Part 1: Marketing Channel Systems

CHAPTER 2
The Channel
Participants

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 ① Major participants in marketing channels
② Why shift distribution tasks to intermediaries?
Learning Objectives

③ Major types of wholesalers

④ Major Trends in Wholesale Structure
⑤ Merchant Wholesalers Specialize in Performance
Distribution Tasks

⑥ Retail structure
⑦ Retail structure trends
⑧ Distribution Tasks Performed by Retailers
⑨ Retailers’ Growing Power in Marketing Channels
⑩ Facilitating Agencies in Marketing Channels 2

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Objective
Major Participants in Marketing
1 Channels

Producers Intermediaries Final Users

&
Manufacturers

Wholesale Retail Consumers Industries

Intermediaries Intermediaries

* Commercial Channel * Target Markets

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Objective
Why shift distribution tasks to
2 intermediaries?

Producers
& Intermediaries
Manufacturers

• Spread high fixed costs

over large quantities of
• Lack expertise diverse products
• Lack economies of scale • Achieve economies of
scope and economies of
scale
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 Example: Distribution of Crayons

Manufacturer direct
to customers

• Huge order processing = cost

facility
prohibitive
• Huge inventory
• Several warehouse
locations
• Transportation of
product to consumers
5

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Objective
Các loại bán sỉ chính
3
All Wholesale Firms

Independent Manufacturer
middlemen owned

Merchant Agents, brokers, Manufacturers'

wholesaler & sales branches
commission &
merchants offices

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 Merchant Wholesalers
Tasks Performed:
Buy
Take title
Hold Inventory
Handle

Large quantities of
products

Resell to:

Industrial,
commercial,
or Other
Retailers
institutional Wholesalers
concerns
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 Agents, Brokers, & Commission
Merchants
Involved in buying &
selling
while acting on behalf
of clients

Commissions
on
sales or purchases

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 Manufacturers’ Sales Branches & Offices

Separated from manufacturing plants

Distribute
Owned & operated by
manufacturer’s
manufacturers
products at
wholesale

Some wholesale allied &

supplementary products
purchased from other
manufacturers.
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Objective

4 Major Trends in Wholesale Structure

1992—2002

42.0% Wholesale trade

26.5% Manufacturer’s sales

branches & offices

51.7% Merchant wholesalers

36.7% Agents, brokers, &

commission merchants

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 Trends in Size & Concentration
Measured by: Types of Wholesalers
Size of Majority are small businesses
wholesaler
Sales volume Nearly 45% of all firms have annual sales
of less than $1 million

# of Employees per About 50% of firms had fewer than 5

firm employees

Economic 50 largest manufacturers’ sales branches

concentration in terms & offices garnered nearly 63% of sales for
of % of total sales this type

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Objective
Merchant Wholesalers Specialize in
5 Performance Distribution Tasks
1. Provide market coverage
2. Make sales contacts
3. Hold inventory
4. Process orders
5. Gather market information
6. Offer customer support

• Operate at high levels of effectiveness and efficiency

• Average cost curves lower than those for their suppliers
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 Merchant Wholesalers’ Distribution
Tasks Serve Customers

1. Assure product availability

2. Provide customer service
3. Extend credit & financial
assistance
4. Offer assortment convenience
5. Break bulk
6. Help customers with advice &
technical support

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 Agent Wholesalers’ Distribution
Tasks

Manufacturers’
Agents

 Market coverage

 Sales contacts

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 Agent Wholesalers’ Distribution
Tasks

Selling
Agents

 Market coverage
 Sales contacts
 Order processing
 Marketing Information
 Product availability
 Customer services

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 Agent Wholesalers’ Distribution
Tasks

Brokers

 Market coverage
 Sales contacts
 Order processing
 Marketing Information
 Product availability
 Customer services

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 Agent Wholesalers’ Distribution
Tasks

Commission
Merchant

 Market coverage
 Sales contacts
 Order processing
 Breaking bulk
 Credit
 Holding inventory

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Objective
Retail Structure
6
Alternative Bases for Classifying Retailers

