Major Points of Ch. 1

1. Key Terms and Definitions 2. Why Marketing Channels and Intermediaries?**3. Marketing Channels and other Marketing

Concepts4. The Flows in the Marketing Channels** 5. Basic Principles for Marketing Channels**6. Evolution of Marketing Channel Concept

1

Let’s Learn about:

Chapter 2 The Channel Participants

Major Points of Ch. 2

1.Who Are Major Participants in the Marketing Channel*

2. Why does a manufacturer shift distribution tasks to intermediaries? **

3. Wholesalers (or Distributors)4. Retailers 5. Facilitating Agencies

1

Let’s learn about:

Major Participants in the Marketing Channel2Topic 1:

Producers&

Manufacturers

WholesaleIntermediaries

RetailIntermediaries

Intermediaries

Consumers Industries

Final Users

* Commercial Channel * Target Markets

1Topic 2:

Why shift distribution tasks to intermediaries?*

Producers &

Manufacturers

• lack expertise• lack economies of scale

in distribution

Intermediaries

• spread high fixed costs over large quantities of

diverse products• achieve economies of scope and economies of

scale

2Example: Distribution of Crayons

• Huge order processing facility• Huge inventory• Several warehouse locations• Transportation of product to consumers

= distribution cost prohibitive

A Manufacturer’s directdistribution to customers

requires

Value Chain Analysis**

Firm InfrastructureHuman Resource Management

Technology DevelopmentProcurement

InboundLogistics Operations Outbound

Logistics

Marketingand

SalesService

Margin

Support Activities

Primary Activities

* Firm Boundary Issue

2Topic 3:

Major Types of Wholesalers

M erchantw holesa ler

Agents, b rokers,&

com missionm erchants

Independentm iddlem en

M anufacturers'sa les branches

&offices

M anufacturerow ned

All Wholesale Firm s

* Transfer Pricing Issue

2(Merchant) WholesalersBuy

Take title toStore

Handle

Large quantities/varieties of products

Resell to

Retailers

Industrial,commercial, orinstitutional concerns

OtherWholesalers

www.ingrammicro.com

2Agents, Brokers, & Commission Merchants

Involved in buying & selling

while acting on behalf of manufacturers

Commissions on

sales or purchases

Ex) Latest Changes in IT Industry

2

Owned & operated by manufacturers

Distribute manufacturer’s

products at wholesale

Some wholesale allied & supplementary products

purchased from other manufacturers.

Manufacturers’ Sales Branches & Offices

Separated from manufacturing plants

Question: Why would a manufacturer operate its own sales branches?

2

Merchant Wholesalers’ Main Distribution Tasksfor Manufacturers

• Operate at high levels of effectiveness and efficiency • Average cost curves lower than those for their suppliers

Provide market coverage Make sales contacts Hold inventory Process orders Gather market information** Offer customer support

Merchant Wholesalers’ Main Distribution Tasks To Serve

Customers*

2

Assure product availability Provide customer service Extend credit & financial

assistance Offer assortment

convenience Break bulk Help customers with

advice &technical support**

2Agent Wholesalers’ Main Distribution Tasks

Manufacturers’ Agents

Market coverage

Sales contacts

2Agent Wholesalers’ Main Distribution Tasks

Market coverage

Sales contacts Order

processingMarketing

information

Product availability

Customer services

Selling agents

2Agent Wholesalers’ Distribution Tasks

Brokers

Market coverage

Sales contacts Order

processingMarketing

information

Product availability

Customer services

Ex) Food Brokers

Agent Wholesalers’ Main Distribution Tasks

2

CommissionMerchant

Market coverage

Sales contacts Order

processingBreaking bulkCreditHolding

inventory

2Trends in Wholesaler Size & Concentration

Measured by: Types of WholesalersSize of

wholesalerMajority are small businesses

Sales volume Nearly 40% of all firms have annual sales of less than $1 million

# of Employees per firm Almost 50% of firms had fewer than 5 employees

Economic concentration in terms of % of total

sales

50 largest manufacturers’ sales branches & offices garnered nearly 53% of sales for this

type

Retail Structure2Topic 4:

• By Ownership of Establishment

• By Kind of Business (Merchandise Handled)

