Types of Intermediaries in Channel of Distribution

Intermediaries in channel of distribution are a middle man. They are the middle person in the chain of distribution between the producers and consumers of a product.

Intermediation is the process used in the distribution to facilitate the distribution of the product from a producer to a consumer.

Examples of different types of intermediaries in the channel of distribution include:

Wholesalers.
Agents.
Distributors.
Retailers

Let’s take a more detailed look at all of those intermediaries to analyze how useful they might be in moving products from the manufacturer to final customers.

1. Wholesalers

Wholesalers link producers with retailers. They act as the intermediary between producers and retailers.

Wholesalers are businesses that buy in bulk large quantities of products from manufacturers. Then, they separate or ‘break the bulk’ purchase into smaller units for resale in convenient quantities to retailers. They handle distribution, transportation and carry storage costs to lower transaction costs for producers and retailers. Wholesalers do not sell to final consumers, but sell to other business organizations and individuals.

Examples of wholesalers include National Grocers, Costco Wholesale, Sam’s Club, Makro, METRO Cash and Carry, Eurocash Group, etc.

Advantages of wholesalers:

Lower transaction costs for producers. The producer only deals with one wholesaler as the customer instead of countless smaller individual retailers. This lowers transactions costs for the manufacturer such as invoicing.
Lower transportation costs for producers. The producer’s transport costs are lowered by having to do fewer journeys to the wholesaler rather than many journeys to retailers. All these free up time for manufacturers which can now focus on production because wholesalers deal with all distribution issues.
Lower storage costs for products. Wholesalers purchase huge quantities of products directly from a manufacturer. Wholesalers bear the costs of storing products freeing up space for both producers and reduces stock-holding costs. This saves money for producers who no longer need to hold large quantities of stock.
Retailers can order smaller amounts of products. Retailers can order in smaller amounts from wholesalers who break bulk selling smaller batches of products to retailers. So, retailers do not need to spend huge sums of cash on placing large orders.
Retailers can buy products at lower price. Wholesalers provide savings for retailers by buying in bulk from producers at a discount. By purchasing products in high volume, they can buy at a lower price from the producers. This can then be broken down into smaller units for retailers at a price that is lower than, if the retailer had bought products directly from the producer.

Disadvantages of wholesalers:

Producers are not able to control the price. Wholesalers will sell the producers’ goods to retailers at the certain price that allows them to make a profit. They will usually add a mark-up to cover their costs. When the final price is too high, retailers may not stock up the product. Hence, if price is very important for manufacturers, using few or no intermediaries, instead of wholesalers, would be a better choice.
Producers pass on the responsibility of marketing their products. This might be risky for some producers as wholesalers may not promote the manufacturer’s products in a way that they might want, therefore negatively impacting all marketing efforts of producers.
Retailers may avoid cooperating with wholesalers at all. Some retailers such as supermarkets, discount stores and hypermarkets where the final price matters to the customers, may not use wholesalers at all. These large retailers will choose instead to order goods directly from manufacturers in order to cut out the costs of using an intermediary which adds its own profit margin.

2. Agents

Agents link those producing goods and/or services and those wishing to buy them. They act as the intermediary bringing buyers and sellers together, especially in foreign countries or new markets as they have local knowledge.

Agents are businesses that are specialist type of distributors. They are typically not employed by the producer, but are used to help sell the vendor’s products. In practice, agents arrange a sale but do not take title to the goods – do not buy and sell anything. They do not hold any stock, but act on behalf of sellers and buyers negotiating the deal.

As experts in their field, they to get paid on a commission basis for their services after the sales are made. The payment is either an agreed fixed fee or based on the level or percentage of the sales made. Agents typically operate in the tertiary sector of services.

Examples of agents (brokers) include real estate agents, travel agents, stock brokers such as Interactive Brokers LLC, insurance brokers, etc.

