Here is a compilation of articles on the ‘Distribution Channels’ for marketing students.
Distribution Channel
Essay Contents:
- Introduction to Channels of Distribution
- Types of Distribution Intermediary
- Functions of a Distribution Channel
- Types of Distribution Channels
- Intermediaries and their Elimination
- Wholesalers
- Retailers
- Channels Conflicts and Management
1. Introduction to the Channels of Distribution:
It is the function of all business organization to deliver products and services to the consumers as desired by customers. It includes all the activities which are performed in the process of delivering including physical distribution. Availability of right product at right place at right time is the main objective of distribution.
Channel decision refers to the decisions on the selection of best routes for moving goods and also with their promotion, selling and marketing control. The channel of distribution is also used to refer to the various intermediaries who help in moving the products from the producers to the consumer, it is the most powerful element among marketing mix elements, by developing a sound distribution – network a firm can carve out a niche for itself.
According to Cundiff and Still, “Physical distribution involve the actual movement and storage of goods after they are produced and before they are consumed”.
Willam J. Stanton, “Physical distribution involves the management of the physical flow of goods and the establishment and operation of flow system”.
According to A.W. Shaw, “Distribution is the application of motion to material as they move from the, place, the condition where they have no value, to the time, places, forms and conditions where they have value”.
Most businesses use third parties or intermediaries to bring their products to market. Distribution channel is requires the flow good and services from producers to consumers. “Distribution channel” is defined as “all the organizations through which a product must pass between its point of production and consumption”.
Intermediaries are specialists in selling – they have the contacts, experience and scale of operation which means that greater sales can be achieved with their coordination.
Types of Distribution Intermediary:
Different types of intermediaries that are involved in the process of distribution before a product gets from the original producer to the final user.
These are described briefly below:
a. Retailers:
Retailers operate outlets that trade directly with household customers.
Retailers can be classified in several ways:
(i) Type of goods being sold (e.g. clothes, grocery, furniture)
(ii) Type of service (e.g. self-service, counter-service)
(iii) Size (e.g. corner shop- superstore)
(iv) Location (e.g. rural, city-centre, out-of-town)
(v) Brand (e.g. nationwide retail brands-local one-shop name)
b. Wholesalers:
Wholesalers stock a range of products from several producers. They purchase goods in large volume and perform function of storage and bulk breaking. They may have stock of more than one company. Wholesalers usually specialized in particular products.
c. Distributors and Dealers:
Distributors or dealers have a similar role to wholesalers that of taking products from producers and selling them on. However, they often sell onto the end customer rather than a retailer. Distributors maintain inventory according to demand in market. And provide ware housing facilities. They also usually have a much narrower product range. Distributors and dealers are often involved in providing after-sales service.
d. Franchises:
It is common in delivery of services companies deals with, fast food chain, beauty clinics health service provider and financial service providers operate their business by the help of franchises. Franchises are independent businesses that operate a branded product (usually a service) in exchange for a license fee and a share of sales.
e. Agents:
Agents sell the products and services of producers in return for a commission (a percentage of the sales revenues) it is common in insurance sector and sales purchase of real estate and industrial goods.
Functions of a Distribution Channel:
The main function of a distribution channel is to provide a link between production and consumption. The first and foremost role of a marketing channel is to fill the gaps between the production and consumption process. These gaps are time gaps, space gaps, quantity gaps and variety gaps. Time gaps arise because there is a considerable time difference between the production and consumption of goods.
Space gaps occur when production takes place at one or a relatively small number of locations. Since the place of production need not be close to the final consumers, it results in space gaps. Quantity gaps occur because manufacturers produce products in much larger quantities than the individual customer would purchase. Intermediaries perform the task of bulk breaking. Large quantities are divided into smaller quantities in order to match the needs of individual customers. Lastly, variety gaps occur because consumers desire a greater variety of products than a manufacturer can produce.
Marketing channels as intermediaries reduce the amount of time and expenditure of the manufacturer by reducing the number of contact points between the point of production and the point of consumption.
