This section of the website examines the importance (effectiveness) of different types of distribution channels. A distribution channel is the means by which a product gets from the manufacturer to the consumer, such as through retail outlets or agents. Manufacturers use intermediaries to distribute their products if it is not feasible to sell directly to consumers. However, a shorter distribution channel ensures the manufacturer has more control over the marketing of its products, whilst the use of intermediaries raises the marketing costs to the producer.

Common forms of distribution channels include: (1) direct distribution, (2) agents, (3) retailers, and (4) wholesalers.

1.  Direct distribution

Direct distribution (or a zero-channel distribution network) involves the producer selling directly to the consumer, without the use of an intermediary. Examples include small businesses selling their goods and services to a local community, e.g. bakery, hair salon, and florist. E-commerce has enabled many more businesses to be able to sell directly to the consumer, such as Amazon, Netflix, and Apple’s iTunes.

 Advantages of direct distribution include:

• As there are no intermediaries used, the business can keep 100% of the sales revenue it earns, without having to pay commission or fees to third party distributors.

• Direct distribution enables the business to maintain direct and personal contact with customers, thus helping to build professional relationships with clients.

• As intermediaries are not used, distribution tends to be faster for customers.

 Disadvantages of direct distribution include:

• It relies on the producer to do the marketing to sell the products. This can be time-consuming and costly for the producer, especially if it lacks marketing expertise.

• The producer also has to be responsible for storage costs and delivery costs.

2.  Agents

Agents are specialist individuals who act as intermediaries in the distribution channel. They can represent producers, wholesalers, and retailers in getting products to consumers. For example, companies such as Deliveroo and Uber Eats act as agents to distribute food on behalf of restaurants and other caterers.

An important difference between agents and retailers is that the former does not legally own the products it is selling. Instead, agents helps to promote and sell products on behalf of their clients, and earn commission on each sale made. Examples include real estate agents and travel agents.

 Advantages of using agents include:

• Specialised services provided by experts can help to increase sales.

• Producers may not have the human and financial resources to be able to reach customers in the same way as agents.

• Agents have the incentive to work hard as they rely on being able to earn their commission.

 Disadvantages of using agents include:

• As an intermediary, commission needs to be paid so this reduces the producer’s share of the sales revenue earned.

• Manufacturers are reliant on a third party to sell their products.

• The reputation of the producer could be hindered if an agent delivers poor customer service.

3.  Retailers

Retailers are commercial businesses that sell a manufacturer’s products directly to consumers. Retailers often have multiple stores, offering customers with a variety of choice and convenience. Examples of large multinational retailers include Walmart, B&Q, Best Buy, 7-Eleven, and Zara.

 Advantages of using retailers as a distribution channel include:

• Retailers take responsibility for marketing the manufacturer’s products.

• They tend to attract a large customer base, so helps to increase the sales of the manufacturer.

• As an intermediary, the services provided by retailers allow the producer to concentrate on its core business activity.

• They also offer convenience (such as the location of the retail stores) and customer services that a producer does not have the resources or expertise to do (such as offering a large and wide range of goods). This means customers have a convenient one-stop shopping experience, being able to purchase all their products under one roof.

 Disadvantages of using retailers as a distribution channel include:

• Retail outlets often have high costs, such as rent and staff salaries. The higher costs result in higher prices being charged for the producer’s goods.

• The producer has no control over how its products are sold or marketed, e.g. Coca-Cola does not know where Tesco or 7-Eleven will place its canned drinks in their supermarkets.

• As an intermediary, retailers add to the price of the final product. Higher prices can make products less competitive or attractive to customers.

4.  Wholesalers

Wholesalers break up bulk for retailers and other customers

Wholesalers are businesses that purchase their products in large quantities directly from manufacturers and other suppliers and act as a break of bulk point, reselling the goods in smaller quantities to retailers and other customers. In particular, smaller retailers benefit from being able to buy smaller quantities of goods from the wholesalers, instead of the considerably larger quantities if they were to buy directly from the producer.

 Advantages of using wholesalers include:

• As with retailers, the services provided by wholesalers allow the producer to concentrate on its core business. This is particularly important for mass-market producers such as Heinz, Evian, Kellogg’s and Coca-Cola.

• Manufacturers benefit from the lower transactions costs by dealing with fewer customers than retailers would. There are also fewer deliveries to be made (to retailers rather than consumers). Wholesalers also take care of the promotion, saving costs for the manufacturer.

 Disadvantages of using wholesalers include:

• Only large scale manufacturers tend to be able to use wholesalers. For many businesses and products, output levels are not large enough to use the services of wholesalers. For example, with less than 9,000 students worldwide studying IB Geography each year, textbook publishers would not find using wholesalers a feasible option to distribute their textbooks.

• As wholesalers buy in huge bulk, they demand a price discount from producers. This means less profit margin for the manufacturers.

 Watch this short video to review the role of retailers, wholesalers and distributors.

The importance and effectiveness of different distribution channels for a particular product depends on various interrelated factors. These include:

• The type of product – Different distribution channels are used according to the type of product being marketed. For example, retailers are not as effective or suitable as agents for selling luxury homes or commercial aircraft. Retailers are far more suitable for selling groceries, fast food, shoes, and toothpaste. Direct distribution would be suitable for tailor-made suits or bespoke wedding dresses.

Shoes are usually distributed using retailers

• The availability of substitutes – The greater the degree of competition that a producer faces, the greater the number of distribution channels it is likely to use. For example, Nike, Adidas, and Puma use retail outlets and e-commerce to sell their sports equipment and sports apparel, due to the intensity of competition in this industry. However, Apple is able to use direct distribution for its apps and other products via its iTunes online platform.

• The price of the product – An expensive luxury product, such as a Ferrari or Tiffany & Co. jewellery, will be distributed in a very limited number of retail outlets. This helps to keep the products exclusive and maintains the high prices being charged. By contrast, mass market goods sold at relatively low prices, such as bottled water, lightbulbs and batteries, are sold in a wide range of distribution channels. Pepsi Cola, for example, is distributed in retail outlets, restaurants, theme parks, cinemas, and vending machines.

• The frequency of purchases – Some products are bought on a regular or even daily basis, such as fruits, milk, shampoo and soft drinks. These need to be readily available, using distribution channels such as retailers. By contrast, some products are bought less frequently, such as horse saddles, window frames, home cinema entertainment systems, and grand pianos. Hence, specialist distributors and agents may be a more effective choice of distributional channel for these products.

• Legal barriers and regulations – Certain goods cannot be made readily distributed to all consumers. For example, there are specific legal age constraints on the sale of certain products, including petrol (gasoline), tobacco, alcohol, fireworks, lottery tickets, medication, and certain video (computer) games. Take a look at this website for more information about the laws against underage sales of goods and services in England, Scotland, and Wales.

Essentially, the importance and effectiveness of different distribution channels can be measured by the extent to which sales and profits increase by the use of these various channels. For example, direct distribution allows a producer to have a greater profit margin, although a three-channel distribution network is likely to reach a greater number of customers.

 Watch this 10-minute video to recap your understanding of place (distribution) in the marketing mix:

 Watch this short documentary on the distribution channels used by Pepsi. Which of its distribution channels do you think are the most effective, and why?