A retail distributor acts as the middle man between consumers and manufacturers. Most often, when a manufacturer produces a product, the manufacturer does not sell the product directly to the end user. Instead, the product is sold in large quantities to a retail distributor who then sells the products out of a retail store.
Manufacturers refer to the individuals or corporations who put together or produce a given product. Much manufacturing takes place in countries where the cost of labor is lower, such as China or the Philippines. These products are then exported to other countries where they are sold.
The manufacturers who produce the items — whether offshore or within the country where the product will ultimately be sold — thus creates a network of retail distributors who handle the sale of the product to the consumer. The manufacturer may have an exclusive distribution agreement, in which it allows only one company to sell its products. Most commonly, however, manufacturers will have distribution agreements with a number of different retailer distributors.
When a retail distributor purchases a product, it pays a wholesale price. This is a cost that is lower because of the volume in which it buys the product. Generally, the larger the distributor it is, the more of a volume discount it can get on a given product. This phenomenon can make it more difficult for smaller retail distributors to compete since they end up paying more for their inventories.
The retail distributor receives the items and then prices them. The manufacturer may set a suggested price for which the distributor sells the product. Alternatively, distributors may set their own prices for a given item. Retail distributors always set the prices for goods at a higher dollar amount than they paid for the item. This is how the distributor makes its money. Some manufacturers will set a price limit that manufacturers cannot exceed or cannot drop below to control the distribution and brand reputation of the given product.
The consumer then buys the item from the retail distributor at the higher price, or markup. A consumer who wishes to avoid paying this premium for using a middle man can consider purchasing items through direct sales or direct from manufacturer items. This is not possible with all consumer goods however.
Retailers may have an agreement in which they are permitted to return unsold items to manufacturers in certain circumstances. This is common in the bookstore industry, for example, in which bookstores can return unsold copies of books. In other situations, once a distributor has purchased an item, it is his to sell. If the product does not sell at the price it is marked, the retailer will then have to liquidate the item at a lower price to recoup some or all of its investment cost in purchasing the product.