CHANNELS OF DISTRIBUTION



CHANNEL MANAGEMENT

INTRODUCTION

• If the consumer could go directly to the manufacturer, it would eliminate all costs & reasons for distribution.

• BUT as this is not feasibly possible, there is an obvious need for a system of distribution

• Types of distribution channels:

1. Manufacturer/Producer to Retailer to Consumer - EXAMPLE

2. Manufacturer/Producer to Wholesaler to Retailer to Consumer - EXAMPLE

3. Manufacturer/Producer to Consumer - EXAMPLE

** Take a look around you. Very few things you see were put there by nature. Where did these come from? All different places……….. But, to wind up here – they had to be marketed & distributed. There are job opportunities in marketing & distribution everywhere. Every step a product takes between the manufacturer & the ultimate consumer involves business, marketing, & distribution.

Channels of Distribution

• = Path a product follows from manufacturer/producer to consumer or industrial/business user

• Middlemen/intermediary

o = A business firm operating between manufacturer & the customer/buyer that aides in the movement of product

o Performs Marketing functions better than manufacturer is capable of

Channels for Consumer GOODS

• Consumer goods

o = Intended for use by individuals/families

o Can be used w/o a great deal of further processing

• 5 common channels for consumer goods:

o 1. Producer to consumer

▪ Shortest channel of dist. For consumer products

▪ Almost all services use this channel of dist

o 2. Producer to retailer to consumer

▪ Retailers involved are usually large firms

o 3. Producer to wholesaler to retailer to consumer

▪ Smaller producers & retailers use this channel of dist

o 4. Producer to agent to retailer to consumer

▪ Agent = middleman who actively assists in the sale of the product w/o taking ownership/title to products

▪ Some producers sell their products thru agents who help them reach large retailers

▪ Agents play an important role in the chain/link, as they help bring buyers & sellers together

▪ Agents can work for/represent retailers as well as producers (trying to find suppliers for certain goods)

o 5. Producer to agent to wholesaler to consumer

▪ Agents are often used in industries where many producers supply a large number of wholesalers scattered around the country

▪ Represent the group of producers

CHANNELS OF DISTRIBUTION FOR SERVICES

• Services = tasks that we pay others to do for us

• Services cannot be separated from the producer/provider

• S’s are provided as they are wanted

o Therefore usually no need for storage (though may need to store supplies needed for providing service)

o As services themselves are not stored, no need for transportation unless delivered services

• Channel of distribution is DIRECT

• Services are consumed at the same time they are being produced

o Therefore no need for middlemen

Channels for Industrial Products

• IP = items sold to businesses that use them to produce other goods, to provide services, to resell, or in their daily activities

• 4 common channels of dist for IP’s

o 1. Producer to industrial user

▪ IP’s are often designed for specific use (parts manufacturers near Mercedes plant)

▪ The majority of IP’s are sold directly from manufacturer to the industrial users

o 2. Producer to agent to industrial user

▪ A producer/manufacturer w/o it’s own sales force may use this channel of dist

▪ Agents have knowledge of the industry – therefore good to use agents to introduce new products or enter a new market vs. using their own sales reps

o 3. Producer to industrial distributor to industrial user

▪ ID = wholesalers who buy goods from producers to sell them to industrial users

▪ ID’s usually handle lower priced goods (i.e. accessory equipment or operating supplies)

• A.Eq. = items such as pc’s, small power tools, copiers, printers, cash registers, etc

• Op.Supl’s = lubricating oil, office supplies, stationery, etc

▪ ID’s often keep quantities of products on hand – thus, can supply numerous industrial users rapidly

o 4. Producer to agent to industrial distributor to industrial user

▪ Small manufacturers often hire agents as independent sales reps to contact large ID’s

▪ Small manufacturers don’t have the resources to sell their goods directly to these ID’s

RETAILING

• = That part of marketing in which g/s are sold directly to the ultimate consumers

o U.C. = people who buy goods & services for personal use

o Most retailing occurs in stores where customers initiate the transaction

• Retailing can be classified by

o 1. Ownership,

o 2. Product lines carried

o 3. & Methods of reaching customers

CLASSIFYING RETAILERS BY TYPES OF RETAIL OWNERSHIP

• Independent Retail Stores

o = Small business managed by the owners

o Independents are small (small sales volume), but numerous

o 1 in 10 retail businesses is operated by a firm that only owns 1 store

o IRS’s account for 50% of all retail sales

• Chain Stores

o = When a business operates more than 1 store selling similar products

o CS’s are the major competitor of the IRS’s

o Many CS’s started out as IRS’s- - - owners decided to expand usually to nearby communities

o CS’s can buy in larger quantities, save $, which results in lower prices to customers

• Franchise Businesses

o Franchise = agreement by which a parent company gives an individual or other small company the right to do business in a standardized manner

o Franchisor = parent company; could be a manufacturer, wholesaler, or service company

o Franchisee = person or company given the rights by the franchisor

o Rights may include authority to sell franchisor’s products, use it’s name, trademark, & operating procedures

o A franchise combines the features of an IRS & a CS

▪ Owners invest their own $$

▪ Enjoy the profits pf success

▪ & Accept the responsibility if a failure

▪ At the same time….. they’re connected with a well known company

▪ That can provide assistance in setting up & operating the business

• Manufacturer Owned Stores

o = Manufacturer has their own retail outlets; therefore complete control over the channels of dist for their products

o Prefer to sell products only through their own stores

o Some use both MOS & other retailers

▪ I.e. – MOS may be used for testing sales of new products or to dispose of styles or products or slightly defective products

