The Distributor Breakdown: Types of Distribution Channels and How to Pick the Best One

What Are Distributors and Their Role

Distributors play a crucial intermediary role in bringing products from manufacturers to end consumers in the marketplace. A distributor purchases products in bulk quantities directly from manufacturers or suppliers and then sells smaller quantities to retailers, who in turn sell to consumers.

Distributors act as a bridge between the production of goods and the delivery of those goods to consumers. Their key responsibilities include:

• Purchasing products in large volumes from manufacturers at a wholesale price
• Storing inventory in warehouses and managing stock levels
• Processing orders from and delivering products to retailers in smaller quantities
• Providing sales and marketing support to retailers to help move product
• Managing billing and collections from retailer accounts

By purchasing in bulk from manufacturers, distributors are able to take advantage of volume discounts and economies of scale. They then provide an efficient way for retailers to obtain a wide variety of products without having to coordinate with hundreds of different manufacturers. Distributors allow retailers to focus on their core business of selling to consumers.

Overall, distributors play an integral role in moving products from where they are produced to where there is consumer demand in a cost-effective and efficient manner. They act as a bridge between manufacturers and retailers in the supply chain.

Types of Distributors

Distributors play a crucial role in getting products from manufacturers to end consumers. There are several major types of distributors that serve different functions:

Wholesale Distributors

Wholesale distributors purchase products in bulk from manufacturers and sell them in smaller quantities to retailers, who then sell to consumers. They take title and ownership of the inventory. Wholesalers provide efficient distribution for manufacturers by managing inventory, storage, order processing, and shipping to customers over a large geographical region.

Limited-Line Distributors

Unlike broad-line wholesalers, limited-line distributors focus on a narrow product category or niche. For example, a book distributor deals exclusively in books and book-related merchandise. Limited-line distributors develop specialized expertise in their niche and deeper relationships with targeted retailers.

Rack Jobbers

Rack jobbers directly manage product placement and merchandising within retail stores. They lease a section of shelf space from retailers and take full responsibility for stocking and promoting particular products in that space. Rack jobbers simplify product replenishment for busy retailers.

Drop Shippers

With drop shipping, orders are sent directly from the manufacturer or wholesaler to the end customer, bypassing the retailer. The retailer handles marketing and sales but does not take ownership of inventory. This helps retailers scale while minimizing inventory costs.

Direct Selling

Direct selling involves distributors directly interacting with customers face-to-face or virtually to promote and sell products. Well-known examples are companies using network marketing or multi-level marketing models. Distributors earn commission on their personal sales.

Wholesale Distributors

Wholesale distributors purchase products in bulk quantities directly from manufacturers, then sell smaller quantities to retailers, who in turn sell to consumers.

Definition: Wholesale distributors act as intermediaries between manufacturers and retailers. They buy products in bulk from manufacturers at a discounted price, store the inventory in warehouses, and sell assorted products in smaller quantities to retailers.

Pros:

• Economies of scale – Buying in bulk allows wholesale distributors to get volume discounts from manufacturers. This makes wholesale prices competitive for retailers.
• Warehousing – Distributors handle storage and inventory management for manufacturers and retailers. This eliminates costs associated with warehousing.
• Marketing – Wholesalers often provide marketing support to manufacturers and retailers. This includes activities like sales representatives, marketing materials, and product sampling.
• Convenience – Retailers can source all the products they need from one wholesaler rather than many manufacturers. This simplifies procurement.

Cons:

• Lower margins – Each distribution channel adds costs and markups, which lowers potential margins. Products may be cheaper for direct sales from manufacturer to consumer.
• Variable service – Not all wholesalers provide the same level of service, marketing support, delivery, etc. Retailers must assess each wholesaler.
• Less control – Using wholesalers means manufacturers have less control over product distribution, marketing, and final pricing.

