Chapter-3
CHANNELS OF DISTRIBUTION
The path and the link along which goods move from the manufacturer to the consumers is known as channels of distribution.
Advantages
1. The goods are easily available at all the places.
2. The financial burden is very less due to channels of distribution.
3. The sale of goods increase due to support of wholesaler and retailers.
4. The goods are available at similar prices throughout the area.
5. It gives more employment.
6. It allows distribution of goods in small quantity.
7. The goods are available in remote area also.
8. The cost of marketing is reduced by channels of distribution.
Market
“Market is the geographical place where purchaser and seller come in personal contact.”
Pharmaceutical Market
“The pharmaceutical market is the market of every specialized product like medicaments, drugs, cosmetics, toilet preparations and other similar products.” It is categorised into:
The distribution channels may be grouped under two major heads:-
(i) Direct selling
(ii) Indirect selling
i. Direct selling
When the manufacturer sells his goods directly the consumer.
Manufacturer -------- Consumer
ii. Indirect selling
In this case, there are one or two middlemen intermediaries are involved in between the manufacturer and the consumer.
For example:
1. Manufacturer -----Retailer----Consumer
2. Manufacturer ----Wholesaler--- Retailer ----Consume
3. Manufacturer ---Distributor ----Wholesaler ----Retailer -----Consumer
MIDDLEMEN
Middlemen are the persons who act as link between the producer and the consumer. They are primarily engaged in marketing and help in purchase and sale of goods and services.
Types of Middlemen
Middlemen are broadly classified into two categories :
(A) Merchantile agents or Functional middlemen
(B) Merchant middlemen.
A. Functional middlemen
The functional middlemen are those inter- mediaries who perform various marketing functions without having any title to goods i.e, they help in transfer of goods from the hands of the producer to those of consumers without acquiring any ownership rights.
The following middlemen come under this category-
(i) Brokers
(ii) Commission agents
(iii) Auctioneers
(iv) Del credere agents
i. Brokers
Brokers are those agents who obtain neither the possession nor the ownership of the goods and their only function is to bring the buyers and seller together. They negotiate purchase and sale of goods on behalf of other parties. Their roles is over as soon as the buyer and the seller agrees as regards the terms of the purchase or sale of goods. The broker gets a certain percentage of commission on the business transacted by him.
ii. Commission agents
They sell goods on behalf of the seller. They negotiate the sale of goods, take possession of the goods and make arrangement for the transfer of the title to the goods. The commission agent has to perform the functions of warehousing, grading, packing assembling and finally its disposal. They get a certain percentage of commission on sales made.
iii. Auctioneers
They sell the goods on behalf of their principals by auction. In an auction, the auctioneer who has collected the goods from the sellers, displays it for the would be buyers and invites bids from them. The bid means the price which the buyer is willing to pay for the goods being auctioned. The buyer who makes the highest bid gets the goods provided the highest bid is at least equal to the minimum reserve price fixed for the purpose.
iv. Del credere agents
They find buyers for the seller and also guarantee the payment of the price of goods on their behalf. In case any buyer fails to pay, it is the del credere agent who will pay on his behalf. For this additional responsibility, an extra commission is charged.
B. Merchant middlemen
They work for profit. They acquire and transfer the title to goods in their own name. The middlemen covered under this category are:-
(i) Wholesalers
(ii) Retailers
WHOLESALE TRADE
Wholesale trade means buying and selling the goods in large quantities and generally deal in a narrow range of goods which are purchased in large quantities from the producers and are sold in not so large quantities to retailers for resale or to industrial users directly but very rarely to the ultimate consumers. The persons dealing in wholesale business are known as wholesalers. The wholesalers are described as connecting links between the manufacturers and retailers.
Types of Wholesalers
1. Manufacturer Wholesalers
2. Retailer Wholesalers
3. Pure Wholesalers
1. Manufacturer Wholesalers
They manufacture the goods and sell them in wholesale. At the same time they also purchase the goods of other manufacturers and sell them along with their own products. In this way their turnover is increased and sale price and overhead expenses are reduced by eliminating the wholesalers.
2. Retailer Wholesalers
They purchase the goods in large quantities directly from the producers and sell them both to the retailers as well as to the consumers.
