Wholesaling Tutorial
As we discussed in the Retailing Tutorial, it is more the rule than the exception that marketers are not able to handle all distribution activities on their own. Instead, to get products into the hands of customers often requires the assistance of third-party service firms. In addition to retailers, marketers should be aware of other resellers whose expertise in certain facets of distribution can prove quite beneficial. Additionally, other activities associated with moving products must also be well understood and often requires the help of others.
In this section of the Principles of Marketing Tutorials, we examine another reselling group – wholesalers – and see how they come into play when a marketer attempts to reach the final customer. We will show that wholesalers exist in many formats, affect a wide range of industries, and offer different sets of features and benefits depending on the markets they serve. We will conclude our discussion of wholesaling with a summary chart that makes it easy to compare various types of wholesaling formats.
What is Wholesaling?
Wholesaling is a distribution channel function where one organization buys products from supplying firms with the primary intention of redistributing to other organizations (but, in general, not to the final consumer). A wholesaler is an organization providing the necessary means to: 1) allow suppliers (e.g., manufacturers) to reach organizational buyers (e.g., retailers, business buyers), and 2) allow certain business buyers to purchase products which they may not be able to otherwise purchase. According to the 2017 U.S. Economic Census for Wholesale Trade, in the U.S. alone there are over 400,000 wholesale operations that generate nearly $8.7 trillion in annual sales and employ over 6 million.
While many large retailers and even manufacturers have centralized facilities and carry out the same tasks as wholesalers, we do not classify these as wholesalers since these relationships only involve one other party, the buyer. Thus, a distinguishing characteristic of wholesalers is they offer distribution activities for BOTH a supplying party and for a purchasing party. For our discussion of wholesalers, we will primarily focus on wholesalers who sell to other resellers, such as retailers.
While most of our discussion in this tutorial focuses on wholesalers and their distribution of physical products, it is also important to understand that wholesalers exists in service and utility industries. For instances, wholesalers can be found in such industries as mortgage creation, vacation rental, and electricity distribution.
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Benefits of Wholesalers
The benefits wholesalers offer to members of the channel can be significant and involve most of the ones we discussed in the Distribution Decisions Tutorial, though specific benefits vary by type of wholesaler. Yet there are two particular benefits – one for suppliers and one for retailers – that are common to most wholesale operations and are worth further discussion:
Provide Access to Products
Wholesalers are in business to provide goods and services to buyers (e.g., retailers), who may not be able to make their own purchases for one of the following reasons:
- the buyer is unable to purchase directly from suppliers because their purchase quantities are too low to meet suppliers’ minimum order requirements, which are often quite high; or
- the buyer may be able to purchase directly from suppliers but they must pay higher prices compared to other buyers, who obtain better pricing because they purchase in greater quantities
Since wholesalers sell to a large number of buyers their order quantities may match those of large retailers, which may allow them to obtain lower prices from suppliers. Wholesalers can then pass these lower prices along to their buyers, which can enable smaller retailers to remain competitive with larger rivals. In this way, transacting through wholesalers is often the only way certain retailers can stay in business.
Provide Access to Markets
Providing smaller retailers access to products they cannot acquire without wholesaler help offers a benefit for suppliers as well since it opens additional market opportunities for suppliers. Namely, suppliers can have their products purchased and made available for sale across a wide number of retail outlets. More importantly, for a company offering a new product, convincing a few wholesalers to stock the product may make it easier to gain traction in the market as the wholesaler can yield power with the smaller retailers convincing them to stock the new product. Considering a wholesaler can serve hundreds of small retail customers, the marketing efforts required to persuade the wholesaler to adopt a new product may be far more efficient compared to efforts needed to convince individual store owners to stock the new product.
Ways to Categorize Wholesalers
In the Retailing Tutorial, we showed how retailers can be categorized using different operational characteristics. Wholesalers can likewise be grouped together, though the characteristics are slightly different.
