B. Wholesaling

Wholesaling includes all activities involved in selling goods and services to those buying for resale
or business use. We call wholesalers those firms engaged primarily in wholesaling activity.
Wholesalers buy mostly from producers and sell mostly to retailers, industrial consumers, and
other wholesalers. But why are wholesalers used at all? For example, why would a producer use
wholesalers rather than selling directly to retailers or consumers? Quite simply, wholesalers are
often better at performing one or more of the following channel functions:
• Selling and promoting: Wholesalers' sales forces help manufacturers reach many small
customers at a low cost. The wholesaler has more contacts and is often more trusted by the
buyer than the distant manufacturer.

• Buying and assortment building: Wholesalers can select items and build assortments needed by
their customers, thereby saving the consumers much work.
• Bulk-breaking: Wholesalers save their customers money by buying in carload lots and
breaking bulk (breaking large lots into small quantities).
• Warehousing: Wholesalers hold inventories, thereby reducing the inventory costs and risks of
suppliers and customers.
• Transportation: Wholesalers can provide quicker delivery to buyers because they are closer
than the producers.
• Financing: Wholesalers finance their customers by giving credit, and they finance their
suppliers by ordering early and paying bills on time.
• Risk bearing: Wholesalers absorb risk by taking title and bearing the cost of theft, damage,
spoilage, and obsolescence.
• Market information: Wholesalers give information to suppliers and customers about
competitors, new products, and price developments.
• Management services and advice: Wholesalers often help retailers train their salesclerks, improve
store layouts and displays, and set up accounting and inventory control systems.

a. Types of Wholesalers

Wholesalers fall into three major groups : merchant wholesalers, brokers and agents, and manufacturers'
sales branches and offices. Merchant wholesalers are the largest single group of wholesalers, accounting
for roughly 50 percent of all wholesaling. Merchant wholesalers include two broad types: fullservice
wholesalers and limited-service wholesalers. Full-service wholesalers provide a full set of
services, whereas the various limited-service wholesalers offer fewer services to their suppliers and
customers. The several different types of limited-service wholesalers perform varied specialized
functions in the distribution channel.

i. Merchant wholesalers

Independently owned businesses that take title to the merchandise they handle. In different trades
they are called jobbers, distributors, or mill supply houses. Include full-service wholesalers and limitedservice
wholesalers:

• Full-service wholesalers

Provide a full line of services: carrying stock, maintaining a sales force, offering credit, making
deliveries, and providing management assistance. There are two types:

Wholesale merchants:

Sell primarily to retailers and provide a full range of services. Generalmerchandise
wholesalers carry several merchandise lines, whereas general-line wholesalers carry one or two
lines in greater depth. Specialty wholesalers specialize in carrying only part of a line. (Examples: health
food wholesalers, seafood wholesalers.)

Industrial distributors:

Sell to manufacturers rather than to retailers. Provide several services,
such as carrying stock, offering credit, and providing delivery. May carry a broad range of
merchandise, a general line, or a specialty line.

• Limited-service wholesalers:

Offer fewer services than full-service wholesalers. Limited-service wholesalers are of several types:

Cash-and-carry wholesalers:

Carry a limited line of fast-moving goods and sell to small retailers
for cash. Normally do not deliver. Example: A small fish store retailer may drive to a cash-andcarry
fish wholesaler, buy fish for cash, and bring the merchandise back to the store.

Truck wholesalers (or truck jobbers):

Perform primarily a selling and delivery function. Carry a
limited line of semi perishable merchandise (such as milk, bread, snack foods), which they sell for
cash as they make their rounds to supermarkets, small groceries, hospitals, restaurants, factory
cafeterias, and hotels.

Drop shippers:

Do not carry inventory or handle the product. On receiving an order, they select a
manufacturer, who ships the merchandise directly to the customer. The drop shipper assumes title
and risk from the time the order is accepted to its delivery to the customer. They operate in bulk
industries, such as coal, lumber, and heavy equipment.

Rack jobbers:

Serve grocery and drug retailers, mostly in nonfood items. They send delivery
trucks to stores, where the delivery people set up toys, paperbacks, hardware items, health and
beauty aids, or other items. They price the goods, keep them fresh, set up point-of-purchase
displays, and keep inventory records. Rack jobbers retain title to the goods and bill the retailers
only for the goods sold to consumers.

Producers' cooperatives :

owned by farmer members and assemble farm produce to sell in local
markets. The co-op's profits are distributed to members at the end of the year. They often attempt
to improve product quality and promote a co-op brand name, such as Sun Maid raisins, Sunkist
oranges, or Diamond walnuts.

