Channels of Distribution – SS1 Economics Lesson Note (Third Term)

Channels of distribution are also known as distributive trade or chain of distribution. They are the various stages through which finished goods are moved from the manufacturers or producers to the final consumers. The common channel is manufacturer or producer, wholesaler, retailer, final consumer.

That is, distribution is the process of getting goods from the producer to the final consumers. The common channel through which the consumer gets the goods is represented as:

Manufacturer/Producer > Wholesaler > Retailer > Final consumer

Behavioural objectives

By the end of the lesson, students should be able to:

• define channels of distribution and state the common channel;
• list the parts of the process of distribution;
• state the functions of the wholesaler and the retailer;
• give reasons why middlemen may be by-passed;
• state the problems of distributing goods in West Africa and the ways of improving distribution;
• state the roles of government in distributive trade.

What is the process of distribution?

The process of distribution involves all human and physical means that aid the smooth transfer of goods from the manufacturers to the final consumers. It involves:

1. Middlemen: the middlemen or agents are the human elements involved in the distribution of goods from the producers to the final consumers, for example the wholesaler and the retailer.
2. Transportation: the medium through which the finished goods are moved by air, land or water from the manufacturers to the final consumers.
3. Advertisement: the process of creating awareness in the mind of the public about the existence of a product.
4. Warehousing: a process through which the goods produced are stored until they are needed.

Who is a wholesaler and what does he do?

A wholesaler may be defined as a trader who buys goods in large quantities from the producer and sells them in small quantities to the retailer. The wholesaler is an essential and desirable element in the channel of distribution and production. He is sometimes called a middleman because he is in between the producer and the retailer.

Functions of the wholesaler to the producer

1. Bulk breaking: this is one of the most essential functions of the wholesaler. He buys in large quantities from the producer and sells in small quantities to the retailer.
2. The wholesaler finances the producer by making prompt or advance payment for goods.
3. He also finances the retailer by giving credit facilities to them.
4. He helps to make the prices of goods stable, especially where production is irregular.
5. He provides warehousing or storage facilities for goods bought.
6. He gives vital information about the market situation to the producer.
7. He completes the manufacturing of some goods by doing the packaging and branding.
8. Wholesalers help to create markets for producers and themselves through large-scale advertising, the use of sales representatives and so on.

Functions of the wholesaler to the retailer

1. He enables the retailer to stock a variety of goods.
2. He provides the retailer with credit facilities.
3. He advises the retailer based on his expert knowledge of the product.
4. He provides a link between the producer and the retailer.
5. He helps to transport goods to the retailer’s shop.

Who is a retailer and what does he do?

A retailer may be defined as a trader who buys goods in small quantities from the wholesaler or directly from the manufacturer and sells them in units to the final consumer.

He is an essential link in the channel of distribution because he is the last link to the consumer, so he is also a middleman.

Types of retail trade

Retail trade can be broadly classified into two types: large-scale retail trade and small-scale retail trade.

Small-scale retail trade comprises kiosk, market or stallholder retailing, street or roadside retailing, cycle boys, mobile shops retailing, itinerant or hawking retailing and so on.

Large-scale retailing can be in the form of department stores, multiple shops, supermarkets, mail-order businesses, hypermarkets and retail co-operative societies.

Functions of the retailer

1. The retailer stocks a variety of goods to satisfy the taste of the consumer.
2. He brings goods to the consumer, thus saving the consumer the inconvenience of going far.
3. He assists the producer and wholesaler in promoting lesser-known goods.
4. He advises the consumer and wholesaler on how to use certain products and about new developments in the market.
5. He provides after-sales services, especially for technical products like computers and televisions.
6. He finances the consumer by selling on credit.
7. He completes the distribution chain by making goods available to the consumer, thus completing the production.
8. He provides market information to buyers and sellers.
9. He advertises the goods through attractive window displays.

Who are the middlemen?

The middlemen are the wholesalers and the retailers who are in between the producers and the consumers. They specialise in performing activities relating to the purchase and sale of goods as they flow from the manufacturers to the final consumers. The presence of the middlemen in distributive trade cannot be overlooked, as they play a vital role in linking the producers with the ultimate consumers for effective trading activities.

Why may middlemen be by-passed?

Some manufacturers by-pass the wholesaler and sell to retailers for the following reasons:

1. Where perishable goods are involved.
2. The establishment of warehouses by the producer.
3. Indiscriminate increase in prices of goods and services.
4. When goods are branded.
5. When consumers combine to buy in bulk.
6. When manufacturers open their own retail stores.
7. The creation of artificial scarcity by middlemen.
8. Where the goods produced are highly technical or made to individual specifications.

What are the problems of distributing and marketing goods in West Africa?

1. Poor and inadequate transportation facilities.
2. Inadequate storage facilities.
3. Too many middlemen.
4. Administrative bottlenecks in the collection and handling of goods.
5. Inadequate credit facilities.
6. The imperfect nature of the market due to inadequate information.
7. The tendency to hoard goods in anticipation of higher prices.
8. Inadequate infrastructural facilities.
9. Inadequate dissemination of information.

What are the efficient ways of distributing and marketing goods in West Africa?

1. A good and efficient transportation network.
2. Provision of good storage facilities.
3. Formation of consumer and wholesale co-operative societies.
4. Rationing of goods in the case of essential commodities.
5. Provision of credit facilities to wholesalers and retailers.
6. Providing adequate information on the market situation.
7. Legal action against hoarders.
8. Establishment of more marketplaces.
9. Construction of a good road network.
10. Improvement in the communication system.

What are the roles of government in distributive trade?

The government at whatever level has a major role to play in the distribution of goods through the establishment of distributive agencies such as:

1. The Nigerian National Supply Company (NNSC) Ltd.
2. Marketing boards.
3. The River Basin Authorities, to encourage large production and distribution of agricultural produce.

The government also helps distributive trade in these ways:

1. Provision of a good transport system.
2. Provision of better storage facilities.
3. Government agencies help to stabilise prices to check inflation.
4. Government agencies help to prevent artificial scarcity of goods.
5. Government agencies also play the role of price control.
6. Establishment of a communication system.

Evaluation

1. Define channels of distribution.
2. List the four parts of the process of distribution.
3. State three functions of the wholesaler to the retailer.
4. State four functions of the retailer.
5. Give three reasons why a manufacturer may by-pass the middlemen.

Assignment

1. Which of the following functions do retailers perform in an economy?
   (a) production (b) exchange (c) hoarding (d) distribution
2. One of the arguments against the presence of middlemen in the distribution chain is that they
   (a) can be found always here (b) help in keeping prices stable (c) cause an increase in the prices of commodities (d) are commissioned agents
3. One of the greatest demerits of the middlemen in Nigeria is that they
   (a) sell in small units only (b) increase the prices of goods and services at will (c) store goods in warehouses that are spacious enough (d) do not advertise their goods
4. Distribution involves the
   (a) transfer of goods and services from wholesaler to consumer (b) transfer of goods and services from production centre to consumers (c) movement of goods and services by middlemen to centres (d) transfer of goods and services from one market to another
5. A major function of middlemen in Nigeria is the distribution
   (a) commodities at all consumers regardless of income (b) commodities to consuming centres (c) wealth to all (d) economic facilities to all