Types of Distribution Channels

Everything you need to learn about the Types of Distribution Channels!

List of Different Types of Distribution Channels (with Functions) as studied in Marketing Management

Types of Distribution Channels in Marketing:

Channels of distribution which are also called trade channels are classified into two types- Conventional (Non-integrated) channels and Non-Conventional (Integrated) channels. These have further sub-classification.

(A) Conventional Channel (Non-Integrated):

Conventional channels are the channels which are fragmented and not integrated. The manufacturer and consumer are closely linked to each other through intermediaries.

Conventional channels are of two types:

(1) Direct Channel:

A direct channel is a one where manufacturer sells directly to the consumer. He does not employ any intermediary and therefore it is also known as Zero level channel. Direct channels are short in size as the manufacturers tries to reach the customers directly. As a result of this there is an immediate transfer of title of the goods to the consumer. Costly goods like laptops, automobiles, heavy machinery, etc. are sold through direct channels.

This method is used in following ways:

i. Through Retail Shops:

In this case, the producer of consumer goods of daily necessity opens a number of retail shops in different parts of the city or country. E.g. Liberty Shoes, Amul.

ii. Through Travelling Salesman:

Salespeople here directly approach the buyers with samples and literature and try to persuade them to buy the goods. Orders taken are directly executed by the company.

iii. Through Mail Order Business:

Here the producer mails the catalogues to the potential buyers. When orders are received the goods are dispatched through mail and payment is also made through mail. This is used for small consumer durable goods.

However, direct channel is expensive and involves heavy investment. The managerial responsibility and the entire risk also lie with the producer. Because of this, producer does not prefer to use direct distribution channel.

(2) Indirect Channel:

Indirect channel is one where intermediaries or middlemen are employed to move the goods to ultimate consumer. The number of intermediaries varies from firm to firm, and as per the type of the product. If one intermediary is employed, it is one-level channel, if two intermediaries are employed; it is two-level channel and so on. The manufacturer here may use the services of wholesaler, retailers, agents, etc. as per the requirement.

(B) Non-Conventional Channel (Integrated):

Non-Conventional or integrated channels are those networks that work with full coordination and co-operation rather than in a loose manner.

These are of two types:

(1) Vertical Distribution Channel:

Vertical distribution channels are rationalised and capital intensive network. These are so designed so as to achieve various managerial promotional and technical economies. This is done by integrating and coordinating various marketing activities and flows from point of production to consumption.

These vertical channels are of three types- administered, contractual and corporate. Administered vertical channel is one in which one or few firm co-ordinates the marketing activities by developing suitable programmes. Generally, this channel is followed by two wheeler/three wheeler/four wheeler manufacturers to win dealer support.

Contractual vertical channel is one in which outside units are hired on contract basis for a price to integrate the programme of the firm to attain economies and increase the market share. Corporate vertical channel is one in which the channel components are owned and operated by the same organisation.

(2) Horizontal Distribution Channel:

Horizontal channel is one in which two or more companies jointly distribute their products in market either themselves or they create an independent unit. This helps in better gain from the marketing opportunities. Horizontal channels are used because of stiff competition, constantly changing market, rapid changes in technology, cyclical changes and such other factors affecting the market.

Types of Distribution Channels (4 Types):

An entrepreneur has a number of alternative channels available to him for distributing his products. These channels vary in the number and types of middlemen involved. Some channels are short and directly link producers with customers. Whereas other channels are long and indirectly link the two through one or more middlemen.

These channels of distribution are broadly divided into four types:

i. Producer-Customer:

This is the simplest and shortest channel in which no middlemen is involved and producers directly sell their products to the consumers. It is fast and economical channel of distribution. Under it, the producer or entrepreneur performs all the marketing activities himself and has full control over distribution.

A producer may sell directly to consumers through door-to-door salesmen, direct mail or through his own retail stores. Big firms adopt this channel to cut distribution costs and to sell industrial products of high value. Small producers and producers of perishable commodities also sell directly to local consumers.

ii. Producer-Retailer-Customer:

This channel of distribution involves only one middleman called ‘retailer’. Under it, the producer sells his product to big retailers (or retailers who buy goods in large quantities) who in turn sell to the ultimate consumers.

This channel relieves the manufacturer from burden of selling the goods himself and at the same time gives him control over the process of distribution. This is often suited for distribution of consumer durables and products of high value.

iii. Producer-Wholesaler-Retailer-Customer:

This is the most common and traditional channel of distribution. Under it, two middlemen i.e. wholesalers and retailers are involved. Here, the producer sells his product to wholesalers, who in turn sell it to retailers. And retailers finally sell the product to the ultimate consumers.

This channel is suitable for the producers having limited finance, narrow product line and who needed expert services and promotional support of wholesalers. This is mostly used for the products with widely scattered market.

iv. Producer-Agent-Wholesaler-Retailer-Customer:

This is the longest channel of distribution in which three middlemen are involved. This is used when the producer wants to be fully relieved of the problem of distribution and thus hands over his entire output to the selling agents.

The agents distribute the product among a few wholesalers. Each wholesaler distributes the product among a number of retailers who finally sell it to the ultimate consumers. This channel is suitable for wider distribution of various industrial products.

Types of Channels of Distribution (Direct and Indirect Channels):

1. Direct Channel of Distribution:

Manufacturer-Consumer:

In this the products are directly transferred to consumers by the manufacturers. It is the shortest and simplest channel. It is adopted specifically by producers of perishable goods, or when the plant is located near the customer and it is earlier to sell the products directly to them.

Direct channel is also widely used wherever new products are introduced into the market for aggressive sales and for goods of technical nature which need demonstration and therefore can be marketed directly.

The following are the methods used by producer, under direct channel:

(i) Opening sales counter at manufacturing plant

(ii) Door to door sales

(iii) Sales by mail order method

(iv) Sales by opening own shops

2. Indirect Channel:

In this channel middlemen or intermediaries are used between producer and consumer.

