CHANNELS OF DISTRIBUTION

1 MEANING OF CHANNELS OF DISTRIBUTION

You know that the main purpose of trade is to supply goods to the consumers living in far off places.
As goods and services move from producer to consumer they may have to pass through various
individuals, let us take an example. A farmer living in Algiers has an apple orchard. Once the apples
are ripened he sells the apples to an agent of Oran. The agent collects the apples from Algiers, packs
them, and sells them to a wholesaler of Oran fruit market. The retailers buy apples from the
wholesalers in small quantities to sell them to the consumers.

Finally, we purchase apples from the vendors as per our requirement. Thus, we find that while coming
from the producer at Algiers, the product reaches the consumers by passing through several hands
like an agent, a wholesaler and a retailer. All these three are called middlemen.

These middlemen are the connecting links between producers of goods, on one side and consumers
on the other. They perform several functions such as buying, selling, storage, etc. These middlemen
constitute the channels of distribution of goods. Thus, a channel of distribution is the route or
path along which goods move from producers to ultimate consumers.

PRODUCER WHOLESALER RETAILER CONSUMER

2 TYPES OF CHANNELS

Normally goods and services pass through several hands before they reach in the hands of the
consumer for use. But in some cases producers sell goods and services directly to the consumers
without involving any middlemen in between them, which can be called as direct channel. So there
are two types of channels, one direct channel and the other, indirect channel.

Direct channel include from Producer to Consumer. While indirect channels are of various types such
as :

(i) Producer Agent Wholesale Retailer

Consumer
(ii) Producer Wholesaler
Retailer Consumer
(iii) Producer Agent
Consu
mer
(iv) Producer Wholesaler
Consumer
(v) Producer
Retailer
Consumer

Common Channels of Distribution

(i) Direct Channel

In this channel, producers sell their goods and services directly to the consumers. There is no
middleman to come between the producers and consumers. The producers may sell directly to
consumers through door-to-door salesmen and through their own retail stores.
For certain service organizations consumers avail the service directly.
Producer →Consumer

(ii) Indirect Channel

If the producer is producing goods on a large scale, it may not be possible for him to sell goods
directly to consumers. As such, he sells goods through middlemen. These middlemen may be
wholesalers or retailers. A wholesaler is a person who buys goods in large quantities from
producers; whereas a retailer is one who buys goods from wholesalers or producers and sells
ultimate by to consumers as per their requirements. Let us look into some of the important indirect
channels of distribution.
Producer →Retailers →Consumer
This is the common channel for the distribution of goods to ultimate consumers. Under this
channel, the producers sell to one or more retailers who in turn sell to the ultimate consumers.
Producer →Wholesaler →Retailer →Consumer

EXERCISE 1 Complete the following statements using suitable words:

(i) Route or path along which goods move from the producer to ultimate consumer is known as
__________.
(ii) A retailer acts as a __________ between the wholesaler and the ultimate consumers.
(iii) Where goods are sold through middlemen, it is known as ___________ channel of distribution.
(iv) Where goods are sold directly to consumers without using services of middlemen, it is known as
___________ channel.
(v) In the direct channel, producers sell goods to customers through door-to-door salesmen and
through their own __________.
3 WHOLESALERS AND RETAILERS

Wholesalers and retailers are important middlemen who generally facilitate flow of goods from the
producers to the consumers. Let us study in details about them.

3.1 Wholesalers

Wholesalers are one of the important middlemen in the channel of distribution who deal with the
goods in bulk quantity. They buy goods in bulk from the producers and sell them in relatively
smaller quantities to the retailers. In some cases they also sell goods directly to the consumers if
the quantity to be purchased is more. They usually deal with a limited variety of items and also in a
specific line of product, like iron and steel, textiles, paper, electrical appliances, etc. Let us know
about the characteristics of wholesaler.

Characteristics of Wholesalers

The followings are the characteristics of wholesalers:

1.Wholesalers buy goods directly from producers or manufacturers.

