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Wholesalers before the internet used to be Big Foot, you never saw them so you questioned if they exist.
But after the internet, where even manufacturers now have a website, consumers can easily reach the manufacturers directly. Does that now make the wholesaler obsolete?
Absolutely not. So how does it work today?
What is a Wholesaler?
A wholesaler is essentially a middleman between a manufacturer and a retail establishment. Wholesalers obtain large quantities of products at a lower price and sell them to retailers or other businesses, which sell them from their e-commerce sites or storefronts, usually to end consumers.
How Wholesalers Make Money
Wholesalers buy products from manufacturers at a lower price than other businesses because they receive discounts for volume buying. They make money by selling these products to retailers for more than they paid, but still at a better price than the retailer can get directly from the manufacturer.
For example, a small business buying 100 dolls per month to sell in its store might have to pay $10 per doll to buy directly from the manufacturer. If the doll is sold for $12, the retail store makes only $2 per doll.
However, a wholesaler who buys 50,000 dolls a month from the same manufacturer can negotiate a better price of $4 per doll. If the wholesaler sells the doll to the retailer for $8, the wholesaler makes $4 from the doll, but so does the retailer selling that same doll to a consumer for $12.
Wholesaling in Practice
The practice of wholesale buying and selling is more complicated than indicated above because there are many other factors involved in the buying, selling, and distribution of products, such as:
- Business partners: The product supply chain between wholesalers and manufacturers can vary depending on the types of businesses they want to work with. They may choose to deal only with businesses that are able to buy particular volumes of merchandise or sign contracts to supply goods for definite periods of time.
- Import availability: Some of the most affordable products for retail sales come from wholesalers in other countries, and importing may be your best option for getting the products you want to sell. However, some wholesalers may not be willing to ship products to other countries, which could make it difficult for you to import products into a U.S. import business or a Canadian import business.
- Product distribution: Another factor is how products are distributed. Wholesalers don’t just sell products they receive to the next retailer. Some wholesalers break products down into smaller units, which are then sold to different retailers. Other times, they assemble goods as part of the wholesaling process.
While the most common type of wholesaling is between manufacturers and retailers, an increasing number of wholesalers sell to other wholesalers. A wholesaler may also sell materials to make goods, buying them from one manufacturer and selling them to another.
Note that wholesaling has also become a retail business model. Chains such as Costco operate on the premise that goods are sold to consumers “factory direct,” cutting out the wholesaler and passing on the goods at lower prices.
Reasons to Use a Wholesaler
A common question about wholesaling is, “Why have one at all?” Why not buy direct from the manufacturer at the discount price? Using the doll example, buying the dolls directly from the manufacturer at $4 each, the retail store would make a whopping $8 profit on each doll it sold for $12.
The reason this doesn’t happen is that manufacturers give wholesalers better prices because they buy in greater quantities. For a small business to work with a manufacturer, it would need to buy in volumes that most retailers cannot afford. A small store may not be able to sell 50,000 dolls to its base of consumers, whereas a wholesaler generally sells to other retailers.
Along with buying large quantities of a product comes the need for storage. Most retail establishments don’t have a warehouse in which to store 50,000 dolls.
Is Wholesaling a Good Business?
Whether or not wholesaling is a good business for you depends on your goals and resources. In general, it’s a viable business option if you have the capital investment to get started and maintain your inventory, as well as contacts with retailers that will purchase your products.
Key Benefits of Wholesale
Instead of selling the products directly to the customers; the manufacturer chooses to sell his goods and products to the wholesaler. Here are some of the key benefits of wholesale if one is interested in the wholesale business;
Wholesale means buying a huge bulk of products at a low price; it’s often 50% off the selling price and then setting the manufacturer’s price as a sale price. In other words, round about 50% profit on the sale of the product.
Brand Creation and Propagation
Wholesalers usually rebrand the product when it comes under their umbrella. Shopping malls, grocery stores, and marts are a very good example of wholesale rebranding because they don’t manufacture any products, instead, they add a label of their store line to brand themselves.
