Think of all the products
you buy: food, toiletries, clothing, sports equipment, train tickets, haircuts,
gasoline, stationery, appliances, CDs, videotapes, books, and all the rest. How
many of these products do you buy directly from the producer? For most people,
the answer is not many. Most companies do not sell their goods directly to the
final users, even though the Internet is making that easier to do these days.
Instead, producers in many industries work with marketing intermediaries
(also called middlemen) to bring their products to market.
Two main types of
marketing intermediaries are wholesalers and retailers.
Wholesalers sell primarily to retailers, to other wholesalers, and to
organizational users such as government agencies, institutions, and commercial
operations. In turn, the customers of wholesalers either resell the products or
use them to make products of their own.
Types of Retail
Unlike wholesalers, retailers
sell products to the final consumer for personal use. Retailers can operate out
of a physical facility (department store, gas station, kiosk), through vending
equipment (soft drink machine, newspaper box, or automated teller), or from a
virtual store (via telephone, catalog, or website). Most retailers today reach
shoppers through a carefully balanced blend of store and nonstore retail
Functions of Wholesalers and Retailers
Match buyers and sellers
Provide market information
Offer promotional and sales support
Gather an assortment of goods
Transport and store products
retailers perform a number of specific distribution functions that make life
easier for both producers and customers:
Match buyers and
and sales support.
Gather an assortment
Transport and store
retailers are instrumental in creating three of the four forms of utility:
place, time, and possession utility. They provide items in a convenient
location (place utility); they save you the time of having to contact each
manufacturer to purchase a good (time utility); and they provide an efficient
process for transferring products from the producer to the consumer (possession
As the slide above
shows, without marketing intermediaries, the buying and selling process would
be expensive and time-consuming. Intermediaries actually reduce the price
customers pay for many goods and services, because they reduce the number of
contacts between producers and consumers that would otherwise be necessary.
They also create place, time, and possession utility.
The majority of
wholesalers are merchant wholesalers, independently owned businesses
that buy from producers, take legal title to the goods, then resell them to
retailers or to organizational buyers. Full-service merchant wholesalers
provide a wide variety of services, such as storage, selling, order processing,
delivery, and promotional support. Rack jobbers, for example, are
full-service merchant wholesalers that set up displays in retail outlets, stock
inventory, and mark prices on merchandise displayed in a particular section of
a store. Limited-service merchant wholesalers, on the other hand,
provide fewer services. Natural resources such as lumber, grain, and coal are
usually marketed through a class of limited-service wholesalers called drop
shippers, which take ownership but not physical possession of the goods
In contrast to
merchant wholesalers, agents and brokers never take title to the
products they handle, and they perform fewer services. Their primary role is to
bring buyers and sellers together; they are generally paid a commission (a
percentage of the money received) for arranging sales. Real estate agents,
insurance brokers, and securities brokers, for example, match up buyers and sellers
for a fee or a commission, but they don't own the items that are sold.
Producers of commercial parts often sell to business customers through brokers.
Manufacturers' representatives, another type of agent, sell various
noncompeting products to customers in a specific region and arrange for product
delivery. By representing several manufacturers' products, these reps achieve
enough volume to justify the cost of a direct sales call.
Changing Role of
efficient and effective global reach is revolutionizing the way goods and
services are sold and distributed. An increasing number of businesses are using
the Internet to improve the efficiency of their distribution systems and to
expand their market reach. But for some wholesalers the Internet is as much a
threat as it is a promise for others.
Types of Retail
When you shop in a
pet store, a shoe store, or a stationery store, you are in a specialty
store—a store that carries only particular types of goods. The basic merchandising
strategy of a specialty shop is to offer a limited number of product lines but
an extensive selection of brands, styles, sizes, models, colors, materials, and
prices within each line.
At the other end of
the retail spectrum are the category killers—superstores that dominate a
particular product category by stocking every conceivable variety of
merchandise in that category. Home Depot, Toys “R” Us, Office Depot, and Barnes
and Noble are category killers.