2.Wholesalers buy goods in large quantities and sell in relatively smaller quantities.
3.They may employ a number of agents or workers for distribution of products.
4.Wholesalers need large amount of capital to be invested in his business.
5.They generally provide credit facility to retailers.
6.They also provide financial assistance to the producers or manufacturers.

Functions of Wholesalers

You have well understood the meaning of wholesaler and listed their characteristics. Now let us
know about the functions of wholesalers.

Following are the functions, which a wholesaler usually performs.

(a) Collection of goods: A wholesaler collects goods from manufacturers or producers in large
quantity.
(b) Storage of goods: A wholesaler collects the goods and stores them safely in warehouses, till
they are sold out. Perishable goods like fruits, vegetables, etc. are stored in cold storage.
(c) Distribution: A wholesaler sells goods to different retailers. In this way, he also performs the
function of distribution.
(d) Financing: The wholesaler provides financial support to producers and manufacturers by
providing money in advance to them. He also sells goods to the retailer on credit. Thus, at both
ends the wholesaler acts as a financier.
(e) Risk taking: The wholesaler buys finished goods from the producer and keeps them in the
warehouses till they are sold. Therefore, he assumes the risks arising out of changes in demand,
rise in price, spoilage or destruction of goods.
(f) Grading: He classifies the goods in different categories since all the collected goods are not of
same quality. He grades the goods on the basis of quality, size and weight etc. He also undertakes
packaging of goods which facilitates trade. Some wholesalers also perform the function of branding.
They give brand names to the products they deal in.
(g) Pricing: The final prices are set by the wholesalers. They provide stability to the prices by
regulating supply of goods in accordance with the demand for them. They influence market
conditions, the demand for the goods and the taste of the people and make necessary
arrangements to meet the demand when it comes up.

EXERCISE 2 Which of following statements about wholesalers are true and which are
false?

1. They buy goods directly from retailers, for sale to customers.

2. They generally provide credit facility to producers as well as to retailers.
3. They collect goods in large quantities and store them safely till they are sold out.
4. Wholesalers require small amount of capital investment for their business.
5. They are located at a number of places in different markets near the customer.
6. They buy goods of a large variety in small quantities for sale.

3.2 Retailers

Retailers are the traders who buy goods from wholesalers or sometimes directly from producers
and sell them to the consumers. They usually operate through a retail shop and sell goods in small
quantities. They keep a variety of items of daily use.

Characteristics of Retailers

The following are the characteristics of retailers:

1. Retailers have a direct contact with consumers. They know the requirements of the consumers
and keep goods accordingly in their shops.
2. Retailers sell goods not for resale, but for ultimate use by consumers.
3. Retailers buy and sell goods in small quantities. So customers can fulfil their requirement
without storing much for the future.
4. Retailers require less capital to start and run the business as compared to wholesalers.
5. Retailers generally deal with different varieties of products and they give a wide choice to the
consumers to buy the goods.
6. Retailers purchase the goods on credit but normally sell them for cash.
7. Retailers give special attention towards the decoration and display of goods in their shops. This
is done to attract customers.

Functions of Retailers

All retailers deal with the customers of varying tastes and temperaments. Therefore, they should be
active and efficient in order to satisfy their customers and also to induce them to buy more. Let us
see what the retailers do in distribution of goods.

(i) Buying and Assembling of goods: Retailers buy and assemble varieties of goods from
different wholesalers and manufacturers. They keep goods of those brands and variety which are
liked by the customers and the quantity in which these are in demand.

(ii) Storage of goods: To ensure ready supply of goods to the customer retailers keep their goods
in stores. Goods can be taken out of these stores and sold to the customers as and when required.
This saves consumers from botheration of buying goods in bulk and storing them.

(iii) Credit facility: Although retailers mostly sell goods for cash, they also supply goods on credit
to their regular customers. Credit facility is also provided to those customers who buy goods in
large quantity.