It is of following types:

(a) One-Tier Indirect Channel:

Manufacturer-Retailer-Consumer:

In this channel there is an intermediary retailer. A manufacturer sells goods to consumers through these retailers.

If the buyers are large, this channel is preferable. Automobile appliances, clothing, shoes etc. are sold directly to retailers.

(b) Two-Tier Indirect Channel:

Manufacturers-Wholesalers-Retailer-Consumer:

Wholesaler and retailers are the two types of intermediary in this channel. A manufacturer channels his products to consumers through these intermediaries, the wholesalers, being used here because they have more finance and knowledge of marketing and selling compared to retailer only.

(c) Three-Tier Indirect Channel:

Manufacturers-Agent/Middlemen/Wholesalers-Retailer-Consumer:

In this, three types of intermediaries are used. The gap between the manufacturers and the consumers is great. In this channel, the manufactures uses the services of the agent/middlemen/sales agent for the dispersal of goods. The agent distributes the goods to the wholesalers who sells the goods to retailer and who in turn sells it to the consumers.

Marketing Problems of SSI:

1. Competition from large scale section.

2. Lack of sales promotion.

3. Weak bargaining power.

4. Lack of infrastructure and finance for marketing.

5. Lack of expertise in marketing.

Types of Distribution Channels (4 Types):

Type # 1. C & F Agents:

The importer must make use of the service of C & F agents who is responsible for carrying out the various procedure and formalities relating to the import of goods. This is particularly true when the consignee lives a long away from the port of the arrival.

The agent thus renders his services as an intermediary who will be kept informed about the arrival of shipping craft receive the goods from the cargo agent, (if he is not himself the agent) carrying out the custom clearance and formalities and assure responsibility of forwarding the goods of the importer on behalf he is working.

In performing the function, the forwarding agencies undertake operations of legal character. He takes delivery on behalf of consignee. He may also store the goods after he has obtained customs clearance.

(i) Clearing and Forwarding agents are essential link in international trade.

(ii) C & F agent plays a vital role in fulfilling the various delivery commitments made by the exporter to the importer abroad.

(iii) C & F agent facilitates the smooth and trouble free passage of cargo from the point of manufacture to the destination.

Activities of a C & F Agent:

(i) C & F agent works closely with the exporter right from the receipt of offer stage. He provides freight rates to various destinations and also informs the exporter about the most economical modes of transportation. He also advises the most cost effective route for the destination.

(ii) Once the order is received by the exporter, C & F agent makes the ship booking, keeping in mind the last date of shipment on the letter of credit.

(iii) As the dispatch dead line approaches, C & F agent estimates the transit time between the factory and the port of shipment as mentioned in the L/C. Accordingly, he advises the exporter about the dispatch date from the factory, so that the cargo reaches the port at right time.

If the cargo reaches too early, it attracts demurrage charges. On the other hand, if the cargo reaches late, it may miss the ship, thereby causing the delay. Such delays are inconvenient and expensive to both the importer as well as the exporter.

(iv) Once the goods are dispatched from the factory, the C & F agent intimates the shipping line regarding the expected arrival schedule of the goods at the port, along with the mode of inland transportation. He also completes the octroi formalities (wherever necessary) so that the export goods are not subjected to octroi duty.

(v) The C & F agent takes delivery of the consignment from the road transport company or the railway station. The cargo is stored in C &F agent warehouse till shipment. Soon after receiving the cargo, the C & F agent initiates action to obtain customs clearance and seeks permission of port authorities for bringing the cargo to the shipment shed.

(vi) C & F agent then applies for and secures port permit so that the goods can enter the port premises. At the same time, the C & F agent helps the exporter in preparing the export declaration form that the value, specification quantity and description of goods mentioned in the shipping bill are in accordance with the export contract and the statement made in the shipping bill is true.

(vii) After this, the C & F agent prepares bill of lading in compliance with the terms and conditions of the sale/letter of credit.

(viii) After this, the bill of lading is submitted to the shipping company and the cargo is loaded on the vessel. The shipping company representative examines the cargo for its condition and signs the bill of lading accordingly. In case of CFR and CIF contracts, the ocean freight is also paid, at this stage and the “Freight Prepaid” seal is obtained on the bill of lading.

(ix) C & F agent then collects all the documents such as bill of lading, customs certified invoice, consular invoice, certificate of origin etc., from the respective authorities and sends them to the exporter for further negotiation.

Type # 2. Distributors:

Distributors purchase products in bulk from manufacturers/vendors at trade prices and resell to retailers in smaller volumes to generate profit. The main benefit of distributors is the speed at which mass produced products can be sold through a network of resellers/retailers.

Distributors are typically located in a selected geographic area where they can easily distribute the products to resellers and retailers in the surrounding areas. Usually distributors will only sell to businesses such as resellers and retailers. Distributors do not usually sell directly to the end consumer.

The basic distribution channel for most industries is-

Manufacturer/Vendor > Distributor/Wholesaler > Reseller/Retailer > End Consumer.

Whilst distributors by definition distribute goods to resellers and retailers, they are in actual fact resellers themselves as they resell goods purchased from manufacturers / vendors. For this reason distributors are often registered as both Merchants & Resellers on www(dot)theresellernetwork(dot)com.

Distributors carry a wide range of related or similar products, usually within one type of industry, but often from many different suppliers. Distributors are therefore well placed to add new products to their stock for retailers to consider buying.

Manufacturers/vendors, who bypass distributors to reduce the margins lost to the middleman, also lose the benefits of higher volumes of sales that distributors achieve through their existing customer base of resellers and retailers. Distributors can also eliminate the need for manufacturers to warehouse and deliver the product.

By registering a free reseller profile distributors can stay up to date and/or quickly and easily find new products and suppliers that add value and increase their revenue.

Distributors who are looking to expand their channel and increase sales should register as a merchant profile so that our network of resellers and retailers can make contact.

