Trade channels *

Selection of trade channels

There is no absolutely standard policy that must be followed in the distribution of merchandise from the manufacturer to the ultimate consumer. Each company must select its own distributive trade channels. Before adopting any one or any combination, it must analyse carefully the various possibilities, and select or determine its own procedure by the process of elimination.

The channels selected should be tried for reasonable lengths of time, but occasionally they may have to be changed. New types of middlemen may appear and grow in importance in a given industry. The automobile and the paved road have brought into existence the wholesale motor-truck merchant and the new roadside stand retail outlet.

The nature of the demand for a particular product may change. New and unfamiliar products may have to be sold directly to the ultimate consumer by house-to-house canvassing or direct-mail solicitation. After these products become established, it may be possible to sell them through appropriate retail outlets.

The four fundamental trade channels

There are four fundamental trade channels. They are:

1. Manufacturer direct to consumers
2. Manufacturer direct to retailers
3. Manufacturer direct to jobbers
4. Manufacturer direct to special distributors
   a. Brokers
   b. Commission merchants
   c. Manufacturers' representatives or selling agents

In the use of the first-named channel, the manufacturer may employ house-to-house salesmen, direct-mail solicitation, or he may establish and conduct his own retail stores on the chain-store principle. In the use of the second channel he will be obliged usually to maintain branch warehouses and assume the jobbing function for his line. In selling to ,jobbers he will employ a regular sales force. His own sales division will handle the dealings with brokers, commission merchants and manufacturers' representatives.

Broadly speaking, a twofold trend is evident in the use of the distributive trade channels. The first tendency is to use as much as possible trade channels that involve the fewest connecting links between the manufacturer and the ultimate consumer. The second tendency is to experiment with various combinations of the fundamental trade channels.

"Cutting out" the special distributor

An increasing number of manufacturers are "cutting out" the broker, commission man, and manufacturer's representative or selling agent in order to sell directly to jobbers. In fact, the broker and his related middleman types are significant in only a limited number of lines of manufactured consumers' goods. This process of elimination comes about because of pressure from above (the manufacturer) and from beneath (the jobber or wholesaler).

The manufacturer feels that it is to his advantage to control his market to a point nearer the ultimate consumer, and that it will pay to maintain a sales force to call on the jobber or wholesaler through developing additional jobbing acceptance for the manufacturer's product line. The jobber feels that, since he buys in large amounts, he should deal directly with the manufacturer, and that by doing so he can secure lower prices and better service.

"Cutting out" the jobber

With the growth in the size of retail establishments more manufacturers are also "cutting out" the jobber to a certain extent and selling directly to large retailers. Department stores in the important cities buy in such tremendous amounts, that they demand direct dealing with the manufacturer.

The same is true of chain-store retailers, cooperative organizations, retail buying syndicates, and mail-order houses. To the manufacturer, a policy of direct sale to retailers is often highly desirable. He can bring sales effort to bear at a point much nearer to the ultimate consumer, can be more sure that his product is being pushed by the retailer, and can get information and selling plans directly into the retailer's hands.

"Cutting out" the retailer

In addition to eliminating the jobber or wholesaler, many manufacturers are "cutting out" the retailer and selling directly to the consumer. Concerns such as the Fuller Brush Company, the Real Silk Hosiery Company, and the Wear-Ever Aluminium Company have adopted direct selling methods with great success. Raincoats, men's clothing, shoes, lingerie, millinery goods, and numerous other products are now being sold from door to door. Institutional selling has also grown noticeably in recent years.

Many manufacturers are undertaking to sell all or a large part of their output directly to large consumer units such as hotels, colleges, hospitals and penal institutions. The principal advantage of direct sales to the consumer is the exclusive and detailed individual sales presentation of the product that is made possible. Salesmen have the time and opportunity to go into extensive selling explanations.

The trend toward a combination of policies

Manufacturers are experimenting more and more with various combinations of trade channels and are no longer sticking closely to any single line of distribution. One manufacturer may sell the majority of his products through the jobber and the retailer to the consumer, a part directly to several larger retailers, and a part to a broker who resells to jobbers, or even to department stores. In certain cities the manufacturer may have been forced to cut out the jobber in dealing with a few large retail stores.

