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Chapter Fifteen
Wholesaling,
Retailing, and
Physical
Distribution
Channels of Distribution
• Channel of distribution (marketing channel)
– A sequence of marketing organizations that directs
a product from the producer to the ultimate user
• Middleman (marketing intermediary)
– A marketing organization that links a producer and
user within a marketing channel
• Merchant middleman—takes title to products by buying
them
• Functional middleman—helps in the transfer of
ownership of products but does not take title to the
products
• Retailer—buys from producers or other middlemen and
sells to consumers
• Wholesaler—sells products to other firms
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Channels for Consumer Products
• Producer to consumer (direct channel)
– No intermediaries
– Used by all services and by a few
consumer goods
– Producers can control quality and price, do
not have to pay for intermediaries, and can
be close to their customers
– Examples: Dell Computer, Mary Kay
Cosmetics
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Channels for Consumer Products (cont’d)
• Producer to retailer to consumer
– Producers sell directly to retailers when
retailers (Wal-Mart) can buy in large
quantities
– Most often used for bulky products for
which additional handling would increase
selling costs, and for perishable or highfashion products that must reach
consumers quickly
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Channels for Consumer Products (cont’d)
• Producer to wholesaler to retailer to
consumer
– The traditional channel
– Used when a producer’s products are
carried by so many retailers that the
producer cannot deal with them all
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Channels for Consumer Products (cont’d)
• Producer to agent to wholesaler to
retailer to consumer
– Agent—functional middlemen that do not
take title to products and are compensated
by commissions paid to the producers
– Often used for inexpensive, frequentlypurchased items, for seasonal products,
and by producers that do not have their
own sales forces
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Channels for Consumer Products (cont’d)
• A manufacturer may use multiple
channels
– To reach different market segments
• When the same product is sold to consumers
and businesses
– To increase sales or capture a larger
market share
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Channels for Business Products
• Producer to business user
– Usually used for heavy machinery,
airplanes, major equipment
– Allows the producer to provide expert and
timely services to customers
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Channels for Business Products (cont’d)
• Producer to agent middleman to
business user
– Usually used for operating supplies,
accessory equipment, small tools,
standardized parts
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Market Coverage
• Intensity of market coverage
– Intensive distribution
• The use of all available outlets for a product to
saturate the market
– Selective distribution
• The use of only a portion of the available
outlets for a product in each geographic area
– Exclusive distribution
• The use of only a single retail outlet for a
product in a larger geographic area
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Marketing Intermediaries: Wholesalers
• Justifications for marketing
intermediaries
– Intermediaries perform essential marketing
services
– Manufacturers would be burdened with
additional record keeping and maintaining
contact with numerous retailers
– Costs for distribution would not decrease,
and could possibly increase due to the
marketing inefficiencies of producers
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Efficiency Provided by an Intermediary
Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 12th ed. Copyright © 2003 by Houghton Mifflin Company,
Adapted with permission.
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Wholesalers’ Services to Retailers
• Buy in large quantities and then sell in
smaller quantities
• Deliver goods
• Stock in one place a variety of goods
• Promote products to retailers
• Provide market information for both
producers and retailers
• Provide financial aid in the form of
inventory management, loans, delayed
billing
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Wholesalers’ Services to Manufacturers
• Provide instant sales forces to manufacturers
• Reduce manufacturers’ inventory costs by
purchasing finished goods in sizable
quantities
• Assume the credit risks associated with
selling to retailers
• Furnish market information gleaned from the
market and customers to the manufacturers
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Marketing Intermediaries: Retailers
• Retailers: The final link between
producers and consumers
• Approx 2.6 million retail firms in the U.S.