Type # 3. Wholesale Trade:

Generally, the goods are produced at some particular place, while consumers are scattered all over the country or the world. Manufacturer cannot directly reach each and every customer. Therefore, some middlemen or intermediaries are required in the market. There are two types of intermediaries, namely wholesaler and retailer. Trade carried on by them is called Wholesale Trade and Retail Trade.

Wholesaler:

Wholesaler constitutes a link between the producer and the retailer. He is the first intermediary in the channel of distribution. He purchases goods in bulk from the manufacturers and sells them in small quantities to the retailers.

Sometimes, he collects raw materials from scattered and small producers and sells them in bulk to the manufacturers. Thus, he stands in between the manufacturers and the retailers on one hand, and also between the producers of raw materials and the manufacturers on the other.

A wholesaler generally specializes in the purchase and sale of only one type of commodity. A person who does such type of trade is called Wholesaler and his trade is known as Wholesale Trade.

“A Wholesaler is a trader who purchases goods in large quantities from manufacturers and resells to retailers in small quantities”. —S. E. Thomas

Type # 4. Retailer:

Retailers are small shopkeepers who sell goods directly to the consumers. Pedlars, hawkers, one-price-shops or petty shopkeepers are all retailers. They are the last link in the chain of intermediaries. They are the intermediary between the wholesalers and the ultimate consumers. They purchase from the wholesaler and sells in very small quantities to the consumers.

They need a smaller capital than the wholesalers and usually, carry trade on cash basis. They do not specialize in any commodity and usually carry a large variety of goods in their stock. Their activities are generally confined to the locality in which their shops are situated.

Retailer constitutes the final stage of distribution. Retailing involves the process of supply of requirements of the consumers in small quantities required by them. It provides the necessary link between the wholesalers and the consumers.

The term ‘re-tail’ is the French word, which means cutting again and again or distribute. The person busy in doing such cutting or distributing activities in the trading form became the retailer in the common language. Therefore, a person buying big quantity and selling it in small by cutting or distributing into small pieces will be considered as a retailer.

We can study some of the following important definitions:

“Retailer is that trader who resells the goods to the consumers. Different goods are collected at the shop of retailer, so that many consumers can buy or collect those goods according to their necessities and convenience.” —James Stephenson

“That business entrepreneur is called retailer who sells the goods to the final consumers and maintains a link between the consumers and producers.” —W.J. Stanton

“The activities involved in selling directly to the ultimate consumer for personal nonbusiness use. It embraces direct-to-customer sales activities of the producer, whether through his own stores or by house-to-house confessing or by mail order business.” -American Marketing Association

Types of Distribution Channels:

Type # 1. Middlemen in Distribution:

In all commodity markets, whether primary or central, we have a host of middlemen acting as essential functionaries.

Middlemen:

Persons or firms specialising in carrying out the transfer of title between producers and consumers are called middlemen or business intermediaries acting as connecting links between producers and consumers. They bridge the gap between primary producers and ultimate consumers. They provide a distribution network through which goods flow to the market. Middlemen perform the marketing job, involving (a) collection or concentration, (b) sorting and equalization, and (c) dispersion.

These middlemen may be merchant middlemen working on their own account and at their own risk of loss, e.g., wholesaler, or they may be agent middlemen, i.e., functional middlemen operating on account of their principals and not on their own account as they are agents, e.g. brokers, commission selling or buying agent called factors, auctioneers, etc. These agent middlemen may also act as sole distributors or agents, enjoying exclusive distributorship by agency agreement.

Middlemen is an intermediary or a connecting link between two persons, e.g., a producer and a consumer or a seller and a buyer in a market.

Types of Middlemen:

We come across two types of middlemen in distribution:

1. Merchants – Merchant middlemen buy and sell on their own account and at their own risk of loss, e.g., wholesaler, retailer, exporter, importer.

2. Mercantile Agents – They act as business agents buying/ selling on behalf of merchants and manufactures who are their employers or principals.

Type # 2. Mercantile Agents:

A “Mercantile Agent” is one who has, in the ordinary course of his business as an agent, authority to buy and sell goods, or to consign them for sale or to raise money on their security. Thus, he is special or general agent having special duties, responsibilities, powers and functions.

A “Mercantile Agent” as a middleman in the world of business is a general or special agent appointed by business men to represent them, or to act on their behalf in business matters. Such a mercantile agent may be empowered to buy or sell goods or services on behalf of his principal or to raise money or credit on certain goods or securities. Being usually in possession of goods belonging to others, he may deal with the third parties as self- assumed owner or ostensible owner of goods.

Types of Mercantile Agents:

The following are different kinds of mercantile agents, i.e., business intermediaries:

(1) Factors,

(2) Brokers,

(3) Commission Agents

(4) Del Credere Agent

(5) Auctioneer

(6) Ware Housekeeper

(7) Forwarding and Clearing Agents:

All mercantile agents are business intermediaries or middlemen between buyers and sellers and they act as specialists or experts in their lines and have a definite role in the machinery of commerce.

We shall now describe functions and services of these mercantile agents.

1. Factor:

A factor is a general mercantile agent. He is employed to sell goods on behalf of his principal. The goods are entrusted to his possession. He is empowered to carry on the selling work in his own name. He may not disclose the name of his principal to the buyer.

In that case, he will incur personal liability and the buyer can sue him for any breach of agreement. If he does not disclose the name of the owner or principal, he can sue the buyer in his own name for a breach of contract or for the recovery of dues. The factor is also entitled to receive payments from buyers and give them valid receipt in his own name.

As a general agent the factor enjoys the right of lien on goods in respect of his commission and other dues. In case his dues are unpaid, he can retain the property in the goods, and if necessary, can sell off the goods to recover his dues by giving due 14 days’ notice of lien to his principal. All commission agents and merchants operating in the central markets are factors and enjoy the powers and authorities of a factor.

2. Broker:

A true broker is a special mercantile agent. He acts as an intermediary between a buyer and a seller. He is employed to negotiate for sale or purchase of goods, securities and services. He may act on behalf of a buyer or a seller. Usually he is not given any actual possession of goods. A broker must carry on buying or selling work in the name of his principal who shall be liable to the third party. He must disclose the name of his principal to the third party.