The portion of his product which he sells through a broker may be "off grade" or "second" quality. A typical example of a mixed and diversified trade-channel policy is that of a certain manufacturer of hand tools for the ultimate-consumer market. This particular manufacturer sells his products as follows:

• To one of the leading jobbers of the country, marked with the jobber's own private but nationally advertised brand.
• To jobbers supplying the retail trade in Ohio, Indiana, Michigan, Illinois, and Wisconsin.
• To a broker who:
  a. Covers New York and New England selling direct to retailers
  b. Sells the jobbing trade in the South and on the Pacific Coast

The manufacturer has a wide range of possibilities in the selection of trade channels but he should base his decisions on careful analysis rather than on mere bizarre or unusual factors. Before he determines to use any particular combination of trade channels he should give the question ample consideration.

Factors that influence choice of policy

The important factors to be taken into account in selecting the trade channel or channels to be used in reaching the ultimate consumer are:

• The product line
• The market
• The industry, including customary policies and degree of competition
• The company, including its financial situation.

In other words, many of the factors and their relationships which have been discussed in connection with market surveys must be examined as the principal determinants of trade-channel policy.

Influence of the nature of the product

The nature of the product line has an important bearing on the selection of trade channels. Convenience goods, for example, are usually marketed on a low profit margin and can seldom be sold on any extensive scale directly to the consumer or even directly to the retailer. Generally speaking, clothespins, buttons, children's stockings, and similar products must be routed through jobbers. However, if the convenience goods are perishable it is desirable to market them directly to the retailer if this plan is possible financially. The bulkier the article, the more desirable it is to market it directly to the retailer.

Any product that requires intensive salesmanship and considerable educational effort should be marketed probably as directly as possible. If the product line is large, several different channels may be used.

Character and location of the market

The markets for some product lines are so diffuse that only the broker and the commission man may be able to discover prospects and serve them effectively and economically. Concentrated groups of customers may be reached by selling directly to retailers. If the variety of the items in the product line implies sharply differentiated markets, two or more trade channels may be necessary. The geographic location of customers, their purchasing power, and the average size of purchase are other important considerations.

Competition and customary policy

Competition and custom within the particular industry also have their influence on trade-channel selection. Marketing through indirect channels such as brokers or jobbers may be successful in cases where consumer demand can be developed for particular brands of products.

If this demand cannot be aroused it may be necessary to market directly to the consumer or to the retailer irrespective of what competitors may be doing. It is a mistake to assume that because a particular trade channel is in common use in the industry it has been proved by experience to be the best indicator of the correct policy. Custom is an aid in selling but, if it is blindly followed, some avenues to the market are likely to remain undiscovered.

Financial position of the company

The age and financial position of the company are also fundamental determinants. The new company without any established good will faces a situation entirely different from that of the old company possessing consumer acceptance for its brand. The new company may be obliged to mix its policies by resorting to brokers and other middlemen in distant markets and cultivating intensively the retailers in its home field with its own sales force.

Unless a company has considerable money at its disposal it cannot assume the responsibilities involved in cutting out the broker and the jobber and marketing directly to the retailer. For financial reasons alone, many companies are unable to attempt to distribute through new or additional trade channels.

Trade channels to the consumer

Trade channels from manufacturer directly to consumer are used mainly by local manufacturers producing for local markets. Three groups : Bakers, tailors, and custom-built furniture makers, the manufacturers of specialty goods that require demonstration and intensive selling, and the manufacturers of different types of consumers' goods who maintain and operate their own retail stores employ this type of marketing. The first two groups depend largely upon house-to-house, specialty salesmen, although they may supplement this method of selling with some direct-mail effort and advertising in newspapers and magazines which reach the ultimate consumer.

House-to-house selling

The manufacturer who attempts any widespread use of house-to-house methods of solicitation must assume the task of recruiting, organizing, training and controlling a very large force of specialty salesmen. Unless a very elaborate system of supervision is set up, the turnover of the field sales personnel is apt to be extremely high.