For our purposes we will separate wholesale operations based on four marketing decisions:
- Products Carried
- Promotional Activities
- Distribution Method
- Service Level
and one legal factor:
- Product Ownership
As we discussed with our retailer categorization, these grouping schemes are not meant to be mutually exclusive. Consequently, a wholesaler can be evaluated on each characteristic.
1. Products Carried
Similar to how retailers can be categorized, wholesalers can also be classified by the width and depth of product lines they handle. The categories include:
General Merchandise
Wholesalers carrying a very broad line of products fall into the general merchandise wholesaler category. Like general merchandise retailers, the product lines these wholesalers carry may not offer many options (i.e., shallow depth). These wholesalers tend to market to the smaller general merchandise retailer, such as smaller convenience or general stores.
Specialty Merchandise
Wholesalers focusing on narrow product lines, but offering deep selection within the lines, fall into the specialty merchandise category. Most specialty merchandise wholesalers direct their marketing efforts to specific industries. For example, specialty wholesalers supply such industries such as grocery, electronics, and pharmaceuticals.
2. Promotional Activities
Wholesalers can be separated based on the importance promotion plays in generating demand for products handled by the wholesaler. Two basic categories exist:
Extensive Promotion
The main job of some wholesalers is to actively locate buyers. This occurs most often where a wholesaler is hired to find buyers for a supplier’s products or where the wholesaler is very aggressive in finding new customers for their own business. Under these arrangements, the most common promotional activity is personal selling through a sales force, though advertising targeted to business customers may also be used.
Limited Promotion
Nearly all wholesalers engage in some promotional activities. Even in situations where a wholesaler dominates a channel and clients have little choice but to acquire products from the wholesaler, some promotion will still occur. For instance, at times a wholesaler may need to use their salespeople to persuade buyers to purchase in larger volume than normal or to agree to stock a new product the wholesaler is handling. In other cases, especially for wholesalers selling products for business use, promotional activities may be more extensive and include advertising and other promotional methods.
3. Distribution Method
Wholesalers offer distribution options similar to those of retailers in that customers may or may not be able to physically visit the wholesaler’s location to acquire their purchase. For the purposes of our discussion of wholesaling, this category is separated based on whether or not a stationary location exists from which the wholesaler conducts the physical movement of products.
Stationary Location
In most common wholesaler arrangements, the wholesaler has one or more fixed facilities where product handling operations take place. However, while stationary wholesalers share the characteristic of a permanent location, they often differ on whether customers can visit these facilities:
Customer Accessible – At certain wholesaler locations buyers can shop at the facility. In fact, retail warehouse clubs, such as Costco and Sam’s Club, also function as wholesalers for qualifying businesses. In addition to selecting their orders, buyers are responsible for making their own arrangements to transport their purchases.
Not Customer Accessible – Most operations classified as wholesalers do not permit buyers to visit their facility in order to select items, rather buyers place orders over the internet, by phone, or through person-to-person contact with wholesaler’s representatives. In more advanced business relationships, the buyer’s inventory management system will automatically place orders (for more see Managing Product Movement Tutorial). Also, in most cases, the wholesaler takes responsibility for product delivery.
Non-Stationary Location
Not all wholesalers carry inventory at a stationary location. In fact, some do not carry inventory at all.
Mobile – Several specialized wholesalers transport products to the customer’s location using vans or trucks. Buyers then have the ability to purchase product by either walking through the mobile facility or ordering from the wholesaler, who then selects the items from the vehicle.
No Facilities – Some wholesalers do not have physical locations that store products. Instead, these operations rely on others, such as delivery companies, to ship products from one location (e.g., manufacturer) to the buyer’s place of business.
4. Service Level
Wholesalers can be distinguished by the number and depth of services they provide to their customers.
Full-Service
Wholesalers in this category mainly sell to the retail industry and, in most cases, require a strong, long-term retailer-wholesaler relationship. In addition to basic distribution services, such as providing access to an assortment of products and furnishing delivery, these wholesalers also offer customers additional services that aid retail store operations. These services include offering assistance with: in-store merchandising, retail site location decisions (e.g., find best geographic location for a new store), store design and construction, back-end operations (e.g., payroll services), financial support, and many more.
