ALLAMA IQBAL OPEN UNIVERSTY

STUDENT ID CLASS SUBJECT

: : :

AM552730 MCOM (II)

MARKETING MGT

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A Report on MARKETING CHANNEL MANAGEMEN CASE OF NESTLE

(Year 2012) Subject: Marketing Management

ALLAMA IQBAL OPEN UNIVERSTY ISLAMABAD Project on Marketing Channel Management (8511)

Prepared & Presented by:

Submitted by : Mabroor Ahmed Roll Number : AM552730 Submitted to Date : Mr Nouman Sattar : September 24, 2012

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ACKNOWLEDGMENT
All acclamation to Allah who has empowered and enabled us to accomplish the task successfully. First of all we would like to thank our Allah Almighty who really helps us in every problem during the project. We would like to express our sincere and humble gratitude to Almighty whos Blessings, help and guidance has been a real source of all our achievements in our life. We would like to admit that we completed this project due to parents who pray for our success. We also wish to express our appreciation to our supervisor Mr Nouman Sattar who helps us and introduce us to new dimensions of knowledge. Last but not the least our team efforts, support, cooperation and encouragement showed by each member in the group with each other.

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DEDICATION
Our PROJECT is dedicated to our beloved Parents, teachers, brothers, sisters and all of ourselves.

ON MANAGING CHANNEL CONFLICTS OFNESTL

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INTRODUCTION
Nestl was founded in 1866 by Henri Nestl and is today the world's biggest food and beverage company. Sales at the end of 2005 were CHF 91 bn, with a net profit of CHF 8 bn. Nestl employ around 250,000 people from more than 70 countries and have factories or operations in almost every country in the world.

The history of Nestl began in Switzerland in 1867 when Henri Nestl, the pharmacist, launched his product Farine Lacte Nestl, a nutritious gruel for children. Henri used his surname, which means little nest, in both the company name and the logotype. The nest, which symbolizes security, family and nourishment, still plays a central role in Nestls profile.

Since it began over 130 years ago, Nestls success with product innovations and business acquisitions has turned it into the largest Food Company in the world. As the years have passed, the Nestl family has grown to include chocolates, soups, coffee, cereals, frozen products, yoghurts, mineral water and other food products. Beginning in the 70s, Nestl has continued to expand its product
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portfolio to include pet foods, pharmaceutical products and cosmetics too.

Today, Nestl markets a great number of products, all with one thing in common: the high quality for which Nestl has become renowned throughout the world The Company's strategy is guided by several fundamental principles. Nestl's existing products grow through innovation and renovation while maintaining a balance in geographic activities and product lines. Long-term potential is never sacrificed for short term performance. The Company's priority is to bring the best and most relevant products to people, wherever they are, whatever their needs, throughout their lives. Taste of Nestl in each of the countries where Nestl sell products. Nestl is based on the principle of decentralization, which means each country is responsible for the efficient running of its business - including the recruitment of its staff.

That's not to say that every operating company can do as it wishes. Headquarters in Vevey sets the overall strategy and ensures that it is carried out. It's an approach that is best summed up as: 'centralize what you must, decentralize what you can'. Nestl is a company which is present in all over the world but it has difference and unique motto to deal in all over the world. Nestl believes that they should think about their organizations globally but they deal with people by interacting with them locally.

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THINKING GLOBALLY ACTING LOCALLY

INTRODUCTION TO NESTL INDIA
Nestl India is a subsidiary of Nestl S.A. of Switzerland. With seven factories and a large number of co-packers, Nestl India is a vibrant Company that provides consumers in India with products of global standards and is committed to long-term sustainable growth and shareholder satisfaction.

The Company insists on honesty, integrity and fairness in all aspects of its business and expects the same in its relationships. This has earned it the trust and respect of every strata of society that it comes in contact with and is acknowledged amongst India's 'Most Respected Companies' and amongst the 'Top Wealth Creators of India'.

AN OVERVIEW
Nestls relationship with India dates back to 1912, when it began trading as The Nestl Anglo-Swiss Condensed Milk Company (Export) Limited, importing and selling finished products in the Indian market.

After Indias independence in 1947, the economic policies of the Indian Government emphasized the need for local production. Nestl responded to Indias aspirations by forming a company in India and set up its first factory in 1961 at Moga, Punjab, where the Government wanted Nestl to develop the milk economy. Progress in Moga required the introduction of Nestls Agricultural Services
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to educate advice and help the farmer in a variety of aspects. From increasing the milk yield of their cows through improved dairy farming methods, to irrigation, scientific crop management practices and helping with the procurement of bank loans. Nestl set up milk collection centers that would not only ensure prompt collection and pay fair prices, but also instill amongst the community, a confidence in the dairy business. Progress involved the creation of prosperity on an on-going and sustainable basis that has resulted in not just the transformation of Moga into a prosperous and vibrant milk district today, but a thriving hub of industrial activity, as well. For more on Nestl Agricultural Services, Nestl has been a partner in India's growth for over nine decades now and has built a very special relationship of trust and commitment with the people of India. The Company's activities in India have facilitated direct and indirect employment and provides livelihood to about one million people including farmers, suppliers of packaging materials, services and other goods. The Company continuously focuses its efforts to better understand the changing lifestyles of India and anticipate consumer needs in order to provide Taste, Nutrition, Health and Wellness through its product offerings. The culture of innovation and renovation within the Company and access to the Nestl Group's proprietary technology/Brands expertise and the extensive centralized Research and Development facilities gives it a distinct advantage in these efforts. It helps the Company to create value that can be sustained over the long term by offering consumers a wide variety of high quality, safe food products at affordable prices.