A true broker carries no personal liability and cannot sue or be sued by the third party on a breach of contract. He cannot receive payments in his own name and pass valid receipts. He also does not enjoy any right of lien on goods in respect of his commission which is called brokerage.

The broker on conclusion of the sale or purchase sends a Sold Note or a Bought Note to his principal. He will issue a ‘Sold Note’ if he is acting for a seller and a ‘Bought Note’ if he is acting for a buyer. These notes are mostly used in the Produce Market, Money Market and on the Stock Exchange.

There is specialisation in brokers’ business. We have produce brokers operating on produce exchanges, insurance and shipping brokers operating in foreign trade, share brokers operating on stock exchanges and so on.

3. Commission Agents:

All buying and selling agents in every branch of trade are called commission agents as their remuneration is in the form of commission, i.e., a certain percentage of purchase or sale price. Usually a commission agent enjoys the authority of a factor and incurs all liabilities of a factor.

In most cases they are personally liable for contracts into which they enter. A commission agent need not disclose the name of his principal and may act in his own name or on his account. Such a commission agent becoming personally liable on the contract is sometimes called a ‘Commission Merchant’.

Commission agents are very useful business intermediates whenever a seller wants to sell his goods in a distant market or a buyer wants to purchase goods from a distant market. They possess expert knowledge of a local or regional market and distant buyers or sellers can utilise their specialised services for procurement of goods or disposal of goods and forcing their sales in distant regions or countries.

Import and Export Commission Agents render invaluable services in the foreign trade of every country. The commission agents usually operate in wholesale markets and sell directly to the wholesalers, retailers or to dealers in other markets and towns.

4. Del Credere Agent:

Del Credere Agent is a special mercantile agent. Commission selling agents when they are acting on behalf of a distant manufacturer or producer, are also required to act as Del Credere Agents. Normally, a selling agent is not required to insure the principal against bad debts and incur any personal liabilities while granting credit to any buyer. However, a Del Credere agent undertakes an extra responsibility of guaranteeing the principal for repayment of debts on account of credit sales.

For bearing this additional risk, he gets an extra commission called Del Credere commission. In case some of the buyers, who are granted credit, are declared insolvent, the Del Credere agent will have to pay their debts from his own pocket and the principal has no worry of bad debts. Thus Del Credere agent act as insurer against bad debts, and his commission is in the nature of an insurance premium.

5. Auctioneer:

An auctioneer is a general mercantile agent entrusted with the sale of goods by ‘Public Auction’. The auctioneer is a specialist in the auction sale which is open to the public. He gives an advertisement in the newspaper mentioning time and place of auction and the general particulars of goods to be sold by auction.

On the appointed day and date he conducts the auction sale when the public gather together and bid for the goods. The goods are sold to the highest bidder. When the goods are sold by auction, he will return the sale proceeds to his principal after deducting expenses and his commission.

6. Ware Housekeeper:

Ware housekeeper keeps the goods of merchants and traders in his warehouse as their agent. As an agent he must take reasonable care in the safety of goods under his charge. He issues a warehouse receipt which acts as document of title of goods. It is transferable by endorsement and delivery. The ware- housekeeper will give delivery of goods on the surrender of warehouse receipt and on the payment of his remuneration. He may specialise in performing many other marketing functions such as assembling of goods, grading, packaging etc.

7. Forwarding and Clearing Agents:

These mercantile agents are usually found in port-towns specialising in the business of forwarding and clearing of goods. They render valuable services to the exporter and importer who may reside in the interiors. A forwarding agent receives the goods at the port-town from the up- country region through the railway company and arranges for their shipment abroad. He has to secure export permit, pay export duties, and negotiate with marine insurance company for marine insurance and with shipping company for carriage of goods from export point to import point.

He is in charge of actual loading of goods on board the ship. He will charge commission for rendering all such incidental services in connection with the shipping of goods. Clearing agents have to take the delivery of imported goods, pay import duties and look after the dispatch of goods to the importer.

The importer must give all shipping documents to the clearing agents for taking the delivery of goods from the shipping company when they arrive at the destination. The shipping company will give the delivery only on the surrender of Bill of Lading.

The forwarding and clearing agents are also employed at present in Home trade at the central markets in the cities like Bombay, Calcutta, Delhi, Madras, Kanpur, Ahmedabad, etc., for forwarding consignments as well as clearing of goods at the Railway Stations— particularly in railway transport by Goods Trains.

Type # 3. Wholesalers:

Home Trade:

All activities of buying and selling of goods and services conducted within the country with or without the help of middlemen constitute home trade of the country. Home trade aims at equitable distribution of goods within the country speedily and at reasonable cost. It is said that distribution costs amount to 40 per cent of retail prices. Hence, we want most efficient machinery of distribution.

Broadly speaking, home trade may be divided into two sections:

1. Wholesale Trade, and

2. Retail Trade.

Wholesalers are individuals or business firms who will sell products to be used primarily for resale or for industrial use. The wholesaler is a bulk purchaser with the object of resale to retailers or other traders after breaking down his ‘Bulk’ in smaller quantities and, if necessary, repacking the smaller lots into lots suitable for his customers, viz., retailers.

Wholesale vs. Retail Trade:

Wholesalers operate on a large scale in the central market and act as the first outlet in distribution, usually specialising in one or a group of allied articles. Retailers operate on a small-scale and in the local markets, selling directly to the consumers a wide variety of goods to satisfy numerous and changing wants of customers.

Wholesale business needs large capital, wholesale prices and margins are relatively lower, and the business can be carried on with or without a showroom. Retail business requires limited capital, the prices and margins are relatively higher and the business requires a shop with or without display.

