Effectiveness of distribution channels
The effectiveness of different types of distribution channel
Direct marketing is where the goods are sold directly from the product direct to the customer. A producer does not have to share its profit with intermediaries and so it is a low cost channel. The producer controls the whole marketing process and as a result can protect and maintain its brand image. Customers are increasingly using direct sales though the internet and can purchase from the comfort of their own home
However, it can be expensive to set up these channels and all the cost of distribution such as storage and damage rest on the producer. In addition, a recent trend is for customers to search online for products and then purchase them physically from outlets after making comparisons on price.
Wholesaler
A wholesaler is normally an intermediary between the producer and the retailer; although some wholesalers have their own outlets. Wholesalers are prepared to buy in considerable bulk from a producer. They break bulk by distributing smaller quantities to individual retailers. Goods are normally stored in regional warehouses where they are distributed using the wholesaler's vehicles to retailers.
Wholesalers, like major retailers, may have international networks and distribute worldwide. Examples of multinational wholesalers are Makro and Costco.
The advantage for a producer of using a wholesaler is that the wholesaler will:
- store the producer's output so freeing up space for new products
- improve the producer's cash flow by purchasing in bulk
- market the products to retailers
- bear the cost of storage
- bear the risk of storage such as theft, fire and damage
- ensure that the distribution process is cost effective.
However, in return for the costs and risks they bear, wholesalers will expect a significant discount from the producer to allow a mark-up when they sell the products on to retailers. Producers cannot be sure that the wholesalers will maintain the brand image.
Agents/Brokers
Agents and brokers are intermediaries between the producer and the wholesaler and/or retailer. They are experts in certain markets and bring buyers and seller together in return for a commission on the value of the sales. They very rarely take possession of any physical items; they just a facilitate negotiations and the selling process.
Agents and brokers are particularly useful when a firm is selling into a market or geographic region, of which they have little knowledge and experience. Brokers and agents will know the local market and, if it is in an overseas location, will help with the language and the legal requirements. They may also negotiate joint ventures with local firms.
Agents and brokers are probably best known in the buying and selling of land and travel services, but virtually all markets require employ such intermediaries.
Retailers
A retailer is an intermediary, which buys products either from manufacturers or from wholesalers and resells them to consumers. They come in all shapes and sizes from the corner shop to the hypermarket. The advantage of manufacturers using retailers is that they:
- are prepared to buy in bulk
- accept responsibility for storing stock and for any unsold items
- may have strong customers loyalty which may is an attractive proposition for the brands that they stock.
Clearly the disadvantage for the producer is that the retailer will demand a share of the profits and they will also decide how, and where, to display the product. With considerable competition for shelf space in multiple retailers, this placement of a product is a key element of the purchasing decision.
Retailers themselves may choose to use the services of distribution specialists. Marks and Spencer, for example, do not distribute their own products to individual stores. This is done for them by a subsidiary of British Oxygen. M&S prefer to concentrate on presentation at the point of sale.
Channels of distribution
There is considerable debate about how long distribution channels should be. Some years ago the basic rule of thumb was that industrial goods had shorter routes than consumer products, but this is now changing. Many of the traditional routes have seen casualties as wholesalers and specialists have gone out of business.
Modern technology allows goods to be tracked along their distribution route and the next buyer in the chain can remain fully informed of just where the products are.
Most producers will use a range of channels to distribute their products; this approach is known as a multichannel distribution.