Mail-order wholesalers:

Send catalogs to retail, industrial, and institutional customers featuring
jewelry, cosmetics, specialty foods, and other small items. Maintain no outside sales force. Main
customers are businesses in small outlying areas. Orders are filled and sent by mail, truck, or other
transportation.

ii. Brokers and agents

Do not take title to goods. Main function is to facilitate buying and selling, for which they earn a
commission on the selling price. Generally, specialize by product line or customer types.

• Brokers:

Chief function is bringing buyers and sellers together and assisting in negotiation. They are paid by
the party who hired them, and do not carry inventory, get involved in financing, or assume risk.
Examples: food brokers, real estate brokers, insurance brokers, and security brokers.

• Agents:

Represent either buyers or sellers on a more permanent basis than brokers do. There are several
types:

Manufacturers' agents:

Represent two or more manufacturers of complementary lines. A formal
written agreement with each manufacturer covers pricing, territories, order handling, delivery
service and warranties, and commission rates. Often used in such lines as apparel, furniture, and
electrical goods. Most manufacturers' agents are small businesses, with only a few skilled
salespeople as employees. They are hired by small manufacturers who cannot afford their own field
sales forces, and by large manufacturers who use agents to open new territories or to cover
territories that cannot support full-time salespeople.

Selling agents:

Have contractual authority to sell a manufacturer's entire output. The
manufacturer either is not interested in the selling function or feels unqualified. The selling agent
serves as a sales department and has significant influence over prices, terms, and conditions of sale.
Found in product areas such as textiles, industrial machinery and equipment, coal and coke,
chemicals, and metals.

Purchasing agents

:Generally have a long-term relationship with buyers and make purchases for
them, often receiving, inspecting, warehousing, and shipping the merchandise to the buyers. They
provide helpful market information to clients and help them obtain the best goods and prices
available.

Commission merchants:

Take physical possession of products and negotiate sales. Normally, they are not employed on a long-term basis. Used most often in agricultural marketing by farmers
who do not want to sell their own output and do not belong to producers' cooperatives. The
commission merchant takes a truckload of commodities to a central market, sells it for the best
price, deducts a commission and expenses, and remits the balance to the producer.

iii. Manufacturers' and retailers' branches and offices

Wholesaling operations conducted by sellers or buyers themselves rather than through
independent wholesalers. Separate branches and offices can be dedicated to either sales or
purchasing.

Sales branches and offices:

Set up by manufacturers to improve inventory control, selling, and
promotion. Sales branches carry inventory and are found in industries such as lumber and
automotive equipment and parts. Sales offices do not carry inventory and are most prominent in
dry-goods and notions industries.

Purchasing offices:

Perform a role similar to that of brokers or agents but are part of the buyer's
organization. Many retailers set up purchasing offices in major market centers
Brokers and agents differ from merchant wholesalers in two ways: They do not take title to goods,
and they perform only a few functions. Like merchant wholesalers, they generally specialize by
product line or customer type. A broker brings buyers and sellers together and assists in
negotiation. Agents represent buyers or sellers on a more permanent basis. Manufacturers' agents
(also called manufacturers' representatives) are the most common type of agent wholesaler. The
third major type of wholesaling is that done in manufacturers' sales branches and offices by sellers
or buyers themselves rather than through independent wholesalers.

b. Wholesaler Marketing Decisions

Wholesalers have experienced mounting competitive pressures in recent years. They have faced new sources of competition, more demanding customers, new technologies, and more directbuying
programs on the part of large industrial, institutional, and retail buyers. As a result, they have had to improve their strategic decisions on target markets and positioning, and on the marketing mix—product
assortments and services, price, promotion, and place

i. Target Market and Positioning Decision

Like retailers, wholesalers must define their target markets and position themselves effectively—
they cannot serve everyone. They can choose a target group by size of customer (only large
retailers), type of customer (convenience food stores only), need for service (customers who need
credit), or other factors. Within the target group, they can identify the more profitable customers,
design stronger offers, and build better relationships with them. They can propose automatic
reordering systems, set up management-training and advising systems, or even sponsor a voluntary
chain. They can discourage less profitable customers by requiring larger orders or adding service
charges to smaller ones.