Industries that use wholesale distribution:

• Consumer packaged goods like food, beverages, personal care items, household goods.
• Pharmaceutical distribution to drug stores.
• Fashion and apparel distribution to clothing retailers.
• Automotive parts distribution to mechanics’ shops and auto parts stores.
• Furniture wholesale distribution to furniture retail showrooms.

Wholesale distribution works well for high volume, established goods where economies of scale provide efficiency advantages in procurement, warehousing, and distribution. It allows retailers to offer a wide assortment of products from many suppliers through one wholesale distributor. The wholesale distribution channel dominates in consumer goods and commodities.

Limited-Line Distributors

Limited-line distributors carry a select category or line of products, rather than a wide range of merchandise. They specialize in selling particular items to retailers, wholesalers, or directly to consumers and businesses.

Some of the key characteristics of limited-line distributors include:

• Definition: They distribute a limited assortment of products, specializing in a specific category or line of complementary products. This allows them to build deep expertise about those items.
• Pros: They have specialized product knowledge and focus. They can offer a deeper selection within a particular category. Their expertise can help them better serve and support customers. It enables efficiency and economies of scale within their niche.
• Cons: Their limited product range means they miss out on some opportunities outside their specialty. It can limit their flexibility to adapt if market demand changes.
• Industries: Limited-line distributors are common in categories like electronics, automotive parts, pharmaceuticals, fasteners, janitorial supplies, office products, and medical equipment.

Some prominent examples of major limited-line distributors include Rexel (electrical supplies), Anixter (network and security solutions), HD Supply (facilities maintenance), Mutual Screw & Supply (fasteners), and Henry Schein (healthcare products).

The focused approach of limited-line distributors works well for many companies looking for an effective go-to-market strategy in specific industries. Their expertise in key categories makes them an asset for both suppliers and resellers. However, the narrow focus may limit their applicability for some businesses.

Rack Jobbers

Rack jobbers are an important, but often overlooked member of the distribution channel. They act as intermediaries between manufacturers and retailers by providing specialized product display racks to retailers and managing the stocking and replenishment of products in those display racks.

Definition

Rack jobbers obtain the rights from manufacturers to sell particular products in their own custom-designed racks that they place in retail stores. The rack jobber buys the product from the manufacturers at wholesale prices, stocks the racks they own with product, and delivers filled racks to various retail locations. They are responsible for maintaining and restocking the merchandise as needed. Rack jobbers typically handle impulse purchase items like magazines, candy, batteries and other consumer goods.

Pros

• Rack jobbers reduce the workload for retailers by managing inventory, stocking and rotating products in the racks. This allows retail staff to focus on other tasks.
• They provide specialized product display racks and ensure shelves look neat and stocked. This leads to higher sales.
• Rack jobbers have expertise in product display and merchandising to maximize sales.
• They take on inventory ownership and obsolescence risks from the retailer.

Cons

• Rack jobbers charge fees for their services, reducing profit margins for manufacturers and retailers.
• Limited communication between rack jobber and retailer staff can lead to out of stocks.
• Damage to racks or poor maintenance of displays reflects poorly on the retailer.
• Rack jobbers have their own profit motives, which may not fully align with manufacturers or retailers.Industries

Rack jobbing is common in retail sectors like:

• Newsstands and convenience stores – for magazines, candy, gum, batteries
• Pharmacies – for over-the-counter medicines, health items
• Grocery stores – for seasonal items, beverages, snacks
• Home improvement stores – for tools, hardware accessories
• Electronic stores – for audio, charging accessories and gadgets

Rack jobbers help ensure high traffic and impulse purchase products are neatly merchandised and adequately stocked in prime locations within retail stores. Selecting the right rack jobber requires evaluating their expertise, existing retail relationships, capacity, rack displays and fees.

Drop Shippers

Drop shipping is a fulfillment method that allows businesses to sell products without keeping inventory. With drop shipping, a retailer partners with a supplier that stocks its own inventory. When the retailer makes a sale, it purchases the item from the supplier, and the supplier ships it directly to the customer.