Nestl India manufactures products of truly international quality under internationally famous brand names such as NESCAF, MAGGI, MILKYBAR, MILO, KIT KAT, BAR-ONE, MILKMAID and NESTEA and in recent years the Company has also introduced products of daily consumption and use such as NESTL Milk, NESTL SLIM Milk, NESTL Fresh 'n' Natural Dahi and NESTL Jeera Raita.
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Nestl India is a responsible organization and facilitates initiatives that help to improve the quality of life in the communities where it operates.

PRESENCE IN
After nearly a century-old association with the country, today, Nestl India has presence across India with 7 manufacturing facilities and 4 branch offices spread across the region.

Nestl Indias first production facility, set up in 1961 at Moga (Punjab), was followed soon after by its second plant, set up at Choladi (Tamil Nadu), in 1967. Consequently, Nestl India set up factories in Nanjangud (Karnataka), in 1989, and Samalkha (Haryana), in 1993. This was succeeded by the commissioning of two more factories - at Ponda and Bicholim, Goa, in 1995 and 1997 respectively. The seventh factory was set up at Pantnagar, Uttarakhand, in 2006.

The 4 branch offices in the country help facilitate the sales and marketing of its products. They are in Delhi, Mumbai, Chennai and Kolkata. The Nestl India head office is located in Gurgaon, Haryana.

HEAD OFFICE

Nestl India Limited Nestl House Jacaranda Marg,

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'M' Block, DLF City, Phase II, Gurgaon - 122002 (Haryana). Tel.: 0124 2389400.

REGISTERED OFFICE

Nestl India Limited M-5A, Connaught Circus, New Delhi 110001. Tel.: 011- 41514444.

EVOLUTION OF NESTL
1867 Henri Nestl founded the company in Vevey, Switzerland.

1898 Nestl purchases its first factory outside of Switzerland Viking Milk factory in Norway.

1905 Nestl merges with Anglo-Swiss Condensed Milk Company.

1929 Nestl merges with Peter-Cailler-Kohler Chocolates Suisses S.A.

1938 Nestl launches Nescaf - the worlds first instant coffee.

1947 Nestl merges with Alimentana S.A. with the brand Maggi.
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1962 Nestl purchases Findus.

1974 Nestl becomes a significant shareholder in the Cosmetics Company LOral.

1977 Nestl purchases Alcon, manufacturer of eye care products and kits.

1985 Nestl purchases the Food Company Carnation.

1988 Nestl purchases the confectionary company Rowntree Mackintosh and the pasta company Buitoni-Perugina.

1992 Nestl purchases the mineral water Company Perrier.

1998 Nestl purchases Spillers pet foods business.

2000 Nestl sells the Findus brand in all countries except for Switzerland.

2001 Nestl merges with Ralston Purina, the premier pet food company in North America, and with unique expertise in the dry dog food area.

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VISION OF NESTL
Nestl's vision of making good food central to enjoying a good healthy life for consumers everywhere. This implies gaining a deeper understanding in many areas of nutrition and food research and transforming the scientific advances into applications for the company.

Having a broad vision the company is doing its best for their consumers to show the great sense of responsibility.

Nestls aim is to meet the various needs of the consumer every day by marketing and selling food of a consistently high quality.

The confidences that consumers have in our brands is a result of our companys many years of knowledge in marketing, research and development, as well as continuity - consumers relate to this and feel they can trust our products.

HIGH QUALITY AND COLLABORATION

Our objectives are to deliver the very best quality in everything we do, from primary produce, choice of suppliers and transport, to recipes and packaging materials. Our operations and collaboration in the Nordic countries gives us greater opportunities to be efficient and strategic and to function well as an organization, both when it comes to the distribution chain and to concentrating on joint product launches and campaigns.

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FOCUS ON E-BUSINESS & WEBSITES

Increased investments in the sphere of e-business give us swifter business and direct contact with trade. Our website is a forum for consumers, students, future employees and the media. We hope that through a sincere approach and by conducting dialogues, we will be able to improve, change and satisfy the demands and wishes of the people of today

MAIN BRANDS OF NESTL ARE AS UNDER:

Coffee Nescaf, Tasters Choice, Ricor, Ricoffy, Nespresso, Bonka, Zogas, Loumidis.

Water Nestl Pure Life, Nestl Aquarel, Perrier, Vittel, Contrex, S.Pellegrino, Acqua Panna, Levissima, Arrowhead, Poland Spring, Deer Park, Ozarka, Hpar, Ice Mountain, Zephyrhills.

Other beverages Nestea, Nesquik, Nescau, Milo, Carnation, Libbys, Caro, Nestomalt, Nestl.

Shelf stable Nestl, Nido, Nespray, Ninho, Carnation, Milkmaid, La Lechera, Moa, Klim, Gloria, Svelty, Molico, Nestl Omega Plus, Bear Brand, Coffee-Mate, milk pak, yougart.

Chilled Nestl, Sveltesse, La Laitire, La Lechera, Ski, Yoco, Svelty, Molico, LC1, Chiquitin.

