an existing retailer
selecting the right partner within a channel
new channel can affect prices of the retailer’s channel
new channel can evoke new direct competition.
Intra-company channel conflicts:
selecting the right channels
new channel targets customer segment already served by an existing channel.
Inter-company channel conflicts occur between an indirect distribution channel, e.g. a traditional retailer, and a direct distribution channel of a manufacturer, e.g. a new flagship store or Internet store respectively. Adding new distribution channels exposes a company to competition with established players on the respective market. Depending on the market saturation, competition can be very tough.
The company has to allocate budget to the different channels reasonably and in accordance with the strategic position of the channel. HUGO BOSS’ flagship stores, e.g., contribute to brand image and brand value to a great extent and therefore consume more capital in comparison to factory stores. Besides that, HUGO BOSS has to define a hierarchical order of the direct sales channels tosolve the strategic question whether cross-channel sales are accepted or not.
When a manufacturer assesses channel conflicts as potentially critical it is important to be able to react to the situation quickly. Therefore, an adequate approach should have been identified before the problem arises.The framework to manage channel conflicts illustrates one example of possible ways to tackle channel conflicts depending on the different stages of its development.Bucklin/Thomas-Graham/Webster (2004) differentiate three stages of severity of the channel conflict. Firstly, a conflict between two or more channels can be identified. Secondly, this has a negative impact on the channel performance and, thirdly, the threatened channel of the manufacturer stops performing and the retailer retaliates against the manufacturer. Consequently, the manufacturer suffers in either case.
The ways for manufacturers, how to react to potential conflicts, can vary on a broad spectrum of possibilities. This begins in the first stage with the possibility to differentiate the products and services that are offered in each channel. On the one hand, it can be the manufacturer who reacts on the conflict as he can enlarge the product offering by product modifications or by exclusive products that are not available in the retailer’s stores. Additionally, the manufacturer can implement an equal-pricing strategy that optimises the manufacturer’s profit and, as research has shown, is preferred by the retailer and the customers as well (Cattani et al. 2006, p. 54). On the other hand, retailers could elevate the purchase experience in a way that is unique and hard for the manufacturer’s direct channel to match. This might work with new services. The spectrum ends on third stage with the manufacturer backing off and shutting down the channel.
Question 3
Given the company-owned retail activities of HUGO BOSS, assess the contribution of the current development to long-term success of the company.
To assess the prospects of HUGO BOSS’ company-owned retail activities, e.g., success factors for vertically integrated brands can be taken into account. Hauptkorn/Manget/Rasch (2005, p.5) have identified five categories of success factors that have a positive impact on long-term success: category characteristics, company characteristics, brand characteristics, market dynamics and competitive environment.
HUGO BOSS’ operational growth strategy is based on four pillars (HUGO BOSS 2015, p. 43):
elevating the BOSS core brand by engaging consumers emotionally
leveraging the brand’s potential in womens-wear, shoes and accessoires
building omnichannel to drive own retail online and offline
exploiting growth opportunities in underpenetrated markets.
Notably, the omnichannel approach is one of the core issues to ensure a longitudinal and sustainable growth. By opening new company owned stores and shop-in-shops, focussing in metropolitan regions, the group sees good opportunities to increase its global market penetration. Even if the expansion rate slows down, comparing to the earlier years, the possibility of profitably operating larger stores than in the pastdue to the breadth and quality of its offerings is given. In addition to opening new stores, HUGO BOSS is also considering the takeover of stores thatare currently operated by franchise partners, depending on the attractiveness and growthprospects of the relevant market.HUGO BOSS conducts to significantly increasing the sales productivity of the stores it takes over by autonomouslyselecting the product range, using its own specially trained sales personnel and assuming responsibility for replenishment.
The strong financial position helps HUGO BOSS to afford the planned growth of the retail network. Revenues of 1,471.3 million EUR of the company owned stores, a consolidated EBIT (earnings before interest and taxes) of 449 million EUR and an adjusted EBITDA (earnings before interest, taxes, depreciation and amortisation) margin of 23.0% in fiscal year 2014 document the financial strength.
References
BUCKLIN, C.B.; THOMAS-GRAHAM, P.A.; WEBSTER, E.A. (2004): Channel Conflict: When Is It Dangerous?, McKinsey Quarterly 1997, No. 3, pp. 36-43.
CATTANI, K.; GILLAND, W.; HEESE, H.S.; SWAMINATHAN, J. (2006): Boiling Frogs: Pricing Strategies for a Manufacturer Adding a Direct Channel that Competes with the Traditional Channel, in: Production and Operations Management, Vol. 15, No. 1, pp. 40-56.
HAUPTKORN, B.; MANGET, J.; RASCH, S. (2005): Taking Care of Brands Through Vertical Integration, The Boston Consulting Group, Munich.
HUGO BOSS (2015): Annual Report 2014,
accessed on March 24, 2015.
STERN, L.W.; EL-ANSARY, A.I.; COUGHLAN, A.T. (1996): Marketing Channels, 5th ed., New Jersey, Prentice Hall.
TSAY, A.A.; AGRAWAL, N. (2004): Channel Conflict and Coordination in the E-Commerce Age, in: Production and Operations Management, Vol. 13, No. 1, pp. 93-110.
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