A wholesaler is someone who buys large quantities of good and sells them to others for distribution, rather than selling directly to the ultimate consumers. Wholesalers are subject to various federal and state laws, depending on the type of goods they deal in.
The following is an example of a state statute involving cigarette wholesalers:
"A cigarette wholesaler's license issued pursuant to SDCL 10-50 may not be issued to any person, firm, or corporation which operates both wholesale and retail outlets where goods and commodities, including cigarettes, are sold both for resale and to consumers."
Wholesalers are "middlemen." Wholesaling is the selling of merchandise to anyone—person or organization—other than the end consumer of that merchandise. Wholesalers represent one of the links in the chain along which most goods pass on their way to the marketplace. As intermediaries between producers and consumers of goods, wholesalers facilitate the transport, preparation of quantity, storage, and sale of articles ultimately destined for customers.
The U.S. Department of Labor describes the important role that wholesalers play in our national economy in a report on the trade simply titled "Wholesale Trade." The report summarizes the wholesalers' role within the economy this way: "They provide businesses a nearby source of goods made by many different manufacturers; they provide manufacturers with a manageable number of customers, while allowing their products to reach a large number of users; and they allow manufacturers, businesses, institutions, and governments to devote minimal time and resources to transactions by taking on some sales and marketing functions—such as customer service, sales contact, order processing, and technical support—that manufacturers otherwise would have to perform."
For the most part, wholesale businesses are small businesses. According to the U.S. Bureau of Labor Statistics, in 2004, fewer than 1.5 percent of wholesale businesses in the United States employed 100 or more people, and 90 percent of wholesale businesses employed fewer than 20 people.
Wholesalers are successful only if they are able to serve the needs of their customers, who may be retailers or other wholesalers. Some of the marketing functions provided by wholesalers to their buyers include:
- Offering the goods of a producer to resellers in appropriate quantities.
- Providing wider geographical access and diversity in obtaining goods.
- Ensuring and maintaining quality verification with the goods that are being obtained and resold.
- Providing cost-effectiveness by reducing the number of producer contacts needed.
- Offering ready access to a supply of goods.
- Assembling and arranging goods of a compatible nature from a number of producers for resale.
- Minimizing buyer transportation costs by buying goods in larger quantities and distributing them in smaller amounts for resale.
- Working with producers to understand and appreciate consumerism in their production process.
TYPES OF WHOLESALERS
There are a number of ways to classify wholesalers. The categories used by the U.S. Department of Commerce in preparing its various Economic Census Reports are the ones used most often. The three categories used in the Census of Wholesale Trade are: 1) merchant wholesalers; 2) agents, brokers, and commission merchants; and manufacturers' sales branches and offices.
Merchant wholesalers are firms engaged primarily in buying, taking title to, storing, and physically handling products in relatively large quantities and reselling the products in smaller quantities to retailers; industrial, commercial, or institutional concerns; and other wholesalers. These types of wholesaling agents are known by several different names, depending on the services that they provide. These merchant wholesaler names include, jobber, distributor, industrial distributor, supply house, assembler, importer, exporter, or simply, wholesaler.
The merchant wholesaling category can be further broken down. There are two basic kinds of merchant wholesalers: 1) service (sometimes referred to as full-service wholesalers) and 2) limited-function or limited-service wholesalers. Businesses in the latter category, which itself is often divided up into little niches, offer varying levels of service in such areas as product delivery, credit bestowal, inventory management, provision of market or advisory information, and sales.
Agents, Brokers, and Commission Merchants
Agents, brokers, and commission merchants are also independent middlemen who usually do not take title to the goods in which they deal, but instead are actively involved in negotiating and other functions of buying and selling while acting on behalf of their clients. Commission merchants typically deal with agricultural goods and commodities like cement, steel, or coal and the like. These types of wholesalers are usually compensated in the form of commissions on sales or purchases. Agents, brokers, and commission merchants usually represent the non-competing products of a number of manufacturers to several retailers. This category of wholesaler is particularly popular with producers with limited capital who can not afford to maintain their own sales forces.