Limited Service
Compared to full-service wholesalers, buyers dealing with limited service firms receive far fewer services. Most offer basic services, such as shipping and allow credit purchasing, but few offer the number of service options found with full-service wholesalers.
No Service
Some wholesalers follow a business model whose only service is to make products available for sale and only on a cash basis. In these instances, the buyer handles their own transportation of the product.
5. Product Ownership
Wholesalers can be classified based on whether they do or do not become the owners of the products they sell. By ownership we mean that title (i.e., legal ownership) has passed from the party from whom the wholesaler purchased the product (e.g., manufacturer) to the wholesaler. It also means the wholesaler assumes any risk that may arise with handling the product.
Do Take Title
Wholesalers taking title own the products they purchase.
Do Not Take Title
Wholesalers who do not take title are focused on activities that bring buyers and sellers together. Often these wholesalers never physically handle products.
Wholesale Formats
Considering the criteria by which wholesalers can be categorized, it is not surprising many different wholesale formats exist. Below we discuss ten wholesale formats. While many of these wholesalers also have an online presence, we do not distinguish an “e-wholesaler” as a separate format the way we did with “e-tailers” or online retailers. The reason? While most wholesalers do operate from a brick-and-mortar facility, few wholesale operations permit customer shopping at their facility. Thus, the nature of industry for many years has been to have customers use communication tools (e.g., phone, fax) to place orders. With the wholesale industry, the internet simply serves as another communication option rather than a significantly different distribution channel.
General Merchandise
These wholesalers offer broad but shallow product lines that are mostly of interest to retailers carrying a wide assortment of products, such as convenience stores, and smaller general merchandise stores, such as those offering closeout or novelty products. Since these wholesalers offer such a wide range of products, their knowledge of individual products may not be strong.
Specialty Merchandise
Many wholesalers focus on specific product lines or industries and, in doing so, supply a narrow assortment of products. However, within the product lines offered there is considerable depth. Additionally, these wholesalers tend to be highly knowledgeable of the markets they serve.
Contractual
In the Distribution Decisions Tutorial, we introduced the concept of wholesaler-sponsored channel arrangements where a wholesaler brings together and manages many independent retailers. The services of these contractual wholesalers are supplied only to the retailers involved in the contractual arrangement.
Industrial Distributors
The industrial distributor directs their operations to the business customer rather than to other resellers. Depending on the distributor, they can carry either broad or narrow product lines.
Cash-and-Carry
A wholesale operation common to the food industry is the cash-and-carry. Historically, this wholesale format involved buyers visiting a wholesaler’s facility where they selected their orders, paid in cash, and then handled their own deliveries (i.e., carry) to their place of business. Today many cash-and-carry wholesalers do not limit payment to cash only and instead accept credit card payment. This form of wholesaling has begun to expand outside of the food industry as large wholesale clubs, such as Costco and Sam’s Club, allow qualified businesses to purchase products intended for retail sale.
Truck
As the name suggests, truck wholesaling operations are primarily run out of a truck that is stocked with products. These wholesalers often have assigned geographic territories where they regularly visit buyer’s locations. In most cases, these wholesalers offer specialty product lines with many being found in the retail food industry and industrial markets.
Rack Jobber
Similar to truck wholesalers, the rack jobber also sells from a truck. However, the main difference is that rack jobbers are assigned and manage space (i.e., racks) within a retailer’s store. The rack jobber is then responsible for maintaining inventory and may even handle other marketing duties, such as setting product price. This form of wholesaling is most prominent with magazines, candy, bakery, and health-and-beauty products. In some trades the name rack jobber is being replaced by the name service merchandiser.
Drop Shipper
Wholesalers in this category never take physical possession of products, though they do take ownership. Essentially they are shipping coordinators who receive orders from customers and then place the order with a product supplier. Shipping is then arranged so that the supplier ships directly to the drop shipper’s customer. Drop shipping is often most useful when very large orders are placed so that transportation and product handling costs can be spread over many items, thus reducing the shipping cost per unit shipped.
