Distribution channels, also called marketing channels, are the systems used to move PRODUCTs and SERVICES from producers to consumers. At first glance, distribution seems like a simple and obvious process for a business: Find out where the customer is and get the product to him or her. But distribution channels can involve numerous structures depending on the needs of customers and producers. Generally distribution channels involve two to five levels. In the simplest two-level system, manufacturers provide their good or service directly to consumers. With expanded use of the INTERNET, direct sales from producers to consumers are becoming more prevalent. Because of the direct contact needed, many service businesses have short, two-level distribution systems. Doctors, dentists, and lawyers rarely have market intermediaries between them and the customer. Many manufacturers do not have the resources or skills needed to effectively market directly to consumers. These firms will sell to WHOLESALERs who then market the products to retailers, who in turn sell the product to customers. In recent years some U.S. retailers have used their market power to eliminate wholesalers, instead buying directly from manufacturers. In addition to wholesale and retail levels in distribution channels, some markets have manufacturer’s representatives who act as intermediaries between producers and wholesalers; in some markets jobbers or rack jobbers act as intermediaries between wholesalers and retailers. Manufacturers’ representatives are often used for complex products where considerable explanation is needed. Rack jobbers provide physical distribution of products to small retail outlets that are not being serviced by wholesalers. The number of levels in a distribution channel depends on who is performing which marketing channel functions. To be successful, all marketing functions must be accomplished. A manufacturer selling directly to consumers will need to advertise and promote the product, manage inventory and assortment, provide physical distribution, monitor customer satisfaction and feedback, and handle all financial aspects of the selling process. Many small E-COMMERCE entrepreneurs have learned there are reasons why intermediaries exist in distribution channels. The intermediaries provide benefits by managing distribution functions. Retailers assist with ADVERTISING and promotion, maintain an assortment of products available directly to consumers, manage returns, often offer credit, and complete the sales transaction. Wholesalers typically manage inventory and storage functions, have distribution systems, sometimes provide credit, and assist with advertising and promotion. Sometimes a firm will want to control various aspects of its distribution channels. A manufacturer that creates or purchases retail outlets or creates its own wholesaling system is involved in VERTICAL INTEGRATION. For example, many U.S. cosmetic manufacturers lease space within retail department stores and hire their own sales staff to sell their products to customers in these stores, and oil companies now refine, distribute, and own the retail stores selling gasoline. Retailers sometimes contract to have products made by manufacturers to the retailer’s specifications and with the retailer’s brand name. Vertical marketing systems can also be created through contractual relationships. Many independent hardware stores are part of a voluntary wholesaling system, buying most of their merchandise from the group wholesaler and pooling funds for advertising. Within distribution systems there exists channel power. One or more of the members of the distribution channel will determine which products are placed on retailers’ shelves, which products are promoted, and which stores will be selected to sell exclusive products. Historically in the United States, manufacturers dominated distribution channels, determining how products were distributed and often dictating product and pricing decisions. In recent years, with an abundance of new products and limits to retail space, retailers have increased their power to influence manufacturers’ and wholesalers’ actions. Price concessions, shelving fees, and advertising allowances are a few examples of the increased channel power of retailers. Distribution channels are a dynamic part of a marketing system. Members of distribution channels are at the same time resistant to change, trying to maintain their part and power in the system but constantly changing in response to new threats and opportunities.
See also BRANDS, BRAND NAMES; ENTREPRENEURSHIP; RETAILING.