Organizations that form any particular distribution channel perform many key functions:
i. Ownership:
The flow of ownership or transfer of the title of the goods takes place on physical receipt of the goods from one channel member to another. The flow of title normally takes place in the same direction as that of the physical flow of goods.
ii. Information Flow:
The flow of information from the channel to the customers is essential in order to create awareness among them about the availability of the products. The flow of information can help in obtaining customer orders, producer promotions, and so on. The information may also flow in the form of customer complaints from the customers to the producers.
iii. Promotion:
They also help in promoting the products through efficient product displays and other techniques like discounts, promotional schemes and so on.
iv. Contact:
It is difficult for a firm to contact with customer scattered in a wide geographical area. It is the task of middle men to locate the prospects and to flow information about company and products.
v. Matching:
A company gets information about expectation and desire related to a product through its channel members because they make direct interaction with customers and has knowledge about local business culture. It is helpful in matching their products and services as per the customer expectations.
vi. Negotiation:
Negotiation is the process of reaching an agreement on the price and other conditions (such as financing, features, and so on) for facilitating easier transfer of ownership and possession of goods.
vii. Physical Distribution:
The primary task of marketing channels is to move the goods from the producer to the end user. The flow of goods physically from the producer to the final consumer takes place with the help of intermediaries, like transporters. The possession of goods thus gets transferred from the producers to the final customers.
viii. Financial Flow:
The financial flow involves the payment process wherein the customers pay for the goods or services they have received from the channel members. Financial flow is usually in the opposite direction of the ownership and physical flow of goods. The payment process may involve financial institutions like banks, and the mode of payment may be either cash or credit.
ix. Risk Flow:
Risks may flow from one channel member to another in the form of product perishability, fluctuating demand patterns, price fluctuations, risks generated by faulty products, and so on.
Types of Distribution Channels:
Each layer of marketing intermediaries that-performs some work in bringing the product to its final buyer is a “channel level”. The function of an intermediary is to move a product or service closer to the final consumer and this is described as a channel level. The length of a channel represents the number of intermediary levels that exist between the producer and the final user.
Some examples of channel levels for consumer marketing channels:
Channel 1:
It is called a direct-marketing channel, since it has no intermediary levels. In this case the manufacturer sells directly to customers. An example of a direct marketing channel would be a factory outlet store. A zero level channel represents a manufacturer directly selling his products to the final consumer. Many holiday companies also market direct to consumers, by passing a traditional retail intermediary – the travel agent.
Direct marketing is possible by direct interaction with customers. Most of industrial goods are sold by this method. It is also known as direct selling. Eureka Forbes Ltd. which markets vacuum cleaners and water purifying equipment sell its products by this method.
Channel 2:
It contains one intermediary. In consumer markets, this is typically a retailer. In this method, retailers directly took order from manufactures. A one-level channel represents a single intermediary, such as a retailer buying goods directly from the producer and selling them to the final consumer. Automobile dealers are examples of a one-level marketing channel. These dealers purchase the product from the manufacturer or producer and sell it directly to the end customer.
Channel 3:
It contains two intermediary levels – a wholesaler and a retailer. A wholesaler typically buys and stores large quantities of several producers’ goods and then breaks into the bulk deliveries to supply retailers with smaller quantities. Fast moving consumer goods (FMCGs) are usually sold by this channel. For example, companies like HUL, LG, Wipro, etc. This arrangement tends to work best where the retail channel is fragmented, i.e., not dominated by a small number of large, powerful retailers who have an incentive to cut out the wholesaler.
An organization may use multiple channels like DELL computers are sold by directly through internet or on line service and also by distributors. Organizations should determine the number of intermediaries they need at each channel level. Depending on the number of intermediaries required at each level, the three major choices of distribution available to producers are- intensive distribution, exclusive distribution and selective distribution.
Intensive Distribution:
Intensive distribution aims to provide saturation coverage of the market by using all available outlets. Intensive distribution is a form of distribution in which the manufacturer distributes his products through as many outlets as possible. For many products, total sales are directly linked to the number of outlets used like cigarettes, cold drinks, potato chips, chocolates, biscuits, etc.
