How do companies get their products to customers? Distribution is a complicated but essential process in business. You can imagine the challenges companies face trying to guarantee that customers have access to products at the right time, and in the right quantities and places and are handled correctly if they are returned. As was discussed in Chapter 11, this process is known as supply chain management.

A channel of distribution is the part of the supply chain that focuses on getting the product to the consumers. More specifically, a distribution channel is a set of marketing intermediaries who buy, sell, or transfer title (or ownership) of products as they are passed from producer to consumer or business user. Some distribution channels involve several intermediaries, whereas others are shorter with few or no intermediaries.

What are marketing intermediaries? A marketing intermediary, formerly known as a middleman or reseller, is a business or person that moves goods and services between producers and consumers (in a B2C environment) or between business users (in a B2B environment). Marketing intermediaries, therefore, pass along products from manufacturers to end users. Sometimes no intermediaries are needed, such as when you buy a dozen ears of corn from the farmer down the road. But usually many intermediaries of different types work to ensure that a product reaches consumers.

What are the different types of marketing intermediaries? There are three main types of marketing intermediaries:

• Wholesalers buy and resell products to other wholesalers, retailers, and industrial users. For example, your local grocery store probably purchased Tide ­laundry detergent from a wholesaler who bought it from P&G, the manufacturer.

• Agents/brokers facilitate negotiations between buyers and sellers of goods and services but never take title (ownership) of the products traded. Examples include real estate agents and brokers, stockbrokers, and agricultural brokers. eBay also can be considered an agent/broker because the company facilitates the transfer of ownership from sellers to buyers.

• Retailers sell products directly to consumers. Many retailers sell products they manufacture themselves. In some instances, retailers purchase products from a manufacturer or directly from a wholesaler and then sell them to the consumer.

Why are marketing intermediaries needed? You might wonder why we need all of these intermediaries and whether they serve to only drive up prices. It is certainly true that each link in the distribution channel results in additional costs, and intermediaries must cover these costs and earn a profit to remain in business. The added value of intermediaries is efficiency.

To examine the efficiencies provided by intermediaries, review Figure 14.6, which shows five consumers and five producers. Without an intermediary, each consumer would have to contact each producer to order the desired goods. Without intermediaries, if Juan, Shannon, Spencer, Ragish, and YunLi each wanted toothpaste, potato chips, soda, tissues, and soap, they would each have to go to the individual companies to get the items. That would involve 25 transactions (five transactions for each person). Now suppose a grocery store stocks and resells each of the five manufacturers’ products. Now the five manufacturers and five customers have only one intermediary (the grocery store) to deal with. Each of the manufacturers makes one trip to the grocery store to deliver the items, and Juan, Shannon, Spencer, Ragish, and YunLi each make only one trip to the grocery store to get those products. This reduces the number of exchange relationships from 25 to 10. Intermediaries therefore reduce the time and costs of providing products to customers.

Figure 14.6

The Efficiencies of Intermediaries

In short, intermediaries are a necessary part of the distribution process. If they are not available to do the job, someone else (ultimately the consumer) would need to perform the task of retrieving a product directly from a manufacturer. Intermediaries also help to transport and store goods and are often involved in other parts of marketing, such as advertising and relationship building. Some intermediaries even serve as interim bankers by financing inventories or supplying credit to their supply chain partners. Historically, intermediaries have proven that they can add value, despite some additional costs.

What are the different types of distribution channels? Not all channels of distribution are the same. As Figure 14.7 shows, the type of distribution channel needed depends on the type of product being brought to the consumer. The number of intermediaries within a distribution channel depends on whether greater efficiency or additional value is provided by adding another link in the distribution system. For example, in Figure 14.7, Jeanne buys cosmetics directly from Avon without the need for any intermediary, but when Kevin buys a Goodyear tire, the tire is manufactured at a Goodyear plant and then delivered to TiresPlus, a Goodyear dealer that sells it to Kevin. Adding the extra component to this channel of distribution adds value to the product because the retail shop can provide information and service more easily than can the manufacturing plant and also provide convenience because Kevin lives closer to the store than to the plant.

