Ch. 2: The Channel Participants

Chapter 2: The Channel Participants An overview of the Channel Participants 3 basic divisions of the marketing channel are: (1) producers and manufacturers, (2) intermediaries, (3) final users (which are not viewed as channel members in this text) Final users are viewed as target markets that are served by the commercial subsystem of the channel The commercial channel excludes final users (the commercial channel is the same as the marketing channel in this text) Producers and Manufacturers Consist of firms that are involved in extracting, growing or making products (agriculture, forestry and fishing, mining, construction, manufacturing and some service industries All exist to offer products that satisfy the needs of customers (products must be made available to customers when, where, and how they want them) Producers and manufacturers often lack the expertise and economies of scale to perform all of the distribution tasks to distribute their products effectively and efficiently to their final users Ex. Distribution of crayons (pg. 34) By shifting distribution tasks to other channel participants, such as wholesalers and/or retailers the company achieves substantial savings This is because the intermediaries distribute the products of many other manufacturers and are therefore able to spread the high fixed costs of performing distribution tasks over large quantities of diverse products, thus achieving economies of scope as well as economies of scale in distribution It allows the intermediaries to operate closer to the optimum points on their average cost curves, which are often well below the corresponding points on manufacturers’ average cost curves for distribution tasks Producing and manufacturing firms often face high average costs for distribution tasks when they attempt to perform them by themselves Intermediaries (or middlemen)—independent businesses that assist producers and manufacturers (and final users) in the performance of negotiatory functions and other distribution tasks (they participate in the negotiation and/or ownership flows) Intermediaries operate at two 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 Types and Kinds of Wholesalers 1. Merchant wholesalers—firms engaged primarily in buying, taking title to, usually storing, and physically handling products in relatively large quantities and then reselling the products in smaller quantities to retailers; to industrial, commercial, or institutional concerns and to other wholesalers 2. Agents, brokers, and commission merchants—independent middlemen who do not, for all or most of their business, take title to the goods in which they deal, but who are actively involved in negotiatory functions of buying and selling while acting on behalf of their clients (they usually get commissions on sales or purchases) 3. Manufacturers’ sales branches and offices—are owned and operated by manufacturers but are physically separated from manufacturing plants (used primarily for the purpose of distributing the manufacturer’s own products at wholesale Size and Concentration in Wholesaling Majority of wholesalers are small businesses The average size of merchant wholesalers and the degree of concentration in the industry are increasing Distribution Tasks Performed by Merchant Wholesalers Merchant wholesalers serve manufacturers as well as retailers and other customers They operate at high levels of effectiveness and efficiency (often the average cost curves for distribution tasks are lower for wholesalers than their suppliers) 1. Provide market coverage Market coverage—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 products are readily available to customers when needed, manufacturers rely on wholesalers to secure market coverage 2. Making sales contacts Sales contact—service provided by merchant wholesalers for manufacturers that reduces the costs of covering a large area with its sales force 3. Holding inventory Holding inventory—task performed by wholesalers for manufacturers that reduces manufacturers financial burden and risks associated with holding large inventories Helps manufacturers better plan their production schedule 4. Processing orders Order processing—performed by wholesalers and is helpful to manufacturers when customers buy in small quantities Ex. processing costs for many dot –coms led to their failure because the processing costs were very high relative to the product’s value Wholesalers are geared to handle small orders from many customers because order processing costs can be absorbed by the sale of several products than that of a typical manufacturer 5. Gathering market information Wholesalers are close to customers and any information they pass on to manufacturers can be valuable for product planning, pricing and the development of competitive marketing strategy 6. Offering customer support Value added services—extra support such as exchanges and returns that wholesalers provide to customers Merchant wholesaler distribution tasks 1. Assuring product availability—providing for the readily availability of products 2. Providing customer service 3. Extending credit and financial assistance Extending open account credit allows customers to use products in their businesses before paying for them Stocking and providing readily availability wholesalers reduce financial inventory burden their customers would bear if stocked all products themselves 4. Offering assortment convenience Refers to the wholesaler’s ability to bring together from a variety of manufacturers an assortment of products, simplifying customer’s ordering tasks 5. Breaking bulk Provides customers the ability to order only what they need 6. Helping customers with advice and technical support Figure 2.8 on pg. 46 (summary) Limited function wholesalers—though taking no title to products, do not perform all of the distribution tasks (ex. mail-order wholesalers do not provide sales contact through personal selling) Distribution Tasks Performed by Agent Wholesalers Manufacturers agents—speacialize mainly in performing the market coverage and sales contact distribution tasks for manufacturers They are especially valuable to manufacturers who are not capable of fielding their own sales force or who find it uneconomical to do so Selling agents—perform more distribution tasks than manufacturers’ representatives Usually do not physically hold inventory or take title to it Broker---usually defined as a go-between or a party who brings buyers and sellers together so that a transaction can be consummated Task: to provide market information Commision merchant—physically hold inventory, provide market coverage, sales contact, breaking bulk, credit and order processing 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 and trends in retailing The decrease in establishments between 92 and 97 and the increase in sales means the average sales volume per store must have increased Concentration in Retailing Large retailers comprise 4 percent of all retail firms but account for 80 percent of total retail sales Small retailers account for almost 70 % of all retail firms but only 6.5 % of retail sales Retailers’ Growing Power in Marketing Channels 1. increase in size and buying power The size of many retailers is increasing due to growth as well as to mergers, acquisitions, and buyouts Size is power so as retailers become larger, their capacity to influence the actions of other channel members also becomes greater Because of Wal-Mart’s huge size and buying power, it is in a position to exert considerable influence on its suppliers Power retailers or category killers is the term for giant retailers with huge buying power, large market share and sophisticated managements 2. application of advanced technologies Use of info technology for inventory control and merchandise management as well as supply chain management Threetailing—term that describes the convergence of in-store, catalog and online channels 3. use of modern marketing strategies Recently more retailers are market driven as they discover the power of modern marketing methods for surviving in such a competitive market Relationship marketing—emphasizes customer training and service to build long-term relationships with customers Ex. Kohl’s uses “racetrack” layout in stores designed to expose customers to max amount of merchandise in the shortest time Retailers are now the “gate keepers” into consumer markets Distribution tasks formed by Retailers Role of the retailer in distribution channel is to interpret the demands of the customers and to find and stock the goods the customers want, when they want them and in the way they want them The growing size of retailers has affected the distribution tasks among channel members (the retailers are taking over distribution tasks that were formally the job of the wholesaler or manufacturer) Most large chains have reduced their use of merchant wholesalers intermediaries to a very marginal level The power of retail intermediaries has increased and now retailers are less easily influenced by the producer or manufacturer Causes high premium on effective channel management Facilitating Agencies –business firms that assist in the performance of distribution tasks other than buying, selling and transferring title By 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 Common types of facilitating agencies: transportation agencies, storage agencies, order processing agencies, advertising agencies, financial agencies, insurance companies and marketing research firms