Intensive distribution is usually required where customers have a range of acceptable of brands. In case if one brand is not available, a customer will simply choose another. This type of distribution is used for those products that are characterized by low involvement of the customer and where customers look for location convenience.
Exclusive Distribution:
Exclusive distribution is a form of distribution in which there are a limited number of intermediaries between the producer and the customer. It is an extreme form of selective distribution in which only one wholesaler, retailer or distributor is used in a specific geographical area. This type of distribution network is opted by producers who want to deliver the maximum service quality to the customers.
By limiting the number of distribution outlets, the manufacturer or producer can control the quality levels at these outlets. An exclusive distribution arrangement also helps the producers to ensure that the distributors do not sell competing products along with the producer’s products. High branded, high priced products are the example of this category.
Selective Distribution:
It involves a producer using a limited number of outlets in a geographical area to sell products. An advantage of this approach is that the producer can choose the most appropriate or best-performing outlets. In selective distribution, an organization does not use all the available marketing channels. It uses more than one distribution channel, as the manufacturer uses a relatively fewer number of distribution channels.
He can maintain good relations with the channel members and as a result, expect an increased marketing effort from them. Branded Shoes like Action and liberty, branded men’s wear Arrow, Zodiac, etc. are available at exclusive showrooms as well as through other distribution channels.
Intermediaries and their Elimination:
Intermediaries or middlemen are the persons or firms who provide a link between the manufacturer and the consumer. They facilitate the purchase and sale of goods and services and also perform the marketing functions.
They charge for their services and to that extent they are responsible for the increase in the cost of the product to the ultimate consumer or user. Despite this, the middlemen constitute an important link in the channels of distribution. They help the manufacturers in selling their products and help the consumers in getting the want-satisfying products.
Elimination of Intermediaries:
Arguments for Elimination:
The arguments for the elimination of middlemen put forward by their critics are as follows:
(i) There are a large number of functional and merchant middlemen who interpose between the manufacturers and the consumers. Since every middleman concentrates on increasing his profit or commission, they are considered as parasites of the society.
The larger the number of middlemen, the higher will be the price of product the consumer has to pay. In some cases, middlemen’s margin constitutes 30 per cent to 50 per cent of the price of the product charged from the consumers.
(ii) Most of the middlemen do not render any corresponding service for the profits they earn while handling the products. They merely act as ‘transfer agents’ and their existence in the channel of distribution may hamper the smooth and quick flow of goods from the manufacturers to the consumers.
(iii) Middlemen do not bear as much risk as is borne by the manufacturers arising from strikes, lockouts, depression and change in fashion. But their profit margin is more as compared to that of manufacturer. As a matter of fact, the middlemen take advantage of adverse conditions in the economy. Sometimes, they indulge in anti-social activities .like hoarding of goods in times of scarcity and earn huge profits.
(iv) Several developments have taken place in the recent years on account of which the manufacturers can sell their goods directly to the consumers more efficiently. Even if a manufacturer does not want to undertake distribution of his products, he can contact directly with the wholesalers and or retailers. At least, the functional middlemen can be avoided.
Arguments against Elimination:
The supporters of middlemen argue that middlemen cannot be eliminated because of the following reasons:
(i) Middlemen render various marketing services which cannot be rendered by others so efficiently and economically. They assemble and disperse goods to make them available to the ultimate consumers. In the process, they undertake certain risks and perform marketing functions like storage, transporting, grading and packaging.
(ii) Middlemen help the manufacturers considerably. They relieve them of the problems of marketing and enable them to specialise in production.
(iii) Since middlemen concentrate on marketing activities, they provide specialised services in the distribution of products. The performance of these functions is a must and they cannot be conveniently performed by the manufacturers and the consumers. The middlemen perform these functions economically. Hence it is not correct to say that the elimination or middlemen would always result in the reduction of cost of product to the consumers.
(iv) In many cases, it is very difficult to combine manufacturing and retailing operations because consumers are widely scattered and their orders are so small that they cannot be executed by the manufacturer economically. Similarly small manufacturers may find it economical to entrust the job of distribution to the middlemen.