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Ice cream Nestl, Antica Gelateria del Corso, Dreyer's/Edy's, Drumstick/Extrme, Maxibon/Tandem, Mega, Mvenpick, Sin Parar/Sem Parar/Non Stop.

Infant nutrition Nestl, Nan, Lactogen, Beba, Nestogen, Cerelac, Neslac, Nestum, Guigoz, Good Start.

Performance nutrition PowerBar, Pria, Musashi.

HealthCare nutrition Nutren, Clinutren, Peptamen, Modulen.

Bouillons, soups, seasonings, pasta, sauces, Maggi, Buitoni, Thomy, Winiary, Torchin.

Frozen foods Stouffers, Lean Cuisine, Hot Pockets, Buitoni, and Maggi.

Refrigerated products Nestl, Buitoni, Herta, and Toll House.

Chocolate and biscuits Nestl, Crunch, Cailler, Galak/Milkybar, Kit Kat, Smarties, Butterfinger, Aero, Polo.

Cosmetics Biotherm, Body Shop, Cosmence, Garnier, Helena Rubenstein, Innov, La Roche-Posay, Lancme, L'Oreal, Matrix, Maybe line, Metamorphosis, Plenitude, Red ken.

Pet food Arthur's, Bakers, BETA, Bonio, Felix, Friskies Go-Cat, Godog, Pro Plan, Purina, Spiller's Winalot.
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DISTRIBUTION CHANNEL
MANUFACTURER

CARRIAGE & FORWARDER AGENT

DISTRIBUTOR

SUPER - STOCKIST

WHOLESALER

RETAILER

RE - DISTRIBUTER

RETAILER

Distribution plays important role in success and failure of any organization. The organization may fail, if its distribution networks are not efficient and unable to provide the necessary items at required place and at reasonable time.

Distribution system of Nestl is one of major source of competitive edge over its existing rivals. Nestl has its own distribution networks equipped with all necessary transportation facilities. They transport their products at major regional sales offices, which are situated at different cities of India. These sales offices (distribution centers) have their own vans with sales people who sell and transport goods to the small retailers.

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In general Nestl follows the above sequence for distribution of its products. In India this strategy is working very effectively and efficiently. By the above diagram, we can understand that the products are sent to the C&F Agents of the company from its Manufacturing Unit. Then at later stage its been sent to Distributor and Super Stockist. Here, Distributor is the responsible person to manage the availability of products in his area, whereas Super Stockist supplies the goods to Re-Distributor who is responsible to manage the availability of outside the region of Distributor. Then the Distributor and Re-Distributor supply the products to Wholesaler and Retail in their respective region or area.

There will be a single C&F Agent for every state who supplies the goods to the Distributor. Now, distributor will be appointed by the company for every urban city. That distributor will be having responsibility to maintain the proper flow of goods in his region. Whereas on the other hand there will be a Super Stockist in the same city who will supply the products to the Re-Distributor who will be there at the near by places of that city.

For Example: There will be only 1 C&F Agent in Uttar Pradesh. He will supply the goods to the Distributor of Noida / Delhi NCR. And at the same time C&F Agent will also send goods to the Super Stockist. But Super Stockist will no supply any goods in Noida / Delhi NCR. Now the Rural areas near Noida / Delhi NCR will be managed by Re-Distributor. Re-Distributor will receive goods from Super Stockist. A Super Stockist will supply the goods to many Redistributors. Then at last, distributor and re-distributor will supply goods to wholesaler and retailer in their respective areas.

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CHANNEL CONFLICT
Channel conflict occurs when manufacturers (brands) disinter mediate their channel partners, such as distributors, retailers, dealers, and sales representatives, by selling their products direct to consumers through general marketing methods. Channel conflict can also occur when there has been over production. This results in a surplus of products in the market place. The products, changes in trends, insolvency of wholesalers and retailers and the distribution of damages goods also affect channel conflict. To avoid a channel conflict in a click-and-mortar, it is of great importance that both channels are fully integrated from all points of view. Herewith, possible confusion with customers is excluded and an extra channel can create business advantages. Agents / Brokers. Channel partners that match marketers with wholesalers or in organization market with customers. They are very important for international marketing with customers.

Wholesalers. A wholesaler is someone who primary sells to others retailers. Also may retail own. Typically buy in bulk.
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 Very important in rural India.

Retailer. The most visible face of the distribution network. India has the largest number of retailers in the world.

TYPES OF CHANNEL CONFLICT

Vertical conflict: arises when there is a clash of interests between member at 2 different level (like wholesaler and retailer) Horizontal conflict : Is between member at the same level , ex Retailer A vs. Retailer B For Example: McDonalds franchisees for instance; if care is not taken, the grumbles might be roar. Attitudinal causes of conflict Disagreement about channel roles. Future expectations Present perceptions Lack of expectations Structural Causes of conflict Divergence in goals Drives for autonomy Fights over scarce resources Felt conflict Related to frustration, disappointments, negative feelings Agree to disagree Manifest conflict Expressed behavior
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TWO MECHANISMS FOR CONFLICT MANAGEMENT

INSTTUTIONAL MECHANISM INTERPERSONAL MECHANISM AND THIRD PARTY MECHANISM 1. Mediation

1. Joint membership association 2. Executives exchange 3. Cooption 4. Distributor councils

of

2. Arbitration

CONFLICTS FOUND DURING RESEARCH

LOWER MARGIN IN THE INDUSTRY

PERFETTI SUPER STOCKIST SUB STOCKIST TOTAL 2.5 4 6.5

CADBURY 2 4 6

NESTL 2 3.8 5.8

LOTTE 2.5 6 8.5

WRIGLEYS 2 5 7

COLGATE 2 5.6 7.6

RECKITT BENCKISER 2 5 7

PROBLEM: From the above chart, we can see that Nestl gives the lowest margin to its distributors in the industry.
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Hence, the margins to the retailers are also reduced. If we consider the motivation of the retailers to keep Nestls products, the throughput or off take of Nestls products is very high and most retailers would be keen to maintain their baskets of goods, the low margins are a dampening factor, as mentioned by a few retailers in our interactions.

