Wholesaling involves purchasing goods in bulk from the manufacturer and then reselling them to the retailer for a profit. A wholesaler is an individual or business connecting the producer with the retailer and constituting an integral component of the supply chain. They can sell a single product, a wide range of products, or both.
Besides physical product distribution, wholesalers are popular in banking and finance, telecommunications, and energy. They provide business-to-business (B2B) services to enterprises in industrial, commercial, and other professional sectors at discounted prices. Though they sell items to retailers at a higher price, it is still much less than the typical retail price.
Table of contents
- Wholesaling Meaning
- Wholesaling is the act of buying large quantities of items from a manufacturer and reselling them to merchants, who subsequently sell them to consumers.
- It is a regular occurrence in industries such as banking and finance, telecommunications, and energy, in addition to physical product distribution.
- The common types of wholesalers include merchant, merchandise agents or brokers, manufacturer’s mini offices or branches, and specialized.
- In some cases, producers and service providers can be wholesalers. However, given the cost of manufacturing and machinery, operating expensesOperating ExpensesOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit., and capital requirements, it might be difficult for a wholesaler to be a manufacturer.
How Does Wholesaling Work?
Wholesaling means purchasing large quantities of goods from the producer and reselling them to retailers, who then sell them to end-users. This entire process depends on the concept of economies of scaleEconomies Of ScaleEconomies of scale are the cost advantage a business achieves due to large-scale production and higher efficiency. .
To begin, a wholesaler invests in buying and storing large amounts of products. They then profit from selling those products in small quantities to merchants in a town, city, or marketplace. The concept gained traction in the 19th century, following the success of mass productionMass ProductionMass production is defined as the manufacturing of goods on a large scale without compromising on the quality. and marketing strategies.
There may be multiple wholesalers selling similar or diverse products from a single manufacturer. Similarly, a single wholesaler may sell to a large number of retailers. It is worth mentioning that companies, such as producers and service providers, can be wholesalers in some situations. Since wholesaling is a vital component in the distribution channelDistribution ChannelA distribution channel is a network of intermediaries that facilitates product delivery from the manufacturer to the end consumer and transfers payments from the buyer to the producer. In other words, it is the route through which a product travels from the production end to the point of consumption. , it has a significant economic impact.
Manufacturers connect with wholesaling companies to get their products efficiently delivered to retailers and ultimately consumers. The manufacturer, wholesaler, retailer, and consumer form the part of the supply chainSupply ChainA supply chain refers to a process beginning with the procurement of raw materials and the production of finished goods and ending with their distribution and sale. in this fashion, each functioning on their level and reliant on the one above them.
- In addition to wholesaling products, wholesalers perform many other functions, such as promotion, warehousing, transportation, financing, management and consulting, market intelligence, risk-taking, etc.
- Wholesalers have a greater price control due to operating or warehousing expenses that fluctuate based on process efficiency, costs of goods and services, and inventory turnover.
- They usually do not provide after-sales service or product support as they are not manufacturers and primarily sell competitive products.
Types Of Wholesaling
Based on their line of business and functions, the wholesaling definition can be of the following types:
#1 – Merchant
The wholesaler buys vast quantities of products from the producer, takes ownership of them, stockpiles them, and sells them to anyone other than the consumer. They work independently and are mainly of two types:
They provide a wide range of services, from inventorying to delivering products to retailers. Furthermore, they assist with credit and management issues and provide complete customer support to retailers. The most prevalent types of them are wholesale and industrial merchants:
- Wholesale Merchants: They sell to retailers and are common in hardware, pharmaceuticals, clothes, and seafood businesses.
- Industrial Merchants: They sell to producers and are common in consumer durables, engineering, machinery, and equipment businesses.
These wholesalers store products in a small place, operate on a smaller scale, and provide fewer services to manufacturers, suppliers, and end-users.
#2 – Merchandise Agents or Brokers
Merchandise agents are wholesalers who purchase products from various producers to resell them. They do not, however, take possession of the goods. Instead, they assist with their storage and display.
On the other hand, merchandise brokers act as a negotiation link between the manufacturer and the retailer. They profit from commissions earned on sales, as seen in insurance, stock, and real estate markets.
#3 – Mini Offices And Branches
The manufacturer sets up a new branch or opens a mini-office to take part in the wholesale process. These branches or offices directly take purchase ordersPurchase OrdersA Purchase Order (PO) serves as a legal document between buyer and seller, wherein, the buyer sends this contract that details the goods and services, date of delivery, payment terms as per the contract etc. and sell items to retailers. They focus on inventory managementInventory ManagementInventory management in business refers to managing order processing, manufacturing, storage, and selling raw materials and finished goods. It ensures the right type of goods reach the right place in the right quantity at the right time and at the right price. Thus, it maintains the product availability at warehouses, retailers, and distributors., advertising, and sales, with a specific geographic region in mind.