• 90% have sales of less than $1 million
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The Ten Largest Retail Firms in the
United States
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Classes of In-Store Retailers
• Independent retailer
– A firm that operates only one retail outlet
• Chain retailer
– A company that operates more than one retail
outlet
• Department store
– A retail store that (1) employs 25 or more persons
and (2) sells at least home furnishing, appliances,
family apparel, and household linens and dry
goods, each in a different part of the store
• Discount store
– A self-service, general merchandise outlet that
sells products at lower-than-usual prices
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Classes of In-Store
Retailers (cont’d)
• Catalog showroom
– A retail outlet that displays well-known brands and
sells them at discount prices through catalogs
within the store
• Warehouse showroom
– A retail facility in a large, low-cost building with
large on-premises inventories and minimal service
• Convenience store
– A small food store that sells a limited variety of
products but remains open well beyond normal
business hours
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Classes of In-Store
Retailers (cont’d)
• Supermarket
– A large self-service store that sells primarily food
and household products
• Superstore
– A large retail store that carries not only food and
nonfood products ordinarily found in supermarkets
but also additional product lines
• Warehouse club
– A large-scale, members-only establishment that
combines features of cash-and-carry wholesaling
with discount retailing
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Classes of In-Store
Retailers (cont’d)
• Traditional specialty store
– A store that carries a narrow product mix with
deep product lines
• Off-price retailer
– A store that buys manufacturers’ seconds,
overruns, returns, and off-season merchandise for
resale to consumers at deep discounts
• Category killer
– A very large specialty store that concentrates on a
single product
line and competes on the basis of low prices and
product availability
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Examples of Category Killers
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Toys “R” Us
Home Depot
Best Buy
Office Depot
PETsMart
Barnes & Noble
Can you think of others?
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Retail Sales Categorized by Merchandise Type
Source: U.S, Bureau of the Census, Monthly Retail Trade: Sales and Inventories, January 14, 2003, www.census.gov.
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Kinds of Nonstore Retailing
• A type of retailing whereby consumers
purchase products without visiting a store
• Direct selling
– The marketing of products to ultimate consumers
through face-to-face sales presentations at home
or in the workplace
• Direct marketing
– Using computers, telephones, and nonpersonal
media to show products to customers, who can
then purchase them by mail telephone, or online
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Kinds of Nonstore Retailing (cont’d)
• Catalog marketing
– An organization provides a catalog from
which customers make selections and
place orders by mail or telephone
• Direct-response marketing
– A retailer advertises a product and makes it
available through mail or telephone orders
• Telemarketing
– The performance of marketing-related
activities by telephone
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Kinds of Nonstore
Retailing (cont’d)
• Television home shopping
– Products are displayed to television
viewers, who can then order the products
by calling a toll-free number and paying by
credit card
• Online retailing
– Presenting and selling products through
computer connections
• Automatic vending
– The use of machines to dispense products
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The Wheel of Retailing
• A hypothesis that suggests that new
retail operations usually follow a pattern
by beginning at the bottom—in price,
profits, and prestige—and gradually
moving up the cost/price scale,
competing with newer businesses that
are evolving in the same way
• The hypothesis is not universally
applicable. It cannot predict what new
retailing developments will occur or
when.
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The Wheel of Retailing
Source: Adapted from Robert F. Hartley, Retailing: Challenge and Opportunity, 3rd ed., p.42. Copyright © 1984 by Houghton Mifflin
Company. Used by permission.
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Physical Distribution
• All those activities concerned with the efficient
movement of products from the producer to
the ultimate user
• Inventory management
– The process of managing inventories in such a
way as to minimize inventory costs, including both
holding costs and potential stock-out costs
• Holding costs—the costs of storing products until they
are purchased or shipped to customers
• Stock-out costs—the costs of sales lost when items are
not in inventory when needed
• Order processing
– Activities involved in receiving and filling
customers’ purchase orders
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Physical Distribution (cont’d)
• Warehousing
– The set of activities involved in receiving and
storing goods and preparing them for reshipment
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Receiving goods
Identifying goods
Sorting goods
Dispatching goods to storage
Holding goods
Recalling, picking, and assembling goods
Dispatching shipments
– Types of warehouses
• Private warehouses—owned and operated by a firm
• Public warehouses—offer their services to all firms
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Physical Distribution (cont’d)
• Transportation
– The shipment of products to customers
– Carrier—a firm that offers transportation services
• Common carriers—services are available for hire to all
shippers
• Contract carriers—available for hire by one or several
shippers; not available to the general public
• Private carriers—owned and operated by the shipper
– Freight forwarders—agents who facilitate the
transportation process for shippers by handling
the details of the process
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Changes in Ton-Miles for Various
Transportation Modes
Source: U.S. Bureau of Transportation Statistics, National Transportation Statistics 1999 and
Statistical Abstract of the United States, 2001.
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