Channels of Distribution: Lecture - 7

A channel of distribution is a route that goods follow on their journey from producers to
consumers. The channels and the organizations that compose them serve as a pipeline by
which the manufacturer moves goods to the ultimate consumer.
The decision to use a channel is based on a number of variables, such as:
- The Industry practice
- The type of product (convenience, shopping or specialty good)
- The degree of market coverage desired (intensive, selective, exclusive)
- The market segment (industrial, consumer)
- The ability of the firm to perform the marketing functions or the need for others to
do so (buying, selling, transporting. storing, financing, risk bearing)
- The competitor’s distribution strategy
- The geographic locations of the market segment

An example of two variables is the influence of the degree of market coverage desired and the
type of products offered.
 A firm that markets convenience products will want widespread market coverage,
intensive distribution that utilizes a large number of wholesalers and retailers.
 Another manufacturer, that markets shopping goods may wish to emphasize image and
a good sales volume through selective distribution that utilizes a moderate number of
retailers and wholesalers.
 Finally, for a specialty good, a manufacturer may use exclusive distribution by limiting
distribution to one retailer or wholesaler in a geographic area.

Channels for Industrial Goods:

 Manufacturer to Industrial Buyer. The shortest and sometimes the most practical
way for a manufacturer to distribute Industrial goods is to sell them directly to
industrial customers. Direct distribution is used if goods are awkward to handle, the
market segment is small, or the seller must train the buyer’s employees to operate the
product.

 Manufacturer to Industrial Wholesaler to Industrial Buyer. Industrial goods with a

broad market, like welding rods, printing paper, and construction materials, need under
 distribution. They utilize a distribution channel featuring Wholesalers known as
industrial distributors. These distributions sell to the industrial-buyer.

 Manufacturer to Agent or Broker to industrial Buyer. In some instances the product

being sold does not require the intermediate ware housing service provided by a
wholesaler. An agent or broker can serve as the contact point for the manufacturer
without-taking possession of or title to the goods.

 Manufacturer to Agent or Broker to industrial Wholesaler to Industrial Buyer.

Small, manufactures often need to contract with an agent or broker to represent predicts
to wholesalers. The agent serves the purpose of bringing the wholesaler and
manufacturer together but does not take title to the goods.

Channel for Consumer Goods:

 Manufacturer to Consumer. Although the direct channel is favored for reaching
industrial users; only approximately 5 percent of consumer, goods are moved this-way;
Such products-as-encyclopedias and Good Humor Ice cream often are sold directly to
consumers. Milk used to be sold: in this- way but rarely is now.

 Manufacturer to Retailer to consumer. Some manufactures select their own retail

outlets to represent them. Shoes, large household appliances are products that
traditionally are distributed directly to retailers without the need for wholesalers.

 Manufacturer to Wholesaler to Retailer to Consumer. Products that require

intensive distribution need a broader channel of distribution. The wholesaler aids in
allocating the product to the retailers in order to have the product available when and
where needed by to the consumer.

 Manufacturer to Agent to Wholesaler to Retailer to Consumer. An agent or broker

does not take title to goods but performs the function of bringing buyers and sellers
together, In the meat packing industry agents are used to contact wholesalers who in
turn buy from manufacturer.

Channel Members:
The various channels of distribution we have examined are composed of organizations or
people known as channel members, middlemen, or intermediaries.
There are two types of middlemen that operate between the manufacturer and consumer or
industrial user: wholesalers and retailers. In the next sections we will discuss each.

Wholesaling Middlemen:
Wholesalers are those middlemen who sell goods to retailers, to other wholesalers, and. to
industrial users but who do not sell in significant amounts to the final consumer. If wholesaler
did not exist retailers would have to spend a great amount of time dealing with many different
manufacturers, attempting to coordinate numerous product orders and shipments and acquiring
and maintaining huge stock inventories.
Retailers can be classified according-to the number of outlets.
 One- type is the independent store, an individual retail store, usually a small family-
own business. Most independents sell a relatively narrow line of products, such as auto
parts or records and tapes few need the sophisticated, management training programs
that J. C. Penney or other large retailers run. Most obtain merchandise through the
wholesaler, not having the capital, sales volume or storage space to justify buying large
quantities directly from manufacturers.

 A second type of store is a chain store, one of two or more similar stores owned by the
same company, usually a corporation. To support relatively large-scale operations the
parent company normally buys products directly from manufacturers and distributes
them to the individual stores for sale to final consumers.

