This article is about one of the most commonly used channels of distribution such as a two-level channel of distribution (or two-intermediary channel) which is about selling indirectly to customer using two different intermediaries such as wholesalers and retailers.
A two-level channel of distribution contains two intermediaries between a manufacturer and consumers. These roles are usually performed by a wholesaler and retailer. Producers use both wholesalers and retailers to get products to consumers. Until recent developments in technology changing how retailing is done on the Internet, a two-intermediary channel was the most common of all channels of distribution.
Main feature of two-intermediary channel
Type and main features of two-level channel of distribution:
Producer -> Wholesaler -> Retailer -> Consumer
A two-level channel is usually used when a wholesaler buys large quantities of manufactured goods from producers and sells them to retailers. It has two intermediaries such as wholesalers and retailers. Indirect sale to customers is made with two intermediaries along the route.
When is a two level channel of distribution used?
This channel of distribution is mainly used when the multi-product producer wishes to sell many consumer goods in a large country in wide geographical areas to each retailer. Consumer goods are distributed through wholesalers which have well-established distribution networks and strong links with retailers, so they take care of the distribution such as transportation, storage and warehousing allowing the producer to concentrate upon production. For retailers, wholesalers offer a chance to purchase a choice of products in a single location, and often provide credit facilities to enhance Cash Flow of the retailer.
Examples of using two-intermediary channel
Let’s take a look at examples of goods or services using two-level channel of distribution.
Many daily consumer goods such as soft drinks by Pepsi, canned food by Campbell Soup Company or personal care products by Procter & Gamble such as shower gels or shampoos are distributed through large retailers.
So are electrical goods, books or clothes.
Advantages of a two-intermediary channel of distribution
Advantages of two-level channel of distribution include:
- Lower storage costs. In two-level channel of distribution, all storage and stocks costs are not paid for by the producer. The manufacturer does not hold all stocks of the product at its own premises nor pay for outside storage which can prove to be very costly. It is the wholesalers who pay for the storage costs of the products purchased from the producer. They buy products in bulk in large quantities from the producer and hold large quantities of products in warehouses. Then, they ‘break bulk’ by breaks this down into smaller quantities and selling to retailers in small quantities.
- Convenience. Wholesalers can select items from many different producers and build assortments for their customers who are retailers. When distribution of goods passes through wholesalers, it helps the producer to sell its goods to a larger market. They also have direct links with large numbers of retailers. Additionally, some producers are simply too small to both product products and sell them direct to large numbers consumers.
- Lower delivery costs. Wholesalers reduce the cost of for the producer of reaching customers for the producer. They are closer to retailers than the producer hence provide quick delivery to retailers who can then sell products to lots of customers who are spread over a wide geographical area. It is wholesalers who pay for transport costs to each retailer. Otherwise, transportation costs would be too high for the products to justify the large number of low-volume journeys requires to deliver to each customer. Hence, the delivery costs per unit are perhaps the lower in two-level channel of distribution among all channels of distribution.
- Risks are reduced. Wholesalers can not only be the valuable source of market information to both their customers (retailers) and suppliers (producers), but they also take on some of the risk from the producer including spoilage or obsolescence of goods. Wholesalers will know exactly how well each products are selling.
- Less problems with promotion. All promotional activities will be designed, carried out and financed by the wholesalers to retailers. In fact, wholesalers can promote products to a large number of retailers by employing a sales force to promote, so manufacturers can focus on production. Two-level channel of distribution might be the best way to enter markets abroad where producers have no direct contact with retailers.
Disadvantages of a two-intermediary channel of distribution
Disadvantages of two-level channel of distribution include:
- Need to share profit. Because there are two other intermediaries in the channel, which add a mark-up, or profit margin, profits have to be shared between three parties. Wholesalers take part of the profit from the producer by adding their own profit mark-up. While retailers will make final goods more expensive to consumer by also adding their own profit margin. This means that three different profit margins will be added to the final price meaning that the customer has to pay more. And, this will reduce potential profits for manufacturers.
- Less control over Marketing Mix. It is not the manufacturer who controls all parts of the Marketing Mix anymore. The producer loses direct control over Marketing Mix – how the product is sold, promoted and priced at to consumers. Therefore, it could be risky for the producer to pass on the responsibility for marketing by using a wholesaler.
- Slower than other channels. Two-level channel of distribution is the slowest method of getting the product from the producer to the consumer. It is obviously because more intermediaries are slowing down the distribution chain.Therefore, it can take a long time for products to reach consumers. This is not suitable for goods that need to be consumed as soon as possible after production, e.g. fresh seafood, meat, fruits and vegetables. But, suitable for products with long shelf life such as canned meat or packaged food.
- No direct contact with customers. Wholesalers and retailers may not promote the product as the business might wish, hence distort branding and lose touch with final consumers. It may reflect badly on the company whose brand of goods has been bought. When the producer does not have direct contact with customers, it cannot utilize useful market research information such as consumer tastes and preference.
In summary, a two-level channel of distribution is all about selling indirectly to customer with the use of other businesses. Sales of products are made with direct intermediaries being involved in the sales process which are the wholesaler and the retailer.
