1.2 A Retailer's Role in a Distribution Channel
A retailer is a business that sells products and/or services to consumers for their personal or family use. Retailers are the final business in a distribution channel that links manufacturers to consumers. A distribution channel is a set of firms that facilitate the movement of products from the point of production to the point of sale to the ultimate consumer. Exhibit 1-1 shows the retailer's position within a distribution channel.
Manufacturers typically make products and sell them to retailers or wholesalers. When manufacturers like Ralph Lauren and Dell sell directly to consumers, they are performing both production and retailing business activities. Wholesalers buy products from manufacturers and resell these products to retailers, and retailers resell products to consumers. Wholesalers and retailers may perform many of the same functions, but wholesalers satisfy retailers' needs, whereas retailers direct their efforts to satisfying the needs of ultimate consumers. Some retail chains, like Home Depot and Office Depot, function as both retailers and wholesalers. They're performing retailing activities when they sell to consumers and wholesaling activities when they sell to other businesses, like building contractors or small business owners.
In some distribution channels, the manufacturing, wholesaling, and retailing activities are performed by independent firms, but most distribution channels have some vertical integration. Vertical integration means that a firm performs more than one set of activities in the channel, such as investments by retailers in wholesaling or manufacturing. Backward integration arises when a retailer performs some distribution and manufacturing activities, such as operating ware houses or designing private label merchandise. Forward integration is when a manufacturer undertakes retailing activities, such as Ralph Lauren operating its own retail stores.
For example, most large retailers €" such as Safeway, Wal-Mart, and Lowe's €" engage in both wholesaling and retailing activities. They buy directly from manufacturers, have merchandise shipped to their ware-houses for storage, and then distribute the merchandise to their stores. Other retailers, such as The Gap and Victoria's Secret, are even more vertically integrated. They design the merchandise they sell and then contract with manufacturers to produce it exclusively for them.
1.3 Functions Performed by Retailers
Why are retailers needed? Wouldn't it be easier and cheaper to buy directly from companies that manufacture the products? The answer is generally no. Although there are situations in which it is easier and cheaper to buy directly from manufacturers, such as at a local farmer's market or from Dell Computer, retailers provide important functions that increase the value of the products and services they sell to consumers and facilitate the distribution of those products and services for those who produce them. These value-creating functions are
€ Providing an assortment of products and services
€ Breaking bulk
€ Holding inventory
€ Providing services
1.3.1 Providing Assortments
Supermarkets typically carry 20,000 to 30,000 different items made by over 500 companies. Offering an assortment enables their customers to choose from a wide selection of brands, designs, sizes, colors, and prices at one location. Manufacturers specialize in producing specific types of products. For example, Campbell's makes soup, Kraft makes dairy products, Kellogg makes breakfast cereals, and McCormick makes spices. If each of these manufacturers had its own stores that only sold its own products, consumers would have to go to many different stores to buy the groceries needed to prepare a single meal.
All retailers offer assortments of products, but they specialize in the assortments they offer. Supermarkets provide assortments of food, health and beauty care, and household products, while Abercrombie and Fitch provides assortments of clothing and accessories. Most consumers are well aware of the product assortments retailers' offer; even small children tend to know where to buy different types of products. But new types of retailers offering unique assortments appear each year, such as Play It Again Sports (used sporting goods