Broker
A far less obvious type of wholesaler is the broker, who is responsible for bringing buyers and sellers together. However, brokers do not take ownership of products and often never handle the product. Brokers are paid based on a pre-negotiated percentage of the sale (i.e., commission) by the side that hires their services. In most cases, the relationship that develops between the broker and the buyer and seller is short-term and only lasts through the purchase. Brokers can be found in the food industry, importing/exporting, and real estate.
Agent
Similar to brokers, agents also bring buyers and seller together though they tend to work for clients for an extended period of time. As with brokers, agents generally are paid on commission. A common type of agent is the manufacturers’ representative, who essentially assumes the role of a sales force for a client. Manufacturers’ reps may handle several non-competing product lines at the same time and during a single meeting with a perspective buyer may discuss many products.
Wholesaler Summary Chart
Below we summarize each wholesale format by using the five categorization characteristics. The characteristics identified for each format should be viewed as the “most likely” case for that format and are not necessarily representative of all wholesalers that fall into this format.
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Concerns of Wholesalers
The wholesale industry has served an important role in the distribution process for well over 100 years, yet the challenges they face today are raising the stakes as many wholesalers fight to maintain their market position. Some of the critical issues facing today’s wholesalers include:
Disintermediation
The growth of the internet as a communication and distribution channel has lead many to conclude that wholesaling will lose its importance as manufacturers and final buyers learn to transact directly. This so called “disintermediation” of marketing channels is a real concern to some wholesalers, especially those that do not function as a dominate party within a distribution channel. For example, assume a retailer operating a gift card store uses a wholesaler only to purchase a specific manufacturer’s products. In this situation, if the manufacturer begins to offer direct purchasing to smaller customers the wholesaler may have little leverage in efforts to retain the retailer as a customer. In instances of disintermediation, wholesalers face the challenge of creating greater value for their services, thus making the retailer’s decision to switch more difficult.
Facility Location
Wholesalers who are heavily involved in product shipment may spend considerable time evaluating sites for locating facilities. For organizations needing very large facilities, the decision as to where to locate becomes more difficult and more expensive the closer the location is to major metropolitan areas. In fact, land costs in some regions of the world have risen so high that utilizing this space for wholesaling operations may not be feasible. In addition to land costs, facility location is also affected by access to adequate transportation, such as roads, seaports, airports, and rail terminals. Areas with available land often lack the infrastructure needed to run wholesale facilities unless expensive and time-consuming improvements (e.g., build highway, extend rail line, etc) are made.
Transportation Costs
For wholesalers involved in transporting products, the fluctuation of fuel costs over that last 25 years has forced a close examination of how they handle product distribution. Transportation expense can represent a significant portion of overall distribution costs and when fuel prices rise these higher costs are often passed on to customers in the form of higher product prices. However, higher transportation expense also presents opportunities for wholesalers that work hard to control fuel costs with such methods as: using equipment and delivery vehicles that are more fuel efficient, utilizing computer routing software to determine less costly delivery routes, and offering greater incentives to customers to accept deliveries during less congested times of the day.
Adapting to New Technologies
In addition to technologies to lower fuel costs, other technologies that assist the distribution process are offering both advantages and disadvantages to wholesalers. New technologies, such as radio frequency identification tags (RFID) placed on shipped products and real-time traffic updates allow wholesalers to maintain tighter control over their distribution activities. However, gaining the benefits associated with these new distribution technologies can be expensive in terms of acquiring and learning to use.
Offering Non-Product Assistance
Wholesalers are finding that offering products is not the only thing of interest to their buyers. Many customers also want wholesalers to offer additional value-added services such as employee training (e.g., teach selling skills), promotional support (e.g., financial support for advertising), and assistance in managing their operations (e.g., building an online store). Keeping pace with the services in demand by their customers requires constant research and communication with customers.