Definition

• Drop shipping eliminates the need for retailers to purchase and store inventory. The retailer sells the product, and then the sale triggers a purchase order from the supplier, who ships the order on behalf of the retailer.
• The retailer handles marketing and customer acquisition. The supplier handles product fulfillment, shipping, and returns.
• Retailers save on inventory and operating costs since they don’t have to store products. Suppliers can reach new markets and customers through the retailers.

Pros

• Low startup costs – Retailers don’t have to invest in purchasing inventory upfront. They also avoid costs related to storing inventory like warehouse space, equipment, labor, etc.
• Easy scalability – Retailers can add or remove products quickly based on demand since they don’t own the inventory. Expanding to new products or markets is easier.
• Wider product selection – By using multiple drop shipping suppliers, retailers can offer a larger catalog of products beyond what they could stock themselves.

Cons

• Lower profit margins – The pricing must account for the supplier’s cut. Retailers make less per sale compared to selling their own inventory.
• Shipping delays – Products come directly from the supplier, so shipping takes longer than if sent from the retailer’s warehouse.
• Lack of quality control – Retailers can’t inspect or customize products before they ship to customers.
• Customer service challenges – It’s harder to handle returns or exchanges when the supplier fulfills orders.

Industries that Use Drop Shipping

• Online retailers – Especially those focused on niche products or that serve a wide geographic area.
• Marketplaces – Allows individual sellers to list products without their own inventory.
• Multilevel marketing – Distributors showcase catalog products to customers. Orders are sent to suppliers for fulfillment.
• Catalog and ecommerce businesses – Can offer more products without limited warehouse space.

Drop shipping provides flexibility and simplicity at lower margins. It’s best suited for retailers focused on marketing and sales versus hands-on product distribution. Proper supplier vetting helps ensure good product quality and service.

Direct Selling

Direct selling is a distribution method that involves person-to-person sales rather than using retail shops. With direct selling, independent sales representatives sell products and services directly to consumers through relationship referrals and word-of-mouth marketing.

Definition

• Direct selling eliminates the middleman and allows companies to reach customers directly. Sales reps demonstrate, promote, and sell products and services to consumers face-to-face, often in their homes or at private sales events.
• Products may include cosmetics, wellness items, home decor, cookware, and more. Sales reps are not employees of the company but are independent contractors who earn income from their direct sales.

Pros

• Allows for personalized customer service and demonstrations not possible in retail settings. Customers get to experience products firsthand.
• Companies can easily enter new markets without major retail investments. Sales reps spread brand awareness.
• Established relationships and word-of-mouth exposure helps drive sales. Customers trust recommendations from people they know.

Cons

• Churn tends to be high. Representatives frequently come and go, making team management challenging.
• There is minimal control or oversight over how sales reps promote and sell products. They are independent operators.
• Without a storefront presence, companies must rely heavily on reps for branding and marketing. This limits reach.

Industries

• Cosmetics – Brands like Avon and Mary Kay have relied on direct selling for decades. Makeup products are well suited for personal demonstration.
• Wellness – Supplements and health-related items are commonly sold through direct sales channels. Brand authority helps provide trust.
• Home goods – Kitchenware, decor, and organizational products turn home parties into shopping extravaganzas. People buy more in social settings.
• Clothing – Fashion retailers use direct selling to provide a “personal stylist” experience. Sales reps establish style credibility.

Direct selling requires extensive coordination of independent sales teams. But the personal approach allows brands to make deeper customer connections in a way not possible through traditional retail alone. When paired with other distribution methods, direct selling provides a sales multiplier effect.

Choosing a Distribution Channel

Choosing the right distribution channel is a key strategic decision that can greatly impact a company’s success in getting its products to the target market. Companies should carefully evaluate multiple factors when selecting distribution channels to find the best fit.

