Question

Which are the advantages and disadvantages of direct versus indirect distribution channels? Discuss and give some examples of brands using one of the two channels or both.

Answer 1

As we are moving towards a digital age, the age of convenience, our preferences are also changing from buying goods from brick and mortar stores to online outlets. Keeping this in mind, it is important for businesses to continuously innovate their distribution strategies to adapt to a competitive business environment.

There are two types of distribution channel: Direct and Indirect.

Direct distribution: It connects manufacturers directly to consumers. This kind of distribution channels are mostly used by online outlets like Amazon.

Pros:

• Direct relationship with consumer
• Removes middlemen, broker fees etc.
• Reduced marketing and advertising expenses
• Can control brand image and consumer experience
• Increased transparency

Cons:

• Risk of financial loss as it requires significant upfront capital
• Increased documentation and tax records
• Purchase of own trucks, warehouses, equipment etc.

Indirect distribution: There are several layers between manufacturer and consumer, the several layers being distributor, wholesales, retailer etc. Common examples are retail stores like Walmart.

Pros:

• Access to increased customer base
• Increased focus on product and customer base
• Can explore other target group
• Starting up cost would be lower
• Lower sales tax under the resale exemption

Cons:

• Increased outside costs like broker fees, commissions, allowances etc. which can impact bottom line
• Freedom to set prices may become a constraint
• May not be Transparent

As discussed above:

Amazon is an example of direct channel as it allows manufacturers to sell on its portal and consumers can directly buy and interact with them.

Walmart: It follows indirect channel. It uses a network of suppliers/distributors to source products, uses hub and spoke model of distribution to transport products to Walmart retail stores.