What is Wholesaling ?
A comprehensive process of selling goods and services to the people who buy those goods or services for business use or resale is called as wholesaling. The entire activity of wholesaling does not include retailers, farmers, and manufacturers as they are basically involved in production activities. A wholesaler is a person who is engaged in the wholesaling activities.
Definition of Wholesaling
According to American Marketing Association :
"Wholesalers sell to retailers or other merchants and or industrial, institutional and commercial users but they do not sell in significant amounts to ultimate consumers".
According to Philip Kotler :
"Wholesaling consists of the sale and all activities in selling goods or services to those who buy for resale or business use".
According to S.E. Thomas :
"The wholesaler or the wholesale trader is a trader, who purchases goods in large quantities from manufacturers and resells to retailers in small quantities".
According to Cundiff and Still :
"The wholesalers buy and resell merchandises to retailers and other merchants and to industrial, institutional and commercial users, but do not sell in significant amount to ultimate consumers".
The working principle of any kind of wholesaler (either freelancer or associated with company) is to generate optimum results for efforts taken. They generally have small margins and are expected to maximize effectiveness of services offered and reduce inaccuracy in operations.
Functions of Wholesalers
Functions of wholesalers are as follows :
1) Sales and Promotion :
Wholesalers have their very own sales-force. Wholesalers render the services of their sales-force to the manufacturers to help them reach several business customers operating at a relatively smaller scale at a reasonably low cost. As wholesalers have good contacts, it is usually observed that purchasers rely on them more than a remote manufacturer.
2) Buying and Assortment Building :
A substantial amount of work a customer does is done by a wholesaler on their behalf by way of choosing the products and preparing a mixed bag of all those products as needed by the customer.
3) Bulk Breaking :
Wholesalers can save big time for their buyers through purchasing products in bulk, i.e., large carload stacks, and then dividing this bulk into smaller units as per individual requirements.
4) Warehousing :
The suppliers and customers do not have to bear the inventory costs because wholesalers hold inventories, which decrease inventory costs as well as the risks associated with them.
5) Transportation :
Because of selection of a prime location for conducting business, a wholesaler can generally deliver the goods faster to the buyers as they are located closer to them.
6) Financing :
Wholesalers finance suppliers by adopting the policy of early ordering and paying all the bills punctually. They also finance customers by granting credit.
7) Risk Bearing :
As wholesalers own the title of the manufacturers, they bear the risk of all the consequences. Cost of all kinds of flaws (like spoilage, damage, theft, obsolescence, etc.) is borne by wholesalers.
8) Market Information :
All relevant information about the market like new products, competitive position, pricing policies and developments are conveyed to the suppliers or manufactures by the wholesalers. They also communicate required information to the customers about variety of products.
Types of Wholesalers
The different types of wholesaling or wholesale structure include :
Merchant Wholesalers
Merchant wholesalers are those who have independently owned businesses that take title to the goods they deal with. Such kind of merchant wholesalers are known as distributors, jobbers or mill supply houses. A merchant wholesaler is an institution that purchases commodities from producers and re-sells them for business use, to other wholesalers, retailers and government agencies. Every merchant wholesaler takes title to the commodities they sell. They can be further categorized into full service wholesalers and limited service wholesalers:
1) Full-Service Wholesalers :
The most extensive range of wholesaling function is performed by full service wholesalers. The reasons due to which customers rely on full-service wholesalers are the availability of products, breaking large quantities into smaller ones, product varieties, technical advice and services and financial assistance. The Full-Service wholesalers can be categorized into following types :
i) General Merchandise (Full-line) Wholesalers :
General Merchandise (full-line) wholesalers have a variety of products available with them. These varieties cover almost all items required by their customers.
ii) Specialty-Merchandise (Limited-Line) Wholesalers:
Focusing on rather limited range of products, Specialty Merchandise (limited line) wholesalers have wide varieties in that particular range of products.
iii) Rack Jobbers :
The job of furnishing the shelves or racks on which products are exhibited is done by rack jobbers. Rack jobbers own the products on the shelves and they undertake the activity of selling these products on consignment basis in which the clients pay from the proceeds received after reselling the goods.
iv) Franchise Wholesaling :
As the name suggests, under franchise wholesaling, independent retailers get associated with an existing wholesaler and make use of the name, store design, business format, and purchase system of the wholesaler.
v) Wholesale Cooperatives :
Member firms. possess wholesale cooperatives to give extensive support and manage functions.