Factors to Consider

The most important factors to consider when evaluating distribution channels include:

• Target Market – The customer demographics and behaviors will determine what distribution channels will be most effective. Channels should match how the target customers prefer to shop and buy.
• Product Characterists – The nature of the product often dictates the best distribution channels. Factors like size, fragility, shelf life, and required support/service impact channel selection.
• Required Coverage – The market coverage needed to reach target customers influences channel choice. Options range from intensive distribution to exclusive distribution.
• Costs – Distribution costs can include warehousing, inventory, transportation, channel margins, and marketing. The company should evaluate all short and long term costs.
• Control – Some channels allow the producer to retain more control over product management & positioning versus reliance on intermediaries.
• Capabilities – Distribution channels must have the skills, processes, and infrastructure to efficiently deliver the product to the end user.

By weighing all these key factors, companies can determine the distribution channel strategy with the best fit for their specific situation. The optimal channels get the right products to customers when and where they want them, in a cost-efficient manner.

Hybrid Distribution Models

Business-to-business (B2B) and business-to-consumer (B2C) companies alike are increasingly adopting hybrid distribution strategies that utilize multiple sales channels. This omnichannel approach provides more flexibility and exposure than relying on a single distribution method.

Some common hybrid distribution models include:

• Brick-and-Mortar and Online: Retailers that operate physical stores while also selling products through their own ecommerce site or online marketplaces. This provides the benefits of allowing customers to see and test products in-person along with the convenience of online ordering and delivery.
• Direct and Indirect Sales: Companies that sell directly to consumers through their own salesforce or website while also distributing products through distributors and resellers. This expands market reach and provides specialized sales expertise.
• Direct-to-Consumer and Wholesale: Businesses that primarily sell directly to consumers while also doing some wholesale distribution to complement their product lineup. This allows maintaining a direct customer relationship while accessing new sales channels.
• Pop-Up Shops and Permanent Locations: Retailers opening temporary pop-up storefronts in high-traffic areas to build awareness while maintaining permanent brick-and-mortar locations. This provides flexibility to test new markets.
• Online and Catalog Sales: Retailers with established catalog sales channels who added ecommerce sites and online marketplaces. This leverages existing customer bases while expanding to new digital channels.

Adopting a strategic, customer-centric approach to combining distribution methods allows businesses to maximize their market reach, reduce channel conflict, and provide a seamless experience. The future looks bright for omnichannel distribution strategies.

The Future of Distribution

Distribution is evolving rapidly alongside emerging technologies and changing consumer preferences. Some key trends shaping the future of distribution include:

• Growth of ecommerce – Online shopping continues to gain momentum globally. Distributors are expanding their ecommerce capabilities or partnering with digital platforms to meet this demand. Many traditional brick-and-mortar retailers are also pursuing an omni-channel strategy.
• Direct-to-consumer – Startups and established brands alike are exploring direct-to-consumer models, cutting out the middlemen distributors. Social media and digital marketing enable companies to build direct relationships with customers.
• On-demand delivery – New delivery methods like gig economy platforms and autonomous vehicles enable faster, more customized delivery. Distributors will need to adapt their supply chains and logistics for speed.
• Personalization – Consumers increasingly expect personalized products, packages and delivery options. Smart warehouses and inventory management using AI will help distributors provide customization.
• Sustainability – Green distribution to reduce environmental impact will be a priority. Options include electric vehicles, optimized routes, minimal packaging and reverse logistics.
• Data analytics – Distributors will harness big data and analytics to gain customer insights, predict trends, optimize operations and inventory and provide transparency.
• Automation – Automated warehouses using robotics and AI will become more common, allowing distributors to save on labor costs while boosting accuracy. Machine learning can further enhance demand forecasting, ordering and delivery.

While the fundamentals remain focused on efficient, cost-effective delivery of goods, emerging innovations will bring major changes to global distribution networks in the years ahead. Distributors that adapt quickly to new technologies and shopping behaviors are poised to gain a competitive edge. By staying nimble, distributors can continue playing a critical role in linking products and manufacturers to markets and customers worldwide.