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Wholesaling is the business of buying goods in bulk at a discount from a manufacturer or other distribution channel member and selling them to retailers for a higher price. Wholesalers are often referred to as middlemen because they are the entity that links the producer to the retailer. Unlike retailers, wholesalers generally do not interact with customers or have physical locations for them to visit. Wholesalers engage in a variety of business practices including buying, storing, selling, and marketing.
IN CONTEXT
Wholesalers are integral marketing intermediaries, responsible for getting the right product to the right place at the right time and creating additional value for the customer and other channel members. Furthermore, wholesalers make the final price for consumers less because they purchase in bulk, whereas some smaller retailers could not afford to. There are several types of wholesalers, and each has its unique importance in the distribution channel.
In addition to the general importance noted above, each type of wholesaler plays a specific and integral role in getting products from a manufacturer to the end user. The decision of which type of wholesaler a retailer will utilize—or which type of wholesaling a wholesaler chooses—will largely depend on the type of product, the additional services needed, and often, the industry as a whole.
Merchant wholesalers engage in buying, storing, and physically handling products in large quantities and selling those products in smaller quantities to retailers. Merchant wholesalers are the most common form of wholesaling and can take on many responsibilities in the distribution channel to assist retailers. Merchant wholesalers are classified by the level of service they provide to retailers and include full-service wholesalers, limited-service wholesalers, and manufacturer’s agents. Retailers and manufacturers will choose which type of wholesaler to work with based on their needs. Some large retailers, such as Walmart, may need fewer services from wholesalers than smaller specialty stores will need. As you continue to read, remember that wholesalers are a business—so they are in business to make money, but they also take on risk in doing so.
IN CONTEXT
Full-service wholesalers offer retailers the most complete range of services, such as buying, selling, storage, transportation, sorting, and financing. They are the wholesalers that take on the most risk. This type of wholesaler likely has its own salespeople to assist retailers and some assist in the stocking of the products on retailers’ shelves. They often give retailers lines of credit to purchase products now and pay later. Merchant wholesalers focus on either general or specialty merchandise.
Full-service wholesalers that offer an extensive list of merchandise for sale are known as general-merchandise (full-line) wholesalers. Retailers can purchase most, if not all, of their inventory from one wholesaler. For retailers, general-merchandise wholesaling is convenient because it provides greater availability and flexibility with product quantities. However, retailers need to be cautious in utilizing only one wholesaler for all their needs as they may find themselves in predicaments they cannot contractually be protected from—such as higher prices.
Unlike general-merchandise wholesalers, which focus on an extensive line of products, specialty wholesalers focus on a limited line of products.
EXAMPLE
Sysco, one of the country’s largest food-service wholesalers, focuses on limited product lines, such as food and food-service supplies. The company’s target market includes hospitals and nursing homes, schools and colleges, and other entities that offer food service on a large scale. You might be surprised to learn that your high school cafeteria or college commons is served by Sysco. The company offers many services to its customers, such as financing, consultation, menu assistance, and food production.As the name suggests, limited-service wholesalers offer a limited range of services to retailers. These wholesalers often compensate for the lack of services by offering lower prices than full-service wholesalers.
EXAMPLE
A limited-service wholesaler may not be able to offer retailers financing or stocking services, but it may purchase excess inventory from full-service wholesalers or manufacturers at a deeply discounted rate and, in turn, offer a better price to retailers. Limited-service wholesalers offer retailers many services to increase value.Rack jobbers are companies that work with retailers to display and sell a product in-store. These items are often not products that the retailer would ordinarily stock and are budget-friendly items.
IN CONTEXT
When you enter a gas station and see a rack of cell phone chargers and accessories, it is likely that they are from a rack jobber. The rack jobber stocks and maintains the cell phone display, and the gas station receives a portion of the sales. The advantage to the retailer is that it is not responsible for ordering products or maintaining and stocking displays; it is almost like passive income. The biggest disadvantage to retailers is that rack jobbers may over-order or under-order products or fail to maintain displays as frequently as needed.
Cash-and-carry wholesalers are those that offer a limited line of fast-moving goods that they sell to retailers for cash. Because these wholesalers do not have massive amounts of storage space and do not offer services, they can offer products at lower prices. They also do not often deliver products, so they do not have overhead related to transportation.
Drop shippers are retailers that use suppliers to ship products directly to the end consumer. In this case, retailers sell the product to the consumer, but they do not take possession (stock on a shelf, have inventory, etc.) of the product. The retailer only pays for the product after the consumer pays for and receives the order. Drop shipping is advantageous to retailers because they do not assume much risk since they do not take possession of the product. However, the profit margins for drop shippers are usually lower than utilizing other wholesalers because the wholesaler assumes all the risk.
Truck jobbers are wholesalers that make calls to retailers carrying goods on a truck. They carry a small inventory of the same product or small product lines, such as milk or bread. Because they have inventory in the truck, they can stop at a retailer, take the order, and deliver it within the same call. Truck jobbers are most often used for perishable foods that cannot sit in a warehouse waiting to be ordered.
The final, and least common, type of wholesaler is a manufacturer’s agent or manufacturer’s representative. Unlike the other types of wholesalers mentioned above, agents do not take possession of any product at any time. Rather, manufacturer’s agents are independent contractors who act as salespersons for multiple manufacturers to sell similar (but not competing) products to retailers. The agent provides advantages to both the manufacturer and the retailer. This is particularly true for smaller manufacturers where the expense and management of a sales force would likely not be feasible. Rather, an agent can take on the responsibility of working with the retailers or wholesalers to sell the product.