Figure 14.7

Distribution Channels for Consumer Products

Other products, such as food and clothing, have more complicated distribution systems and require the use of brokers, wholesalers, and retail stores to get the products to the consumer, but all are necessary to achieve efficiency. Similar channels of distribution also exist in B2B markets. Competitive markets determine what number of intermediaries will be required to achieve the greatest level of efficiency.

What services do wholesalers provide? Wholesalers are intermediaries that buy and resell products to retailers, other wholesalers, and industrial users. They are different from retailers in that retailers sell products only to final consumers. One of the most effective ways to distinguish wholesalers from retailers is to remember that wholesalers sell primarily B2B products, whereas retailers sell only consumer products. Nevertheless, to their customers, wholesalers provide an array of services, some of which are listed in Table 14.3.11

Table 14.3

Services Provided by Wholesalers

What are the different types of wholesalers? Wholesalers are independently owned businesses that take ownership (title) of the products they handle. Wholesalers include full-service wholesalers and limited-service wholesalers. Full-service wholesalers provide a full line of services: carrying stock, maintaining a sales force, offering credit, making deliveries, and helping their price, market, and sell products. There are two types of full-service wholesalers: wholesale merchants sell primarily to retailers, and specialty distributors sell to manufacturers and institutions, such as hospitals and the government.

As intermediaries, limited-service wholesalers offer fewer services than full-service wholesalers. The major types of limited-service wholesalers include the following:

• Cash-and-carry wholesalers carry a limited line of fast-moving goods and sell to small retailers for cash. They normally do not deliver. For example, a small fish store may drive to a cash-and-carry fish wholesaler, buy fish for cash, and bring the merchandise back to the store.

• Truck wholesalers (or truck jobbers) sell and deliver directly from their trucks. They generally carry semiperishable items that regular wholesalers prefer not to carry. For example, trucks that deliver bread or snack food to convenience stores and restaurants are truck wholesalers.

• Drop shippers don’t carry inventory or handle products. After receiving an order, they select a manufacturer that ships the merchandise directly to the customer. Drop shippers assume title and risk from the time of the order to delivery. They operate in bulk industries, such as lumber, coal, and heavy equipment.

• Rack jobbers sell mostly nonfood items in grocery stores and drugstores in which they set up racks and displays. Magazines are an example. Rack jobbers retain title to the goods and bill the retailer only for the goods sold to consumers.

Because of their limited functions, these limited-service wholesalers usually operate at a lower cost than full-service wholesalers.

What are some common types of agents? Agents and brokers are unique among intermediaries because they do not transport or take title to the products traded. They merely facilitate the buying and selling of products and earn a commission on their sale. What distinguishes agents from brokers is that agents represent the buyers or the sellers who hired them on a more permanent basis, whereas brokers are hired on a temporary basis.

Three common types of agents are manufacturers’ agents, selling agents, and purchasing agents:

• Manufacturers’ agents are independent contractors who sell products for more than one manufacturer. Generally, manufacturers’ agents represent two or more manufacturers of complementary lines. A formal written agreement with each manufacturer covers the pricing, territories, order handling, delivery service and warranties, and commission rates they earn. Manufacturers’ agents are often used in such lines as apparel, furniture, and electrical goods. Most manufacturers’ agents are small businesses with only a few skilled salespeople. Small manufacturers may hire an agent if they cannot afford their own field sales forces, whereas larger manufacturers rely on agents to open new territories or cover territories that cannot support full-time salespeople. Some manufacturers’ agents work directly for the manufacturer and directly distribute the company’s products to retailers. In some instances, these agents deal directly with the consumer, skipping the retail middleman altogether.

• Selling agents have the contractual authority to sell a manufacturer’s entire product line when the manufacturer is either not interested in the selling function or feels unqualified to do so. The selling agent serves as the sales department for the manufacturer. Selling agents are common in the industrial machinery and equipment businesses; coal, chemicals, and metals industries; and real estate and stock brokerage industries.

• Purchasing agents generally have long-term relationships with buyers and make purchases for them, often receiving, inspecting, warehousing, and shipping merchandise for them. They provide helpful market information to clients and help them obtain the best goods and prices available.