3. Pure Wholesalers
They deal only in wholesale business. They neither manufacture nor sell the goods direct to the consumers. They purchase the goods in bulk from the manufacturers and sell them in small lots to retailers. Sometimes they engage their own vehicles to distribute the goods to retailers. They may be either mill supply wholesaler, single product wholesaler or multi products wholesaler. A wholesaler may work on commission basis or on regular income basis. A wholesaler may be appointed according to the area covered i.c, local, district level, division level or state level.
Functions of Wholesalers
1. Assembling of Goods
He places orders to various producers and collects different types of goods at one place and resells them to the retailers.
2. Distribution
The wholesalers help in the distribution of goods to the consumers through the retailers.
3. Storage
The wholesalers store the goods for both the producers and retailers.The storage of goods is needed on account of time gap between production and consumption of goods.The goods are also stored to meet the demands of the retailers.
4. Financing
The wholesalers generally advance money to the producers and sell goods on credit to the retailers thus financing both of them.
5. Grading and Packing
Sometimes the wholesalers also undertake the work of grading the goods according to their quality and packing them in different containers before supplying to the retailers.
6. Transportation
The wholesalers purchase the goods in large quantities and supply them in small lots to the retailers who are widely scattered at far off places. For this purpose they may employ their own vehicles or hired vehicles. In this way the botheration of retailers for transportation of goods will be saved. He will receive the goods at his retail outlet.
7. Risk Bearing
The wholesalers bear a lot of risk by bulk purchasing and storing because the goods can become outdated, the price may go down or non-recovery of payment from retailers or there can be damage due to theft, fire etc.
8. Providing Market Information
The wholesalers provide valuable information to both the manufacturers and retailers. He collects the information by market survey and passes it on to the manufacturers regarding the tastes, preferences, likes and dislikes of the customers. Similarly he keeps informing the retailers about the price fluctuation and new products of the manufacturers.
Advantages of Wholesale Trade
A. To producer:
(i) Helps in large scale production by giving advance orders.
(ii) Feedback information regarding market.
(iii) Helps in marketing functions like advertisement.
(iv) Shoutout risk of the producer by bulk buying and storage.
(v) It provides financial help by giving advance.
(vi) They help in adjusting demand and supply thus help in stabilizing the price of goods.
B. To retailers :
(i) He collects goods from various producers for resale to retailers.
(ii) He sells the goods in small quantities to the retailers which the producer might not have given directly to the retailers.
(iii) He provides credit facilities to the retailers thus helps him financially.
(iv) He helps in making the retailer free from the risk of large stock.
(v) He informs the retailer regarding fluctuation in prices and about the new products of the manufacturers.
(vi) He gives trade discount on bulk purchasing by the retailers.
(vii) He undertake large scale advertisement for the products by which the retailers are benefited and their sales are enhanced.
'viii) Generally the wholesalers supply the goods at the business places of the retailers by employing their own vehicles or hired vehicles.
C. Services to consumers and society :
(i) He provides an opportunity to the consumer to select the best of various products in accordance with his tastes, fashions and demand which he has supplied to the retailers.
(ii) He provides latest information of the products by advertising.
(iii) He helps in keeping the prices in control by constantly supplying enough goods.
(iv) He stores sufficient quantities of goods thus minimises the probability of scarcity of goods in the market.
Disadvantages of Wholesalers
(i) They increase the price of goods by increasing their margin of profit.
(ii) They create artificial scarcity by hoarding.
(iii) Sometimes they supply duplicate goods.
(iv) No proper services are rendered as compared to their margin of profit.
RETAIL TRADE
Retailing is the final stage in distribution of goods and involves direct selling to the ultimate consumers. The persons who deal in retail sale of goods are known as retailers. A retailer is a direct link between manufacturer and/or wholesaler and consumer.
Functions of Retailing
(i) Assembling of Goods
Retailers collect variety of goods from different wholesalers to satisfy the demands the consumers.
(ii) Transportation
Retailers bring the goods from the wholesalers to their shops and then provide free home delivery to their customers.
(iii) Storage
They store goods till they are demanded by the customers, The goods are kept as reserve stocks in order to ensure uninterrupted supply to the consumers.
(iv) Credit Facility
They grant credit facility to their regular customers.
