Once called middlemen, intermediaries help to distribute goods, either by moving them or by providing information that stimulates their movement from sellers to customers. Wholesalers are intermediaries who sell products to other businesses for resale to final consumers. Retailers sell products directly to consumers.

Distribution of Goods and Services

A distribution channel is the path a product follows from producer to end user. Figure 13.1 shows how four popular distribution channels can be identified according to the channel members involved in getting products to buyers.

Figure 13.1

Channels of Distribution

Figure 13.1 Full Alternative Text

Channel 1: Direct Distribution

In a direct channel, the product travels from the producer to the consumer or organizational buyer without intermediaries. Avon, Dell, GEICO, and Tupperware, as well as many online companies, use this type of channel. Most business goods, especially those bought in large quantities, are sold directly by the manufacturer to the industrial buyer.

Channel 2: Retail Distribution

In Channel 2, producers distribute consumer products through retailers. Goodyear, for example, maintains its own network of retail outlets. Levi’s has its own outlets but also produces jeans for other retailers. Large outlets, such as Walmart, buy merchandise directly from producers and then resell to customers online and at Walmart retail stores. Consumers can also go online to buy popular products such as book, movie, and music downloads from online retailers. Many industrial buyers, such as businesses buying office supplies from Staples, also rely on this channel.

Channel 3: Wholesale Distribution

Once the most widely used method of nondirect distribution, traditional brick-and-mortar Channel 2 distribution requires a large and costly amount of floor space for storing and displaying merchandise. Wholesalers relieve this space problem by storing merchandise and restocking retailer store displays frequently. With approximately 90 percent of its space used to display merchandise and only 10 percent needed for storage and office facilities, the combination convenience store and gas station’s use of wholesalers is an example of Channel 3.

Channel 4: Distribution by Agents or Brokers

Sales agents or brokers represent producers and receive commissions on the goods they sell to consumers or industrial users. Sales agents, such as online travel agents, generally deal in the related product lines of a few producers, such as tour companies, to meet the needs of many customers. In industries like real estate and stock exchanges, brokers match numerous sellers and buyers as needed to sell properties, often without knowing in advance who they will be.

The Pros and Cons of Nondirect Distribution

One downfall of nondirect distribution is higher prices—the more “stations” in the channel, the more intermediaries making a profit by charging a markup or commission, and the higher the final price. Intermediaries, however, can provide added value by providing time-saving information and making the right quantities of products available where and when consumers need them. Figure 13.2 illustrates the problem of making chili without the benefit of a common intermediary, the supermarket. As a consumer, you would obviously spend a lot more time, money, and energy if you tried to gather all the ingredients from separate producers. In short, intermediaries exist because they provide necessary services that get products efficiently from producers to users.

Figure 13.2

The Value-Adding Intermediary

Figure 13.2 Full Alternative Text

Selecting an appropriate distribution network is a strategic decision; it determines both the amount and cost of market coverage that a product gets, or how many of any kind of intermediary will be used. Generally, strategy depends on the type of product and the degree of market coverage that is most effective in getting it to the greatest number of customers. Marketers strive to make a product accessible in just enough locations to satisfy customers’ needs. You can buy milk and bottled water, for instance, in many different retail outlets, but there are very few outlets for buying a new Ferrari. Three strategies, (1) intensive, (2) exclusive, and (3) selective distribution, provide different degrees of market coverage.

• Intensive distribution means distributing through as many channels and channel members as possible (both wholesalers and retailers). It is normally used for low-cost consumer goods with widespread appeal, such as candy and magazines. M&M’s candies enter the market through many different retail outlets—supermarkets, vending machines, drugstores, online, and so forth.

• With exclusive distribution, a manufacturer grants the exclusive right to distribute or sell a product to a limited number of wholesalers or retailers, usually in a given geographic area. Such agreements are most common for high-cost prestige products. Rolex watches are sold only by “Official Rolex Jewelers.”

• Using selective distribution, a producer selects only wholesalers and retailers that will give a product special attention in sales effort, display and promotion advantage, and so forth. Selective distribution is used most often for consumer products such as furniture and appliances. Frigidaire and Whirlpool use selective distribution for appliances to cement relationships with wholesalers who will market Frigidaire and Whirlpool over other brands.

Manufacturers and services providers (such as Nike, LG Electronics, and Allied Insurance) may distribute through more than one channel, and many retailers (such as Walgreens) are free to strike agreements with as many producers (like the makers of Tylenol, Advil, and Aleve) as capacity permits. In such cases, channel conflict may arise. Conflicts are resolved through better coordination, and a key factor in coordinating the activities of organizations is channel leadership.