From the analysis of the arguments in favour of and against the elimination of middlemen, it can be said that it is not possible in each and every area of business activity to eliminate middlemen. However, with the improvement of communication and transportation, it is possible to dispense with the services of functional middlemen.
The functional middlemen do not handle the goods in the capacity of owners; they merely establish contacts between the seller and the buyer. The manufacturers can easily sell their products to the mercantile middlemen or to the consumers. Thus, it is possible to have a fewer middlemen in the channel of distribution to reduce the distribution cost.
It is important to point out that many manufacturers have attempted to eliminate the middlemen by opening multiple shops and mail order houses. Even the consumers have tried to eliminate the middlemen by opening consumers’ co-operative stores. These developments do not necessarily prove that there is no role for the middlemen.
The marketing functions must be performed in order to satisfy the wants of the consumers. These functions may be performed by the manufacturers, consumers or the middlemen. Middlemen will continue to exist so long as they perform these functions more economically. These days, large scale retailers are gaining wide acceptance because of this reason. Thus, it can be concluded that it is not always feasible to eliminate all the middlemen.
The functional middlemen and even the wholesalers can be eliminated if large-scale retailers like departmental stores and super markets are able to perform all the marketing functions efficiently. And the manufacturers can also sell directly to the consumers if they have sufficient resources and experience to undertake responsibility for distribution. This will help the consumers in getting the products at low prices.
Wholesalers:
The term ‘wholesaler’ applies to all merchant middlemen who purchase and sell in large quantities. A wholesaler provides an important link between the manufacturer or producer and the retailer. He takes title to the goods he handles and assumes marketing risks in the process of distribution of goods. He purchases in bulk and sells in small lots to the retailers or industrial users and is generally away from the ultimate consumers. However, some wholesalers also sell directly to the consumers.
Services by Wholesalers to Manufacturers or Producers:
(i) A wholesaler facilitates large scale production throughout the year because the manufacturer is assured by the wholesaler about the sale of his product.
(ii) The wholesaler enables the manufacturer to specialise in manufacturing only. The latter is saved from the botheration and the risks of distributing his product.
(iii) The wholesaler facilitates round the year production by the manufacturer.
He undertakes to purchase the goods as soon as they are produced or manufactured and stores them in his own warehouse till they are demanded.
(iv) The wholesaler provides financial assistance to the manufacturer by making cash payment against the goods purchased. Sometimes, the wholesaler also gives advance to the manufacturer. The manufacturer need not block his capital in the stocks.
The wholesaler undertakes risk in dealing in the goods produced by different manufacturers.
Services by Wholesalers to Retailers:
(i) The wholesalers save the retailers from the trouble of searching out and assembling goods from several manufacturers.
(ii) The retailers can purchase different varieties of products in small lots from the wholesalers. They need not block their capital in bulk purchasing.
(iii) The wholesalers sell goods on credit to the retailers.
(iv) The wholesalers pass on the benefit of their specialised knowledge to the retailers. They bring to the notice of the retailers the new types of products, their uses and prices.
(v) The wholesaler assists the retailers in selling the products by undertaking advertising and other promotional activities.
(vi) The retailers can buy in small quantities from the wholesalers. This helps them in avoiding the risks of storing the goods and reduction of prices of goods.
Retailers:
“Retailing includes all activities directly related to the sale of goods or services to the ultimate consumer for personal, non-business use.” Retailing or retail trade involves all such activities which are related to direct sale of goods to the ultimate consumer. Retail trade is usually done by the retailers. A retailer may be defined as a dealer in goods and services who purchases from manufacturers and wholesalers and sells to the ultimate consumers.
The term ‘retailing’ does not cover sale by producer of industrial goods and industrial supply houses or by retailers, to-industrial buyers for use in the conduct of their business. It is also important to point out that retailing may be done by any other institution in addition to retail stores. A manufacturer or a wholesaler selling the products directly to the ultimate consumers for non-business use is engaged in retailing.