Types of Distribution Channels (Top 3 Types):

1. Wholesaling:

Wholesalers are one of the most important middlemen in the channel of distribution. Wholesaling involves buying goods in bulk from the producer and selling them to retailers and merchants, or to industrial, commercial and institutional users. Wholesaling often occurs when large quantities of merchandise are reassembled, sorted, then repackaged, and distributed in smaller lots.

Wholesalers may also sell directly to the customers in case of heavy industrial goods like iron and steel, machinery and equipment, etc. but wholesaling is not necessarily the work of wholesale middlemen alone. The manufacturers who sell directly to retailers or to other manufacturers are also involved in wholesaling.

If in a transaction the buyer is buying for purposes of resale, or to further his business operations, the seller in those transactions is engaged in wholesaling. According to William j. Stanton- “wholesaling or wholesale trade includes the sale and all activities directly incidental to the sale of products or services to those who are buying for the purpose of resale or business use.”

Characteristics of Wholesaling:

I. Direct large buying- wholesalers generally buy merchandise direct from the producers in large quantities mainly in cash.

II. Sale through agents- wholesalers are trading concerns having an army of agents and stock the large quantities of goods, supply or sell goods to the retailers directly or through their agents in small quantities.

III. Good financial position- generally, wholesalers possess good financial health. They purchase goods in cash from the manufacturers and sell to the retailers on credit.

IV. Small profit margin- wholesalers’ profit margin is very small so that they maximise their sale-volume to earn maximum profit.

V. Limited product line- wholesalers’ deal is limited, generally in one or two products or product-lines. More often they deal in products of only one manufacturer.

VI. warehouses- wholesalers maintain warehouses at different places in the country to facilitate the trade at minimum transportation charges.

VII. Grading- wholesalers sometimes make grading of the goods under their own name or brand.

2. Retailing:

Retailing refers to the sale of goods to end users, not for resale, but for use and consumption by the purchaser. It is the sale of goods in small quantities to ultimate consumers for personal or household consumption. In the chain of distribution between the manufacturers and the ultimate consumer, the retailer is the last link.

Retailers buy goods from the wholesalers or in some cases, directly from the manufacturers and sell them to consumers. They make the goods conveniently available to millions of consumers.

The retail shops are the oldest and most widely used business establishments in any country of the world. According to William j. Stanton- “a retailer or a retail store is a business enterprise which sells primarily to the ultimate consumers for non-business use.” retailers are the buying agents for their customers. They are the marketing or merchandising arm of many manufacturers.

Retailing is subjected to constant changes which increase both the risks and opportunities of the participants. it is influenced by many forces such as population growth and the mobility of consumers (social forces), increased personal income, changes in the distribution of income, consumer credit and competitive changes (economic forces), etc. it is also influenced by government policies and technological innovations which prevail in the country.

Retailing Functions:

I. Buying and Assembling:

Retailers buy and assemble goods from various wholesalers.

II. Stocking:

Retailer keeps stock of different varieties of goods. An average consumer cannot afford to stock the goods that he requires for everyday use. By holding stocks of these goods the retailers relieve the consumer of performing this function.

III. Creation of Demand:

Most of the demand creation methods are undertaken by retailers for the manufacturers and wholesalers. They arrange for the display of goods, supply necessary information to the customers and provide various similar services.

IV. Transport:

The physical movement of goods for the supply to the final consumers to meet their needs and requirements.

V. Distribution:

Retailer is an expert in the distribution of consumer goods. Due to his experience, training and intimate knowledge of the goods he is in a position to help the customers in the proper selection of goods.

VI. Information:

They provide information concerning the behaviour, tastes, and preference of customers to the wholesalers and producers.

VII. Personal Services:

Retailer provides many personal services to the customer such as home delivery, after- sales service, liberal exchange of goods, etc.

VIII. Risk Bearing:

The assumption of risk concerning the price, nature and extent of demand of goods as long as they remain unsold.

IX. Financing:

The financing of inventory and the extension of credit to consumers for a short period.

Essentials for Successful Retailing:

a. Selection of Proper Goods:

A retailer should be able to select proper goods which can meet the requirements of his customers. He should exercise his foresight, use his past experience and keep in view the changing fashions for proper selection.

b. Perfect Knowledge about Goods:

A retailer should have thorough knowledge about the goods he deals with, in order to be able to satisfy his customers and answer their questions.

c. Proper Sales Policy:

A retailer should adopt the policy of buying in bulk and increase his sales by adopting a competitive margin of profit.

d. Adequate Capital:

A retailer should have adequate capital at his disposal because he has to allow some credit facilities also to his customers.

e. Suitable Business Location:

The success of a retailer depends upon his choice of location. A suitable location will depend on the nature of goods one deals in.

f. Customer Knowledge:

Retailer should be well versed with the art of salesmanship. He should have knowledge about the habits and temperaments of his customers.

g. Attractive Display and Advertisement:

In order to attract more customers the retailer should arrange things in an attractive style. Goods should be prominently displayed and advertised.

h. Credit Facility:

In modern times providing credit facilities has also become necessary, for which the retailer should know the financial position of his customers and their habits also.

3. Physical Distribution:

Physical distribution is the science of business logistics whereby the proper amount of the right kind of product is made available at the place where demand for it exists. It includes handling, movement, and storage of goods from the point of origin to the point of consumption or use, via various channels of distribution.

It is the key link between manufacturing and demand creation. It is generally used to describe a series of interrelated activities that comprise inventory controls, storage, transportation, material handling, order size control and order processing. In other words, it consists of the total distribution system.

Philip Kotler defines physical distribution as- “the tasks involved in planning and implementing the physical flows of materials and final goods from points of origin to points of use or consumption to meet the needs of customers at a profit.”

