Distribution Channels Law and Legal Definition
Goods produced in factories and/or commodities produced in agriculture must reach consumers. The systems by means of which goods reach the consumer are known as distribution channels. These are organizations that facilitate the sale and movement of products. The totality of all distribution channels forms a distribution network. Distribution is a very complex system but can be conceptually divided into four major categories: 1) market makers, 2) sellers, 3) transporters, and 4) hybrids.
PARTICIPANTS IN DISTRIBUTION
Market makers are organizations that provide either a real or virtual place where goods may be bought and sold. Classical example are the farmer's market, considered as the entity that actually rents space to farmers for their stalls, a stock market that controls who may or may not trade by selling seats on its exchange, a shopping mall that makes its money by leasing space to stores at the mall, convention centers like McCormick Place in Chicago that hosts trade fairs, and a franchiser who, in effect, sells a method, a name, and an image. Markets need not be "places." Therefore catalog publishers and web-based sellers are also "market makers." A pure form of a web-based market maker is the auction house e-bay: e-bay itself does not sell anything; it hosts a selling/buying community. The distribution function fulfilled by market makers is the aggregation in a real or virtual place of diverse and competing sellers. Thus market makers provide a convenience to the customer who likes to compare many competing products with the least amount of trouble.
Sellers and Resellers
Selling organizations either purchase and own the goods they sell or they fulfill a selling function without ownership. If they are in the first category, they will be called distributors, wholesalers, jobbers, retailers, or dealers. If sellers are in the second category, they will be called brokers, traders, rep organizations, and agents. The distinction between these categories is all important from the producer's point of view. "Purchasing and owning" sellers are the most desirable because they take possession and cannot return the merchandise. Sales agents just represent: they take no ownership risk.
Central to every distribution system, but usually least talked about, is the community of organizations that physically store and move the goods. These elements may be owned by sellers or producers; most often they are independently owned. The Post Office and commercial freight carriers, or instance, are important players. Transporters operate warehouses and provide ground, water, and air transport services.
Some of the functions described above are mutually exclusive. A seller either owns merchandise or does not. Other roles, however, are more easily combined and traditionally have been. A grocery store is thus the merging of an old farmers market and a dry goods market into a single enterprise that now "makes its own market" and also owns all the merchandise it sells. Major grocery chains also tend to own all or part of the transportation system they use. In the modern environment a large shopping mall is a market of markets, each store within it being itself an assembly of many types of merchandise that, once, were sold in separate markets. A restaurant is the best example of a small "hybrid." It creates its own market by offering a diversity of foods; it combines the production function by cooking the food and the selling function by offering it for sale on site. Most diverse stores such a grocery chains, drug stores, department stores, and major discounters are hybrids in that they make a market but also own and sell the merchandise. The ice cream vendors selling in the city from a little truck combines seller and transporter roles in a hybrid distribution mode.
STRUCTURAL FEATURES OF CHANNELS
Economic activity viewed functionally consists of aggregating valuable commodities into centers of production where value is added to the commodities by labor. The products of many suppliers are centralized into manufactories. The structural function of a distribution channel is to invert this movement, causing the transformed commodities to reach end-users again. (At the end of this systems comes another aggregation function, namely waste disposal, which now moves residues to their final resting place in landfills.) Distribution is therefore a logistical function at the physical level modulated by communications activities. Channels have evolved over time—and continue to change as participants attempt to take advantage of change as it occurs. A good example of a recent impact on distribution is the communications revolution introduced by the Internet. Thus many books once purchased in stores are bought online and delivered by UPS, FedEx, and DHL. Many airline tickets once sold by travel agents and picked up by customers are purchased online and picked up at the airport.
Distribution systems are said to have tiers or levels, the number of tiers being defined by the middleman between the original seller and the ultimate buyer. A single-tier system involves a single intermediary seller, namely the retailer. A two-tier system will have a distributor/wholesaler plus a retailer. More tiers may be present. Imported goods, for instance, may be channeled first through an importer. In some industries smaller wholesalers (jobbers) may be involved as secondary distributors between a major wholesaler and a large number of retailers. Some manufacturers sell directly to customers. This may be viewed as a "tier-less" distribution channel; more correctly the manufacturer simply acts as its own retailer: the retail function is simply kept in-house. Competitive pressures limit the number of tiers possible because every level must be compensated and has its own margin (in effect its own "tax") on the transaction. Hierarchical distribution may be necessitated by capital intensity (manufacturers needing to share the burden of capitalizing the distribution system), by remoteness and distance (producers cannot reach every corner of their market), by technical service requirements (manufacturers need dealers to service technical goods and do not wish to establish hundreds of wholly-owned operations), and other factors.
