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Chapter 2
THE CHANNEL PARTICIPANTS
Teaching Notes
This chapter begins with some technical charts depicting the rise of channel members in
the distribution process. It would be prudent to spend some additional time on the
examination of reading and understanding what these charts are illustrating to the
students.
Chapter Objectives
This chapter defines the different and various types of channel participants and the
distribution tasks they perform. It is important to note to the students that not all channel
members perform all of these functions and that various terms/nomenclature is assigned
to different participants. The chapter defines wholesalers/retailers/brokers/manufacturing
agents and other channel members. The chapter makes a point of excluding consumers
(or final users) as members of the channel discussions. The chapter closes discussing the
why, how and implication of wholesale channel concentration and its affect on
manufacturers and producers.
Learning objectives
1) Familiarization of the classification of the major participants in the marketing
channels.
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5) Recognize the value of distribution tasks performed by the majority of
wholesalers.
6) Appreciate the complexity of the retail structure and familiarize the student with
Chapter Topics
1) An Overview of the Channel Participants
Chapter Outline
An Overview of Channel Participants
The three basic divisions of the marketing channel are: producers and manufacturers,
intermediaries and final users.
▪ Channel participants are defined as participants that engage in negotiatory functions
Figure 1 illustrates the basic dichotomy between channel membership based on
performance or nonperformance of the negotiatory functions (buying, selling and
transferring title).
Producers and Manufacturers
Producers and manufacturers consist of firms that are involved in the extracting, growing,
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The section then goes into a detailed explanation regarding the firm Binney & Smith, the
makers of Crayola® crayons. Figure 2.2 deals with hypothetical average cost curves for
Binney & Smith.
Intermediaries
Key Terms and Definitions
▪ Intermediaries: Are independent businesses that assist producers and manufacturers in
the performance of negotiatory functions and other distribution tasks.
A) Wholesale Intermediaries
These organizations consist of businesses that are engaged in selling goods for resale or
business use to retail, industrial, commercial, institutional, professional, or agricultural
firms, as well as to other wholesalers.
1) Types and Kinds of Wholesalers
Three major types of wholesalers as defined by the Census of Wholesale Trade. These
are:
Figure 2.3 shows a schematic description of these three types.
a) Merchant Wholesalers
Firms engaged primarily in buying, taking title to, usually storing, and physically
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b) Agents, Brokers, and Commission Merchants
Independent middlemen who do not take title to the goods in which they deal, but
c) Manufacturer’ Sales Branches and Offices
Offices owned and operated by manufacturers but are physically separated from the
manufacturing plants.
2) Structure and Trends in Wholesaling
3) Size and Concentration in Wholesaling
Most wholesalers (45%) are small businesses with sales less than $1,000,000 in annual
revenue.
4) Distribution Tasks Performed by Merchant Wholesalers for Producers and
Manufacturers
Modern well-managed merchant wholesalers perform the following types of distribution
tasks for producers and manufacturers:
• Providing market coverage
a) Market Coverage
b) Making Sales Contacts
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apparent if the firm wishes to sell outside of the United States.
c) Holding Inventory
“Holding” inventory is when the wholesaler takes title to and possession of the
d) Processing Orders
Processing orders is very helpful to producers and manufacturers because many
e) Gathering Market Information
Wholesalers are close to their customers through frequent sales contacts. As such,
f) Customer Support
5) Distribution Tasks Performed by Merchant Wholesalers for Producers and
Manufacturers
In addition to the above services, merchant wholesalers are equally well suited to perform
the following distribution tasks for their customers:
• Assuring product availability
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Figure 2.8 illustrates the distribution tasks performed by merchant wholesalers and their
effect on the marketing channel.
a) Assuring Product Availability
b) Providing Customer Service
Services such as delivery, repairs or warranty work saves the customer time and
effort.
e) Breaking bulk
Shipping costs dictate the shipment of many products by rail or truckload quantities.