Functions of Physical Distribution System:

i. Control on Distribution Cost:

A detailed analysis of transportation and storage costs is made with view of controlling or minimising the distribution cost under an efficient system of physical distribution. Stress is laid on improvement in packaging, control over channels of distribution, simplification of distribution system and technical improvements.

ii. Increase in Sales Volume:

Physical distribution seeks to increase sales volume by ensuring availability of goods at various markets. When goods are accessible over a wider geographical area, the sales volume is naturally bound to increase.

iii. Co-Ordination of Demand and Supply:

Physical distribution facilitates the coordination between demand and supply. Two main factors are involved in the process, i.e., time factor and place factor. The goods are stocked safely when the demand is low and are sold when the demand is high. Physical distribution helps to create time and place utility by making the goods available at the right place at the right time.

iv. Stabilisation of Prices:

Control over supply position helps in stabilising the prices in the market. If demand exceeds the supply, then additional supplies can be released from the warehouses. On the other hand, if demand is less, then extra goods are stocked in order to arrest the fall in prices.

Transportation system also helps to maintain the price-level. The supply can be transported from the place of abundance to the place of shortage which equalizes the prices of two places.

v. Help in Deciding Channel of Distribution:

Physical distribution system affects the decision on channels of distribution. If the product requires storage, it should be sold through wholesalers who own their own storage facilities. If a company decides to manage its warehouses, it should decide the points where to establish them and what type of transport facility should be arranged to carry the goods to the warehouses.

vi. Help in Deciding Size of Inventory:

If transport facilities are good, the size of inventory may be kept at low level because goods can be purchased as and when it is required. The development of physical distribution facilities has made production possible throughout the year at lower cost of production and distribution.

Types of Distribution Channels (Non-Integrated and Integrated):

Distribution channels can be broadly divided into two types:

1. Non-Integrated, and

2. Integrated

1. Non-Integrated or Conventional Channels:

As the name indicates, conventional distribution channels are not organized. Hence, these non-integrated channels are also known as individualistic channels. Here, manufacturers, wholesalers and retailers bargain with each other for their terms of sale,
trade discounts and terms and conditions of payment. For example- the publishing business is still done through conventional channels; wholesale and retail book dealers negotiate their terms with publishers.

Non-integrated distribution channels are divided into two categories:

(a) Direct distribution, and

(b) Indirect distribution

(a) Direct Distribution Channel:

In the case a of direct distribution channel, the company chooses to sell its products and service directly to consumers without any intermediaries or middlemen.

For Example- Manufacturer → Consumer

In the case of bakery products, the direct distribution channel is followed. If we buy a pastry from a Nilgris counter, it is a direct transfer from the manufacturer to the consumer. Similarly, ready-made shirts, trousers and jeans have their factory outlets to avoid middlemen.

(b) Indirect Distribution Channels:

In the case of an indirect distribution channel, a company chooses to engage intermediaries to channelise its products and services to consumers. Three options are available in this type of distribution.

(i) Manufacturer → Retailer → Consumer

(ii) Manufacturer → Wholesaler → Retailer → Consumer

(iii) Manufacturer → Agent Middlemen → Wholesaler → Retailer → Consumer

(i) Manufacturers → Retailers → Consumers:

This channel consists of only one type of intermediary called the retailer, through whom a manufacturer sells goods to consumers. The advantage of this distribution channel is that manufacturers are always in constant touch with the trends in demand which can be immediately fulfilled. For example- KFC, McDonalds, Bata, Bombay Dyeing, Raymond sell their products through this type of distribution channel.

(ii) Manufacturers → Wholesalers → Retailers →Consumers:

This is the most widely used and most traditional distribution channel in India. It consists of two types of intermediaries, viz. wholesalers and retailers, through whom a manufacturer channelizes its products to consumers. In this type of channel, manufactures move further away from the ultimate consumer due to the presence of wholesalers and retailers in the chain, Examples of this type of distribution channel are Godrej, V-guard, Kelvinator, Samsung and many other consumer durable companies.

(iii) Manufacturer → Agent Middlemen → Wholesaler → Retailer → Consumer:

This is an indirect and the longest channel of distribution where the manufacturer has relatively lesser contact with the ultimate consumer. It consists of three types of intermediaries, viz. agent middlemen, the wholesaler and retailer. This type of distribution channel exists in the case of agricultural products like wheat, paddy, jowar, pulses, etc.

Sometimes companies use a combination of two or more types of distribution channels depending on the demand. If a company uses only one channel for all its products and services in all market segments, it is referred to as a mono or single channel.

If it uses two types of distribution channels, it is known as a dual channel. For example- MTR is using the direct channel for ‘MTR’ softies’ and the indirect channel for other products. If a company uses more than two types of distribution channels, it is known as multiple channels.

2. Integrated Channels:

In contrast to non-integrated distribution channels, integrated channels are networks in which channel components participate in a coordinated manner. These channels are well organized and managed by professionals. They have better bargaining power by virtue of their large size and also eliminate the duplication of services. For example- in the travel and tourism industry we see integrated marketing channels among hotels, tour operators, taxi services, travel agents etc.

Integrated distribution channels can be divided into two:

(a) Vertical integrated distribution channels, and

(b) Horizontal integrated distribution channels

(a) Vertical Integrated Distribution Channels:

Vertical distribution channels are “professionally managed and centrally programmed networks that are pre-engineered to achieve operating economies and maximum market impact.” Car manufacturer ‘Maruti Udyog Ltd.’ is a good example of this type of channel.

Vertical distribution channels can be divided into three types:

(i) Corporate Vertical Channel

(ii) Contractual Vertical Channel, and

(iii) Administrative Vertical Channel

(i) Corporate Vertical Channels:

These channels are those in which channel components are owned and operated by one organization. In simple terms, in these channels a single firm owns both the production and distribution facilities. For example- Madura Garments has its own production units and retail shops. This system gives a firm maximum control over its marketing and production.

(ii) Contractual Vertical Channels:

These are channels in which independent firms are employed on a voluntary basis to develop a more efficient distribution system. This system thus works through franchise or retail cooperatives or voluntary chains.

Herein, one of the members of the system develops a total marketing approach that can be used by all other members of the system to handle support services such as central buying, advertising and financing. For example- the Amul Milk Marketing Federation and Karnataka Milk Marketing Federation are using this type of distribution channel.