2) Limited-Service Wholesalers :
The limited service wholesalers deliver comparatively less marketing services than full-service wholesalers. These wholesalers have few specialized functions and the remaining functions are performed by the producers The producers may further pass on these functions to the customers or other intermediaries. The limited-service wholesalers can be of following types :
i) Truck Wholesalers :
Truck wholesalers transport a limited line of products directly to the customers for immediate assessment and purchase. Sometimes, they may also be known as truck jobbers.
ii) Mail-Order Wholesalers :
These types of wholesalers make use of catalogs to sell products to the business buyers and retailers instead of employing sales representatives
iii) Cash-and-Carry Wholesalers :
Such types of wholesalers are intermediaries, where small businesses are their customers. These businesses pay cash and in return they avail transportation services. Hence, they are known as cash and-carry wholesalers.
iv) Drop Shippers :
They never take actual possession of goods but only take title to the goods and negotiate sales. They are also called as desk jobbers.
Merchandising Brokers and Agents
Merchandising brokers and agents do not provide large number of services like merchant wholesalers. They are not entitled with the ownership of the product but negotiate sales for manufacturers for whom they are acting as an agent.
1) Brokers :
Brokers are the medium through which buyers and sellers are brought together. Brokers do not own the title to the goods but they only receive commission on sales. They own almost negligible rights to interfere in the sales policies of the firm. Brokers are located in various markets including commodities, real estate, insurance and agriculture where the information that would join buyers and sellers is available in very less quantity.
2) Agents :
Agents usually represent buyers or sellers on a more persistent basis and agents can be categorized into following types :
i) Selling Agents :
Selling agents are responsible for marketing the complete output produced by a manufacturer of every item of a particular product line. Besides taking title to goods, selling agents perform every wholesaling activity. These agents are time and again used as a substitute for marketing departments and commonly perform the sales function for many producers at the same time.
ii) Commission Merchants :
Local sellers, provide goods on consignment to the commission merchants and further these merchants negotiate sales in the central market. These agents enjoy comprehensive powers concerning prices and terms of sales and are also known as factor merchants. Commission merchants have ability to negotiate and obtain the best possible price in the current market conditions.
iii) Manufacturers/Service Providers Agents :
These agents work for many manufacturers and/or service providers' and transport complementary and non competitive products in selected areas. These agents do not provide credit facility on product but they provide delivery and storage services. They also offer research facility as well as support in planning. Last but not the least, they provide merchandising and promotional support.
iv) Food Brokers :
As the name suggests, food brokers bring together buyers and sellers of food and related products, in order to complete a sale. These brokers are associated with a limited number of food producers and function in particular location.
v) Commercial Stock Brokers :
Acting as licensed sales representatives, commercial stock brokers are individuals who take orders, suggest business clients and then obtain stock and/or bonds for their clients.
Manufacturers Wholesalers
Merchant wholesalers operations are similar manufacturers' sales, branches and offices :
1) Sales Branches :
Sales branches to are intermediaries possessed by manufacturers that sell products. They are also responsible in providing support services to the manufacturers' sales representatives. Such branches are usually located away from manufacturing units, in areas where large number of prospective customer are available and demand for the products and services is high. They perform different functions such as deliver goods, offer credit, extend promotional aid and provide other related services.