A retailer is an important link in the channel of distribution. He purchases and collects various kinds of goods from numerous sources and sells them to the consumers in small lots. He is in direct touch with the ultimate consumers. Retailers are generally located near the thickly populated residential areas. Retail stores are mostly organised on proprietorship or partnership basis and their capital investment is small as compared to wholesaling and manufacturing enterprises.
Services by Retailers to Manufacturers and Wholesalers:
(i) Distribution of Goods:
Retailers act as the last link or outlet for distribution of goods. They connect the wholesalers and consumers.
(ii) Ascertaining Customers Need:
Retailers have direct contact with customers. They help the wholesalers in ascertaining customers’ needs.
(iii) Providing Information:
On the basis of first-hand information about the likings and preferences of customers, retailers advise the wholesalers/manufacturers to introduce necessary improvements in their products.
(iv) Relieving from Retail Botherations:
Retailers relieve the wholesalers of the botheration of dealing with a large number of customers having different backgrounds.
Services by Retailers to Consumers:
(i) Supply of Goods in Small Quantities:
A retailer makes available to the customers all commodities in the smallest possible quantities. The customers need not store the goods.
(ii) Large Variety of Goods:
A retailer keeps large variety of goods manufactured by various manufacturers. The consumers are offered a wide choice.
(iii) Advice to Customers:
A retailer gives advice to the customers to help them make a choice of products to satisfy their needs. He advises them about the methods of use and utilities of various products.
(iv) Personal Services:
A retailer maintains personal contacts with the customers. He tries to meet their demands. He also satisfies them in case the customers have any complaint.
(v) Home Delivery:
Some retailers provide free home delivery services to their customers.
(vi) Credit Facility:
Retailers often grant credit to their customers which is a great service to the customers having temporary shortage of funds.
(vii) Customers’ Convenience:
A retailer aims at giving maximum local convenience to the customer. He is generally situated near the residential areas.
(viii) After Sale Service:
Retailers provide after sale service, if needed, e.g., repair and maintenance of goods.
Channels Conflicts and Management:
There may be conflicts among channel members and organization due to various reasons like sales targets, commissions, replacements, interruption of supply, payments etc. control on business may be one factor, these conflicts must of solved out to achieve the marketing goals and objectives.
Main types of conflicts are:
1. Vertical Channel Conflicts:
This type of channel conflict arises when channel members operating at different levels compete for the same market share. They may compete in the same market. For example, if a company is selling products directly and through distributors in the same market, extra offerings by company can create conflict.
2. Horizontal Channel Conflicts:
This type of conflict arises between channel members operating at the same level and also within the same market.
Multi-Channel Conflict:
Multi-channel conflicts arise when a manufacturer sets up two or more channels that serve and compete for the same market segments. For example, the conflict between retailers and factory outlets of a manufacturing company.
Reasons of Channel Conflicts:
(i) Goal incompatibility between manufacturer and wholesalers.
(ii) Ambiguity and confusion related to roles and responsibilities of manufactories and distributors.
(iii) Appointment of multiple dealers in same territory.
(iv) Lack of communication.
(v) Competition between manufacturer and channel members in the same market.
(vi) The channel members are margin-focused in their approach, where as producers, would prefer mass production and sales to reduce costs.
Managing Channel Conflicts:
To minimize the conflict, the manufacturer may take the following steps:
1. Effective Business Communication:
A regular communication between manufacturer and channel members is helpful to understand reasons of conflict, the meeting between top marketing executives and intermediaries can resolve the channel related problems.
2. Dealer Councils:
Dealer councils can resolve conflicts. Manufactures plays an effective role in these councils. It provides a platform for dealers to jointly resolve any dispute related to channel conflict.
3. Legalistic Strategies:
Legalistic strategies involve following legal processes such as arbitration and settlements for resolving the conflicts that arise between channel members.
4. Cooperation and Coordination:
It is the best method of conflict resolution, regular meeting between dealers and marketing mangers helps in understanding a problem in its initial stage. Cooperation and coordination of the channel to achieve profits and to increased market share. Cooperation is the process in which a channel member is motivated to work jointly with other channel members and follow its policies, procedures and strategies.