A. Industrial Marketing Channels:

Industrial goods are distributed by manufacturers through four important channels:

1. Producer – Industrial User

2. Producer – Industrial Distributor – User

3. Producer – Agents – Users

4. Producer – Agents – Industrial Distributors – Users

1. Producer – Industrial User:

This is a direct channel through which manufacturers sell their products directly to industrial users. For example- lifts and generators are sold through this channel.

2. Producer – Industrial Distributor – User:

This is a distribution channel in which only one intermediary is present. This channel is used for building materials, construction equipment, etc.

3. Producer – Agents – User:

This type of distribution channel is used when a new product is introduced or a new market is entered. This helps to promote the new product or capture the new market.

4. Producer – Agents – Industrial Distributors – User:

This is the distribution channel in which two intermediaries are present. In it the agent works in between the producer and industrial distributor. He explains the benefits and special features. Medicines are usually distributed through this channel.

B. Service Sector Channels:

The concept of marketing channels is not limited to the distribution of physical goods. Producers of services and ideas also face the problem of making their output available and accessible to the target population.

Banking, Insurance, Educational institutions etc. are all using the internet, road shows and agents to promote their services.

Manufacturer → Consumer

Manufacturer → Retailer → Consumer

Manufacturer → Wholesaler → Retailer → Consumer

Manufacturer → Agent Middlemen → Wholesaler → Retailer → Consumer

Producer → Industrial Distributors

Producer → Industrial Distributors → Industrial Users

Producer → Industrial Users

Producer → Agents → Industrial Distributors → Industrial Users

Type of Intermediaries or Middlemen:

In simple terms, a middleman is an independent business concern situated in marketing channels at points between the producer and the final buyer. A middleman is an independent business unit or intermediary that operates between producers and ultimate customers. Either the middlemen takes the title to the merchandise as it flows from the producer to the consumer or actively negotiates the transfer of title.

Producers consider middlemen as extensions of their own sales and marketing organizations, because if there were no middlemen it would become their duty to carry on all negotiations leading to purchase by final buyers. Consumer and industrial users consider middlemen as direct sources of goods and points of contact with producers.

Generally middlemen can be divided into two types:

(I) Merchant Middlemen, and

(II) Agent Middlemen

(I) Merchant Middlemen:

The main distinguishing characteristic between the two types of middlemen is the issue of taking title of the goods handled by them. If the title is taken, then he is a merchant and if not, then he is an agent. Merchant intermediaries are those channel members who take both the title and possession of goods from preceding members and channelize them to subsequent members in the channel sequence.

Merchant middlemen can be divided into:

i. Wholesalers, and

ii. Retailers.

(II) Agent Middlemen:

Agent middlemen are those channel members who never take title to and usually do not take possession of goods, but merely assist manufactures, merchant intermediaries and consumers in carrying out transactions of sale and purchase.

Therefore, unlike merchant intermediaries, they do not buy or sell goods on their own account, but merely bring buyers and sellers together in order to strike a transaction. There exists an agency relationship between an intermediary and manufacturer wherein the farmer acts as the agent and the latter as his principal. Real estate brokers are the best examples of agent middlemen.

Agent middlemen can be classified into four types:

(a) Brokers

(b) Commission agents

(d) Manufacture agents.

(e) Retailers

(a) Brokers:

Brokers are those agent intermediaries who bring buyers and sellers together. They may represent the buyer or the seller. They negotiate with regard to prices, terms of sale, delivery etc. They can’t set the price, which is negotiated by the buyer and seller. Brokers get a percentage of the selling price as their fee (currently 2% is the standard rate).

(b) Commission Agents:

These agents do not buy or sell the goods in their account but work as the manufacturer’s extension. They have more powers than brokers and take physical possession of goods and negotiate sales at the best possible prices. They take deliveries of goods, arrange for storage, grading, extend credits, receive payments from customers and after deducting their commission and marketing expenses, remit the balance to their principals.

(c) Sole Selling Agents:

A sole selling agent undertakes to sell the entire output of a manufacturer’s production without any territorial restrictions on the basis of the conditions mutually agreed and entered into in an agency agreement. These agents undertake the responsibility of selling the manufacturer’s products and such intermediaries are quite common in India.

(d) Manufacturer’s Agents:

These agents work for several non-competing manufacturers and act as sales representatives for them in a particular territory. They are also called manufacturer’s representatives. They have no control over the prices, terms of sale, etc. Agents usually represent non-competing but related lines of goods. For example- a dealer selling television sets of Philips, Samsung, Onida, Sony, etc.

(e) Retailers:

Retailing is a “trading activity directly related to the sale of goods and services to the ultimate consumers for personal or non-business use.” The party which does the retailing is called the retailer. A retailer is the last link in the channel of distribution. He sells either goods or services to the final consumer.

This is because sale is intended to meet personal requirements. For example- if a buys a car for his personal use, then the sale is called a retail sale. A retailer buys in bulk from the wholesaler. Thus, in a way he subdivides the lot into smaller lots for easier distribution among customers.

Type of Retailers:

Retailers can be divided into two groups:

(I) Store retailers, and

(II) Non-store retailers

(I) Store Retailers:

As the name indicates, a store retailer sells the products to consumers through its retail outlets. For example- Shoppers Stop is store retail.

The various types of store retailers are:

(a) General stores

(b) Convenience stores

(d) Specialised departmental stores or Hypermarkets

(e) Departmental stores

(f) Super market

(g) Manufacturers own shops

(i) Co-operative stores, and

(j) Public distribution system

(a) General Stores:

These stores are very common and offer a wide variety of unrelated products. They fulfill the requirements of a large section of consumers. For example- Sunday to Monday, Fab Mall, Food World, etc.

(b) Convenience Stores:

These are stores located near residential areas. They store provisions, vegetables, dairy products, etc. and often give one month’s credit, are open seven days a week with long working hours and home delivery facilities.