Most customers order in single units; thus, the large loads must be “broken” down
into single unit sales. A wholesaler provides this service to its customers.
f) Helping Customers
An important point here is to add that there are “limited function wholesalers” who do
not perform many or all of these tasks. Examples include, mail-order wholesalers, and
cash-and-carry wholesalers.
6) Distribution Tasks Performed by Agent Wholesalers
These wholesalers do not take title to the products they sell and as a rule do not perform
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Selling agents are another type of agent wholesaler performing more distribution tasks
than manufacturing agents. Selling agents may perform many, if not most, of the other
distribution tasks such as: market coverage, sales contacts, order processing, marketing
information, product availability and customer services.
Finally, the third major category of agent wholesalers, the commission merchant, is
mainly significant in the agricultural markets. Their distinction from the other merchant
agents is that commission merchants typically take possession of the goods although not
title.
Retail Intermediaries
Key Term and Definition
▪ Retailers: Consist of business firms engaged primarily in selling merchandise for
personal or household consumption and rendering services incidental to the sale of
goods.
A) Kinds of Retailers
Retailers in the United States comprise an extremely complex and diverse
B) Structure and Trends in Retailing
Here it is important to note that in 2002 (latest year for which data are available) there
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C) Concentration in Retailing
From strictly an economic standpoint, large firms increasingly dominate retailing in the
United States.
▪ Figure 2.10 illustrates that large firms represent only 4 percent of all firms but
D) Online Sales in Retailing
As of 2007, total online sales in the U.S. for all categories of goods totaled almost $127
E) Retailers’ Growing Power in Marketing Channels
The power and influence of retailers in marketing channels have been growing mainly
due to three major developments:
1) Increase in size and thus buying power
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Modern retailers have become astute followers and ardent users of many new
technologies such as the Internet, scanners, sophisticated inventory management
software, shelf management software, forecasting, and consumer shopping trip studies.
Turning now to retailers’ growing emphasis on marketing, a fundamental change has
been evolving in thinking by leading retailers about the application of marketing strategy
in a retail setting. In the past, retailers have been more supplier (vendor) driven than
market driven.
To sum up, retailers in the United States have become much larger, more concentrated,
more technologically adept, and more sophisticated marketers. As a result, they have
become far more powerful members of marketing channels and indeed have come to
dominate many of the marketing channels.
F) Distribution Tasks Performed by Retailers
Retailers are especially suited to the following distribution tasks:
1. Offering manpower and physical facilities that enable producers/manufacturers
and wholesalers to have many points of contact with consumers close to their
places of residence
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2. Providing personal selling, advertising, and display to aid in selling supplier’s
products
At this point in the chapter, examples of the retailers Nordstrom® and Marshalls® are
given. Perhaps here you can open up the class to a discussion on these retailers and ask
the students to “sum up” the retailers’ approach to the performance of their distribution
tasks.
Facilitating Agencies
Key Term and Definition
▪ Facilitating agencies: Are business firms that assist in the performance of distribution
tasks other than buying, selling, and transferring title.
By properly allocating distribution tasks to facilitating agencies, the channel manager will
have an ancillary structure that is an efficient mechanism for carrying out the firm’s
distribution objectives.
Some of the more common types of facilitating agencies:
▪ Transportation agencies such as United Parcel Service (UPS®) and common carriers
▪ Storage agencies which consist mainly of public warehouses that specialize in the
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Answers to Review Questions
1. Figure 2.1 is a straightforward representation of the classification of channel
participants; students will have little difficulty understanding it. However, asking
students to explain it in detail will reinforce their understanding. Even asking a
student to reproduce it on the board can be a useful exercise.
2. Production tasks and distribution tasks may require quite different types of expertise
and may have very different economic requirements for efficient performance.