2) Sales Offices :
The operations of sales offices are owned by manufacturer of product; they generally hire an agent for offering their services. Sales offices do not carry any inventory, and similar to sales branches, they are located away from the manufacturing units. They may sell products which will enhance the product line of the manufacturing firm.
For example, firms like Campbell Soup offer a large variety of services to customers, their wholesaler and retail customers.
Importance of Wholesaling
Wholesaling is important to different parties (manufacturers, retailers and customers or society) differently. This is described below :
1) Importance for Retailers :
The entire activity of wholesaling is very important for retailers. Wholesalers buy goods in large quantities and then sell it to retailers in smaller quantities. They also deliver goods to retailers. Because of wholesalers, the retailers are able to buy different kinds of products under one roof. If wholesalers are not there, the retailers would have to contact number of manufacturers for their products. Following points reflect the importance of wholesaling to the retailers :
i) Promotion :
There are some wholesalers who promote the products which they sell to retailers. Generally, they perform this work at a fixed cost or for free. Variety of display materials and and props are used by wholesalers the product and stimulate impulse promote the to buying. They assist retailers to make impressive and compelling shelf, counter and window displays. In order to make the promotion effective, sometimes wholesalers appoint their own men at the retail counter.
ii) Market Information :
Significant information about the market and the many customers is transferred to the retailers by the wholesalers. Wholesalers having contacts with the local businesses and suppliers are able to collect reasonable information about the market, i.e., about supply conditions, pattern of demand, trade related changes and developments, prices, industry personnel, etc. Here, sales-forces of the wholesalers play an important role in conveying (informally) such information to the retailers. Wholesalers act as clearinghouse as they provide market information to attached suppliers as well as retailers.
iii) Financial Aid :
Wholesalers usually provide a kind of financial aid to the retailers. Retailers tend to take such financial aid for granted. Wholesalers facilitate the retailers to keep their own stock investments less in context of sales generated, by making frequent and expeditious deliveries. This indirect financial aid forwarded by wholesalers enables the retailers to decrease their amount of operating capital requirement.
2) Importance for Manufacturers :
Wholesalers are important to manufacturers in the same way as they are important to the retailers. Following points describe the importance of wholesalers to the manufacturers :
i) Salesforce for Retailers :
Wholesalers offer their own sales-force service for the manufacturers. They direct their sales-force to communicate to the retailers on behalf of the manufacturers and save their time, money, and effort. Due to geographical dispersion, wholesalers' sales-force is able to reach different regional retailers.
ii) Reducing Inventory Costs :
Manufacturers have large quantities of finished goods that they have to store. It causes a significant inventory cost to them. Here, wholesalers. buy in bulk from the manufacturers and store products in their warehouses, and thus, reduce the storage cost as well as the finished goods inventories of the manufacturers.
iii) Avoiding Credit Risks :
The issue of credit risk of the manufacturers is eliminated by the wholesalers as they (wholesalers) offer credit on their own. It is the wholesalers who bear the risk of non-payment or collect payment form the retailers. Thus, manufacturers become free from risk associated with credit.
iv) Market Information :
Along with providing information to the retailers, wholesalers also transfer relevant market information to the manufacturers. The information may include current trends of consumer demand, consumer buying behavior, other competitive manufacturers and their strategies etc.
3) Importance for the Society :
Wholesalers are also important for the society as they offer variety of goods at required time in required quantity. Following points describe the importance of the wholesaler for the society :
i) Support to Economic Growth :
With its supportive functions focused towards the retailers, manufacturers and the customers, it contributes to the overall development of the business. Due to number of wholesalers, the manufacturers are able to produce and distribute their goods and services to the large extent, thus, enabling the growth of the business and commerce of the nation. Therefore, economic growth of a nation is supported by wholesalers.
ii) Facilitating Mass Consumption :
It is the wholesalers who facilitate mass consumption of the goods produced by the manufacturers. Being present in local areas, it becomes very easy for the wholesalers to distribute the manufacturers' goods at the large scale. Due to large scale operations and customized services, wholesalers offer low cost of distribution across various parts of the globe.