Manufacturers' Sales Branches and Offices
Manufacturers' sales branches and offices are owned and operated by manufacturers but are physically separated from manufacturing plants. They are used primarily for the purpose of distributing the manufacturers' own products at the wholesale level. Some have warehousing facilities where-inventories are maintained, while others are merely sales offices. Some of them also wholesale allied and supplementary products purchased from other manufacturers.
THE CHANGING LANDSCAPE OF WHOLESALING
Two factors appear to be influencing the wholesale trade industry in the first decade of the 21st Century, consolidation within the trade and the spread of new technology. The trend that has emerged in recent years, towards consolidation of wholesale trade firms into fewer and larger companies, is likely to remain strong. The U.S. Bureau of Labor Statistics describes the trend as follows: "Globalization and cost pressures are likely to continue to force wholesale distributors to merge with other firms or to acquire smaller firms. As retail firms grow, the demand for large, national wholesale distributors to supply them will increase. The differences between large and small firms will become more pronounced as they compete less for the same customers, and instead emphasize their area of expertise. The resulting consolidation of wholesale trade into fewer, larger firms will reduce demand for some workers, especially office and administrative support workers, as merged companies eliminate redundant staff."
The other factor that is causing a great deal of change within the wholesale trading industry is the spread of new technologies. The use of new technologies is helping wholesalers to better serve their customers and in many cases develop systems that interact automatically with those clients.
Inventory management is one area in which wholesalers may be able to offer added value to their clients on both ends of the relationship, their suppliers and their customers.
The newest trend in the area of inventory control and management are vendor-managed inventory (VMI) systems and agreements. One way in which a wholesaler can participate in a VMI system is by agreeing to take over the inventory management for its customers. Based on daily reports sent automatically from the customer to the wholesaler or distributor, the wholesaler replenishes the customers' stocks as needed. The wholesaler sees what is selling in the customers' place of business and makes all necessary arrangements to send the customer new products or parts automatically. No phone calls or paperwork are necessary allowing the supply chain process to remain uninterrupted.
The benefits that can accrue to both parties in a VMI arrangement are noteworthy. Both parties should experience a savings of time and labor. The customer is able to maintain fewer items in stock and can rely upon a steady flow of products or parts. The wholesaler benefits in two ways. First, the wholesaler is able to better anticipate the customers' requirements. Second, the wholesaler benefits from a strong relationship with the customer, one that is more difficult to alter than would be a vendor-customer relationship in which such automated systems did not exist.
New radio frequency identification (RFID) technology has the potential to streamline the inventory and ordering process further and replace the need for manual barcode scans and eliminate most counting and packing errors. As RFID spreads it may lessen demand for administrative workers, particularly order, stock, and shipping, receiving, and traffic clerks. Not all wholesalers will implement this technology though, as it may not be cost-effective for some firms, and workers will still be needed to maintain these new systems.
The 21st century supply chain will create a strong demand for computer specialists in the wholesale trade industry. They will be needed in order to manage evermore complex and automated inventory systems when dealing with both their suppliers and their customers. Knowledge of information technologies will also be required by wholesalers in order to most effectively leverage the benefits of e-commerce and manage electronic data interchanges (EDI) systems. If the wholesalers do not keep up with these changes in the tools of the trade, they run the risk of being bypassed by technically savvy manufacturers who wish to deal directly with retailers. Wholesalers planning for the future should stay abreast of all the ways in which they can add services to their mix of offerings, to customers on both ends of their business, those from whom they buy and those to whom they sell.
SEE ALSO Distribution Channels; Inventory Management
Hegarty, Ronan. "Retailers Feel Pinch of Rising Wholesaler Costs." Grocer. 24 September 2005.
U.S. Department of Commerce. Bureau of the Census. "Monthly Wholesale Trade." Available from http://www.census.gov/svsd/www/mwts.html. 7 April 2006.
U.S. Department of Labor. Bureau of Labor Statistics. "Wholesale Trade." Available from http://stats.bls.gov/oco/cg/cgs026.htm. Retrieved on 8 May 2006.
"Wholesaling." Do-It-Yourself Retailing. November 2000.
Hillstrom, Northern Lights
updated by Magee, ECDI