Door-to-door selling is difficult and disheartening. Fairly large commissions must be paid to the salesmen, license fees will be required for the individual salesmen in various communities, and premiums and ultimate consumer advertising may have to be employed to prepare the way for the salesmen to gain the attention of their prospects. Arrangements for delivery and for the collection of balances due may present their difficulties. Direct selling by means of house-to-house salesmen may prove to be, in the end, as expensive as selling through jobbers and retailers.

Product lines suitable for house-to-house selling

Convenience goods and shopping goods are usually unsuited for direct-to-consumer distribution by house-to-house salesmen. However, clothing, shoes, hosiery, hats, and even calicos and ginghams are being sold successfully by this method. In most cases, this channel is used by manufacturers of new and unknown products that require demonstration and intensive selling, and by the manufacturers of novelty products. Items such as sewing machines, vacuum cleaners, electric household appliances, aluminium cooking utensils, and kitchen cabinets are often sold through this channel, at least, until they become known and established.

Novelties such as musical instruments, portrait enlargements, wall maps, subscription book sets, club magazine offers, brushes and household implements are well known direct-sale items. The public is indifferent to such products unless urged to buy them by intensive "face to face" salesmanship.

Direct marketing through manufacturers' chains

As has been suggested, the ultimate consumer may be reached also by chains of retail stores owned by the manufacturer. These chains are common in some lines, notably men's hats, tobacco products, confectionery, and shoes. Convenience goods such as groceries and dry goods are seldom sold in this way because in these instances the products of many different manufacturers must be combined to produce the variety of retail stock that is necessary. Usually the manufacturer's chain will be most successful when the manufacturer makes and sells a full line of products, or when he makes and sells products of a high unit value.

In any case, the operation of retail stores by the manufacturer involves a large capital outlay and raises many serious problems of management and supervision. Manufacturing and retailing are two distinct activities; each requires a distinct type of training and ability.

The manufacturer can use his capital often to better advantage by extending his manufacturing facilities than by branching out into retail selling. Unless he is prepared to go the whole way by selling exclusively through his own stores he had better not begin such a program. If he operates one or more stores of his own this fact will have a disturbing effect on independent retailers to whom he may have to look for the distribution of the major portion of his goods.

Unquestionably, the future will see further developments in the establishment of manufacturers' retail chains. A suggested modification is a chain owned by a group of non-competing manufacturers.

The tendency, toward mergers of various product lines under single ownerships may introduce manufacturers' chains that will handle the merged company's complete line and also the products of other manufacturers. This development is likely to spread even into the field of convenience goods. Although the wholesaler and the independent retailers in many cases vigorously object to this plan, many manufacturers of certain types of products will probably continue to develop their own chains of retail stores in the larger cities, and depend upon the independent jobber and the independent retailer in other territories.

Factors involved in marketing to retailers

In selling directly to retailers, the manufacturer must undertake three important tasks. To perform effectively any one of these tasks involves considerable expense. In the first place, the manufacturer must recruit, select, train, direct, and control a field sales force large enough to call upon retailers with the frequency that retail buying habits make necessary. In most instances the retailer purchases his merchandise often and in small quantities.

The manufacturer may issue catalogue and solicit business by mail from the retailer in a supplementary way to reduce the visits required of salesmen. But in using the mail-order method, the manufacturer must offer attractive price inducements if he is to compete successfully against other manufacturers or jobbers whose representatives personally solicit business. The retailer appreciates the aid the personal salesman can render. In most cases he prefers to buy from salesmen who carry samples with them.

Warehousing may be necessary

The manufacturer who sells directly to the retailer must make his merchandise conveniently available. If the product line is perishable, or bulky, or if the area to be covered is extensive, "convenient availability" for the retailers means that the manufacturer must carry stocks at convenient shipping points throughout the whole marketing area.

The retailer who practices hand-to-mouth buying will insist on quick deliveries. He can get quick deliveries from the jobber and from nearby manufacturers. He will expect the same service from distant, direct-dealing manufacturers. The manufacturer is faced therefore with the necessity of working out some branch warehousing system. He may do this by buying sites and building warehouses at strategic points, by buying warehouses which are already erected, by renting space in public or private warehouses, or by employing representatives to act as transfer agents and to receive and ship merchandise on his orders.