Prior to 2019, most of us did not give much thought to the supply chain or its channel members. We went to the store and were welcomed with endless aisles of the products we were used to purchasing. However, when the COVID-19 pandemic hit, the entire country became more in tune with channel members. Wholesalers were not unaffected by the disruption that the pandemic caused channel members, and current trends are on the horizon for wholesalers. Let’s look at these recent trends that affect wholesaling.
Globalization has been integrating global markets for the past several decades. And supply chains have had to adjust to keep up with these changes. With products available from around the world at lower costs and retailers demanding faster deliveries, many wholesalers have expanded their operations in response to the rise of the global economy. This comes with its own set of challenges, such as an expanded sales force and the need to understand other economies, cultures, and languages.
More recently, it has become apparent in the United States and around the world that supply chain participants were not prepared for disruptions such as those seen during the COVID-19 pandemic. Shortages of workers, products, containers, and long-haul truck drivers have proven to the industry that some major changes need to occur.
Regulatory Requirements and Complexity: With advancements in technology (and the need for consumer security) as well as the growing global economy, regulatory requirements also increase—and become more complex. Wholesalers must understand such requirements to conduct business legally. For example, wholesalers need a special license to distribute restricted goods, such as alcohol, controlled drugs, firearms, and pesticides. Depending on the type of transportation being used—such as tractor-trailers hauling containers—special licensing may need to be obtained.
Consumer Protection: Caveat emptor (Latin for “let the buyer beware”) was a long-standing motto in commercial transactions, one that implies the buyer purchases at their own risk. However, consumer protection laws are now woven into the fabric of the economy. Regulations help keep sellers honest and consumers protected. In general, consumer protection regulations exist to prevent unethical or dangerous business practices throughout the distribution channel. These practices range from false advertising to predatory lending to scams and frauds.
Product traceability refers to the ability to track all processes for a product, from the procurement of raw materials to production, consumption, and disposal. Increasing numbers of consumers want to know exactly where their products are coming from and whether they are ethically sourced. Aside from consumer demand, it is a crucial part of the distribution channel as product recalls become more common.
EXAMPLE
On January 6, 2022, the U.S. Department of Agriculture (USDA) announced a recall of over 25,000 pounds of ground beef. Because of product traceability, the specific ground beef under the recall was able to be traced to a specific location, production date, and lot. Without product traceability, there may have been no way of knowing where the ground beef came from, forcing consumers to discard purchases of products that were not tainted. Additionally, product traceability helps combat counterfeit products by finding the originating source.Challenges of Technology Evolution: The advancement and increased use of technology has brought about both challenges and opportunities for wholesalers. Product traceability has become increasingly easier, for example. Orders are easier to make and track. However, technology is expensive and comes with a learning curve for inexperienced users. The increased demand of consumers and retail customers requires wholesalers to keep up with technological advancements to stay competitive.
Just as retailers may face the temptation to be unethical toward consumers, wholesalers often find themselves in an ethical dilemma with their retail customers. Two common ethical issues that arise in wholesaling surround fairness and pricing.
IN CONTEXT
Fairness can certainly be a subjective term. What you and your sibling may each deem as fair is based on your individual perspectives and opinions. In wholesaling, and commerce in general, the government has enacted regulations to maintain fairness in business practices. You have probably heard the term “monopoly.” In the United States, monopolies (the exclusive possession or control of the supply of or trade in a commodity or service) are considered unfair business practices and thus are largely against FTC regulations. If one or a few businesses control all an industry, the laws of supply and demand cease to exist because one company controls both. In the wholesaling industry, the same rules apply. If a wholesaler requires a retailer to sign very specific contracts that they will use no other wholesaler, the retailer is at the mercy of the wholesaler when it comes to everything surrounding their business’ livelihood.
Just as with fairness, wholesalers also need to pay close attention to their billing practices. Wholesalers and retailers agree on the billing method to be used in their contract. However, it is unethical for wholesalers to bill retailers for products never shipped or received, damaged products without recourse, or products not ordered.
EXAMPLE
In 1967 in Pasadena, California, the first Trader Joe’s was opened. Today, the retail grocery chain has 505 stores in over 42 states as well as an online presence. Trader Joe’s has always been committed to improving sustainability in its channel. Unlike many competitors in the grocery industry, Trader Joe’s donates 100 percent of its unsold products. It does not allow certain controversial products in the manufacturing of its private-label goods and continues to make organic products more accessible. Also, the company removed over 6 million pounds of plastic from packaging and still has high employee satisfaction rates. The ethical decisions of Trader Joe’s involve relationship building throughout the supply chain to ensure that each channel member upholds the high ethical standards that help enhance the customer experience. There are other supermarkets known for ethical practices. These include Natural Grocers, Sprouts, Costco, and Whole Foods.Source: THIS CONTENT HAS BEEN ADAPTED FROM OPEN STAX "PRINCIPLES OF MARKETING." ACCESS FOR FREE AT https://openstax.org/details/books/principles-marketing. LICENSE: CREATIVE COMMONS ATTRIBUTION 4.0 INTERNATIONAL.