ii. Marketing Mix Decisions

Like retailers, wholesalers must decide on product assortment and services, prices, promotion, and
place. The wholesaler's "product" is the assortment of products and services that it offers. Wholesalers
are under great pressure to carry a full line and to stock enough for immediate delivery. But this
practice can damage profits. Wholesalers today are cutting down on the number of lines they carry,
choosing to carry only the more profitable ones. Wholesalers are also rethinking which services
count most in building strong customer relationships and which should be dropped or charged for.
The key is to find the mix of services most valued by their target customers.
Price is also an important wholesaler decision. Wholesalers usually mark up the cost of goods by a
standard percentage—say, 20 percent. Expenses may run 17 percent of the gross margin, leaving a
profit margin of 3 percent. In grocery wholesaling, the average profit margin is often less than 2
percent. Wholesalers are trying new pricing approaches. They may cut their margin on some lines
in order to win important new customers. They may ask suppliers for special price break when
they can turn them into an increase in the supplier's sales.
Although promotion can be critical to wholesaler success, most wholesalers are not promotion
minded. Their use of trade advertising, sales promotion, personal selling, and public relations is
largely scattered and unplanned. Many are behind the times in personal selling—they still see
selling as a single salesperson talking to a single customer instead of as a team effort to sell, build,
and service major accounts. Wholesalers also need to adopt some of the nonpersonal promotion
techniques used by retailers. They need to develop an overall promotion strategy and to make
greater use of supplier promotion materials and programs.
Finally, place is important—wholesalers must choose their locations and facilities carefully.
Wholesalers typically locate in low-rent, low-tax areas and tend to invest little money in their
buildings, equipment, and systems. As a result, their materials-handling and order-processing
systems are often outdated. In recent years, however, large and progressive wholesalers are reacting
to rising costs by investing in automated warehouses and online ordering systems. Orders are fed
from the retailer's system directly into the wholesaler's computer, and the items are picked up by
mechanical devices and automatically taken to a shipping platform where they are assembled. Most
large wholesalers use computers to carry out accounting, billing, inventory control, and forecasting.
Modern wholesalers are adapting their services to the needs of target customers and finding costreducing
methods of doing business.

KEY TERMS

Distribution channel

A set of interdependent organizations involved in
the process of making a product or service available
for use or consumption by the consumer or
business user.

Channel level

A layer of intermediaries that performs some work
in bringing the product and its ownership closer to
the final buyer.

Direct marketing channel

A marketing channel that has no intermediary levels.

Indirect marketing channel

Containing one or more intermediary levels.

Channel conflict

Disagreement among marketing channel members
on goals and roles—who should do what and for
what rewards.

Conventional distribution channel

A channel consisting of one or more independent
producers, wholesalers, and retailers, each a separate
business seeking to maximize its own profits even at
the expense of profits for the system as a whole.

Vertical marketing system (VMS)

 A distribution channel structure in which producers,
wholesales, and retailers act as a unified system. One
channel member owns the others, has contracts
with them, or has so much power that they all
cooperate

Corporate VMS

A vertical marketing system that combines
successive stages of production and distribution
under single ownership—channel leadership is
established through common ownership.

Contractual VMS

A vertical marketing system in which independent
firms at different levels of production and
distribution join together through contracts to
obtain more economies or sales impact than they
could achieve alone.

Franchise organization

 contractual vertical marketing system in which a
channel member, called a franchiser, links several
stages in the production-distribution process.

Administered VMS

A vertical marketing system that coordinates
successive stages of production and distribution, not
through common ownership or contractual ties but
through the size and power of one of the parties.

Horizontal marketing system

A channel arrangement in which two or more
companies at one level join together to follow a new
marketing opportunity.

hybrid marketing channel

Multi-channel distribution system in which a single
firm sets up two or more marketing channels to
reach one or more customer segments.

Intensive distribution

Stocking the product in as many outlets as possible.

exclusive distribution

Giving a limited number of dealers the exclusive
right to distribute the company's products in their
territories.

Selective distribution

The use of more than one, but fewer than all, of the
intermediaries who are willing to carry the
company's products.

Physical distribution/marketing logistics

he tasks involved in planning, implementing, and
controlling the physical flow of materials, final
goods, and related information from points of origin
to points of consumption to meet customer
requirements at a profit.

Distribution center

A large, highly automated warehouse designed to
receive goods from various plants and suppliers,
take orders, fill them efficiently, and deliver goods
to customers as quickly as possible.

Integrated logistics management

The logistics concept that emphasizes teamwork,
both inside the company and among all the
marketing channel organizations, to maximize the
performance of the entire distribution system.

Third-party logistics provider

An independent logistics provider that performs any
or all of the functions required to get their clients'
product to market.

Retailing

Retailing includes all the activities involved in selling
goods or services directly to final consumers for
their personal, no business use. Many institutions—
manufacturers, wholesalers, and retailers—do
retailing. But most retailing is done by retailers:
businesses whose sales come primarily from retailing.

Wholesaling

holesaling includes all activities involved in selling
goods and services to those buying for resale or
business use. We call wholesalers those firms
engaged primarily in wholesaling activity.