In contrast to
category killers, discount stores offer a wider variety of merchandise,
lower prices, and fewer services. One of the newest categories of discounters
is supercenters, large discount stores that offer broad selection of groceries,
toys, household items, and other products at discount prices. Since the early
1990s, Wal-Mart has opened over 1,140 U.S. supercenters with an average
size of 190,000 square feet and is now one of the nation’s largest food
Among the most
popular types of nonstore retailers are mail-order firms. These
companies provide customers and businesses with a wide variety of goods ordered
from catalogs and shipped by mail or private carrier.
For certain types of
products, vending machines are an important nonstore retail outlet. In Japan, soft
drinks, coffee, candy, sandwiches, and cigarettes are all commonly sold this
You have probably
experienced telephone retailing, or telemarketing, in the form of calls
from insurance agents, long-distance telephone companies, and assorted
nonprofit organizations, all trying to interest you in their products and
Gone are the days
when a large sales force called directly on customers in their homes or offices
to demonstrate merchandise, take orders, and make deliveries, simply because in
many households both parents work outside the home. However, two famous names in door-to-door
selling(and its variant, the party plan)—Avon
and Tupperware—are trying to stay in business by changing their approach. Both
have recently launched initiatives to sell directly to the customers over the
Internet and in retail stores.
Catalogs on computer
disk or published over the Internet have many advantages: They offer an easy
way for customers to search for products; they allow businesses to reach an enormous
number of potential customers at a relatively low cost; and they present timely
information about a product’s price and availability.
retail complexes house dozens of virtual storefronts, or Internet-based
stores. Consumers can buy everything from computer software to gourmet
chocolates in cybermalls.
are small free-standing electronic structures vend products and services in
convenient locations and introduce new products in dynamic ways.
Today, a growing
number of businesses sell a huge selection of goods and services online. For
some, such as Amazon, the Internet is their only marketing channel. But for
others, such as Costco and REI, the Internet offers an additional way to sell
Retail Industry Challenges
Oversupply of Store Space
Nonstore Retailing and E-Commerce
retailers are facing a number of pressing challenges in today’s competitive
marketplace. Chief among them is an oversupply of physical retail store space.
The United States
now has about 1,800 malls, which industry watchers say is about one third too
many. In addition to an oversupply of stores, retailers are grappling with a
weakened economy, and changing consumer demographics, lifestyles, and shopping
patterns. Finally, the growth of nonstore retailing and e-commerce is forcing
many retailers to revise their sales and marketing strategies to accommodate
In the midst of the
Internet boom, conventional wisdom held that shoppers, lured by the convenience
of online buying, would disappear from physical retail stores. So traditional
retailers rushed to establish websites and engage in e-tail (conducting
retail business over the Internet). Their thinking was that an independent web
operation could make faster decisions, be more flexible, and be more
entrepreneurial and thus could compete more effectively with pure-play
e-businesses. Some retailers, such as REI, ignored this advice and adopted a clicks-and-bricks
strategy from inception.
The disadvantages of
running a company’s retail and Internet operation independently became apparent
during the dot-com meltdown at the end of the 20th century. Difficulty in
acquiring brand recognition, high customer-acquisition costs, logistical snags,
and competition among siblings were just a few of the problems encountered by
retailers who chose to run their e-tail
channels—Internet, telemarketing, mail order, and physical stores—has many
advantages. A clicks-and-bricks strategy allows customers to purchase what they
want, where they want, and when they want. It also facilitates the product
exchange and return process. Customers can gather production information from a
company’s website before heading to the store, where they can use salespeople
to answer specific product questions and to demonstrate products. Customers can
also order merchandise online and pick up or return their purchases at a nearby
A company’s decision
about the number and type of intermediaries to use—its distribution mix—depends
on the kind of product being sold and the marketing practices of the industry.
A company’s decision
about the number and type of intermediaries to use—its distribution mix—depends
on the kind of product being sold and the marketing practices of the industry.
purchase goods they use in their operations directly from producers, so the
distribution channel is short. In contrast, the channels for consumer goods are
usually longer and more complex. The four primary channels for consumer goods
are as follows:
consumer. Producers who sell directly to consumers
through catalogs, telemarketing, infomercials, and the Internet are using the
shortest, simplest distribution channel.
retailer to consumer. Some producers create longer
channels by selling their products to retailers such as Ace Hardware, who then
resell them to consumers.
wholesaler to retailer to consumer. Most manufacturers
of supermarket and drugstore items rely on even longer channels. They sell
their products to wholesalers, who in turn sell to the retailers.
agent/broker to wholesaler to retailer to consumer.