(v) Risk Bearing
The retailers bear the risk of bad debits on account of non-payment of purchases made by the customers. He bears other risks like fire, theft, spoilage, date of expiry risk and change in demand risk etc.
(vi) Market Research
Because of their contact with the consumers they are in a better position to gauge (judge) the tastes and needs of the customers which can be passed on to the producer through the wholesalers for remedial actions.
Advantages
A. Advantages to manufacturers and wholesalers :
(i) They are the last link between the producer and the customer and help in the distribution of goods.
(ii) They take over the function of dealing with large number of persons and selling goods in very small quantities thus relieve the wholesalers from this job.
(iii) Without the services of the retailers it is not possible to introduce a new product in the market.
(iv) They provide the latest information with regard to tastes, fashions and demand of the consumers to the wholesalers who in turn transmit the same to the producers.
(v) Sometimes they make advance payments for the goods to be received thus help in financing the wholesalers.
B. Services to consumers :
(i) They sell goods to the consumers in the smallest possib quantities according to the needs of the customers.
(ii) They keep large variety of goods and thus offer a wide choice to the customers.
(iii) The retailer keeps personal contacts with the customers, listens to their complaints and tries to satisfy them. He passes these genuine complaints to the manufacturers/wholesalers for rectification or substitution of goods.
(iv) They advice the customers regarding the suitability, use and maintenance of the products.
(v) They also provide free home delivery and after sales services to regular customers.
(vi) The retailers often grant credit facility to the needy customers thereby helping them in times of difficulty.
(vii) They allow cash discount to the consumers on the products sold.
(viii) They provide fresh and latest products to the customers.
(ix) Since the retail shops are generally situated near the residential areas so it is convenient for the customers to meet their daily requirements.
(x) Some of the retailers render day and night services which is very helpful in emergency cases.
Types of Retailers
A. Itinerant retailers :
Peddlers, hawkers and street traders.
B. Fixed shop small scale retailers :
(i) Street stall holders
(ii) Second hand good retailers
(iii) General shops
(iv) Speciality shops
C. Fixed shop large scale retailers :
(i) Departmental stores
(ii) Multiple shops
(iii) Mail order business
(iv) Super markets
(v) Co-operative stores
(vi) Hire-purchase shops.
A. Itinerant Retailers
These retailers do not have any fixed place or shop to carry on their business. They generally move from one place to another to sell their goods. They carry the goods on their heads or on some kind of vehicles. They need very limited money to carry on their business. They generally deal in those articles which can be sold easily during the day e.g. vegetables, fruits, milk and other eatable articles. Such retailers can be seen along the road sides, streets, bus stands, railway compartments, fairs etc
i. Departmental Stores
A departmental store is a big store engaged in the retail trade of wide variety of goods under the same roof. There may be separate departments for clothes. readymade garments, books, medicines, groceries etc., however the management is the same.
Advantages of Departmental Stores
(i) Since a departmental store purchases goods in large quantities thereby it can avail economies of large scale buying, transportation costs and trade discount etc.
(ii) Customers do not have to run from one shop to another. Here they can practically buy everything at the same place.
(iii) Departmental storcs can make extensive use of advertisement.
(iv) Some of the departmental storcs provide various services to customers such as free home delivery, after sales services, accepting orders on telephones and credit facilities.
(v) Some of the departmental stores provide recreational facilities, bank, telephone, post and telegraph services etc.
(vi) They can hire professionals and experts.
(vii) Due to large volume of sales and large turnover, the overall selling costs per unit are reduced.
Disadvantages of departmental stores
(i) The initial cost of running the business is very high.
(ii) Since the departmental stores provide various specialized services to customers and undertake extensive advertising which leads to higher overhead charges and operational costs.
(iii) Due to high operational costs the prices of goods charged from the customers are comparatively higher.
(iv) Generally departmental stores are located at central places of the city therefore people living at distant places cannot visit these stores easily.
(V) Since there are too many sections and large number of employees work in a departmental store, it is very difficult for the owner of the store to establish proper co-ordination and supervision of their functioning.
