Importance of distribution channels, and agent and merchant middlemen

Meaning of channels of distribution

A channel of distribution is the route by which goods pass from the producer to the final user, together with the middlemen, such as wholesalers and retailers, who handle them on the way; choosing it is one of the two main decisions in physical distribution. Channels may be direct (zero-level: producer to consumer) or indirect, with one or more intermediaries such as wholesalers and retailers.

Importance of channels of distribution

1. Bridging gaps. Channels close the gaps of place, time and ownership between producers and consumers, so that goods are available where and when buyers want them.
2. Fewer transactions. One intermediary dealing with many producers and many buyers greatly reduces the number of contacts needed, saving cost for all.
3. Assortment. Producers make large quantities of a few items; consumers want small quantities of many. Middlemen sort, grade, break bulk and assemble assortments.
4. Storage and transport. They hold stocks and move goods, smoothing supply and allowing seasonal goods to be sold all year.
5. Financing and risk. Wholesalers and dealers pay producers and give credit to retailers, and they bear risks of damage, obsolescence and price fall.
6. Promotion and information. They promote products at the point of sale and pass information about demand, competitors and complaints back to producers.
7. After-sales service. Dealers install, repair and service durable products.
8. Market coverage. They let producers reach scattered rural and urban markets they could not serve alone.
9. Specialisation. Producers can concentrate on production and product development, leaving selling to firms that specialise in it and do it at lower cost.

Agent middlemen

Agent middlemen negotiate purchases or sales but do not take title to the goods; they earn a commission or fee.

1. Brokers. Bring buyers and sellers together and help them bargain; they usually do not hold goods. Common in commodities, property and insurance.
2. Commission agents. Take possession of goods (but not title), sell them on the principal's behalf, collect payment, and receive a commission. Common in agricultural produce markets.
3. Selling agents. Sell the entire output of a producer and often control prices, terms and promotion.
4. Manufacturers' agents. Represent several makers of related but non-competing products in a territory.
5. Auctioneers. Sell goods to the highest bidder at public auction, as in tea, wool and used-car auctions.

Merchant middlemen

Merchant middlemen take title to the goods, buy and resell them on their own account and earn a profit margin, bearing the risks of ownership.

1. Wholesalers. Buy in bulk from producers and sell in smaller lots to retailers and institutions; they store, finance and transport goods, and serve producers by taking large orders and passing on market information. Full-service and limited-service (cash-and-carry, rack jobbers) wholesalers exist.
2. Distributors and stockists. Appointed for a territory to stock a company's range and supply retailers there.
3. Retailers. Buy from wholesalers or producers and sell to final consumers, through store-based formats (kirana shops, supermarkets, department stores) and non-store formats (online, vending, direct selling).

Conclusion

Channels of distribution are essential for efficient marketing of goods. Agent middlemen help sell without owning goods; merchant middlemen own and resell them. The producer's choice between them depends on the product, market, control desired and costs. For example, a farm-produce trader in a mandi may sell through a commission agent, while a packaged-food company appoints distributors who supply thousands of kirana shops; both depend on the efficient working of their chosen middlemen.