RECOMMENDATION: Considering the low motivation of the Nestl retailers, due to lower margins on products sold by them, company should try to compensate them or give them an opportunity to increase their profits by extending better percentage incentive schemes on purchase in bulk. Instead of harming the profitability of the company by extending greater margins, these schemes would lead to high volume purchase by retailer, thereby increasing the profitability of the company.

Issues in Implementation: The problem which could emerge while extending greater percentage schemes are that once the retailers get used to higher schemes on a particular product, it becomes very difficult for the company to change/ reduce the scheme on the product. Apart from that, profitability of the company is definitely affected if the scheme is extended in an unplanned manner.

Tackling Implementation Issues: These schemes should not be extended on the products haphazardly. In order to implement the schemes, company needs to identify on which products is the scheme suitable. The products which already have a very good pull effect like Maggi need not be given higher schemes. The products which majorly require pull effect like Everyday tetra pack milk, coffee etc should be a part of such incentive schemes. In order to have better control over the channel and prevent retailers resistance while changing/reducing the scheme, company should device a strategy of rotation of scheme among the various products in portfolio, e.g. for Jan-Mar Company could go for higher schemes on Everyday tetra pack milk, for April- Jul it should reduce the
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scheme on Everyday and increase the scheme on Coffee packs. The company can further decide upon which products it wants to push for a particular time period.

PROBLEM: We realized that the displays bought by Nestl were not maintained properly and they scored low on hygiene and adherence to planogram. As the merchandisers performance is not measurable, it is not possible to make his work accountable which results in slack of work among some merchandisers. Hence, the main challenge lies in the fact that the merchandisers productivity and effectively is currently not measured hence his performance cannot be measured unlike Distributor Salesman whose turnover is an important input for performance evaluation.

RECOMMENDATION: Every Distributor will have some merchandisers who are responsible for putting up the displays and maintaining them, week-in and week-out. Merchandiser beat plan covers around 40-50 outlets per week and generally, there are 1-3 merchandisers per distribution point. From our market visit, we observed that the slack of work by merchandisers cannot be gauged and there is lack of motivation among the merchandisers to excel in their work. The recommendation for this is to have incentives for merchandisers based on their work. The merchandisers productivity and efficiency can be measured by the Sales Officers by more frequent visits and taking feedback from the distributor salesman. Incentives of Rs. 400-500 would motivate the merchandisers and put proper effort into his job.

Issues in Implementation: The performance evaluation of merchandisers is very subjective and incentivizing on the basis of visits and feedback of Distributor Salesman may lead to discontent for certain merchandisers and probable conflict with the Distributor Salesman.

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Tackling Implementation Issues: To ensure that the incentives structure does not cause any discontent among merchandisers, it should be the Sales Officers responsibility that he keeps the feedback from Distributor Salesmen as private so that there is no conflict of interest and be in constant communication with the merchandisers about their market beats and performance.

Visit Details: We visited retail outlets in Sector 18 & 29 in Noida and Krishna Nagar in Delhi; interacted with the retailers. We identified the problems which the retailers are facing and possible suggestions for the company to resolve these issues. We also accompanied a salesman and interacted with him to discuss the working and issues with Nestl distribution channel.

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NIKE - CASE STUDY ON CHANNEL CONFLICT

As 1999 drew to a close, Mary Kate Buckley, general manager of nike.com, found herself and her division at a crossroads. Over the last twelve months, nike.com had rolled out an ambitious ecommerce initiative, signed an exclusive deal with Fogdog sports that allowed NIKE products to be sold by a pure internet company for the first time, and had grown from twelve to 150 employees. But nike.com faced countless critical decisions in the coming months. Specifically, nike.com needed to plan not only its own direct-toconsumer sales strategy, but also its policies and rules for on-line sales of NIKE products by other vendors.

COMPANY HISTORY, STRATEGY AND STRUCTURE

BRS, the company that would evolve into NIKE, was founded in 1964 by Phil Knight. The purpose of the company was to make high-performance athletic shoes for the U.S. market. Knight, a Stanford MBA and middle distance runner at the University of Oregon, recognized an unmet need for quality athletic footwear that could be filled inexpensively with well-made Japanese imports. Knight started selling these imported shoes directly to runners at track meets in his spare time and NIKE was born. Over the following 35 years, NIKE grew from a part-time job for Phil Knight into the worlds dominant athletic footwear and apparel company by following a consistent and logical strategy: to capitalize on the importance of sports in peoples lives and to be identified with competition and victory in consumers' minds (the company is named for the Greek goddess of Victory). Located on a bucolic campus in Beaverton, Oregon, NIKE stood out as atypical for a large apparel company. The NIKE culture was famous for its internal collegiality and outward competitiveness, a tribute to founder Phil Knight's influence on the firm. Knight had held close control of the company since its founding and had ruled with a shifting mix of closely allied senior managers.

