A direct distribution channel is basically a set of intermediaries or companies through which a certain good or service reaches the end user. Different channels are separated into direct and indirect channels. Direct channels let the consumer purchase products directly from the producer, while an indirect channel takes the product to the end user indirectly. It also makes possible the development of economies of scale.
The State Of Today’s Economy
There are several types of direct distribution channels in the modern economy. For instance, the retail chain stores, where products are sold directly to the customers and the manufacturer who produces them sells them to retailers. The factory that manufactures shoes also sells its products directly to the customers who purchase them at stores. Apart from retail chain stores, there are warehouse clubs which sell almost all types of goods under one roof and indirectly to customers. Online stores use SocialWick to reach more customers and sell directly to them.
There are direct distribution channels that carry goods or services directly to the end consumers such as grocery stores, super markets and other such outlets. Such outlets carry goods or services directly to the final consumers and the producer does not have to go through the intermediaries. The intermediary here is the retailer or the agent who purchases the goods or services from the wholesaler and brings them to the final consumers. Such intermediaries form part of the chain of distribution.
When Distribution Isn’t Straightforward
The indirect chain of distribution consists of wholesalers and retailers who purchase directly from manufacturers and bring them to the final consumers. The direct distribution channel provides greater opportunities to the producer to earn higher profits. Sometimes wholesalers pass on lower than usual commission to retailers, leading to lower margins for the retailers. For retailers, it reduces the cost of manufacturing and selling the product. For example, if the wholesaler has negotiated a better price with another wholesaler, the retailer can buy directly without any intermediary cost.
There is also a problem for the wholesaler if they have signed a distribution agreement with a retailer who is also his agent or has negotiated a price with him. When the wholesaler sells directly to the consumer, the retailer will have to pay brokerage and other charges to that retailer. But if the wholesaler has negotiated with the retailer directly, the retailer will be able to pass on these costs to the customer. Thus, a loss may be incurred in the first instance by the wholesaler but passed on to the retailer who will ultimately pass it on to the consumer when the products reach the retail store.
Comparing The Different Channels
One thing that must be kept in mind while analyzing indirect and direct distribution between wholesalers is the fact that both have their own characteristics which will affect both the efficiency and profitability of the venture. The efficiency is based on how well the manufacturer carries out the process. The profitability is the result of the net income an enterprise receives after expenses have been taken out. Both these aspects have their own characteristics and determining the efficiency and profitability will go a long way to determine whether the venture will be a success or not.
An intermediary is someone who sells from the producer and buys directly from the consumer, with no third party involved. For example, the distribution of food products such as milk, fruit juice and vegetables can be handled by a single middleman called the wholesaler. He not only sells the products to the end user, he also negotiates a price with the producer and gets them delivered to the door of the consumer for retail sale. Thus the wholesaler works as the intermediary who acts as a channel between the producer and the end user. An intermediary can either be an agent or a part of the distributor.
Studying Case Examples
In order to understand the dynamics of distribution channels, it is important to study some of the successful companies like Wal-mart or Ford. Such companies show that there can be great profit and loss results depending on which distribution channel the business company takes. For instance, Wal-mart, which is one of the most successful business companies in the world, has its huge retail chain anchored in the US. Thus it can be concluded that there are multiple distribution channels that can be used in any business.