• By Size of Establishment• By Degree of Vertical

Integration• By Type of Relationship with

other Business Organizations

• By Method of Consumer Contact

• By Type of Location• By Type of Service Rendered• By Legal Form of

Organization• By Management

Organizations or Operational Technique

Alternative Bases for Classifying Retailers

Kind-of-Business Classifications2

Retail Trade

• Motor vehicle & parts dealers• Furniture & home furnishings stores• Electronics & appliance stores• Building material & garden equip. & supply dealers• Food & beverage stores• Health & personal care stores

• Gasoline stations• Clothing & clothing accessories stores• Sporting goods, hobby, book, & music stores• General merchandise stores• Miscellaneous store retailers• Nonstore retailers

Retail Structure Trends1

Decreasing number of establishments

Increasing sales

= increase in size of retail establishments measured by average sales volume

per store

1Concentration in Retailing

4% of all retail firms accounted for nearly 80%

of total sales!!

Distribution Tasks Performed by Retailers 2

The role of the retailer 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. — Charles Y. Lazarus (1961)

2Distribution Tasks Performed by

Retailers• Interpret and relay consumer

demand*• Remove risk by ordering in advance

of the season• Divide large quantities into

consumer-sized lots• Offer manpower & physical facilities

close to consumers’ residences• Provide personal assistance to help

sell products*• Offer storage

RETAILER TYPE

MAIN FOCUS ON MARGIN

OR TURNOVER?

BULK-BREAKING

SPATIAL CONVEN-

IENCE

WAITING & DELIVERY

TIME

VARIETY (BREADTH)

ASSORT-MENT

(DEPTH)

Department store (e.g., May Co.)

Margin Yes Moderate Low wait time Broad Moderate/ Shallow

Specialty store (e.g., The Gap)

Margin Yes Moderate Low wait time Narrow Deep

Mail Order/ Catalog (e.g., Lands' End)

Margin Yes Extremely High Moderate/ High wait time

Narrow Moderate

Convenience store (e.g., 7-Eleven)

Both Yes Very High Low wait time Broad Shallow

Category killer (e.g., Toys "R" Us)

Turnover Yes Low Low wait time Narrow Deep

Mass Merchandiser (e.g., Wal-Mart)

Turnover Yes Low Moderate wait time (may be out of stock)

Broad Shallow

Hypermarket (e.g., Carrefour)

Turnover Yes Low Moderate wait time

Broad Moderate

Warehouse Club (e.g., Sam's Club)

Turnover No Low Moderate/high wait time (may be out of stock)

Broad Shallow

A TAXONOMY OF RETAILER TYPES*

Retailers’ Growing Power in Marketing Channels*

2

Increased size & buying power

Become power retailers &

category killers

Application of advancedTechnologies

Information technology & the Internet; threetailing*

Use of modern marketing strategies

Modern techniques; relationship marketing

THE INCREASING POLARITY OF RETAIL TRADE

Stagnant Rates ofGrowth and Low Profitability

ConventionalOutlets

Mass-Merchandisers:

High Tech

SpecializedRetail Outlets:

High Touch

High Rates ofGrowth and

Attractive Profitability

USE OF THE UPC CODE IN RETAIL PRODUCT REPLENISHMENT: WAL-MART EXAMPLE

UPC Code for Carnation Nonfat Dry Milk, 25.6 oz. size

UPC Code for Duncan Hines Moist Deluxe Lemon Supreme Flavor Cake

Mix, 18.25 oz. size

UPC Code for Marketing Channels, 5th edition

• The UPC is scanned and registered into Wal-Mart’s database

• Item locator program.• Data transmission.• Retail link.• Forecasting.

Source: Text is adapted from Linda F. Magyar, “A Turn of the SKU,” New York Times Magazine, April 6, 1997, section 6, p. 55. UPCs are scanned from real products.

Facilitating Agencies in Marketing Channels

Topic 5: 2

• Transportation agencies• Storage agencies• Order processing agencies• Advertising agencies• Financial agencies• Insurance companies• Marketing research firms

SOME SOURCES OF INFORMATION ABOUT THE WHOLESALING/RETAILING

• General industry information:– http://www.naw.org (National Association of

Wholesaler-Distributors)– http://www.pwc.com/Extweb/industry.nsf/docid/F8F0

7C9BBD28881A85256D9D00127C1C (a site run by PWC)

• Industry consultants: Pembroke Consulting, Inc. Merrifield Consulting Group, Inc. Indian River Consulting Group Frank Lynn & Associates Michael E. Workman & Associates

• We Missed Something in the Whole Discussion on Marketing Channel Participants.

• What is it?

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