(iv) Personal services: Retailers render personal services to the customers by providing expert
advice regarding quality, features and usefulness of the items. They give suggestions considering
the likes and dislikes of the customers. They also provide free home delivery service to customers.
Thus, they create place utility by making the goods available where ever they are demanded.
(v) Risk bearing: The retailers have to bear many risks, such as risk of:
(a) fire or theft of goods
(b) deterioration in the quality of goods as long as they are not sold out.
(c) change in fashion and taste of consumers.

(vi) Display of goods: Retailers display different types of goods in a very systematic and
attractive manner. It helps to attract the attention of the customers and also facilitates quick
delivery of goods.

(vii) Supply of information: Retailers provide all information about the behaviour, tastes,
fashions and demands of the customers to the producers through wholesalers. They become a very
useful source of
information for marketing research.

3.4 DISTINCTION BETWEEN WHOLESALERS AND RETAILERS

You have studied about wholesalers and retailers. You might have noticed that both of them differ
in their style and function. Let us find out these differences.

WHOLESALERS RETAILERS
Buy goods in large quantities Buy goods in small quantities
Buys goods directly from producers Generally buy goods from the wholesalers
Deals in limited variety of goods Deals in wide range of products
Require more capital to start the business Require less capital to start and run the business
Sell goods for resale purpose Sell goods for consumption
No direct contact with consumers Direct contact with consumers
No special attention is given to decoration of shops In order to attract the attention of customers, retailers
give more attention to decoration of shop

EXERCISE 3 From the sentences given below, mark (W) for those belonging to
wholesalers and (R) for retailers in the boxes given against each:

(i) Selling goods in small quantities ( )

(ii) More capital required ( )
(iii) Sale of goods for resale ( )
(iv) Dealing in a limited range of goods only ( )
(v) Direct contact with consumers ( )

II. Answer the following questions:

(i) What are the types of risks borne by the retailers? Mention any two risks.
___________________________________________________________________________________
___________________________________________________________________________________
(ii) How do the producers get benefits from the functions of retailers? Write the benefits arising
from any two functions.
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
(iii) Suppose two or three shopkeepers sell the same type of goods in your locality. From which
shopkeeper would you like to purchase your requirements?
___________________________________________________________________________________
___________________________________________________________________________________

III. Multiple Choice Questions

i. Direct Channel includes only.

(a) Producer →Retailer →Consumer (c) Producer →Wholesaler →Consumer
(b) Producer →Consumer (d) Producer →Agent →Consumer

ii. The trade in which bulk quantity of goods are sold to trader is called
(a) Foreign Trade (b)Wholesale Trade (c) Inland Trade (d) Retail Trade

iii. Wholesaler is an important link between

(a) Producer and Wholesaler (b) Retailer and Consumer
(c) Producer and Consumer (d) Producer and Retailer

iv. The likes and dislikes of consumers reach to wholesalers form time to time through-

(a) Advertisement (b) Newspaper

(c) Retailers (d) Consumers

v. The main feature of a wholesaler is –

(a) To advertise the products

(b) To sell the goods at cheap rates
(c) To deal in variety of goods
(d) To purchase the goods from producers and sell it to retailers

Channels of distribution is the route taken by goods as they move from producers to consumers.
When producers sell goods and services directly to the consumers, it is a direct channel where a
number of middlemen are involved in the process of distribution it is an indirect channel.

Wholesalers are those middlemen in the channel of distribution who deal in goods in bulk
quantity. They sell goods to retailers and in some cases directly to consumers. Wholesalers perform
the functions of collection and storage of goods, distribution, financing, risk taking, grading and
pricing.

Retailers are the traders who by goods from wholesalers and sell them to the consumers. They
perform various functions as buying and assembling of goods, storage of goods, credit facility,
personal services, risk bearing, display of good and supply of information.

1. What is meant by Channels of Distribution?

2. Give four examples of services that are distributed through the direct channels.

3. Explain the different channels through which a product moves from producers to ultimate

consumers.

4. Define wholesaler. How do they serve as an important link in the channel of distribution?

5. Give any four characteristics of retailers.

6. Explain the role of retailers in distribution of goods.

7. State any five differences between wholesalers and retailers.

8. Explain the functions of wholesalers.