GROUP 1

THE CHANNEL PARTICIPANTS

Learning Objectives
After reading this chapter you should:

1. Be familiar with the classification of the major participants in marketing channels.

2. Understand why producers and manufacturers often find it necessary top shift many of the
distribution tasks to intermediaries.
3. Identify the major types of wholesalers as reflected in the Census of Wholesale Trade.
4. Be aware of major trends in wholesale structure, including patterns of size and concentration in
wholesaling.
5. Recognize and explain the value of distribution tasks performed by the major types of wholesalers.
6. Appreciate the complexity of retail structure and be familiar with the different approaches used to
classify retailers, including the classifications used by the Census of Retail Trade.
7. Know about major trends occurring in retail structures, especially with regard to size and
concentration in retailing.
8. Have an overview of the distribution tasks performed by retailers.
9. Be cognizant of the retailer's changing role in the marketing channel.
[Link] the role played by facilitating agencies in marketing channel.
• The marketing channel was defined as the external contractual organization that
management operates to achieve its distribution objectives.

• We noted that the channel manager should use intermediaries in the channel based
on the principles of specialization and division of labor as well as contactual
efficiency.

• If the channel manager does a good job of allocating the distribution tasks among
well-chosen group of channel participants, the resulting channel structures should
achieve the firm’s distribution of objectives with a high level of effectiveness and
efficiency.
Producers and Manufactures

• Producers and manufacturers consist of firms that are involved in extracting, growing or making
products. This category includes those firms that the U.S. Bureau of the Census classifies under
agriculture, forestry and fishing, mining, construction, manufacturing and some service industries.

• The range of producing and manufacturing firms is enormous, both in terms of the diversity of goods
and services produced and the size of the firms. It includes firms that make everything form straight
and that vary in size from one-person operations to giant multinational corporations with many
thousands of employees and multibillion-dollar sales volumes.

• But even with all this diversity, a thread of commonality runs through producing and manufacturing
firms: all exist offer products that satisfy the needs of customers. For the needs of those customers to be
satisfied, products must be made available to customers when, where, and how they want them.

• Therefore, producing and manufacturing firms must ensure that their products are distributed to their
products are distributed to their intended markets.
• However, most producing and manufacturing firms, both large and small, are not in a
favorable position to distribute their products directly to their final user markets.
They often lack the requisite expertise and economies of scale and or scope to
perform all the tasks necessary to distribute their products effectively and efficiently
to their final users.
• The reason for this is that the intermediaries distribute the products of many other
manufactures and are therefore able to spread the high fixed costs of performing the
distribution tasks over large quantities of diverse products, thus achieving economies
of scope as well as economies of scale in distribution. This allows the intermediaries
to operate closer to the optimum points on their average cost curves, which are often
well below the corresponding points on manufactures’ average cost curves for
distribution tasks.
Intermediaries
• Intermediaries, or middlemen, are independent businesses that assist producers and manufactures
(and final users)in the performance of negotiatory functions and other distribution tasks.

• Intermediaries thus participate in the negation and/or ownership flows. They operate at two basic
levels: wholesale and retail.

Wholesale Intermediaries
• Wholesalers consist of businesses that are engaged in selling goods for resale or business use to
retail, industrial, commercial, institutional, professional or agricultural firms, as well as to other
wholesalers. Also included are firms acting as agents or broker in either buying goods for or selling
them to such customers.

Types and Kinds of Wholesalers the most comprehensive and commonly used classification of
wholesalers Is the used by the Census of Wholesale Trade, published by the U.S. Department of
Commerce every five years.
Classification categories wholesalers into three major types:

1. Merchant Wholesalers - are firms engaged primarily in buying, taking

title to, usually storing and physically handling products handling
products in relatively large quantities.

2. Agents, brokers, and commission merchants – are also independent

middlemen who do not, for all or most of their business , take title to the
goods in which they deal.

3. Manufactures’ sales branches and offices – are owned and operated

by manufactures but are physically separated from manufacturing
plants.
• The Census of Wholesale Trade further classifies wholesalers by kind of business
– of which there are 18 different categories. For data gathering and reporting
purposes, the Census of Wholesale Trade cross-classifies these kind-of-business
groupings with the three major types of wholesalers

• Hence, data are available for the United States as a whole and for many smaller
geographical areas.
STRUCTURE AND TRENDS IN WHOLESALING

• The latest comprehensive Census of Wholesale Trade for which data

are available, taken in 2002, showed that there were about 350, 000
wholesaler firms and approximately 436, 000 individual wholesale
establishments, with combined total sales in excess of $ 4.6 trillion.
A look at how this total breaks down among the categories of
wholesalers reveals important trends in wholesaling for the decade
between 1992 and 2002.
SIZE AND CONCENTRATION IN WHOLESALING

• Although wholesalers vary widely in size, the industry

is still made up chiefly of small businesses. In terms of
sales volume, many wholesalers are quite small, which
almost 45 percent of all wholesale firms having annual
sales of less than $ 1 million.
DISTRIBUTION TASKS PERFORMED BY
MERCHANT WHOLESALERS

• Merchant wholesalers serve manufactures as well as retailers and other customers.