 One type of retail outlet spelled the demise of the small mom-and-pop grocery stores:
the convenience store, usually part of a chain, which carries a wide selection of
popular consumer items from groceries to motor oil.

 One familiar retail outlet, the supermarket, is a store that sells a wide variety of food
items. Although initially intended to be a high-volume, self-service, one-stop food-
shopping outlet for consumers, it has become much more.

 The original supermarket has evolved into the superstore, a food-based retailer that
carries a variety of other products. Superstores have a minimum of 30,000 square feet
of selling space and carry household appliances, clothing, automobile oil and filters and
boutique items in addition to a full, line of supermarket items. Safeway, Grand Union
and Giant Foods are venturing into superstores.
  The retail outlet known as the specialty store is a store that offers many models or
sty1es of a specific product, such as stereo equipment, cameras, or musical instruments.
These make up the majority of stores located in the regional shopping centers that are
anchored by one or more, full-service department stores.

 A department store is a retail outlet, usually a member of a chain, that is organized by

departments and provides an extremely wide variety of merchandise including home
furnishing, clothing, appliances, cosmetics, furniture and dry goods. Department stores
provide a full line of services including gift wrapping, home delivery and credit.

 A discount store is a store that has low prices, a broad line of merchandise, self-service
a low rent location and limited store environment. This store’s rarely offer their own
credit cards, although most accept such bank credit cards as Visa and Master Card and
they avoid home delivery, gift wrapping and other services that would force them to
raise their prices.

 Popular in France, Japan and Germany, a hypermarket is a gigantic discount retail

complex that combines the features of supermarkets, department stores and specialty
states under one roof.
 These stores offer few services and Spartan facilities, but they provide an avalanche of
merchandise, displayed in manufacturer’s cartons or stacked in bins, some stores of this
type have been opened in Illinois and New Jersey and more may appear in densely
populated areas.
 Sometimes known as a second outlet or a manufacturer’s courtesy outlet a factory
outlet is a retail store that sells products directly from the plant to the final consumer at
greatly discounted prices. These outlets help producers to create good will to sell off
production overruns and out-of-season items and to dispose of products with cosmetic
flaws or imperfections.

Out-of-store Retailing. Out-of-store retailing includes those retailers who do not use
conventional retail facilities. This category includes the following:
- House-to-house retailing
- Vending machine retailing
- Telephone retailing
- Mail-order retailing
  House-to-house retailing is out-of-store retailing whereby salespeople call on
prospective customers in their homes, brushes, cosmetics encyclopedias, kitchen
utensils and vacuum cleaners are sometimes sold in this way.

 A popular method of marketing such convenience items as soft drinks, snack foods,
newspapers, candy and gum is vending-machine retailing; out-of-store retailing that
distributes products to consumers by coin-operated machines.

 Sales by telephone retailing are out-of-store sales initiated by a salesperson that calls
prospects or follows tip on the customer’s response; to promotional campaign increases
in printing and mailing costs, combined with the savings and flexibility provided by
American Telephone and Telegraph’s (AT&T) wide area telephone service, (WATS)
lines have increased the use of this technique, According to AT&T.

 In the form of marketing known as mail-order retailing, out-of-store retailers ask

buyers to order products from catalogs or brochures sent directly to their homes or
through order blanks placed ill newspapers and magazines.

The Physical Distribution System:

The physical distribution system is the activities that take place as the goods move through
the channels. These activities include warehousing, order processing, transportation, inventory
control, arid materials handling. Let’s discuss each briefly.

- Warehousing is receiving, identifying and sorting goods. The warehouse function can
be provided by company-owned (private) or public warehouses. Public warehouses rent
the space to other organizations.
- Order processing includes the grouping of the products specified by the customer and
the accompanying paperwork. The activities include development of the shipping
orders requisitions from inventory and collection of the physical goods.
- Materials handling includes the activities involved: in moving materials in-house. The
classification of in-house includes the manufacturer’s own plants and warehouses.
- Transportation includes the modes or means of shipping the goods. There are five
major modes: railroads, trucks, waterways, pipelines and airways. Each has it strengths
and weaknesses.
- Inventory control includes the monitoring of the physical inventory of goods,
monitoring inventory levels and minimizing reorder costs. Inventory control attempts to
maximize usable inventory and minimize the costs to the organizations of that
inventory.