(vi) Due to big rush the personal contacts between the owner of store and custoiners may not be established which may affect the sales. Some of the salesmen may not attend the customers properly and satisfy their demands
ii. Multiple Shops or Chain Stores
Multiple shops consist of a chain of stores in a city, throughout the state/country and are organised by a centralised agency for selling the same kind of products. As multiple shops are owned and managed by a central organisation, the uniformity of operations is the basic feature of this form of retailing. Examples of multiple shops are Bata, D.C.M., Usha appliances etc.
Characteristicis of multiple shops
(i) Multiple shops specialize in one or a few types of goods.
(ii) When organised by manufacturers, multiple shops aim at eliminating both wholesalers and retailers.
(iii) Purchasing, assembling, transporting, advertising and financing etc. for all the multiple shops are made by the central office.
(iv) Generally the multiple shops have the same design, decoration and layout.
(v) The prices charged for the goods are fixed and are the same every where.
(vi) They generally sell goods on cash and carry basis and do not allow credit and free delivery services to customers.
(vii) They generally deal in consumer goods.
Advantages of multiple shops
(i) The prices are fixed and no bargaining is done.
(ii) Generally quality goods are sold.
(iii) Due 10 lower operational costs the prices of goods are generally lower.
(iv) Common advertisement is donc from a centralised place which covers the entire national network.
(v) Since they work on cash and carry principle so the chances of bad debt are minimum.
(vi) Better market research can be done because of direct contact with the consumers.
(vii) The problem of dead stock is almost eliminated because if certain product is not sold on one shop the same may be transferred to another shop where these items can be sold out.
(viii) Multiple shops can be easily identified because of uniform pattern of design and decoration of the shops.
Disadvantages of multiple shops
(i) These shops do not give any credit facility to the customers which has a negative effect on sales.
(ii) They do not provide any home delivery service to the constimer
(iii) Since only the staff employed runs the shops they rnay not give full attention towards customers satisfaction as well as they may not be faithful to the owner.
(iv) To run chain stores heavy investments and faithful persons are required to look after the business.
(v) Customer's choice is limited since chain stores deal only in limited range of products.
iii. Mail Order Business
A mail order business is a kind of retail trade where business is carried on through post. The orders are received by post and goods are sent to the customers by post. Under this system of retailing a contact is established with the customers through advertisements like press, radio, T.V., sending price lists, samples, circulars or leaflets etc. giving details of the product. Sometimes the mail order houses send reply paid postage cards to the prospective buyers. In this case the buyer does not meet the seller or vice versa. After satisfying himself, the customer places the order for the goods by post. The goods are then dispatched to the customers usually through V.P.P. (value payable parcel) or by registered post. Sometimes goods are also sent by railways or transport agencies. The railways or transport bilties are sent to respective banks and the customers are informed accordingly. After paying the amount to the bank the bilti is released. After presenting the billi to the delivery office of railways or transport agencies the goods are handed over to the customers. In the case of goods sent by V.P.P. the postman brings the parcel to the customer, after collecting the said money he hands over the parcel to the customer. The money so collected is sent back to the mail order houses by means of V.P.P. order forms (similar to that of money order forms). So the whole process is carried on by post therefore the mail order business is also described as “shopping by post”.
Characteristics of mail order business
(i) There is no need of large capital.
(ii) There is no need of middlemen.
(iii) There is no need of keeping the goods in godowns. Moreover no shop is required because business can be carried on from house itself.
(iv) It is purely based on advertisements.
(v) The orders are placed by post only.
(vi) The goods are generally dispatched by V.P.P. or by registered post.
Advantages of mail order business
1. Theobuyer is not required to travel to get the delivery of goods. He will get them at his residence by means of V.P.P.
2. The buyer is generally given a money back guarantee.
3. Since the overhead expenses of the mail order houses like show room rent, salesmen's salaries, commission to middlemen etc. are not required therefore it is an economical operation.
4. Since the goocis are sent by V.P.P. the chances of bad debt are negligible.
5. It is very useful for those buyers who are sitting at far off and remote places.
6. "There is no need of large investment in the business.