Differentiation by Customer
Distribution channels typically service either the consumer or an industrial/institutional client. Industrial/institutional distribution is frequently highly adapted to specific branches. On the whole industrial distribution activity is less marked by hype and much more technical and price-oriented; the impulse buying element is eliminated by professional purchasing functions; at the same time, occasionally industrial sales produce corruption and kickback scandals because very large transactions are frequently the rule.
Differentiation by Technology
A subset of industrial distribution is technological differentiation marked by the employment of sales engineers on the one side and highly skilled technical buyers on the other. The vast spread of computer use in every institution, for example, produced a brand new category of intermediaries, the so-called VARs or value-added resellers, sometimes called integrators. These organizations came into existence as independent entities because the complexity of adapting computer systems and networks into the operations of a buying establishment require many complex skills in the absence of which no product could actually be sold. Very few producers of computers or peripherals are able (never mind willing) to master the intricacies of competing products in order to sell their own. The VARs took on this challenge. The emergence of VARs is an excellent example of the manner in which products and services shape and transform distribution channels.
In the cyclical relationship between the original producer and the "channel," the existence of a distribution "margin" produces recurring attempts by both sides to capture more of that margin by down- or upward integration or by cutting out the middleman. Producers frequently attempt to eliminate distributors by establishing a wholly-owned "branch" structure—making themselves distributors. Distributors, in turn, attempt to buy manufacturing operations so that they come to own the products that they sell. A similarly recurring trend is to eliminate the retailer by "selling at wholesale" in large, bare discount operations—usually somewhat below the retail level but not quite at the wholesale price. Yet another perennial is represented by the well-established machinery seller who distributes through "servicing dealers" and who, thinking of having it both ways, suddenly shifts a large part of his or her sales to a big discount house that does not offer services. The dealer channel will find itself undersold and burdened by new service business which is notsubsidized by original equipment sales. The reaction is usually violent, eventually forcing the producer to abandon discount sales. An intermediate position is presented by powerful retailers who offer their customers "home brands" cheaper; these, typically, are of a lower quality than branded merchandise. Such recurring gyrations are accompanied by the ever new (but ancient) practice of starting up membership stores where customers pay a fee to have access to lower prices; eventually membership becomes ever cheaper; in due time no check of membership is made.
DISTRIBUTION AND SMALL BUSINESSES
Small businesses typically inherit a distribution channel. The founding owner may be quite expert in distribution by having worked in the industry before. In the absence of personal knowledge, the best approach to learning about the channel rapidly is by immersion in the trade literature. Trade magazines will rapidly teach the business owner such fundamentals as major shows where the industry regularly meets. Visiting such a show and talking to competitors, buyers, and sellers will soon reveal the opportunities open to the business. The owner will probably encounter sales rep organizations, see retail and wholesale distributors at work, and will learn the one or two major preferred means of reaching the market used by the industry.
The owner will rapidly discover that choices are few and the channels already well developed. Learning exactly how to fit the business's products or services into existing channels will become the primary task. Effective entrance may necessitate a different way of packaging the product than initially envisioned, different methods of pricing, the use of incentives not imagined before but common in the industry, and so on.
Special difficulties face the new business which enters an activity for which distribution channels are poorly developed. Such will often be the case where the business is a new kind of service not yet "commodified." An extreme example might be decorating ceilings with original art. The business owner may have to discard his or her original intent to sell the service through art stores but discover that very high-end furniture dealers are the right distribution venue—and the mode of contact will be to decorate the ceilings of such dealers free of charge to attract the eyes of wealthy shoppers. Another venue may be by working closely with stores that sell special lighting equipment—which would, of course, be an element in ceiling art. Consulting businesses with abstract product, e.g. futures studies in support of marketing strategy, may similarly have to create their own distribution channel by the sheer rock-breaking methods of trial and error. Communication being a central element in the distribution of goods and services, such businesses may attempt to create industry specific futures projections and attempt to publish them in industry journals. This may lead to invitations to a conference. Where there is a will, there is a way … These examples illustrate how finding the distribution channel arises, gradually, from exploring the product or service itself.
SEE ALSO Transportation
Barrow, Andy. "Keeping the Big Boys at Bay." Computer Reseller News. 30 January 2006.
"Changing Channels—A Whale Of A Program." VARBusiness. 19 December 2005.
Griffith, Kimberly. "More Than Just a Shopping Cart." Industrial Distribution. 1 January 2006.
Olsztynski, Jim. "Why the 'Middleman' Hangs Around: Excerpted from an address given to the Ft. Wayne Indiana, ASHRAE Chapter on Oct. 11, 2005." Supply House Times. December 2005.
Reinhart, Len. "The Final Frontier: Ultra-Wealthy Clients Demand White-Glove Service During all Phases of the Adviser Relationship." Financial Planning. 1 May 2004.
"Work With the Channel Partner." Rental Equipment Register. 1 February 2006.