They have survived as intermediaries in the marketing channel because, as specialists
in the performance of distribution tasks, they can operate at high levels of
effectiveness and efficiency.
• Often the average cost curves for distribution tasks are lower for wholesalers, or they
are able to operate closer to the optimum points on the curves than their suppliers.
Modern, well-managed merchant wholesalers are especially well suited for
performing the following types of distribution tasks for producers and manufacturers:
1. Providing market coverage
2. Making sales contacts
3. Holding inventory
4. Processing orders
5. Gathering market information
6. Offering customer support
MARKET COVERAGE
• is provided by merchant wholesalers to manufacturers because the
markets for the products of most manufacturers consist of many
customers spread over large geographical areas. To have good
market coverage so that their products are readily available to
customers when needed, manufacturers often rely on merchant
wholesalers to secure the necessary market coverage at reasonable
cost.
SALES CONTACT
• is a valuable service provided by merchant wholesalers.
For manufacturers, the cost of maintaining an outside sales
force is high. If a manufacturer’s product is sold to many
customers over a large geographical area, the cost of
covering the territory with its sales force can be
prohibitive.
HOLDING INVENTORY
• is another crucial task performed by wholesalers for manufacturers.
Merchant wholesalers take title to, and usually stock, the products of the
manufacturers whom they represent. By doing so, they can reduce the
manufacturers’ financial burden and reduce some of the manufacturers’
risk associated with holding large inventories. Moreover, by providing a
ready outlet for manufacturers’ products, wholesalers help
manufacturers to better plan their production schedules.
ORDER PROCESSING
• performed by wholesalers is very helpful to manufacturers because many customers buy in small
quantities. Yet manufacturers both large and small find it extremely inefficient to attempt to fill
large numbers of small orders from thousands of customers. Many of the original dot-com firms
engaged in e-commerce were undermined by the high fulfillment costs associated with
thousands of small orders. For most of them, order processing costs were a major cause of their
demise because the costs were very high relative to the value of the products being sold.
• Wholesalers, on the other hand, are specifically geared to handle small orders from many
customers. By carrying the products of many manufacturers, wholesalers’ order processing costs
can be absorbed by the sale of a broader array of products than that of a typical manufacturer.
GATHERING MARKET INFORMATION

• is another task of substantial benefit to manufacturers. Wholesalers

are usually quite close to their customers geographically and in many
cases have continuous contact through frequent sales calls. Hence,
they are in a good position to learn about customers’ product and
service requirements. Such information, if passed on to
manufacturers, can be valuable for product planning, pricing, and the
development of competitive marketing strategy.
CUSTOMER SUPPORT
• is the final distribution task that wholesalers provide for manufacturers. Products may
need to be exchanged or returned, or a customer may require setup, adjustment,
repairs or technical assistance. For manufacturers to provide such services directly to
large numbers of customers can be very costly. Instead, manufacturers can use
wholesalers to assist them in providing these services to customers. This extra
support by wholesalers, often referred to as value added services, plays a crucial role
in making wholesalers vital members of the marketing channel from the standpoints
of both the manufacturers who supply them and the customers to whom they sell.
IN ADDITION TO PERFORMING THE SIX DISTRIBUTION TASKS FOR
MANUFACTURERS MERCHANT WHOLESALERS ARE EQUALLY WELL
SUITED TO PERFORM THE FOLLOWING DISTRIBUTION TASKS FOR THEIR
CUSTOMERS:

1. Assuring product availability

2. Providing customer service
3. Extending credit and financial assistance
4. Offering assortment convenience
5. Breaking bulk
6. Helping customers with advice and technical support
• Product availability, providing for the ready availability of
products, is probably perhaps the most basic distribution task
performed by wholesalers for customers. Because of the
closeness of wholesalers to their customers and/or their
sensitivity to customers’ needs, they can provide a level of
product availability that many manufacturers could not
easily match.