What are the important retail strategies? Retailers primarily sell products to the final consumer. Retailing constitutes a major sector of our economy. You are likely familiar with retail distributors because most of your personal shopping experiences take place at retail stores. All companies that sell products need to decide how intensively they wish to cover any geographic market. Companies can choose to sell either through all available retail outlets or only through a more selective distribution (see Figure 14.8):

Figure 14.8

Distribution Strategies

• An intensive distribution is most appropriate for companies selling convenience goods, such as newspapers, chewing gum, and milk. Companies want these products to obtain the widest possible exposure in the market and so strive to make these products convenient for purchase in as many convenience stores and supermarkets as possible.

• A selective distribution strategy uses only a portion of the many possible retail outlets for selling products. This approach is appropriate for the sale of shopping products and durable goods, such as stereos, televisions, and furniture. Buyers spend more time comparing competitors’ prices and features when buying shopping products. A sale often depends on providing buyers with information on these features to successfully differentiate one brand’s product from another. Naturally, producers want to selectively determine where their products will be sold to ensure successful differentiation. Moreover, customers often want other services, such as installation, to be properly distributed. Again, producers are selective in determining outlets and may provide training to outlets to ensure the best service.

• An exclusive distribution strategy uses only one outlet in a geographic area. This is most appropriate when selling specialty products, such as high-quality cars or high-end jewelry and clothing. Because these products carry a certain degree of prestige, sellers often require distributors to carry a full line of inventory, offer distinguished high-quality service, and meet other exclusive requirements. Another common form of exclusive distribution exists with franchises. Often, to avoid competition between franchises within the same company, only one outlet is allowed in a given geographic area, and the retail distributors are required to meet strict quality and service standards to protect brand-name integrity.

What are the different types of retailers? There are two main types of retailers: in-store retailers and nonstore retailers. Table 14.4 describes the major types of retail stores and lists some examples of each.

Table 14.4

Types of Retail Stores

What kinds of in-store retail organizations are there? In-store retail organizations consist of corporate chain stores, individually owned retail stores, cooperatives, and franchises:

• Corporate chain stores are two or more retail outlets owned by a single corporation. They attempt to realize economies of scale by buying large volumes at reduced prices. Corporate chains appear in all types of retailing.

• Individually owned retail stores, sometimes referred to as mom-and-pop stores, are prevalent.

• Cooperatives are formed when independent companies voluntarily band together and buy in bulk to experience economies of scale that reduce costs. Some cooperatives agree to use common merchandising techniques, such as the Independent Grocers Alliance (IGA) and True Value (hardware stores). Some cooperatives have created jointly owned, central wholesale operations, such as Associated Grocers (groceries) and Ace (hardware stores).

• Franchises are a distribution system where a franchiser sells a proven method of doing business to a franchisee for a fee and a percentage of sales or profits. Subway, Jiffy Lube, and Holiday Inn are familiar franchises. Franchisees are typically required to purchase necessary items from the franchiser and must meet strict rules and regulations to ensure consistency and quality.

What is nonstore retailing? Little has drawn as much attention in modern retailing as the growth of nonstore retailing. Nonstore retailing is a form of retailing in which consumer contact occurs outside the confines of a traditional brick-and-mortar retail store. Of course, the Internet is a big component of nonstore retailing, but there are other forms of nonstore retailing that you commonly interact with. For example, vending machines, kiosks, and carts are convenient and inexpensive ways of providing products and services. Some other important nonstore retailers include the following.

• Telemarketers sell products over the phone. Sometimes the sales pitches are recorded messages. To avoid such sales pitches, many have signed up for the National Do Not Call Registry.

• Direct sellers sell goods and services door-to-door at people’s homes and offices or at temporary or mobile locations. Direct selling is also known as multilevel marketing (MLM) because of the marketing structure that defines the corporate strategy of many of these organizations. Often MLM companies are referred to as pyramid structures because of the resulting hierarchy of compensation levels. Not only is the sales force compensated by the products sold, but they are also incentivized to bring other sales members to an organization. When they bring in other sales members, they receive a percentage of the sales generated by the new associates, creating multiple levels of compensation. Avon cosmetics, Pampered Chef kitchen products, and Herbalife health products are sold through MLM.