iii) Contribution to other Business and Employment :
More employment opportunities are generated by the wholesaling business as it links with different other businesses like banking, transportation, insurance etc. Moreover, it contributes to their development.
iv) Sustaining Market Equilibrium :
Wholesalers assist in maintaining stability of prices and general equilibrium of the market by helping manufacturers in evaluating consumer requirements and offering stocks in required locations at required time. This can be achieved by balancing of supplies against demand. Practically, they are the key support of a free market economy.
Marketing Decisions for Wholesalers
Wholesaler marketing decisions include following important decisions :
1) Target Market and Positioning Decision :
Wholesalers cannot serve every type of customer. Therefore, like retailers, they need to define their target markets and position themselves in that particular market in effective way. They may select a specific target group depending on size of customers mainly large retailers, or can serve credit services to customers who require credit, or offer product to customers through convenience stores etc. Target groups help in identifying promising customers, designing better offers for them and building long-term relationships with them. Different initiatives like sponsoring a voluntary chain, designing systems for management training and advising, recommending automatic systems for reordering, etc., may be taken by the wholesalers. Customers who bring less profit can be reduced by adding service charges on less amount of purchase or by setting a limit for purchase (for encouraging large amount of purchase).
2) Marketing Mix Decisions :
Marketing mix decisions involve decisions related with the 4Ps of marketing. A wholesaler should decide about the product, price, place and promotion decision which are as follows :
i) Product Decisions :
While making the product related decisions, the wholesalers need to decide about the variety of products and services they want to offer. It is very difficult for the wholesalers to undertake full line services or to stock more inventories for immediate sales. However, they have to manage this difficult situation and maintain adequate inventory, else they would lose their prospective profits. Nowadays, wholesalers are reducing the number of product lines they are executing and selecting to continue only those which are profitable ones. They are also giving significant consideration to those services which are helping in establishing strong customer relationships as well as the services which should be dropped down or accompanied with some service charges.
ii) Price Decisions :
Pricing decision is one of the most significant decisions for a wholesaler. The general criterion followed in pricing is to mark-up the price of product and services by 20 per cent. After excluding expenses (near about 17 per cent), the profit margin remains only 3 per cent. The profit margins in grocery items is slightest, i.e., less than 2 per cent. Hence, all the wholesalers try to adopt new approach for pricing Various new pricing techniques are being considered by them. Sometimes, for attracting new customers, wholesalers simply reduce the profit margin on certain product lines.
iii) Place Decisions :
Finally, place decision is also very crucial for a wholesaler as he must be very cautious while selecting his presence at a suitable location or on internet. It is often observed that wholesalers prefer locations with low rent, low taxes and are prone to invest very less money in their systems, equipment and buildings. Correspondingly. their order-processing and material-handling systems are usually obsolete. However, recent times, have witnessed many wholesalers who are operating on a large scale and have a progressive approach towards doing business, acknowledging increasing costs by investing in online ordering systems and automated warehouses. They are becoming technologically equipped so as to become more efficient. These processes function in the following manner orders received from customers are fed from the retailer's system directly into the wholesaler's system. Then the goods are collected by mechanical devices and automatically transferred onto a shipping platform where they are assembled. Now wholesalers are operating on a larger scale making use of latest technology for billing, accounting, inventory control and forecasting.
iv) Promotion Decisions :
Promotion decision is also very significant, yet many wholesalers do not give much importance to promotional activities. Various promotional activities conducted by wholesalers such as personal selling, trade advertising, public relations and sales promotion are usually unplanned and disorganized. They still give more importance to personal selling (one to one) instead of targeting a whole segment or group at a time. Hence, the wholesalers need to change this traditional approach and go for modern techniques of promotions, some of which are used by retailers.