CHAPTER – VII

CHANNELS OF DISTRIBUTION
 A channel is an institution through which goods and services
are marketed.
 Channels give place and time utilities to consumers. In order to
provide these and other services, channels charge a margin.
 The longer the channel the more margins are added.

Direct and Indirect Selling Channels

 Indirect selling, also known as the local or domestic channel, is
employed when a manufacturer market its product through
another firm that acts as the manufacturer's sales intermediary
 Cont’d….
Advantages of indirect domestic channel:
 Channel is simple and inexpensive.
The manufacturer incurs-no-start-up cost for the channel
 Manufacturer is relieved of the responsibility of physically
moving the goods overseas.
An indirect channel have limitations
 The manufacturer has given up control over the marketing of
its product to another firm.
This situation may adversely affect the product's success in the
future.
 Cont’d….
If the chosen intermediary is not aggressive, the manufacturer
may become vulnerable, especially in the case where competitors
are careful about their distribution practices.
Direct selling:
 Is employed when a manufacturer develops an overseas
channel.
 Manufacturer deal directly with a foreign party without going
through an intermediary in the home country.
 The manufacturer exports through its own internal export
department
One advantage of direct-selling:
 Channel is active market exploiter since the manufacturer is

more directly committed to its foreign markets.

 Greater control.

 The channel improves communication.

Limitations of Direct selling:

 It is a difficult channel to manage if the manufacturer is

unfamiliar with the foreign market.

 Channel is time consuming and expensive.
 Cont’d…
 Exporters who do not undertake international marketing

research have a tendency to sell directly to their own home

country export agent.
Direct Channel
a) Foreign Distributor:
A foreign distributor is a foreign firm that has exclusive rights
to carry out distribution for a producer in a foreign country
Orders must be channeled through the distributor, even when
the distributor chooses to appoint a subagent or sub-distributor.
 Cont’d…..
 Distributor purchases goods from the producer at a discount and
then resell or distributes the goods to retailers/consumers
 There are a number of benefits in using a foreign distributor.
Unlike agents, the distributor is a merchant who buys and
maintains merchandise in its own name.
 This arrangement simplifies the credit and payment activities for
the manufacturer.
b) Foreign Retailer: If it is used, the product in question must be a
consumer product rather than an industrial product.
 Cont’d….
c) State - Controlled Trading Company: For some products,
particularly utility and telecommunication equipment, a
producer must contact and sell to state-controlled companies.
Companies that have a complete monopoly in the buying and
selling of goods.
d) End User: Sometimes, a producer is able to sell directly to
foreign end users with no intermediary involved in the process.
This direct channel is a logical and natural choice for costly
industrial products.
 Cont’d…
Indirect Channel : firm does not have to correspond with foreign
parties in foreign countries.
 Local sales intermediaries, all can be grouped under two broad
categories:
 Domestic agent: It never take title of goods, regardless of
whether the agents take possession of the goods or not. It
represents the producer.
 It can bind the producer in authorized matters to contracts
made on the producer's behalf.
 Cont’d…
 Domestic merchants: It own the merchandise, regardless of
whether the merchants take possession or not.
The basic difference between the two is title rather than just
the physical possession of the merchandise.
Merchant/distributor represents the manufacturer's product.
The merchant has no power to contract on behalf of the
manufacturer
 Cont’d….
a) Export Broker: bring a buyer and a seller together.
 Negotiates the best terms for the seller but cannot conclude
the transaction without the principal's approval of the
arrangement.
 For any action, the broker receives a fee or commission. An
export broker does not take possession or title to the goods.
Only make an arrangement for credit.
 Cont’d…
b) Manufacturer's Export Agent or Sales Representative: this is
an independent business person who usually retains his or her
own identity by not using the producer's name.
 Having more freedom that the firm's own salesperson Like a
broker, the manufacturer's export agent works for
commission.
 Unlike the broker, the relationship with the manufacturer is
continuous and more permanent.
 An export agent may take possession but not title to the goods
and thus assumes no risk-the risk of loss remains with the
manufacturer.
 Cont’d….
c) Export Management Company (EMC):
 EMC manages, under contract, the entire export program of a
manufacturer.
 An EMC is also known as a combination export manager
(CEM) because it may function as an export department for
several allied but non-competing manufacturers.
 When compared with export brokers and manufacturers'
export agents, the EMC has greater freedom and considerable
authority.
 Cont’d….
d) Cooperative Exporter: It is a manufacturer with its own export

organization that is retained by other manufacturers to sell in

some or all-foreign markets.

 The usual arrangement is to operate as an export distributor for

other suppliers, sometimes acting as a commission.

 Because the cooperative exporter arranges shipping, it takes

possession of goods but not title.

 A cooperative exporter is often referred to as a "mother hen,"

a "piggyback exporter," or an "export vendor".

 Cont’d…
E) Webb – Pomerania Association: It is formed when two or

more firms, usually in the same industry, join together to market

their products overseas.

The association constitutes an organization jointly owned by

competing manufacturers exclusively for the purpose of export.

 Cont’d…
f) Purchasing/Buying Agent:
 It represents the foreign buyer. By residing and conducting
business in the exporter's country, the purchasing agent is in a
favorable position to seek a product that matches the foreign
principal's preferences and requirements.
This agent may also become an export-confirming house
when confirming payment and paying the seller after receiving
invoice and title documents for the client.
g) Country-Controlled Buying Agent: A variation on the purchasing agent is

a country-controlled buying agent.