CLASSIFYING RETAILERS BY PRODUCT LINES CARRIED

• Department Stores

o = Sell a variety of merchandise grouped into well defined departments

o Large stores that usually offer many services

▪ IE – credit, delivery, merchandise returns, personal assistance

o IE – Richs, Sears, etc

• Specialty Stores

o = Carry limited variety of goods, but large assortment of each item

▪ Assortment = range of choice fro each type of product offered

o In most cases SS’s are named for the type of product line carried

o Sometimes handle unusual imported or domestic goods not found in other stores

• Supermarkets

o = Large retail store that sells a wide variety of food & some non-food items, features self-service 7 low prices

o Divided into sections

o Account for ¾ of grocery store sales in the USA

o Ex.’s = Winn-Dixie, Bruno’s, etc

o Prior to 1930’s

▪ Food retailing occurred in small neighborhood grocery stores

▪ Clerks stood behind the counter, customer was separated from the goods

▪ Clerks filled orders & delivered groceries to customer’s homes

o First super markets were independent stores that opened in the 1930’s

o Few independent supermarkets still remain (mainly small towns); as chain stores now dominate the market

• Convenience Stores

o = Carry limited variety of food items that meet customers needs in between major shopping trips

o Offer convenience vs. a wide variety of goods

o Prices often higher & customers are willing to pay this for the convenience of making purchases quickly & easily

o Usually in easy to reach location s near residential areas or high traffic intersections

o Ex.’s – combo gas & convenience Tiger Marts, etc.

• Superstores

o = Very large stores that carry foods & numerous other goods & services consumers routinely buy

o Goal of superstores = meet customer’s ordinary needs at low prices

o Superstores go beyond supermarkets

▪ By stocking complete lines of health & personal care products, greeting cards, some toys, books, records, etc.

▪ By providing services – eyeglasses, branch banking, dry cleaning, shoe shine, etc.

• Discount Houses

o = Offer wide variety of products at so called discount or low prices – prices are typically lower, but not always

o Sell appliances, furniture, clothing, food items, etc.

o Buy in large quantities at reduced prices & pass the savings on to customers

o Low operating costs – self-serve shopping, low rent locations, fixtures, decorations, etc. (Again savings passed on to customers)

CLASSIFYING RETAILERS BY METHODS OF REACHING CUSTOMERS

• Over the Counter Retailing/Brick & Mortar

o = Sell products in a store

o Majority of retailing occurs this way

• Mail Order Retailing

o = Customers select products they want from catalogs or advertisements my mail or phone

o Merchandise is delivered directly to customers

o Stores who also use catalogs - customer picks up order at the store (Sears, Johnstone)

o Catalogs can provide a wide variety or be highly specialized

o Dwindling as more & more catalogs go online w/their won websites

• Direct Retailing

o = Sellers contact prospective customers in their homes

o 2 types

▪ Door to door (rarely seen today – EX Avon)

▪ Party plan (EX – Tupperware, Pampered Chef)

• Vending Machine Retailing

o = Requires no personal contact between seller & buyer

o Continues to grow into new markets (i.e.- a/l tickets)

o Most familiar type is coin operated, though more are now taking credit cards

o ATM’s are vending machines for banks

• E-tailing/E-commerce

o = Online retailing, involves retailers selling products to customers over the internet

o Some retailers exclusively use the internet (Ex. Amazon)

WHOLESALING

• = Selling products to buyers who are purchasing them for reasons other than personal or family use

• In other words: business use, resale, production

• Wholesalers sell to other businesses, not directly to consumers

• 2 Main types of Wholesalers

o 1. Merchant

o 2. Agent

MERCHANT WHOLESALERS

• Take title to the products they distribute; they own them

• 2 types of Merchant Wholesalers

o 1. Full Function Wholesalers

▪ AKA – full service or service W’s

▪ = Perform a wide range of marketing activities

▪ Most common type of merchant w

▪ Rack jobbers

• = A type of full function W

• = Place their own display racks in stores & stock them w/merchandise

• Keep displays neat, clean & well stocked

• Consignment = one way RJ’s work

o Retailers carry items w/o buying them

o Retailers assume no risk if products don’t sell

▪ Many full function W’s specialize in products carried

• I.e. – food items, hardware, medicines

o 2. Limited Function Wholesalers

▪ = Provide a narrow range of marketing services for their customers

▪ 4 kinds of limited function W’s

• 1. Cash & carry wholesalers

o = Sell on a cash basis only

o Do not make deliveries

• 2. Drop shippers/desk jobbers

o = Take title to the goods they sell, but do not take physical possession

o Obtain orders & arrange to have shipments sent directly to buyer

o Have offices (desks), but do not have warehouses or delivery equipment

o Deal typically in bulky goods – i.e.: lumber, coal, heavy machinery

• 3. Mail order wholesalers

o = Sell through catalogs that are distributed to their customers

o Customers are typically small retailers or other businesses in rural areas not served by other types of wholesalers

AGENT WHOLESALERS

• = Actively assist in the sale of products w/o taking ownership/title to goods

o Perform fewer services than limited function wholesalers

• Most important types of Agent Wholesalers

o 1. Brokers

▪ = Negotiates the sale of the product then allows the seller to accept or reject the prospective buyer’s offer

▪ Commission = percentage of the dollar amt of the product(s) sold

▪ Hired for a single transaction

▪ Often deal in seasonal products – i.e.: fruits & veggies

o 2. Selling Agents

▪ = Independent middlemen who perform entire marketing task for firms

▪ Given authority to set prices& decide how products will be promoted

o 3. Manufacturers Agents

▪ = Independent middlemen who sell similar products for several non-competing manufacturers

▪ Sell products according to the instructions of the companies they represent

HOW DO CHANNEL MEMBERS ADD VALUE TO A PRODUCT? Right PLACE, Right TIME

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