Whatever the method, it is bound to be costly. Some idea of the problem in the case of national distribution may be secured from the fact that the National Biscuit Company has more than 400 branch warehouses.

Facilities required for credit and accounting

In selling directly to the retailer, the manufacturer must be prepared to assume heavy credit burdens and considerable accounting expense. Someone must give the retailer credit and carry his account. When the jobber is used in reaching the retailer, the jobber performs these services. When the manufacturer sells directly to the retailer, the manufacturer must carry the account and watch the credit. Although bankers are taking a larger part in financing the retailer, most retail dealers depend upon the sellers for large amounts of their working capital.

A tremendous amount of expensive work is required to gather and evaluate credit data, watch the accounts, and make collections. The manufacturer who sells directly is usually in a less favourable position to watch credit than the jobber whose salesmen make frequent calls upon the retailer and keep in close touch with local conditions. Similarly, the manufacturer who sells directly to the retailer has a higher bookkeeping cost for his single line going to many outlets than the jobber who sells perhaps hundreds of different items to a far smaller number of retailers.

Conditions favouring sales to retailers

Regardless of how desirous a manufacturer may be to sell directly to retailers, the total expense and difficulty may preclude the possibility of any exclusive or major use of this channel of distribution. On the other hand, if a manufacturer has ample financial resources there are certain conditions which may make direct sale to the retailer highly effective and economical. These conditions are:

• The willingness of many large-scale retailers to purchase the product line in quantity
• The manufacture of a product line of relatively high unit value which necessitates special services to the ultimate consumer
• The existence of a limited number of retail outlets The manufacture of a complete line or family of products
• The manufacture of fashion or perishable products that need to reach the retailers as quickly as possible.

Quantity purchases by retailers

In many cases the manufacturer's principal retail outlets are the large-scale retailers, the chain stores, department stores, and mail-order houses. These retailers may be willing to buy in large amounts and may not demand frequent visitation. In fact, they may order at one time a substantial proportion of their requirements for an entire season, and be entirely willing to send in fill-in orders by mail, telephone, or telegraph. In such cases the policy of selling directly may be advisable and profitable. In the marketing of furniture, musical instruments, men's clothing, hats and shoes, the direct manufacturer-retailer channel is commonly employed.

Sales of products of high-unit value

If a manufacturer makes a product of high unit value, involving a considerable investment in stock by the dealer, direct sale to the retailer is usually desirable.

In such cases the size of the individual purchase warrants the direct personal solicitation of orders. Pianos, electrical appliances, radios, phonographs, and other branded specialties are often sold almost exclusively through this trade channel. If such products involve special service to ultimate purchasers in the form of installation or convenient availability of repair parts and repairing service, this trade channel is still more definitely advisable.

Limited outlets

The jobber is particularly strong in those product lines that are handed on to the consumer through large numbers of retail outlets. If convenience or shopping goods make up the manufacturer's line a widespread retail distribution is needed. On the other hand, the market for high-grade specialty goods may require only a few retail outlets in a given city and may even be confined to cities in certain sections of the national market. Direct-to-retailer marketing therefore may be effective and economical.

Sale of a family of products

If a manufacturer produces a full line or complete family of products, it may be desirable for him to emphasize direct-to-retailer distribution. Individual orders from retailers may cover a number of different items and prove profitable for direct solicitation. The National Biscuit Company, H. J. Heinz, and the Loose-Wiles Company sell direct to the retailer, in part, at least, because they are able to offer a complete line. Many mergers in the food products field appear to have been effected with the thought of ultimately using this direct-to-retailer channel of distribution for a large and varied line of items. This policy, which is rapidly growing, enables dealers to obtain a large part or all of their stock direct from one manufacturer.

Fashion goods and perishable products

In the case of goods that change quickly in selling value, such as perishable products or those with a definite style or fashion element, marketing must be rapid or heavy losses will be sustained by the manufacturer. Consequently, manufacturers of such commodities often establish distributing stations and encourage the retailer to buy in small quantities and frequently. In this way, these manufacturers attempt to reduce any spoilage and obsolescence. Unsalable products or reduced-value products are not allowed to clog the dealer's shelves.

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