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The company's brand management efforts focused on endorsing the best possible athletes and making the famous NIKE swoosh ubiquitous. The roster of athletes who wore and promoted NIKE products read like a multi-sport hall of fame, including mega-stars such as Michael Jordan, Tiger Woods, Mia Hamm, and Ken Griffey, Jr. NIKE went to tremendous lengths to promote its brand and image across the world. The company typically spent over 11% of revenues on advertising, sports marketing and promotional spending, or nearly one billion dollars in fiscal year 1999. (Exhibit 1) NIKEs advertising has included some controversial campaigns that stressed winning above all else. Other campaigns were downright whimsical, involving basketball encounters between humans and loveable cartoon creatures. NIKE was a highly centralized and extremely focused company. Management concentrated on a few core corporate functions, such as brand building and supply chain management. In addition, a dedicated sales force sold NIKE products to retailers or, in a limited number of countries, to distributors.

NIKE VALUE CHAIN

Manufacturers / Suppliers Consistent with its original strategy, NIKE outsourced virtually all of its footwear manufacturing to low-cost Asian or South American manufacturers. By 1999, the primary locations for NIKE production were Indonesia, Vietnam, Korea and China. Managing its global supply chain was a core strategic advantage for NIKE and all its operations were geared towards ensuring smooth integration with contract manufacturing. The company worked with hundreds of manufacturing partners in order to develop long-term, trusting relationships. Manufacturing partners did not necessarily provide the cheapest production, but for the most part, they delivered consistent, timely shipments of
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goods that met NIKEs high quality standards. The partners were willing to invest heavily in capabilities to manufacture new designs or features, knowing that production levels would be high enough to offset the investment. NIKE generated all its own new product ideas and managed the design process in-house. Once a design was perfected, a manufacturer would begin the eight-month product cycle process of developing volume production capabilities in all the relevant sizes. Once production was fully on-line, NIKE could expect orders to be fulfilled within 90 days, plus an additional 30 days for shipping by sea freight. Product Lifecycle Getting a new athletic shoe model on a store shelf could take 15 to 18 months, from initial planning to final product distribution. Volumes were determined far before shoes arrived at consumer outlets, requiring careful forecasting from NIKE and its merchants. A typical new NIKE shoe had a market life of 3 to 6 months from introduction to depletion of inventories. Because the product life was so much shorter than the production cycle, it was not possible to adjust production runs to meet unexpected levels of consumer demand. As a result, NIKE did not try to match supply of any given shoe model with demand, preferring instead to set conservative production targets and then begin designing the next generation model. A typical NIKE factory produced between 2,000 and 3,000 pairs of shoes in a day, implying a production run of about three months for a line that would sell 200,000 shoes. It was difficult for NIKE to make money on smaller production runs, although the company did produce some specialty shoes at considerably lower volumes. Retail Sales Channel NIKE utilized a large in-house sales force to sell its products through a number of different types of stores multi-sport general athletic department stores, specialty athletic department store
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retailers and general-purpose shoe stores. Despite the company's origins selling shoes straight to\ track runners from the back of Phil Knight's car, NIKE had not been very interested in direct to consumer sales. The company did not have a meaningful catalog or mail-order business and had opened only a handful of its own stores, called NIKE Towns. Even these NIKE-owned stores were seen more as a marketing and brand-building effort than a meaningful source of sales. The retail market for athletic footwear and apparel was extremely fragmented. (Exhibits 2, 3 and 4) The top ten sporting goods retailers represented a mere 14% of total U.S. sales. Because these retailers were so small, they had been slow to implement sophisticated technology to track purchases and inventory, leading to frequent stock outs and misallocations of inventories. NIKE had suffered in the past from imperfect information concerning retailers' inventory levels and was hopeful that better methods of inventory monitoring would be found. NIKEs 40% market share in U.S. athletic footwear gave it additional influence with the merchants who carried their products. The company encouraged advance planning from its retail partners nearly 90% of the orders it received from retailers were for future deliveries nine months out. As a result, NIKE was able to plan manufacturing and distribution far in advance to meet its guaranteed future sales. NIKE was also able to negotiate favorable contract terms with its retailers, including display characteristics, inventory levels, and other details that affected the consumer experience. The company distributed most of its own products from its factories to retail stores or retailer distribution centers. The distribution process was extremely complex; a retailers monthly order of 300,000 pairs of shoes could involve over 50 different models being shipped to 100 different locations. In the late 90s, NIKE invested over $1 billion in several large regional distribution centers to replace its numerous smaller centers. NIKE also started providing discounts to retailers who managed their own distribution right from the NIKE Factory, thus avoiding the need to go through a NIKE
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distribution center at all. NIKE tried to keep inventories to a bare minimum and managed over 5 inventory turns a year. Direct Sales Channels In 1999, NIKE owned and operated 13 NIKE Town superstores; typically located in extremely high-traffic, upscale shopping neighborhoods. The first NIKE Town store was opened in Portland in 1990 and was described by its designer as a cross between the Smithsonian, Disney World, and Ralph Lauren. While a broad range of NIKE footwear and apparel was sold (at full retail price), the layout of the store and the merchandise selection made it as much a showcase of NIKE products as a retail store. The Portland store was quickly followed by an even more ambitious project in downtown Chicago. The Chicago store, a 70,000 square foot operation located in some of the most expensive real estate in town, quickly became the citys largest tourist attraction as 7,500 visitors a day flooded in to see the two-story mural of Michael Jordan and try NIKE shoes out on the miniature basketball court. The NIKE Town stores were not run to be independently profitable, or even to be major selling channels for NIKE products. Instead, they were a showcase for NIKEs newest or most innovative product lines, an opportunity to strengthen ties with consumers, and an extraordinary brand advertising opportunity. The stores also carried hard-to-find products or specialty items not available from typical retailers. Another source of sales at NIKE Towns was souvenir items, such as the Michael Jordan paraphernalia sold at the Chicago store. Initially, retailers were wary of the concept, fearing they would lose sales to NIKE Town stores, but their fears were eventually allayed as the companys intentions became clearer. There was a sense within NIKE that the NIKE Town stores had not lived up to their full retail potential due to efforts to appease retailers concerns about competing directly with NIKE. In addition to the NIKE Town stores, NIKE operated 53 outlet locations to liquidate overstocked or outdated inventory. This channel provided the company with a convenient means of
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disposing excess inventory without giving up too much control of the brand. Prices and quality were both controlled directly to minimize impact on the core brand, rather than relying on other liquidation channels.