#4 – Specialized
These wholesalers specialize in a specific product or commodity and are well-versed in its benefits and drawbacks.
Let us look at a few examples of the wholesaling market to have a better understanding of the concept:
Martin runs a wholesale business of soft drinks and supplies and delivers hundreds of crates per day to fast-food restaurants and hotels in his neighborhood. He puts bulk orders for cold beverages with their producer at a substantially reduced price based on market demand.
To accommodate consumer demand, all restaurants and hotels contact him to deliver a particular number of batches at a discounted price. These restaurants then offer soft drink bottles to their customers at a higher price. As a result, Martin and his network of retailers maintain a relationship and profit from their lines of business.
Increased online sales have put downward pressure on branded product prices, forcing manufacturers to tighten their pricing rules. Prada, the Italian luxury fashion brand, has declared that it will cut the number of its wholesalers in Italy and other parts of Europe.
The initiative aims to set uniform prices for company products while minimizing discounts. The fashion house also feels that eliminating end-of-season incentives will provide pricing uniformity across different retail channels in an increasingly fragmented wholesaling market. Prada intends to expand its wholesale network to include e-retailers to increase profits and retain control of its brand for long-term growth.
The supply chain process benefits both the wholesaler and the retailer. However, reducing their presence in the network may help the company increase earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments.. For example, Nike made some substantial changes in its distribution strategy in 2019. Nike’s expansion plan included a reduction in the number of merchants selling its goods and the termination of supply agreements with independent stores.
Wholesaling In Finance
The wholesaling definition encompasses not only the physical distribution of goods but also banking and financial services. Wholesalers operate as underwriters or mutual fundMutual FundA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etc sponsors for asset management firms looking for investors.
Real estate developers, pension fundsPension FundsA pension fund refers to any plan or scheme set up by an employer which generates regular income for employees after their retirement. This pooled contribution from the pension plan is invested conservatively in government securities, blue-chip stocks, and investment-grade bonds to ensure that it generates sufficient returns., and other institutional clients, rather than merchants, are among their clientele.
Wholesaling vs Retailing
Both wholesaling and retailing are essential for a supply chain to function. A wholesaler focuses on maintaining partnerships with retailers and manufacturers and serves as a conduit between them. Retailers do not contact company officials directly in cases of product shortages, supply concerns, price rises, discount offers, or complaints. Instead, they go to the wholesaler.
On the contrary, retailing simply refers to a local shop owner who purchases large amounts of items from a wholesaler and sells them directly to consumers. End users see retailers as the company’s face.
When wholesalers acquire a good deal or a discount on purchasing items from a company, they pass it on to retailers. Merchants then pass it on to end customers, ensuring profit and fairness for all.
Other striking differences between wholesalers and retailers include:
- Wholesalers resale products in bulk and at lower prices to retailers, industries, and other groups since they incur no further expenditures. Due to additional costs, retailers sell items in smaller quantities and at higher rates to end customers.
- Wholesaling companies function as a go-between for producers and retailers. Retailers act as a go-between for wholesalers and customers.
- Wholesalers are often enormous, need a significant amount of money, and have lower profit marginsProfit MarginsProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. . Retailers are small businesses with low capital requirements and high-profit margins.
Frequently Asked Questions (FAQs)
In wholesaling, a person or business buys goods in large quantities straight from the manufacturer and resells them to retailers via various distribution channels. A wholesaler is a person or company linking the producer and the retailer and is a crucial aspect of the supply chain. They can sell a single item, a large selection of items, or both.
Connecting the manufacturer and the retailer, ensuring a seamless supply of goods, maintaining partnerships, and promoting products are the key objectives of wholesalers. Wholesalers execute a variety of tasks in addition to wholesaling products, including warehousing, shipping, financing, management and consulting, market intelligence, risk management, and so on.
The wholesaler directly deals with the manufacturer, and by leveraging economies of scale, they optimize profits. They can also choose and control various distribution channels and are eligible for pricing offers not available to retailers or consumers. They also assist manufacturers in getting their items to merchants and, eventually, customers promptly.
This has been a guide to Wholesaling and its meaning. Here we discuss how wholesaling works along with its functions, types, and examples and its differences from retailing. You can learn more from the following articles –