Copyright © Cengage Learning. All rights reserved Chapter Fourteen Wholesaling, Retailing, and Physical Distribution 14 | 1

Copyright © Cengage Learning. All rights reserved

Chapter Fourteen

Wholesaling, Retailing, and Physical Distribution

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Learning Objectives

1. Identify the various channels of distribution that are used for consumer and industrial products.

2. Explain the concept of market coverage.3. Understand how supply-chain management

facilitates partnering among channel members.4. Describe what a vertical marketing system is

and identify the types of vertical marketing systems.

5. Discuss the need for wholesalers and describe the services they provide to retailers and manufacturers.

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Learning Objectives (cont’d)

6. Identify and describe the major types of wholesalers.

7. Distinguish among the major types of retailers.

8. Identify the categories of shopping centers and the factors that determine how shopping centers are classified.

9. Explain the five most important physical distribution activities.

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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 high-fashion products that must reach consumers quickly

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• 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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• 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, frequently purchased items, for seasonal products, and by producers that do not have their own sales forces

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• 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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Partnering Through Supply Chain Management

• Supply chain management– Long-term partnership among channel members

working together to create a distribution system that reduces inefficiencies, costs, and redundancies while creating a competitive advantage and satisfying customers

– Category management• The retailer asks a supplier how to stock the shelves

– Technology• Has enhanced implementation of supply chain

management

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Vertical Marketing Systems

• Vertical channel integration– The combining of two or more stages of a distribution

channel under a single firm’s management

• Vertical marketing system (VMS)– A centrally managed distribution channel resulting from

vertical channel integration

– Administered• One channel member dominates the others

– Contractual• Intermediary cooperation, rights, and obligations are

formalized in contracts

– Corporate• The entire channel is owned by the producer

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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, 15th ed. (Mason, Ohio: South-Western/Cengage Learning, 2010). 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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Types of Wholesalers

• Merchant wholesalers– Middlemen that purchase goods in large quantities and

then sell them to other wholesalers or retailers and to institutional, farm, government, professional, or industrial users

– Operate in one or more warehouses where they receive, take title to, and store goods

– These wholesalers are sometimes called distributors or jobbers

– Full-service wholesalers• General merchandise wholesaler• Limited-line wholesaler• Specialty-line wholesaler

– Limited-service wholesalers14 | 19


Types of Wholesalers (cont’d)

• Commission merchants, agents, and brokers– Functional middlemen that do not take title to products

– Perform some marketing activities

– Paid a commission (percentage of sales price)

– Commission merchant• Carries merchandise and negotiates sales for

manufacturers

– Agent• Expedites exchanges, represents a buyer or a seller, and

is often hired permanently on a commission basis

– Broker• Specializes in a particular commodity, represents a

buyer or a seller, and is likely to be hired on a temporary basis

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Types of Wholesalers (cont’d)

• Manufacturer’s sales branch– Merchant wholesaler owned by a

manufacturer– Carries inventory, extends credit, delivers

goods, helps in promoting products– Customers are retailers, other wholesalers,

and industrial purchasers• Manufacturer’s sales office

– Sales agent owned by a manufacturer– Sells goods manufactured by its own firm and

also others that complement its own product line

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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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Source: “2008 Top 100 Retailers,” Stores, July 2008, p. T5, www.stores.org/pdf/08TOP100.pdf. Reprinted with permission fromWrights Reprints.


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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• 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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• 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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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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Planned Shopping Centers

• A self-contained retail facility constructed by independent owners and consisting of various stores– Lifestyle shopping center

• Has an open-air configuration and is occupied by upscale national chain specialty stores

– Neighborhood shopping center• Comprises several small convenience and specialty

stores

– Community shopping center• Includes one or two department stores and some

specialty stores, along with convenience stores

– Regional shopping center• Contains large department stores, numerous specialty

stores, restaurants, movie theaters, and sometimes hotels

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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

• Warehousing– The set of activities involved in receiving and storing

goods and preparing them for reshipment• 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)

• Materials handling– The physical handling of goods, in warehousing as well as

during transportation• 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

– Railroads—in terms of total freight carried, these are America’s most important mode of transportation

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Ratings of Transportation Modes

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Changes in Ton-Miles for Various Transportation Modes

Source: U.S. Bureau of Transportation Statistics, National Transportation Statistics 2005 , www.bts.gov ; accessed January 30, 2006

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http://www.bts.gov/

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Copyright © Cengage Learning. All rights reserved Chapter Fourteen Wholesaling, Retailing, and Physical Distribution 14 | 1