Advantages of agents:

Agents are vital when selling abroad. Using agents when conducting international trade saves the producer a lot of time and expenses. They have specialist knowledge of the market, especially a foreign market where they know local wholesalers and retailers who can buy the product from the overseas producer.
Agents can offer many products for wholesalers and retailers. Agents usually offer a range of many different products for their customers to choose from. This typically includes several different suppliers from different countries even. Agents are often able to find the best deal for their clients from various manufacturers that they have access to.

Disadvantages of agents:

Agents do not hold stock. Agents are different from distributors in that an agent does not hold any stock, therefore it is not able to show the real product to the customer on the premises. This is especially disadvantageous when conducting overseas transactions.
Agents do not sell in high volume. Due to the nature of transactions when agents are involved such as helping to trade expensive specialist products, agents do not sell in high volume, but typically sell in high value. Agents tend to rely on personal selling techniques such as telesales, trade fairs and exhibitions, face-to-face sales, etc.
Final price will be higher. By using agents in distribution, one more middleman is added to the channel of distribution. This either increases the price of a product for the final customer or reduces the profit for the producer. When another middleman enters the channel of distribution this usually reduces the amount of profit earned by the producer.

3. Distributors

Distributors act as intermediary which trade in the products of one or only a few manufacturers to the consumer.

Distributors are independent and specialist businesses that distribute (sell on) products from many producers serving a local sales point. They specialize in a particular industry and hold stock from several manufacturers providing greater choice for customers. Vehicle distribution centers may be selling many different car brands to the final consumers, while construction distribution centers will be offering various building supplies.

For example, Sime Darby Motors is one of the leading automotive groups in Asia Pacific, representing luxury brands such as BMW, Jaguar, Land Rover and Porsche to broad-appeal

Advantages of distributors:

Distributors professionally handle product sales. Distributors provide greater choice of products in one place as they offer products from many producers. They can also provide customers with professional advice as they specialize in a particular industry. It enables the customer to ask product-related questions and get immediate answers. Majority of the distributors are also able to demonstrate how the product actually works through personal selling.

Disadvantages of distributors:

Distributors need to endure high storage costs. Distributors are different from agents in that a distributor holds stock, therefore needs to pay for large premises where large numbers of products are stored.

4. Retailers

Retailers link mainly wholesalers with the final customer, but some manufacturers prefer to deal directly with retailers too. They act as the intermediary

Retailers are businesses that are commonly referred to as ‘shops’ in everyday language being the final step in the chain of distribution. Retailers buy in bulk from the wholesaler and responsible for the sale of products to the final consumer usually in small quantities. They may deal either directly with makers of products or wholesalers who often need to persuade retailers to stock a firm’s products. This is because retailers have limited floor space and shelf space, so will only want to hold supplies of brands that sell well.

This decision is based on sales, or profits, per square meter or square foot. As retailers can reach a large number of consumers many manufacturers prefer to deal directly with large retailers. Retailers also break bulk as most sales are to the final retail consumer are single items.

There are many examples of various kinds of retailers, such as:

Independent retailers. Independent retailers are small local vendors that usually sell a small range of products. They are often just single convenience stores owned by individuals or partners, or simply family businesses running as mom-and-pop stores. These independent retailers typically operate in their local areas and have limited number of customers. Examples include small local vendors often owned by a sole trader such as hair salon, nail salon, restaurant, diner, neighborhood convenience store, etc.

Retail cooperatives. Retail cooperatives are businesses that pool the resources of individual retailers to form a collective partnership in order to serve their local communities. The cooperative employs economies of scale on behalf of its retailer members to acquire discounts from producers and often share marketing expenses. Retail cooperatives are owned by their members who participate in decision making and all earnings are split among them. Examples of retail cooperatives include Best Western, Carpet One, E. Leclerc, Foodstaffs, Nisa, Do It Best, etc.