7. There is no need of storing the goods. The same may be procured as and when the order is received.
8. There is no need of appointing the middlemen.
Disadvantages of mail order business
1. There is lack of personal contact and hence buyer cannot inspect the goods before purchasing.
2. Goois sont by post are costlier because postal expenses are also to be met by the customer.
3. Somcumos postal delay may cause inconvenience to the buyer.
4. Fraud can be done on innocent customers.
5. No after sales services can be rendered to the customers.
6. The customers are deprived of credit facilities.
7. This system is not suitable for all types of goods. It can be used only for a specific type of goods.
8. This system is suitable only to the educated persons.
9. Lot of money is spent on advertisements.
10. Mail order business is not suitable for bulky and perishable goods.
11. In mail order business there is risk of loss of goods during transit.
iv. Super Markets
Super markets are also known as 'Super Bazars', They are large scale retail institutions having different departments which work under one roof. These bazars deal mainly in food articles, grocery items, cloth and medicines etc. The main feature of these markets is that they do not employ salesmen and shop assistants to help the customers. The customer himself picks up his requirements from different racks in a bucket which are then brought for payment to the cashier who sits near the exit door. After making the payment the customer is allowed to take the goods. Duc to this reason these markets are also known as 'self service stores'. These markets operate strictly on cash and carry principle and do not provide any credit and after sales services facilities to the customers.
These types of stores are very popular in U.S.A. and other foreign countries. In India these Super Bazars exist only in big cities and only a few have the self service facilities whereas at others salesmen meet the demands of the customers.
v. Consumers Co-operative Stores
In this system the consumers themselves form a society which runs the store. The main purpose of such stores is to eliminate the middlemen. The goods are purchased in bulk direct from the manufacturers/wholesalers and are sold to the customers in small quantities at market rates. A part of the profit thus earned is distributed among the members of the society in the form of bonus.
Advantages
1. The overall cost of the products is reduced since they are purchased in bulk direct from the manufacturers. Thus the middleman's profit is eliminated.
2. The consumers get good quality products since the chances of adulteration are not there which is generally practised by some retailers in the private sector.
3. Consumers are assured of availability of certain products even when there is an overall shortage of those products in the market and that too at reasonable rates.
4. The overhead expenses are reduced since unnecessary expenditure on advertisement and decoration of store is not required. The expenditure due to wages of employees is also reduced since less number of employees can serve the purpose.
Disadvantages
1. The societies have very limited resources so these stores cannot run on large scale.
2. The people in general do not visit such stores regularly. They come to buy the things when there is scarcity of the products in the market.
3. All the members of the society may not be co-operative and responsible hence these stores tend to suffer financial losses.
vi. Hire Purchase System
In this system the purchaser gets the immediate possession of the goods without paying the full amount to the seller. A part of payment is made at the time of purchase and the balance is paid in easy instalments spread over a specified period. In this system the buyer becomes the owner of goods only after paying the full amount to the seller. If a purchaser does not pay the instalment(s) the seller is free to carry back the goods. The whole system works on an agreement signed between the sellers and the buyer with or without guarantors (sureties).
Advantages
(i) Hire purchase system is usually carried on in case of durable costly consumer articles like radios, televisions, refrigerators, cycles, scooters etc.
(ii) This system is quite useful for people having limited income because they can pay the amount in easy instalments.
(iii) This system helps to increase the sale of costly items because it tempts a large number of people to buy the same.
(iv) Even the people who have enough money to buy are tempted to buy on hire purchase system because the money for the item is to be paid in easy instalments and they can invest their own money elsewhere.
(v) This system is very helpful to salaried class of people.
Disadvantages
(i) The people are tempted by the instalment schemes to buy the products which they are unable to afford.
(ii) The buyer has to pay a higher price which includes the cost and interest on unpaid instalments.
(iii) Some of the buyers become defaulters because they are unable to pay heavy instalments.
(iv) The traders dealing in hire purchase system have to arrange a large capital to run the business.
Channels of distribution for pharmaceuticals/drugs
The pharmaceuticals/drugs can't be distributed or sold direct to the consumers which is the major difference between the sale of drugs and ordinary consumable goods. They will have to be recommended by a physician or a doctor and dispensed by a registered pharmacist. Moreover a licence is required for the sale of drugs. Generally the following channels are selected for the distribution of drugs from manufacturer to consumer :
Manufacturer ---Wholesaler ---Retailer ------------Consumer
(a) Wholesale
(b) Retail sale
(a) Wholesale
Basically the wholesale of drugs and pharmaceuticals is quite similar to the wholesale trade of other consumable goods as discussed earlier in detail but differs in the following respects:
(i) A drug licence is required for the wholesale business of drugs
(ii) Only a qualified person according to Drugs and Cosmetics Act, 1948 is authorised to do wholesale business of drugs.