• Customer service is another valuable distribution task

performed by wholesalers. Customers often require services
such as delivery, repairs, or warranty work. By making these
services available, wholesalers save their customers effort
and expense.
• Credit and financial assistance is provided by wholesalers in two ways. First, by
extending open account credit to its customers on products sold, wholesalers allow
customers to use products in their business before having to pay for them. Second, by
stocking and providing ready availability for many of the items needed by their
customers, wholesalers significantly reduce the financial inventory burden their
customers would bear if they had to stock all the products themselves.

• Assortment convenience refers to the wholesaler’s ability to bring together an

assortment of products from a variety of manufacturers, greatly simplifying customers’
ordering tasks.21 Instead of having to order separately from dozens or even hundreds
of manufacturers, customers can turn to one or a few general line or specialist
wholesalers who can provide them with all or most of the products they need.
• Breaking bulk is important because customers do not often need large quantities of
products, or they may prefer to order only a small quantity at a time. Many manufacturers
find it uneconomical to fill small orders and will establish minimum order requirements to
discourage them. By buying large quantities from manufacturers and breaking down these
“bulk” orders into smaller quantities, wholesalers provide customers with the ability to buy
only the quantity they need.

• Advice and technical support is the final distribution task wholesalers are called on to
perform for their customers. Many products, even those that are not considered technical,
may still require a certain amount of technical advice and assistance for proper use as well
as advice on how they should be sold. Wholesalers, especially through a well-trained
outside sales force, are able to provide this kind of technical and business assistance to
customers.
• There are differences among merchant wholesalers in the extent to
which they participate in the performance of distribution tasks. Many
do perform all of the distribution tasks discussed here most of the
time, or at least they attempt to. At the other end of the spectrum are
some merchant wholesalers traditionally referred to in the marketing
literature as limited function wholesalers who, though taking title to
products, do not perform all of the distribution tasks discussed.
DISTRIBUTION TASKS PERFORMED
BY AGENT WHOLESALERS
• As mentioned earlier in the chapter, agent
wholesalers (defined by the Census of Wholesale
Trade as agents, brokers, and commission
merchants) do not take title to the products they
sell.
• Manufacturers’ agents (also referred to as manufacturers’ representatives or reps), for example,
specialize mainly in performing the market coverage and sales contact distribution tasks for
manufacturers.
• Selling agents, another type of agent wholesaler, usually perform more distribution tasks than
manufacturers’ representatives. In fact, they may handle virtually the entire marketing and sales effort
for the manufacturers they represent. Therefore, although selling agents usually do not physically hold
inventory or take title to it, they may perform many, if not most, of the other distribution tasks such as
providing market coverage, sales contact, order processing, marketing information, product availability,
and customer services.
• Brokers, the second major category of nontitle-taking wholesalers defined in the Census of Wholesale
Trade, offer another example of the wide deviation between definitions based on the performance of
distribution tasks presented in the marketing literature and performance in actual practice.
• In the marketing literature, the broker is usually defined as a go-between or a party who brings buyers
and sellers together so that a transaction can be completed.
• Finally, the third major category of agent wholesalers in the Census
of Wholesale Trade is the commission merchant, who is of
significance mainly in agricultural markets. Commission merchants
perform a wide range of distribution tasks, including physically
holding inventory (though not taking title), providing market
coverage, sales contact, breaking bulk, credit and order processing.
These distribution tasks are performed when commission merchants
act on behalf of his or her principals (producers or manufacturers).
RETAIL INTERMEDIARIES
• Retailers consist of business firms engaged primarily in
selling merchandise for personal or household
consumption and rendering services incidental to the
sale of goods.
• Structure Trends in Retailing As of 2002 (the most recent year for which data are available from
the Census of Retail Trade), there were 1,114,637 retail establishments in the United States
producing a sales volume of almost $3 trillion. When the previous census was taken in 1997 there
were 1,118,447 retail establishments with a combined sales volume of almost $2.5 trillion. Given the
decrease in number of establishments between 1997 and 2002 and the 20 percent increase in sales,
the size of retail establishments measured by average sales volume per store must have increased
significantly during those five years. This was indeed the case continuing a long-term trend dating
back to 1948. As shown in Table 2.7, average sales for retail establishments were almost $2.7
million by 2002, up from $2.2 million in 1997. This is an increase of almost 23 percent. This pattern
of increasing total sales as well as average sales per retail establishment was consistent across all
major kind-of-business groups between 1997 and 2002.