Chain stores. Chain stores, or multiple retailers, are multiple shop organizations offer a wide range of products in their specialty area. Chain stores are usually businesses with 10 or more establishments which have developed strong brand recognition and possess good brand image so consumers know what to expect. These retailers with numerous outlets also benefit from solid reputation because people can trust what they are getting. They can benefit from brand recognition and brand loyalty as well. Examples of chain stores include Lowe’s, Body Shop, H&M, Bed Bath & Beyond, etc.

Department stores. Department stores are large retail establishments selling a large range of consumer products to the general public such as furniture, jewelry, kitchen equipment, clothing, toys and cosmetics. Each area of the store or different floors will usually specialize in particular product category. It is also common for different franchisors to run different parts of the store. Department stores are built on several floors and are located in busy retail districts. Department stores typically sell five or more different lines of products. Examples of department stores include Kohl’s, Myer, David Jones, Macy’s, Sears, House of Fraser, Galeries Lafayette, Harrods, Sogo, Nordstrom, etc.

Supermarkets. Supermarkets have large scale of operation. They are huge outlets selling everyday products mainly food items. Many supermarkets skip the wholesale process and buy products directly from manufacturers because of time with regards to food spoilage. Supermarkets are built on one floor. Examples of supermarkets include Tesco, Lidl, Whole Foods Market, Aldi, Target Grocery, Loblaws, First Mart, etc.

Discount stores. Discounters focus on selling core daily products at cheaper prices to low income customers. These off-price stores are buying goods cheaply from manufacturers (production surplus, liquidated goods, out of season clothes, discontinued product lines, salvaged items, part of an odd or partially damaged lot of goods) and limit their advertising budgets. Examples include Marshalls, Big Lots, Dollar Tree, dd’s DISCOUNTS, Bargain King, Ross Dress for Less, etc.

Hypermarkets. Hypermarkets, or superstores, are very large supermarkets that stock a wide range of products such as food, clothes, home appliances, gardening equipment, cosmetics, etc. Hypermarkets are built on one floor. Because of their huge size, they tend to be located on suburbs (out of town) where the space is available and the cost of land is lower. Examples of hypermarkets include e.g. Walmart, Carrefour, Target, Auchan, Nesto, etc.

Advantages of retailers:

Wide market coverage. Retailers are the sellers of products to the general public; therefore they have the ability to reach large numbers of final customers. They (i.e. consumers) that operate in outlets. Because they reach a large number of consumers especially those that have a global reach, they can easily influence product quality and production volumes.
Suitable for the multi-channel distribution strategy. Most businesses these days use a range of channels to distribute their products, hence retailers are needed in a multi-channel distribution strategy. Simply, retailers enable producers to reach a wider range of customers, located in different areas and in different market segments.

Disadvantages of retailers:

Less known producers may be rejected by retailers. Most retailers rely on stocking well-known brands to attract customers, so it might be difficult to cooperate with retailers for those less known brands or unknown brands. For example, if Coca-Cola products generate more sales or profits than rival brands, then retailers will devote more shelf space to Coca-Cola goods. Prime space, such as the entrance to a store or other busier areas of an outlet, tends to be reserved for the best-selling products or for the client that can offer the highest rental price. Hence, many smaller suppliers may be excluded.
Final price will be higher. By using retailers in distribution, one more middleman is added to the channel of distribution. This either increases the price of a product for the final customer or reduces the profit for the producer. This is because retailers will add their own mark-up to cover their costs and make a profit. When another middleman enters the channel of distribution this usually reduces the amount of profit earned by the producer. If price is very important for the manufacturer, using few or no intermediaries would be a better choice.

In summary, main functions of intermediaries in the channel of distribution include transportation, storage, advertising and sales. Producers use those middlemen to distribute their products.

Although intermediaries take their own profit margin, it is still more cost effective for manufacturers to use those specialists in the intermediation process.

So, producers can focus solely on what they are the best at – manufacturing the product.