 It performs exactly the same function as the purchasing buying agent, the

only distinction being that a country-controlled buying agent is actually a

foreign government's agency.

 This agent is empowered to locate and purchase goods for its country.

 This agent may have a permanent office location in countries that are

major suppliers
h) Resident Buyer: is an independent agent that is usually located
near highly centralized production industries.
• It helps to maintain a steady and continuous business relationship
as long as the supplier remains competitive in terms of price,
service, style, and quality.
• If the foreign client decides to visit manufacturing plan~ or
offices, the resident buyer can assist by making' hotel
reservations, announcing the visit to suppliers, arranging vendor
appointments, and so on.
 Cont’d…
i) Export Merchant: domestic merchants are independent
businesses that are' in business to make a profit rather than to
receive a fee.
 All domestic merchants take title, they are distinguished by
other features such as physical possession goods and
services rendered.
 One kind of domestic merchant is the export merchant. This
merchant seeks out needs in foreign markets and makes
purchases from manufacturers in its own country to fill those
needs.
 Cont’d….
 It resells the goods in its own name. In completing all these
arrangements, the merchant assumes all risks associated with
ownership.
j) Export Drop Shipper: is known as a desk jobber or cable
merchant, is a special kind of export merchant.
 As all these names imply, the mode of operation requires the
drop shipper to request a manufacturer to "drop ship" a product
directly to the overseas customer.
 It is neither practical nor desirable for the shipper to physically
handle or possess the product.
 Cont’d….
 It places an order with a manufacturer, directing the
manufacturer to deliver the product directly to the foreign buyer
 The manufacturer collects payment from the drop shipper, who
in turn is paid by the foreign buyer.
 Use of it is common in marketing of bulky products of low unit
value
 It can reduce the risk while simplifying the transactional tasks.
k) Export Distributor: Whereas export merchants and drop
shipper’s purchase from a manufacturer whenever they--receive-
orders from overseas, an export distributor deals with the
manufacturer on a continuous basis.
 This distributor is authorized and granted an exclusive right to
represent the manufacturer.
 It pays for goods in its domestic transaction with the
manufacturer and handles all financial risks in the foreign sale.
 Cont’d….
The export distributor, in comparison, is located in the
manufacturer's country and is authorized to sell in one or more
markets abroad.
The export distributor operates in its own name
I) Trading Company: Those that want to sell and those that
want to buy often have no knowledge of each other or no
knowledge of how to contact each other.
 Trading companies have come into existence to fill this void.
 Cont’d…
A trading company performs many functions:
1) has more diverse product lines,
2) offers more services.
3) Is largest and letter financed,
4) takes' title (ownership) 'to merchandise,
5) Is not exclusively restricted to engaging in export trade
As the name imply the trading company trades on its own account
for profit.
 Cont’d…..
 By frequently taking title to the goods it. Handles, its risks of
doing business greatly increase.
 A trading company does not merely represent manufacturers
and/or buyers thus reducing risks, because increased risks are
usually accompanied by increased rewards.
 Manufacturers and buyers use trading companies for good
reasons.
 Channel Decision
 Three channel decisions: length, width, and number of channels of
distribution:
a) Channel length: is about the number of times a product changes
hands among intermediaries before it reaches consumer.
 It is long when a manufacturer move its product through several
middlemen.
 It is short when the product has to change once or twice. If the
manufacturer elects to sell directly to final consumers, the channel
is direct.
 Cont’d…
b) Channel width: is about the number of middlemen at a
particular distribution channel.
 It is a function of the number of wholesalers used and kind of
retailers used.
 More intermediaries are used, it becomes wider and more
intensive.
 Few qualified intermediaries are needed, the channel is
selective.
 Cont’d…
c) Number of distribution channels to be used: manufacturer
may employ many channels.
 It may use a long and a direct channel simultaneously. The use
of dual channel is common if the manufacturer has different
brands intended for different kinds of consumers.
 Another reason for using multiple channels may involve the
manufacturer's setting up its own direct sales force in a foreign
market
 Determinants of Channel Types
a) Legal Regulations: A country may have specific laws that
rule out the use of particular channels or middlemen for
example, prohibits the use of doors to door selling.
b) Product Image
The product image desired by a manufacturer can dictate the
manner in which the product is distributed.
A product with a low- price image requires intensive
distribution.
 Cont’d….
 On the other hand, it is not necessary or even desirable for a
prestigious product to have wide distribution.
c) Product Characteristics
 The type of product determines how that product should be
distributed.
 For low high-turnover convenience products, the requirement
is for an intensive distribution network.
d) Middlemen's Loyalty and Conflict: As the channel widens and as
it number increases, more direct competition among channel
members in inevitable.
 Some members will perceive large competing member and self-
service members as being unfair.
 Some members will blame the manufacturer for being motivated
be greed when setting up a more intensive network. In effect
intensive distribution reduces channel members.
e) Local Customs: Local business practices, whether outmoded or
not, can interfere with efficiency and productivity and may force
a manufacturer to employ a channel of distribution that is longer
and wider than desired.
 Cont’d…
f) Control: If it has a choice, a manufacturer that wants to have
better control over its product distribution may want to both
shorten 'and-narrow 'its distribution channel.
 Apparently, manufacturers want to get closer to final
customers.
 One study employed a model based on transaction cost analysis
to explain exporters' vertical control selections.
 Exporters of specialized products should establish channel
structures that require a greater commitment of resource.
 U!
Y O
NK
H A ND
T E
H E
T