Additional channel levels are common in certain industries, such as
agriculture, where specialists are required to negotiate transactions or to
perform interim functions such as sorting, grading, or subdividing the goods.
The appropriate market
coverage—the number of wholesalers or retailers that will carry a
product—varies by type of product. Inexpensive convenience goods or
organizational supplies such as computer paper and pens sell best if they are
available in as many outlets as possible. Such intensive distribution
requires wholesalers and retailers of many types. In contrast, shopping goods
(goods that require some thought before being purchased) such as Sub Zero refrigerators
require different market coverage, because customers shop for such products by
comparing features and prices. For these items, the best strategy is usually selective
distribution, selling through a limited number of outlets that can give the
product adequate sales and service support.
If producers of
expensive specialty or technical products do not sell directly to customers,
they may choose exclusive distribution, offering products in only one
outlet in each market area.
Costs play a major
role in determining a firm’s channel selection. It takes money to perform all
the functions that are handled by intermediaries. Small or new companies often
cannot afford to hire a sales force large enough to sell directly to end users
or to call on a host of retail outlets. Neither can they afford to build large
warehouses and distribution centers to store large shipments of goods. These
firms need the help of intermediaries who can spread the cost of such activities
across a number of noncompeting products. With time and a larger sales base, a
producer may build enough strength to take over some of these functions and
reduce the length of the distribution channel.
A third issue to
consider when selecting distribution channels is control of how, where, when,
and for how much your product is sold. Longer distribution channels mean less
control for producers, who become increasingly distant from sellers and buyers
as the number of intermediaries multiplies. Shorter distribution channels, on
the other hand, gives producers more control over how the goods are sold in the
market, but there is a tradeoff. Concentrating too many distribution functions
in the hands of too few intermediaries can increase the negotiating power of
Inadequate Product Support
Too Many Intermediaries
Multiple Sales Channels
Because the success
of individual channel members depends on the overall channel success, ideally
all channel members should work together smoothly. However, individual channel
members must also run their own businesses profitably, which means that they
often disagree on the roles each member should play. Such disagreements create channel
conflict. Channel conflict may arise when suppliers provide inadequate
product support, when markets are oversaturated with intermediaries, or when
companies sell products via multiple channels, each of which is competing for
the same customers.
Strategies: Additional Factors
In addition to
channel length, market coverage, cost, control, and possible channel conflict,
managers should consider several other factors when selecting distribution
channels. These factors include the nature and price of the product, the
market's growth rate, the geographical concentration of the customer base,
customers' need for service, the importance of rapid delivery, the strengths
and weaknesses of the various types of intermediaries within the channel, and
international laws and customs when selling in other countries.
distribution strategy involves more than selecting the most effective channels
for selling a product. Companies must also decide on the best way to move their
products and services through the channels so that they are available to the
customers at the right place, at the right time, and in the right amount. Physical
distribution encompasses all the activities required to move finished
products from the producer to the consumer, including the in-house operations
of forecasting, order processing, inventory control, warehousing, materials
handling; and outbound transportation.
of the distribution process can be
divided into in-house operations and outbound transportation. The in-house
steps include forecasting, order processing, inventory control, warehousing,
and materials handling.
To control the flow
of products through the distribution system, a firm must have an accurate
estimate of demand. To some degree, historical data can be used to project
future sales; however, the firm must also consider the impact of unusual events
(such as special promotions) that might temporarily boost demand.
Order processing involves preparing orders for shipment and receiving orders when
shipments arrive. It includes a number of activities, such as checking the
customer’s credit, recording the sale, making the appropriate accounting
entries, arranging for the item to be shipped, adjusting the inventory records,
and billing the customer.
If your inventory is
too large, you incur extra expenses for storage space, handling, insurance, and
taxes; you also run the risk of product obsolescence. On the other hand, if
your inventory is too low, you may lose sales when the product is not in stock.
The objective of inventory control is to resolve these issues.
Products held in inventory are physically
stored in a warehouse, which may be owned by the manufacturer, by an
intermediary, or by a private company that leases space to others. Some
warehouses are almost purely holding facilities in which goods are stored for
relatively long periods. Other warehouses, known as distribution centers,
serve as command posts for moving products to customers.