THE SPORTING GOODS E-COMMERCE LANDSCAPE

The on-line market for sporting goods in 1999 was chaotic. A variety of types of competitors were eager to join the internet frenzy traditional sporting goods retailers, manufacturers focused on selling direct to consumers, and new start-up companies formed to take advantage of the new opportunities on the internet. Complicating matters was the emergence of Global Sports, Inc. (GSI), an internet start-up with an innovative outsourcing-based business model. Traditional Retailers Virtually every significant sporting goods retailer had established some type of web presence by late 1999. Several retailers, such as Foot Locker and Copeland's Sports had established web businesses on their own, typically offering a full range of products at prices similar to what was charged in their stores. These real-world retailers were able to leverage their existing brands and operational capabilities to offer extensive shopping experiences. Footlocker.com, for example, offered over 14,000 products from 150 different manufacturers at prices equal to or lower than in-store prices. Footlocker.com also offered in-store returns of on-line purchases, easing the burden on the customer. In 1999, six of the 20 largest sporting good retailers, including The Athlete's Foot and the Sports Authority, signed deals with Global Sports Interactive, the internet division of GSI, to manage not only their websites but also their complete e-commerce operations. According to these deals, GSI handled the design, order fulfillment, processing, shipping, and business development involved with the retailers' internet businesses. The participating retailers simply chose their product lines and pricing strategy and generated web customers, but GSI managed the rest of the process. By developing
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a common sporting goods e-commerce infrastructure for its multiple retail partners, GSI claimed to lower drastically the costs associated with electronic commerce. Each retailer collaborated with GSI in decisions related to its brand presentation, website and e-commerce operations. NIKEs Direct Competitors NIKEs competitors, the other leading athletic footwear and apparel manufacturers, faced similar dilemmas and problems related to their own e-commerce strategies. Because these competitors were smaller and less powerful than NIKE, they were even more reliant on their traditional retail partners for sales. These companies possessed little or no experience selling goods directly to the consumer market and treaded lightly in their initial forays into ecommerce. By late 1999, virtually all of NIKEs major competitors (Adidas, Converse, Reebok and New Balance) had established websites with detailed product information, store locators, and editorial content on selected athletes or events. Each competitor, however, took a slightly different approach to the strategy and operation of its ecommerce capabilities. Converse offered no ecommerce functionality or specific information on acquiring its products on-line. Adidas and Reebok each offered limited product lines at full retail prices to their internet customers. New Balance adopted a hybrid approach, allowing customers to select any current product and then directing them to the websites of its affiliated retailers (both real-world and internet-only) who carried that product. NIKEs competitors were generally more willing than NIKE to allow retailers to sell their products over the internet. The competitors did not exert as much control over the end retail experience as NIKE did and granted more flexibility to their internet retail partners. Reebok allowed both on-line only and bricks-and-mortars retailers to offer their full product lines (frequently at discounted prices) on their websites. New Balance was slightly more protective of both product offerings and pricing, but not nearly to NIKEs level of excluding internet retailers from entire product lines. Adidas was
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the only major competitor who had taken a similar position to NIKE, severely restricting sale of product online. Pure On-line Start-ups As in many other consumer segments, sporting goods attracted a number of internet entrepreneurs seeking to take advantage of the new technology to exploit the inefficient cost structure of traditional retailers. These internet endeavors included full-range retailers (such as fogdog.com) and highly specialized niche players (such as lucy.com, focusing on women's sports or chipshot.com, selling custom-made golf clubs). In addition to the internet retailers, many sports media concerns were eager to leverage their viewer base into e-commerce customers. ESPN.com, a division of Walt Disney Corporation, and SportsLine.com (partially owned by CBS) each had avid followings among sports fans due to the content they had been able to leverage from their media conglomerate owners. Each of those companies were making major pushes to convert their website viewers into purchasers.