(c) Speciality Stores:

In this type of stores, goods of a particular variety are sold. These dealers specialize and deal only in one line of goods. For example- M/s Gangarams Book Bureau and M/s Sapna Book House are dealers in books. Another example is Exide Battery showroom; it sells batteries for two, three and four wheelers.

(d) Specialized Departmental Stores or Hypermarkets:

This combines the principles of a super market, departmental store, speciality shop and service shop in one giant sized store. It has a wide collection of goods in one shopping mall. These types of shops are called “one stop shops” and store food products, sport goods, garden products, dress materials etc. For example- Big Bazaar.

(e) Departmental Stores:

A departmental store is a huge retail shop situated at a central place in the city, divided into a number of smaller shops or departments, each dealing with one or two lines of goods and specializing in those lines. All such departments or speciality stores are under one roof and under one management and control. This type of department store is usually owned by one company and requires huge capital. For example Wills Life Style store, Shoppers Stop, etc.

(f) Super Market:

M.M. Zimmerman defines a super market as “departmentalized retail establishment having four basic departments, i.e., self-service, grocery, meat produce and dairy plus other household items and doing a maximum business. It may be entirely owner operated or have some of the departments leased on a concession basis”. Usually these stores are self-service stores and store lots of food and non-food products.

The features of a super market are:

1. They are located in areas with ample parking facilities.

2. They use mass displays of merchandise.

3. Some shops have centralized security surveillance.

4. They normally operate on a cash and carry basis, but credit cards and debit cards are also accepted.

5. They make their appeal on the basis of low prices, selection of merchandise, wide publicity, etc.

6. They conduct customer surveys and also have a number of lucky draws, promotional schemes, etc.

7. They operate largely on a self-service basis.

8. Supermarkets carry on retail trade with a specialty, and

9. There are fewer salesmen to assist the buyer

(g) Manufacturer’s Own Stores:

Manufacturers themselves organize retail stores for selling their products. This is needed to survive in today’s competitive world. These type of shops are popular with ready-made shirts, jeans, branded shoes etc. For example- Adidas, Peter England, Lee, etc.

(h) Chain Stores or Multiple Shops:

Chain stores or multiple shops are a network of retail shops owned and operated by a manufacturer or an intermediary. Chain stores are “groups of retail stores that are centrally owned and managed and handle the same line of products”. A chain shop is owned and operated by a big retailer. They deal in a variety of products manufactured by different manufacturers. For example- Food World, Fab Mall, etc. The idea is to avoid wholesalers.

Multiple shops are retail units with different varieties of goods of an individual manufacturer. They are opened in different parts of a city to specialize in the trading of particular merchandise. For example- Pizza Hut, K.F.C, McDonalds etc. Another example of a multiple shop is ‘Band Box’ dry cleaners.

The advantages of these shops are:

1. Their products can be sold through their own retail outlets.

2. Goodwill attached to one product or service will automatically go to other branches also, and

3. Similarly, uniformity in prices at places or outlets wins the confidence of the general public.

(i) Consumers’ Co-Operative Stores:

A consumers’ co-operative society is set up to ensure the steady supply of essential commodities of standard quality at fair prices. This society can eliminate middlemen by establishing a direct link with producers. They purchase articles of daily consumption directly from manufacturers or wholesalers and sell them to members at reasonable prices. The profits of the society are distributed among members in proportion to their purchase during the year. Examples of consumer’s cooperative societies are Vijaya Bank, Hindustan Aeronautics Limited, Employees Cooperative Society, Canara bank Employees Co-operative Society, etc.

(j) Public Distribution System:

This is an initiative of the Government of India to supply essential commodities at reasonable prices to the poorer section of society. The other objectives of the public distribution system are stability of prices and equitable distribution of essential commodities and prices are fixed by the government. The usual items distributed through the public distribution system are oil, kerosene, rice, wheat, pulses, etc.

(II) Non-Store Retailers:

In non-store retailing, consumers do not make purchases from the retail stores directly. These shops have no live contact between the seller and the buyer.

These types of non-store retailing methods are:

(a) Door to door selling

(b) Mail order selling

(d) Automatic vending

(a) Door to Door Selling:

This is one of the oldest methods of selling and is also called “in-house selling”. This type of selling is used by Aqua Guard and Eureka Forbes. Here, the salesman takes the products along with him and visits various houses. They can collect feedback directly from customers and consumers get the benefit of buying things sitting at home. But the major drawback of this method is that choice is limited for consumers and they cannot compare the products as is possible in a showroom.

The Nirma proprietor Mr. Patil used this type of selling when he developed his product “NIRMA”. He sold this product to housewives in some apartments in Mumbai and collected firsthand information. Their suggestions were incorporated for product development and innovation.

(b) Mail Order Selling:

This is another type of retailing. This system has no live contact between the seller and the buyer. Manufacturers open some retail outlets which sell goods by mail only. The mail order house centrally procures products, advertises them and expects prospective buyers to send offers with some advance money. The products sold are sent through ordinary post or value payable post. Now television channels advertise different products and ask the viewer to send their requests through post or telephone.

(c) Internet Selling:

This type of retail selling has become popular due to the advancement of technology. Manufacturers advertise their products and services through their websites. They give facilities to place orders and the sold items are delivered to their address. Indiatimes(dot)com. is one such example.

The buyers get discounts and the manufacturers can avoid middlemen. The buyer also saves both time and the extra expenses of shopping and gets more time for making the payment. The seller can setup his business unit in a comparability cheaper building, the number of salesmen can be reduced considerably and the problem of bad debts can also be avoided.

(d) Automatic Vending:

This type of retail selling is also called ‘Robot retailing’ and is quite popular in western countries. It is now becoming popular in India also. Coin operated telephones, weighing machines, vending machines at railway stations for platform tickets, etc. are popular in India.

The investment for the machines is high, but customers get the vending machine facility twenty four hours a day and 365 days a year. The drawback of this system is technical failure and machinery breakdown. Another drawback is that customers cannot inspect or return the item.

Types of Distribution Channels (Wholesaling, Retailing & Physical Distribution):