Just so you know, typically distributors and labels are two separate entities. Labels do the promotion work, like you said, but they don't usually have warehouses to store all that merchandise, so they send it off to a distributor that does nothing but store merchandise, and ship it. It's another fish in the food chain that eats away your money, meaning the money flow goes:
Consumer -> Retail Store -> Distributor -> Label -> You.
And each entity gets a cut of the money. So you're right, it sucks for the artists. They get like 5% of what people spend at retail stores.
Which is why the popularization of internet releases, digital music, and the rising trend of independent artists is KILLING labels. If there's no need to manufacture thousands of cd's, and therefore no reason to store them, and the artists now has the power to do all his own producing (Pro Tools, Logic, cheap software) and design (Photoshop), then what's the point of having labels anyway? Digital distributors like TuneCore, which delivers you digital music to Rhapsody, iTunes, Amazon, and many other online sites is now the way to get your sound out there without spending much money, as long as you have the talent to record, produce, and design everything yourself.
This way, the artists gets MORE of the money that comes through the pipeline because there's fewer entities involved, but as usual, whoever gets their hands on the money first (in this case, online retailers like iTunes and Rhapsody) still end up keeping the biggest cut of the money.
Marketing is still an issue though, but I suppose it will always be.
On the plus side, this means some labels are getting desperate, meaning it's now easier than is usually is to get "picked up" by a record label.