NIKES INTERNET STRATEGY

Other Internet Sellers (Non-NIKE) As new on-line retailers were created and traditional retailers launched their own internet initiatives, NIKE was bombarded with requests from merchants to sell NIKE products on-line. Initially, the company was extremely hesitant; worrying that the NIKE brand value would be diluted by careless internet retailers. "We saw a lot of online retailers who were not putting the right emphasis on product presentation," explained Mary Kate Buckley. "Our bricks-and-mortars partners offer a convenient location where customers can feel the product quality and try products on we were concerned that over time if everyone is selling the same thing online, the only difference would be price." NIKEs traditional retail partners were anxious to expand into online sales, but NIKE moved cautiously, allowing its largest retail
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partners to sell NIKE products on their websites, provided they maintained the same standards enforced at the stores. Foot Locker and Copeland Sports (through its shopsports.com division) each started selling NIKE products, but Copeland quickly learned that NIKE's concerns were to be taken seriously. In the summer of 1999, NIKE stopped selling to shopsports.com, explaining that "they were not meeting our marketing standards." Although NIKE resumed sales to shopsports.com shortly thereafter, the company's point had been made to retailers. By the end of 1999, NIKE had approved ten of its bricks-and-mortar retail partners to sell NIKE products over the internet. The company remained unconvinced, however, that all those retailers would be able to deliver acceptable service levels, and continued to monitor their performance carefully. Some internet sellers were able to acquire NIKE products from other retailers' overstocks and other unofficial channels. Once these goods had passed from the hands of NIKE-authorized retailers, NIKE no longer had any say over how the products were marketed or priced. Because NIKE handled its own international distribution and managed inventory liquidation through its own outlets, however, the company saw less of these after-market resales than other manufacturers. In addition, NIKE strictly enforced sales agreements with retailers and actively policed the web for offenders. Fogdog Deal In September of 1999, NIKE signed a deal with internet sporting goods retailer Fogdog Sports that allowed Fogdog to sell the entire NIKE product line on its website. Fogdog was given exclusive access (among internet-only sellers) to the NIKE product line for six months in return for warrants to buy up to 12% of Fogdog's shares at a pre-IPO valuation. Fogdog Sports was founded in early 1998 (originally as SportSite.com) to sell athletic gear directly to consumers over the internet. The company was the evolution of a web design and ecommerce Company started in 1994 by three graduates of Stanford
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University. In 1998 the company attracted venture capital financing from VenRock Associates and Draper Fisher Jurvetson. In September of 1999, after negotiations with NIKE had begun, Fogdog hired Tim Joyce, formerly VP of Global Sales at NIKE, to be its new president. Fogdog had repeatedly requested to carry the NIKE product line, only to be rebuffed by NIKE, like every other internet retailer. In the end, Fogdogs pricing policy of respecting manufacturers recommended minimum prices and reputation was attractive to NIKE. Fogdog was able to point to three years of consistently executing its pricing policy. Due to its ownership stake, NIKE had an incentive to make the deal work for both sides and agreed to treat Fogdog like any other major account, including preferred prices, joint promotions, and information sharing. Fogdog also received other special considerations from NIKE, such as product images for display on the fogdog.com website, product and sales data sharing, and unusual return privileges. As part of the Fogdog deal, NIKE agreed not to sell to other virtual retailers including those sites managed by Global Sports, Inc. for at least six months. This promise was sure to anger some of NIKEs most important bricks-and-mortar partners, such as The Athletes Foot, which relied on NIKE for 40% of their footwear sales. Michael Rubin, the young CEO of GSI, commented on the channel conflict that NIKE faced: "Our six partners are all among NIKEs top 20 accounts. NIKE needs to support them, and they need to be on the internet in order to survive in the 21st century." nike.com The nike.com website was initially launched in August 1996 to provide information and entertaining content to NIKE customers. There were no e-commerce capabilities on the site; instead, it reflected a typical NIKE approach to brand building. Different sports received their own separate pages, with tips and advice from NIKE athletes, news and updates on sports events, and detailed product information, including design inspirations and athlete endorsements.
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Despite the lack of e-commerce and no efforts to drive traffic to the site through advertising expenditures, the nike.com site logged 14 million visitors in 1998. At first, NIKE proceeded with extreme caution on the internet. A plan to sell posters on the NIKE website was considered for nearly a year before being launched during the Christmas 1998 season. Over the next twelve months, however, NIKEs website strategy evolved substantially. In February of 1999, Nike launched a test to sell its high-end Alpha Project line of footwear and apparel. In addition, the website was redesigned to provide a store locator and more detailed product information. In June of 1999, NIKE re-launched a completely overhauled and redesigned website, with greatly expanded e-commerce functionality. NIKE made hundreds of its most popular products available for purchase, all at full retail prices. The June re-launch was the first time the companys senior management seemed to understand the revolutionary importance of the internet. Phil Knight commented to the media that "on-line commerce is a partial return to our original roots of selling products at track meets from the trunks of our cars -- rekindling the direct relationship between NIKE and its consumers." Despite the significant new push into e-commerce, NIKE maintained much of its previous website focus on brand-building and inspirational content. NIKE added profiles on NIKE athletes of all levels, new information on future product development, and innovative new technologies. Many of the web functions were so advanced that some consumers were unable to use them all without downloading various plug-ins. "I wouldnt say were on the bleeding edge of design technology, but I will say were on the bruised edge," said nike.coms creative director, Bob Lambie.