(iii) A wholesaler cannot sell the drugs direct to the consumers.
Manufacturers generally appoint stockists, distributors or wholesalers for the sale of drugs. They supply the drugs to these stockists or wholesalers who further supply the drugs to hospitals, research institutions, practising practitioners and retailers. The retailers sell the drugs to consumers or patients. The sale of drugs by the stockists or wholesalers to the retailers is known as wholesale trade and the sale of drugs by the retailers to the consumers or patients is known as retail trade.
The following conditions are necessary for the grant of licence for wholesale of drug:
(i) The licencee must have adequate premises not less than 10 square meters in area which should have facilities for the storage as well as to maintain the potency of drugs.
(ii) The licencee must be a qualified person according to the Act.
(iii) He will stock only those categories of drugs for which licence is granted i.e. whether the licence is granted for the sale of Schedule C and C, drugs or other than Schedule C and C1 drugs or both.
(iv) He will be permitted to sell the drugs only from the premises for which licence is granted.
(v) He will maintain the proper record of purchase and sale of drugs.
(vi) He will display the licence at a prominent place of the premises open to the public.
(vii) If there is any change in the qualified staff he will immediately inform about the same to the licensing authority.
(b) Retail Sale
Basically the retail sale of drugs is similar to general consumable goods already discussed in detail but it differs in the following respects :
(i) A drug licence is required for the retail sale of drugs.
(ii) A qualified person i.e. qualified pharmacist is authorised to sell the drugs. (i) Most of the drugs are sold to consumers only on presentation of prescription from the physician.
(iv) A physician is the only decision maker regarding the selection of a drug The selection is not in the hands of a retailer or a consumer while the sale of ordinary goods is an open trade where the consumer is at liberty to select the goods of his own choice.
(v) Home delivery of drugs is not made.
The following conditions are necessary for the grant of licence for retail sale of drugs:
(i) The licencee must have adequate premises which should have sufficient facilities for the storage as well as to maintain the potency of drugs.
(ii) The licencee must be a qualified pharmacist.
(iii) The licencee will stock only those categories of drugs for which licence is granted i.e. whether the licence is granted for the sale of Schedule C and C1 drugs or other than Schedule C and C1 drugs or both.
(iv) He will be permitted to sell the drugs only from the premises for which licence is granted.
(v) He will maintain the proper record of purchase and sale of drugs.
(vi) He will display the licence at a prominent place of the premises open to the public.
(vii) If there is any change in the qualified staff he will immediately inform about the same to the licensing authority.
(viii) Licencee must allow an authorised inspector to inspect the premises, registers and records to verify whether the provision of the Act and Rules are being observed.
Retail Vending of Drugs
Under certain circumstances drugs are allowed to be sold by vendors who have no fixed place of business but move from one place to another to meet the demands of customers. They are granted licences by the licensing authority for the retail sale of drugs in a particular area. Such licences are issued to the persons who undertake the distribution of drugs in sparsely populated areas or far-flung areas where there are no other agencies for the distribution of drugs. The persons who are granted such licences are permitted to sell drugs other than those specified in Schedule C and Cı. The licences of such persons can be cancelled if they violate the rules of the act.
Functions of Retailers
A chemist has to perform the following functions :
(i) Estimation Retailers estimate the probable demand by the physicians through the consumers for various types of drugs prescribed by him.
(ii) Assembling the Drugs Retailers collect variety of drugs from different wholesalers to satisfy the demand of the consumers.
(iii) Transportation Retailers bring the drugs from the wholesalers to their shops.
(iv) Storage They store the drugs till they are demanded by the consumers. The drugs are kept as reserve stocks in order to ensure uninterrupted supply to consumers.
(v) Customer Services Some of the retailers render day and night services which is very helpful in emergency cases.
(vi) Market Research Since the retailer is in direct contact with the consumers so they are very important source of information regarding the prescribing trends of doctors around him. He can give the information regarding the movement of drugs of other competitive manufacturers. The information so collected may be passed on to wholesalers who will ultimately supply this information to manufacturers.
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