• Concentration in Retailing From the standpoint of economic concentration, retailing in the United
States is increasingly dominated by large firms. In 2002, for example, large retailers (those with
sales of $10 million or more) accounted for almost 80 percent of total retail sales, though they
comprised just 4 percent of all retail firms. On the other hand, small retailers (those with sales of less
than $1 million) accounted for 66 percent of all retail firms but less than 5 percent of total retail sale.
ONLINE SALES IN RETAILING
• Although we will address Internet-based online retail channels in much greater depth in
Chapter 15 (Electronic Marketing Channels), a few basis facts are presented here to
provide some perspective on the importance of online retail sales channels in the overall
retail structure.
• As of 2007, total online sales in the U.S. for all categories of goods totaled almost $127
billion. This accounted for almost 3.2 percent of total estimated retail sales in 2007 of
close to $4 trillion.
• What is especially interesting to note for online sales is the growth that
has occurred in less than a decade. In 1999, total online sales were just
over $15 billion and accounted for about one-half of 1 percent of total
retail sales. When compared with the 2007 sales data cited above,
online sales increased by over 800 percent and by over 300 percent as
a percentage of total retail sales!

• Clearly retail sales via online channels of distribution have become a

major and growing part of the channel structure serving consumers.
RETAILERS’ GROWING POWER IN MARKETING
CHANNELS

• The power and influence of retailers in marketing channels have been growing. This trend follows three
major developments:

1. increase in size and buying power;

2. application of advanced technologies and
3. use of modern marketing strategies

• As discussed earlier, the size of many retailers is increasing due to growth as well as to mergers,
acquisitions and buyouts.
• Growing size and concentration of retailers, as discussed on the
foregoing pages, is the most fundamental reason for greater retailer
power in marketing channels.31 But two other factors are also
important.

• The first is the increased application of advanced technology by

retailers

• The second is the growing emphasis by retailers on the use of modern

marketing strategy.
• The many technological innovations of recent years have not gone
unnoticed by retailers. Indeed, retailers have become astute followers
and, more importantly, ardent users of many new technologies that
have made them more sophisticated and demanding channel members.

• Giants such as Walmart, Home Depot, Target, Costco, Best Buy,

Safeway, [Link], and numerous others have become world-class
in their use of information technology for inventory control and
merchandise management as well as supply chain management.
• But even the “smaller” retailers listed in the bottom 50 of the 100 largest
retailers shown in Table 2.8 are using sophisticated information
technology to spot slow-moving items and keep them off the shelf as
well as to identify hotselling merchandise so that it is available when and
where customers want it.

• Many of these retailers have also been making better use of their scanner
data for promotion and pricing decisions as well as to calculate profits on
individual items through direct product profitability (DPP) analysis,
shelf management, forecasting, and consumer shopping trip studies.
• Perhaps the most exciting technological development being embraced by retailers
is their growing use of the Internet to enhance the shopping experience of their
customers. While the “pure-play” online retailers such as [Link], which
sells all of its product via the Internet, have gotten much of the attention in recent
years, another revolution is occurring in the way conventional retailers are
integrating Internet-based e-commerce with their store and catalog operations

• In fact, a new term called threetailing has emerged to describe this convergence
of in-store, catalog, and online channels. Some retailers, such as JCPenney, are
inviting their customers to come in (store), call in (catalog), or log on (online) to
shop.
• Staples, the giant office superstore, has fully integrated its online capabilities with its
retail operations so that customers can order online from the firm’s extensive Web
site and then pick up the product in the store. And if they want to return it, they can
bring it back to the store.

• These are, of course, just a small sample of the technologies being used by retailers,
but they are indicative of the role of technology in increasing their capabilities and, in
turn, their power in the marketing channel.

• Turning now to retailers’ growing emphasis on marketing, a fundamental change has

been the evolution in thinking by leading retailers about the application of marketing
strategy in a retail setting.
• Retailers have traditionally been more supplier-(vendor)
driven than market-driven. In recent years, however, more
retailers are discovering the power of modern marketing
methods for surviving and prospering in fiercely competitive
retail markets. Indeed, some retailers now rival the best of the
major U.S. consumer packaged goods manufacturers in the
application of marketing strategies.
DISTRIBUTION TASKS PERFORMED BY RETAILERS

• The role of retailers in performing distribution tasks is summarized very

succinctly in a classic statement by Charles Y. Lazarus:

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.
ELABORATING ON LAZARUS’S LIST, WE MAY SPECIFY THE
DISTRIBUTION TASKS FOR WHICH RETAILERS ARE
ESPECIALLY WELL SUITED, AS FOLLOWS:

1. Offering manpower and physical facilities that enable producers, manufacturers and
wholesalers to have many points of contact with consumers close to their places of
residence
2. Providing personal selling, advertising and display to aid in selling suppliers’
products
3. Interpreting consumer demand and relaying this information back through the
channel
4. Dividing large quantities into consumer-sized lots, thereby providing economies for
supplies (by accepting relatively large shipments) and convenience for consumers
ELABORATING ON LAZARUS’S LIST, WE MAY SPECIFY THE
DISTRIBUTION TASKS FOR WHICH RETAILERS ARE ESPECIALLY WELL
SUITED, AS FOLLOWS:
5. Offering storage, so that suppliers can have widely dispersed inventories of
their products at low cost and enabling consumers to have close access to
the products of producers, manufacturers and wholesalers
6. Removing substantial risk from the producer and manufacturer (or
wholesaler) by ordering and accepting delivery in advance of the season.
The level at which retailers perform these distribution tasks varies
enormously across the spectrum of retailing, from an all-out effort to do
everything to a bare bones level of doing little.
• Nordstrom, a well-known chain of upscale department stores, is an excellent
example of a retailer that puts forth all-out effort for its customers. In fact, this
retailer has become famous for providing the highest level of service at the
retail level.

• At Nordstrom, stocking the stores with highly desirable assortments of

merchandise in impeccable surroundings and selling it through knowledgeable
and helpful salespeople is only the beginning.

• Salespeople also gift wrap packages at no extra charge and sometimes drop off
orders at customers’ homes. Piano players serenade shoppers year-round.
• In Alaska, Nordstrom employees have been known to warm up cars while drivers
spend a little more time shopping. There is even a story about a customer who got
his money back on a tire even though Nordstrom does not sell tires! Nordstrom
was simply attempting to live up to its “no questions asked” returns policy.
• At the other end of the spectrum of retail service levels are off-price retailers such
as Marshalls, an apparel chain that stocks an unpredictable assortment of
merchandise in spartan surroundings and offers no personal service with long
checkout lines.
• In the middle range are retailers such as Target, the chain of more than 1,500
discount department stores that has some of the ambience of upscale department
stores and carries merchandise that is chic and fashionable, yet priced well below
what conventional department stores charge.
• Although there is little sales help, store signage is excellent and wide aisles,
attractive displays and short checkout lines create a different and better
shopping experience than what customers would ordinarily expect from a
discount mass merchandiser.
• Then, of course, there are the so-called “pure-play” or Internet only retailers
such as [Link], [Link], [Link] and many others that
also perform distribution tasks. Even though these retailers sell only via
online channels, they can and do provide excellent customer service by
offering incredible selections of merchandise, thorough yet concise product
descriptions and reviews, customized product assortments aimed at the
particular interests of customers, as well as low prices and quick delivery.
• So, the fact that these retailers do not have physical facilities that customers can visit
does not undermine their capacity to perform distribution tasks with a very high
degree of effectiveness and efficiency

• In essence, each retail channel member makes its own decisions about how it will
approach the performance of distribution tasks. But to remain a viable member of the
marketing channel, each must offer something of value to its customers as well as its
suppliers.

• If it fails to do so, existing competitive retailers, other channel members or new forms
of channel institutions will be only too happy to take its place in the marketing
channel.
• The growing size of retailers, discussed earlier, has also affected the allocation of distribution
tasks among channel members. Specifically, distribution tasks that were formerly the province
of wholesalers or manufacturers have increasingly been taken over by the large-scale retailers.

• On the one hand, the potential of retail intermediaries to perform distribution tasks effectively
and efficiently has increased. But on the other hand, the larger scale of retailers has increased
their power and independence; hence they are less easily influenced by the producer or
manufacturer.

• As a result, the channel manager in the producing or manufacturing firm will face both
increased opportunities and greater difficulties in the course of using retailers in the channel of
distribution, placing an especially high premium on effective channel management.
FACILITATING AGENCIES
• Facilitating Agencies are business firms that assist in the performance
of distribution tasks other than buying, selling and transferring title.
From the standpoint of the channel manager, they may be viewed as
subcontractors to whom various distribution tasks can be farmed out
based on the principle of specialization and division of labor. By
properly allocating distribution tasks to facilitating agencies, the
channel manager will have an ancillary structure that is an efficient
mechanism for carrying out the firm’s distribution objectives.
HERE ARE SOME OF THE MORE COMMON TYPES OF
FACILITATING AGENCIES:
1. Transportation agencies
2. Storage agencies
3. Order processing agencies
4. Third party logistics providers
5. Advertising agencies
6. Financial agencies
7. Insurance companies
8. Marketing research firms
THANKS FOR LISTENING!