• Direct marketers are those retailing a good or a service and bypassing intermediaries. Such retailers include catalog sales and direct mail and infomercials.

How has the Internet impacted retailing? Electronic retailing, or the selling of consumer goods and services over the Internet, is a subset of e-commerce. It is now almost mandatory that any business, especially a retail store, have an online as well as a social media presence.

In addition, the Internet has enabled consumers to access data and information about products and competitors quickly. The ability to purchase products online has changed a consumers’ expectation of an in-store experience. Often, consumers come into a store to touch and interact with a product before purchasing or to seek more information. If a sales associate is not familiar with a product or cannot access information more quickly than can the customer with his or her smartphone, the store risks losing a sale.

Stores are also keenly aware of other factors that can potentially turn customers away, such as long lines or insufficient store inventory. If customers have to wait too long or if the product is not on the shelf, they may decide to leave and order the product online when they get home—or they may ultimately not purchase the product or purchase it from somewhere else. Either way, the sale is lost.

What do we mean by distribution logistics? Logistics refers to managing the flow of materials, information, and processes that are involved in getting a product from its initial raw stages to the point of consumption. Different kinds of logistics are involved at various stages of the production and distribution processes, as shown in Figure 14.9. Bringing raw materials, supplies, information, and any other goods and services from suppliers to the producer is inbound logistics. Managing the movement of resources throughout the production process is materials handling and operations control. Finally, managing the physical distribution of produced products to customers in the quantities needed, when and where they want them, is outbound logistics. It is also important to properly manage reverse logistics, bringing products back to the producer when they are defective, overstocked, outdated, or returned for recycling. If part of the process is outsourced, then managing that process is third-party logistics.

Figure 14.9

The Distribution Logistics Process

What are the benefits and costs of various transportation modes? Transportation is often the most expensive distribution cost. To keep costs as low as possible, a company looks for the most economical mode of transportation. However, companies also have to consider other factors beyond cost—such as speed, dependability, flexibility in product handling, frequency of shipments, and accessibility to markets. Table 14.5 outlines the benefits and costs of the five major modes of transportation according to these criteria. Businesses have to carefully weigh these benefits and costs in making a mode-of-transportation decision. They look at different transportation methods when receiving materials from suppliers as well as when delivering orders to customers. A firm might rely on one method of transportation or a combination of methods for each component.

Table 14.5

Benefits and Costs of Various Transportation Modes

How does a company determine the transportation method? Routing is simply the way in which goods are transported to a client, from suppliers, or anything in between. Proper routing ensures that any transportation of goods, be it with a company’s own equipment or through a courier, is done at a minimum of cost, time, and distance without sacrificing quality. The best way to understand all the variables of each transportation option pertinent to a specific company is to develop a comprehensive routing guide that provides detailed routing solutions for a company’s every possible shipping situation.

How important is warehousing? Warehousing, or storing products at convenient locations so they are ready for customers when they are needed, is critical for customer service. There are two types of warehouses:

• Storage warehouses store goods from moderate to long periods of time.

• Distribution warehouses (or distribution centers) are designed to gather and move goods quickly to consumers. Walmart operates approximately 42 distribution centers in the United States. Each center is more than 1 million square feet of space (about 29 football fields) under one roof.12

Warehousing today uses sophisticated technologies to effectively store and distribute products.

How is inventory tracked? One of the challenges in managing a supply chain is managing inventory levels to ensure that there is neither too much nor too little inventory on hand. Encountering either situation can be costly, as having too much inventory involves extra warehousing fees, and too little inventory means lost sales. As we mentioned earlier, companies use bar codes, or Universal Product Codes, on almost all products to help identify and track products.

Radio frequency identification (RFID) tags are intelligent bar codes. RFID technology, although costlier than bar codes, is more versatile and provides a richer amount of information about the movement and details of a product. Companies use bar codes and RFID tags to help reduce inventory costs by generating information on a real-time basis, thus providing accurate stocking information and reordering information.