• By Ownership of Establishment • By Method of Consumer

Contact
• By Kind of Business
(Merchandise Handled) • By Type of Location
• By Type of Service
• By Size of Establishment
Rendered
• By Degree of Vertical • By Legal Form of
Integration Organization
• By Type of Relationship with • By Management
other Business Organizations Organizations or
Operational Technique

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 Kind-of-Business Classifications
Retail Trade
• Motor vehicle & parts • Gasoline stations
dealers • Clothing & clothing
• Furniture & home accessories stores
furnishings stores • Sporting goods, hobby,
• Electronics & appliance book, & music stores
stores • General merchandise
• Building material & garden stores
equip. & supply dealers • Miscellaneous store
• Food & beverage stores retailers
• Health & personal care • Non store retailers
stores

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Objective
Retail Structure Trends
7

Decreasing number of establishments

Increasing sales

= increase in size of retail establishments

measured by average sales volume
per store

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 Concentration in Retailing

In 2002
4% of all retail firms
accounted for nearly 80%
of total sales!!

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Objective
Distribution Tasks Performed by
8 Retailers

The role of the retailer in the distribution channel,

regardless of his size or type, is to interpret the
demands of his customers and to find and stock the
goods these customers want, when they want them,
and in the way they want them. This adds up to having
the right assortments at the time customers are ready
to buy.

— Charles Y. Lazarus

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 Distribution Tasks Performed by
Retailers

• Offer manpower & physical facilities close to

consumers’ residences
• Provide personal assistance to help sell products
• Interpret and relay consumer demand
• Divide large quantities into consumer-sized lots
• Offer storage
• Remove risk by ordering in advance of the season

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Objective
Retailers’ Growing Power in
9 Marketing Channels

Increased size & buying Become power retailers

power &
category killers
Application of advanced Information technology &
Technologies the Internet; threetailing

Use of modern marketing Modern techniques;

strategies relationship marketing

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Objective
Facilitating Agencies in Marketing
10 Channels

• Transportation agencies
• Storage agencies
• Order processing agencies
• Advertising agencies
• Financial agencies
• Insurance companies
• Marketing research firms

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 Discussion Question #1
Wrigley is the world’s leading manufacturer of
chewing gum, producing literally millions of packages of
gum every day. It is a large, financially strong company
whose manufacturing technology for producing gum is
state-of-the-art. It sells its products to millions of gum-
chewing consumers all over the United States and many
other countries around the world. Still, Wrigley has never
attempted to sell its chewing gum directly to consumers,
but instead uses a wide variety of intermediaries at the
wholesale and retail levels.

Why do you suppose Wrigley has chosen to use

intermediaries rather than sell direct to consumers?
Explain the underlying economics of the company’s policy.

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 Discussion Question #5
Best Buy is by far the largest consumer electronics retailer in the
world with sales of over $45 billion and almost 4,000 stores world wide.
Best Buy enjoys tremendous power in the marketing channels within
which it operates. All manufacturers and other suppliers providing
products to Best Buy have to pay close attention to what this 1,000
pound gorilla of a retailer wants. But even when suppliers go out of their
way to meet the demands of Best Buy, they are finding that the giant
retailer could block them from getting their products to consumers
because Best Buy may favor certain suppliers with which it can make
especially attractive deals. In addition, Best Buy is increasing its
emphasis on offering its own private brand products such as the thinnest
laptop on the market and an all-electrical motorcycle. Some of Best
Buy’s own products may even compete directly with famous supplier
brands, such as Apple and Sony.

Why do you think Best Buy is flexing its muscles in the channel? Do
you think this type of behavior is inevitable on the part of giant
dominant retailers?

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 Discussion Question #6
Jacobson Companies, headquartered in Des Moines,
Iowa, describes itself on its Web site as a “can do” third
party logistics company. The company is indicative of the
new breed of logistics services firms that can do it all. If a
company, whether a manufacturer, wholesaler, retailer or
other type of firm, needs logistical help, they can find “one-
stop shipping” for logistical services if they deal with 3PL
firms. Along with the availability of an almost unlimited
range of services, is the capability of many 3PLs to custom
tailor the logistical services they provide to fit the particular
needs of their clients.

Why do you think 3PLs have become such an important

type of facilitating agency in market channels? Do you
expect this trend to continue?
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