Simply, the requisite skills for product design and manufacturing are not the same
3. A producer or manufacturer distributing its own products would be spreading the
fixed costs of distribution over a relatively small array of products. Intermediaries and
facilitating agencies are able to spread those costs across a far larger assortment
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4. The basic classification is: (1) merchant wholesalers, (2) agents and brokers, and (3)
manufacturer’s sales branches. The main criticism of this classification is that it is
5. Given that trends established since 1948 apparently are varying, this is a most
provocative topic. Students might be assigned this question for library research and a
short oral or written report. This will give them an opportunity to become familiar
with the Census of Wholesale Trade and the Current Business Reports. Library
6. Total wholesale sales were over $4.0 trillion in 1997, an increase in absolute sales of
62% over 1987 sales of $2.5 trillion.
a. Merchant Wholesalers: Between 1987 and 1997, merchant wholesalers’ percent
of total wholesale sales slipped from 58.6% to 57.5%. This decrease represents a
7. Distribution tasks for which wholesalers are well suited include:
For their suppliers:
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a. providing for market coverage for large geographic areas
b. making sales contact with downstream resellers and industrial customers (this is a
For their customers:
a. assuring product availability
8. The growth in the average size of retail units and a 32% increase in average sales
volume between 1992 and 1997, will have important implications for producing and
manufacturing firms:
▪ As retailers become larger, their capacity to perform distribution tasks tends to
increase. Some of the tasks previously performed by producing and
9. By 2007, total online sales in the U.S. totaled almost $127 billion, representing
approximately 3.2% of total retail sales. Table 2.9 provides an excellent breakdown
10. Distribution tasks for which retailers are especially well suited include:
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a. Offering manpower and physical facilities that enable producers and
manufacturers as well as wholesalers to have many points of contact with
11. Retailers are getting larger and stronger and they increasingly see their role as that of
“buying agents” for their customers rather than “selling agents” for manufacturers or
other suppliers. Consequently, retailers will exercise increasing independence in
terms of what products they will sell and how they will go about selling them, and
12. A discussion of several types of facilitating agencies and the role they play in
channels of distribution might include:
a. Transportation agencies such as the United Parcel Service (UPS), Federal Express
and the U.S. Post Offices are examples of transportation agencies. Because of
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orders themselves.
d. Third party logistics providers, sometimes referred to as “3PLs” or “TPLs,” are
firms that specialize in providing logistics services to companies or organizations
that are not capable or who find it more convenient and efficient to let an outside
channel tasks.
Commentaries on Issues for Discussion
1. This issue is aimed at promoting discussion about the limitations on manufacturers –
even large and well-financed ones – when it comes to distributing their products
directly to customers at reasonable cost. Wrigley Chewing Gum is recognized in the
United States and other countries around the world as a giant and leader in the
2. The intention of this issue is to promote discussion about the Censuses of Wholesale
and Retail Trade. The specific question concerns the timeliness of the data provided.
However, the discussion may go well beyond that to include other issues, such as
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3. The purpose of this issue is to make the point that all merchant wholesalers, from the
smallest to the largest, fundamentally do the same thing – they perform a set of
4. These arrangements do make sense for the small to medium size producers and
manufacturers interested in getting their products on the Web if they fully understand
that by such arrangements the firm is placing the firm’s customer perception of
service quality in the hands of others. That is to say, that the firm is giving more
control over to the intermediaries in the channel distribution for the sake of reaching a
larger audience.
Advantages:
▪ No capital investment in Web-based services.
Disadvantages:
▪ Allows intermediary, the Web-based fulfillment house to control and provide
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5. The power in the channel has shifted in favor of the retailer in part because of the
emergence of large scale, technologically sophisticated and marketing oriented
retailers like Best Buy. Because such retailers account for a significant market share,
manufacturers are increasingly dependent upon them to distribute their products. In
fact, failure to secure shelf space from the power retailers can mean the death of a
6. Third party logistics companies (3PLs) provide an economical alternative to creating
logistical capabilities in-house for retailers and manufacturers. 3PLs specialize in
providing logistics services by providing assets (e.g., large truck fleets, warehouses,
etc.) and expertise. A key benefit of 3PLs to firms is to enable them to increase net
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