The wholesaler gets the opportunity to be in direct contact with the manufacturer and the customer at the same time, which gives him an opportunity to brand himself and remove the manufacturer out of the picture by putting his brand label.
Become an Expert
Being directly in contact with the customers, you’ll observe which manufacturing product is selling more. Then you can use this knowledge to your own business advantage and focus only on that specific product which would attract more customers to your store.
Wholesaling provides you an opportunity to diversify the market risk by starting with the sale of running items i.e. pencils, legal pads, etc. Once your wholesale brand starts growing, then you can expand your market share by adding some bigger items which are in demand.
Build Supply Network
By dealing with different products and manufacturers at the same time; it helps you to compare different aspects of manufacturers like quality, timely delivery, etc. Once you’re familiar with all the suppliers’ networks, then you can build your own network of suppliers who’ll deliver you the quality product on time. So, you can deliver the same thing to your customers.
Functions of Wholesale
A wholesaler performs the following functions;
Buying and Assembling
Wholesaling begins with choosing a reliable supplier or a manufacturer and then buying goods and products from him at a bulk quantity; sometimes, it involves importing products from abroad.
Now, the wholesaler has the product, the next step is to store the product in the warehouse for a considerable time. Once the demand is created in the market, then the wholesaler can make the product available to retailers and customers.
As we know that wholesalers buy products in a bulk quantity; then they sub-classify it into smaller lots or packages to distribute it to the smaller business and retailers by tagging their wholesaling brand name on it.
Many wholesalers provide transportation services for the delivery of products from the warehouse to the retailers; transportation not only adds value to the product but also makes it easier for the retailers.
A very important function of wholesaling is that the wholesalers usually buy products from the manufacturers on a cash basis; then they offer credit to the retailers. Both parties are in short of money; maintaining this cash flow and financing both parties put wholesaler at a very important position.
Greater profit of wholesaling also comes with bearing the greater risk as well. For instance, how long the product has to be stored in the warehouse, some products can be damaged with time. A wholesaler is the one who absorbs all the risks.
Types of Wholesalers
There are different types of wholesalers who deal with different products; some of them are as follows;
Merchant wholesalers are the ones who don’t have any prior knowledge of the product; what they know is the list of profitable items. They deal with all of the kinds of goods and products and then sell it to the distributors, resellers, retailers and etc.
As the name implies, this type of wholesaler often deals with generals items of different products from a variety of manufacturers and suppliers for a range of customers. They usually buy product in a bulk quantity, then sell it in a small quantity to the retailers or small business owners over a period of time.
Special wholesalers are very knowledgeable about their product because they are very precise and specific about their product category and industry. They may have multiple suppliers of the same product category, but the product category and industry doesn’t change with manufacturers and suppliers.
Cash and Carry Wholesalers
Cash and carry wholesalers fall in the line of limited wholesaler’s type who offers very limited services to their resellers and retailers. It is because of fast-moving and subtle products like the retailers have to get the product by themselves, no delivery service. For instance, flowers, fruits, vegetables and etc.
Discount wholesalers usually deal with off seasoned, returned and discontinued products; then selling it by offering some discounts to attract the retailers and customers.
Dropshipping is a type of wholesalers that directly delivers the products to the customers, but they use the online platform and traffic of retailers to approach their target customer. In order to do that they sign an online contract with the retailers to make things run smoothly.
This type of wholesaler sells products online by offering a discount on certain products. They don’t have overhead costs like office, building and etc, by reducing such costs they make a profit out of a discounted price.
Examples of Wholesalers
The simplest example of wholesale chain includes manufacturer, wholesaler, retailer and consumer. But there are wholesalers who directly sell to consumers. For example, Costco Wholesale Corporation offers bulk quantity of goods at a discounted price.
Another example of wholesale business is Amazon and Ali Baba. These two b2b marketplaces connect manufactures, wholesalers and buyers. Wholesalers attract buyers because they have the luxury to offer products at lower prices than the retailers and luxury retail store, because they use warehouses which minimize overhead and marketing cost.