The four principal trade channels

Attempts have been made to establish exact points of difference between the usually recognized trade channels. Sometimes, they are designated as long or short channels, depending on the number of separate hands through which the goods pass between manufacturer and consumer. There are direct or indirect channels, depending on the degree to which the manufacturer himself controls and performs the functions which must be performed in the process of moving goods from point of production to point of consumption.
Perhaps the best method is the one that distinguishes between the type of middleman that takes part in the process. In this way, we can set out four distinct types of performers:
(a) Channel A. Distribution through an agency that stands between the manufacturer and the wholesaler. In this channel, we find the broker, the manufacturer's agent, the commission merchant, and the export merchant. Generally speaking, the manufacturer uses this channel when he cannot afford or does not wish to invest the necessary amount to develop a sales force of his own.
One example will make this clear. A manufacturer of high-pressure hose and brass couplings for the transportation industry found that he could operate a sales
branch with stock at a cost of 7.7 per cent of sales. The earnings and expenses of his salesmen cost him an addi¬tional 11 per cent of sales. Thus the cost of managing his branch and the cost of direct selling added up to 18.7 per cent of sales. A commission merchant agreed to distribute the same goods for 6.5 per cent, provided the manufacturer warehouse the stock and ship to the buyer against orders sent in.
By centralizing warehousing activities, the manu¬facturer was able to establish three shipping points, operated at an overhead cost of 6 per cent of sales. This, plus the 6.5 per cent commission to the agent, made a total cost of 12.5 per cent as against 18.7 per cent when he sold through his own branches and sales force. In this instance, the manufacturer gave up some of the advantages of control which he could exercise with his own branches, and saved the difference in cost.
(b) Channel B. Selling to wholesalers who sell to retailers. Selling to wholesalers is often referred to as the traditional channel. The term wholesaler stands for very specific functions of buying in large quantities, re¬ceiving and storing, selling in smaller quantities to a large number of retail buyers (this is sometimes re¬ferred to as breaking bulk), and doing all these things for his own account. Thus, the wholesaler is a merchant who buys goods from a manufacturer and sells to the retailer. He naturally tries to sell for more than he pays. The difference is called the margin, markup, or gross profit.

(c)    Channel C. Selling direct to retailers or dealers. When the manufacturer sells direct, he assumes the functions of the agent or broker, whose job it was to find wholesale buyers. He also assumes the functions of the wholesaler, whose job it was to buy in large quantities, and resell in smaller quantities. This naturally means greater inventory and a larger sales force for the manufacturer. It means operation and management of warehouses. It means more activity on the part of the manufacturer in arranging for, supervising, and controlling transportation to the retail destinations.
The development of supermarkets, of department stores, and of discount houses would have been almost impossible if it had not been for the ability of large retailers to buy direct from the manufacturer, and, in turn, for ability of the manufacturer to establish close merchandising and promotion relations with these large-scale retailers. Exclusive selling, discussed later in this chapter, would also be difficult in some instances without this direct relationship.
(d)    Channel D. Selling direct to consumers. Selling direct to consumers is more common in industrial marketing than in the marketing of consumer goods. Industrial chemicals, machinery installations, heavy equipment and made-to-order installations are generally sold on a direct manufacturer-to-user basis.
The federal government, which has become the largest buyer of machinery and equipment in the world, also buys direct from the manufacturer. Most goods manufactured for the government, particularly for the defense program, are made to order. By their very nature, these cannot be commercial products. Even commercial products, such as automobiles, jeeps, and supplies are usually purchased direct by government agencies.
Direct selling of commercial goods to the consumer, by house-to-house, mail order, or through vending machines still constitutes a very small part of total retail selling, about 3 per cent.