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MANAGING NIKE.COM
Operational Concerns Running a successful e-commerce business required distinct operational capabilities that NIKE did not possess. Because NIKE had no experience with remote order fulfillment, it lacked any knowledge or expertise in packing and shipping boxes, tracking delivery, or customer service. Rather than building each of those capabilities from scratch, NIKE chose to outsource the new functions to United Parcel Service (UPS). In a far-reaching agreement, UPS agreed to provide warehousing and shipping services as well as a call center with 500 dedicated customer service operators. It was uncharacteristic of NIKE to entrust their brand identity to another company, but NIKE believed it was preferable to doing an inferior job in-house and afforded NIKE the opportunity to learn and gather data. To provide a positive experience for its e-commerce customers, NIKE needed vital new skills in web design, systems infrastructure, and other related IT areas. The company outsourced many of these needs and relied on proven market leaders like InterWorld Corporation for its enterprise commerce software and Red Sky Interactive for website design and production. Strategic Concerns The new dedication to direct e-commerce over the nike.com website raised significant strategic concerns for NIKE and its partners. Traditional retailers of NIKE products, always concerned about being cannibalized by direct sales, had more reason to worry than ever before as they were denied the opportunity to compete head-tohead with NIKE for internet customers. NIKE knew it would have to strike a difficult balance to keep its traditional retailers content while expanding the companys own direct sales efforts. NIKE hoped that by maintaining full retail pricing on its site, it would alleviate traditional retailers concerns over unfair competition. "We are hoping that our website will expand the pie, not take market share away from retailers," explained Mary
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Kate Buckley. Nevertheless, NIKE understood that the real opportunity for nike.com lay in defining a new, more profitable channel for selling shoes and other goods to consumers. We want to be cognizant of channel conflict, said Buckley, not apologize for it. In addition to the risk of alienating its retailers, NIKE was concerned about the experience of its e-commerce customers. NIKE had never before had significant direct contact with consumers and would now need to tailor the shopping experience to be consistent with the NIKE brand. For products like athletic shoes, with a high "touch-and-feel" component, NIKE would have to find creative ways to satisfy customers desire to know how the products looked and fit. It was hard to see how NIKE could fulfill that need without continuing support from its bricks-and-mortars partners. As NIKE considered further expansion into e-commerce, the company had to rethink its approach to nearly every core function it performed or managed. Manufacturing standards would have to change if NIKE was to ship goods directly to consumers who had to rely on consistent sizing for sight-unseen purchases. NIKE needed to learn manufacturing planning and inventory management to suit uncertain consumer demand rather than pre-determined retailer orders. The customization of marketing facilitated by the web gave NIKE reason to rethink its approach to athlete selection as athletes with smaller but intensely loyal fan bases could be better utilized. Direct-to-consumer sales also allowed for greater pricing flexibility and forced NIKE to better understand price sensitivity across narrow bands of consumers. Organizational Issues The rapid growth and extraordinary potential of nike.com created a number of organizational dilemmas that defied easy answers. The initial stages of NIKEs e-commerce launch were conducted in stealth mode by a small team that reported directly to the president of the company. Decisions were made quickly and often secretly, in stark contrast to NIKEs culture of candor and consensus. The media eagerly reported on any new developments and speculated on what the future held for nike.com.
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Once it became clear that nike.com would play an integral role in the future of the company, it became a vastly larger and more visible department. Nevertheless, it retained an aura of distinction within the company. At a time of disciplined spending within NIKE, the online division was seen as having an enviably large budget and a willingness to spend. When nike.com began reporting directly to Phil Knight in the summer of 1999, its stature within the company and in the media increased. Despite rapid headcount growth and a preference for internal candidates, nike.com was unable to satisfy the ever-growing roster of internal applicants. As other NIKE departments began to realize the fundamental importance of nike.com, they became involved in its major strategic decisions. The sales department helped to ensure that online sales policies were consistent with NIKEs fundamental standards and policies. The manufacturing department collaborated on plans to produce customized shoes for specific online customers based on individual preferences. The marketing department assessed every real world advertising campaign to determine how it could best be modified for the on-line world. New Opportunities NIKE's e-commerce operations presented several new opportunities that were not available to NIKE under its old wholesaling model. For the first time, NIKE was in a position to directly collect large amounts of customer data, covering not only the demographics of its customer base, but also customer shopping habits price sensitivity, purchase frequency, and product bundling. With this information in hand, NIKE would have the ability to market new goods or services to exactly the right customers, increasing the effectiveness of its extensive marketing efforts.\ Perhaps the most important new opportunity to NIKE was the ability to capture the enormous mark-ups between wholesale and retail prices for its goods (see Exhibit 5 for a breakdown of the value chain). NIKE had been extremely successful throughout its history at managing its value chain while only participating in the central
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and core functions. By not performing either the manufacturing or the selling in-house, NIKE had been able to grow dramatically while staying very profitable. Encroaching into the new territory of direct sales presented NIKE with an opportunity to capture more of the value chain than ever before.

THE FUTURE
NIKE understood throughout 1999 that the most important goal was to learn as much as possible about doing business over the internet. Mary Kate Buckley explained NIKEs internet philosophy in June of 1999: "The new site is really just the next stage in a grand experiment. . . More than anything, our work over the last six months has proven that the future of internet presence for a global brand like NIKE will be in a constant state of incubation." At the same time, Buckley understood that the real opportunity for nike.com lay in defining a new, more profitable way of selling products to its loyal consumers. She began to think about what steps NIKE should take in the year 2000.

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