An important part of
warehousing activities is materials handling, the movement of goods
within and between physical distribution facilities. One main area of concern
is storage method--whether to keep supplies and finished goods in individual
packages, in large boxes, or in sealed shipping containers.
Each of the five
major modes of transportation has distinct advantages and disadvantages:
Railroads can carry
heavier and more diverse cargo and a larger volume of goods than any other mode
of transportation. However, trains are constrained to tracks, so they can
rarely deliver goods directly to customers.
Trucks are a
preferred form of transportation for two reasons: (1) the convenience of
door-to-door delivery, and (2) the ease and efficiency of travel on public
highways, which do not require the use
of expensive terminals or the execution of right-of-way agreements (customary
of air and rail transportation). Trucks cannot, however, carry all types of
cargo cost effectively; for example, commodities such as steel and coal are too
large and heavy.
The cheapest method
of transportation is via water, and is the preferred method for such low-cost
bulk items as oil, coal, ore, cotton, and lumber. However, ships are slow, and
service to any given location is infrequent. Furthermore, another form of
transportation is usually needed to complete delivery to the final destination,
like it is for rail.
offers the advantage of speed—but at a price. Airports are not always
convenient to the customers. Moreover, air transport imposes limitations on the
size, shape, and weight of shipments and is the least dependable and most
expensive form of transportation. Weather may cause flight cancellations, and
even minor repairs may lead to serious delays. But when speed is a priority,
air is usually the only way to go.
For products such as
gasoline, natural gas, and coal or wood chips (suspended in liquid), pipelines
are an effective mode of transportation.
Although they are expensive to build, they are extremely economical to
operate and maintain. The downside is transportation via pipeline is slow (3 to
4 miles per hour), and routes are inflexible.
Shippers can combine
the benefits of each mode by using intermodal transportation (a
combination of multiple modes). For instance, a company may ship goods in
over-the-road trailers that ride part of the way on flat bed railroad freight
cars and part of the way on highways.
distribution strategy - Firm's overall plan for moving products to intermediaries and final cu stomers
marketing intermediaries - Businesspeople and organizations that channel goods and services from
producers to consumers
wholesalers - Firms that sell
products to other firms for resale or for organizational use
retailers - Firms that sell goods
and services to individuals for their own use rather than for resale
wholesalers - Independent wholesalers that take legal
title to goods they distribute
merchant wholesalers - Merchant wholesalers that
provide a wide variety of services to their customers, such as storage,
delivery, and marketing support
jobbers - Merchant wholesalers that are responsible
for setting up and maintaining displays in a particular section of a retail
merchant wholesalers - Merchant wholesalers that offer
fewer services than full service merchant wholesalers; they often specialize
in particular markets, such as agriculture
shippers - limited-service merchant wholesalers that
assume ownership of goods but don't take physical possession; commonly used to
market agricultural and mineral products
and brokers - Independent wholesalers that do not take
title to the goods they distribute but mayor may not take possession of those
scrambled merchandising - Policy of carrying merchandise that is ordinarily sold in a different
type of outlet
wheel of retailing - Evolutionary process by which stores that feature low prices gradually
upgrade until they no longer appeal to price sensitive shoppers and are
replaced by new low-price competitors
specialty store - Store that carries
only a particular type of goods
category killers - Discount chains that sell only one category of products
discount stores - Retailers that sell a variety of goods below the market price by
keeping their overhead low
mail-order firms - Companies that sell products through catalogs and ship them directly to
mix - Combination of intermediaries and channels a
producer uses to get a product to end users
distribution - Market coverage strategy that tries to
place a product in as many outlets as possible
selective distribution - Market coverage strategy that uses a limited number of outlets to
exclusive distribution - Market coverage strategy that gives intermediaries exclusive rights to
sell a product in a specific geographical area
distribution - All the activities required to move
Finished products From the producer to the consumer
- The planning, movement, and flow of goods and
related information throughout the supply chain
processing - Functions involved in preparing and
receiving an order
- Facility for storing inventory
centers - Warehouse facilities that specialize in
collecting and shipping merchandise
handling - Movement of goods within a firm's warehouse
terminal, factory, or store.