Written by Judy Li
McLane Co., Core-Mark Holding Co. Inc. and Harbour Wholesale Grocery – they are all top wholesalers in the U.S.. All of us have heard of Amazon and Alibaba, however, you probably haven’t thought of the mechanism behind the products you purchase from these superstores? In this blog, we will look into the magic of wholesale, which is the key to a seamless supply chain.
Before getting into how to sell wholesale to retailers, let’s figure out the answers to these questions – What is wholesale?, What is retailing? and How are wholesaling and retailing different?
Understanding 101: What is Wholesale?
In general, wholesale refers to a type of business in which wholesalers purchase goods in bulk directly from manufacturers or distributors and then resell them to other business users. ‘Wholesale’ is too big to be discussed simply through its definition. Therefore, we will try to figure out the classification of ‘wholesale’ and the mechanism between it.
Types of Wholesalers
There are various classifications of terminology in differentiating various types of wholesalers, here we will discuss the most popular-used way of classification by the Census of Wholesale Trade. The three common types of wholesalers are 1) Merchant wholesalers, 2) Agents, brokers, and commission merchants; and 3) Manufacturers’ sales branches and offices. We will look at what they are, how they work and their differences as well.
1. Merchant wholesalers
Merchant wholesalers, as the name itself suggested, is an institution that buys products from manufacturers and then resells them to other businesses, government agencies, other wholesalers, or retailers. They are often centralized and standardized companies which specialize in doing such buying and reselling businesses. By engaging in operations in the chain between producers and retailing merchants, they eliminate geographical and time barriers that separate producers and merchants.
Two popular forms of merchant wholesalers are full-service wholesalers and limited service wholesalers. They provide a full set of services and fewer options of services to their customers and suppliers respectively. Full-service wholesalers normally engage in reselling of customer durables or engineering products. Walmart discount stores, for example, are department stores which operate by linking up customers and manufacturers.
2. Agents, brokers, and commission merchants
When it comes to agents, brokers and commission merchants, the first example popped up in your mind would probably be insurance agents and financial planners. But what exactly are agents, brokers, and commission merchants? They often can be symbolized as several manufacturers of noncompeting products on a commission basis. Being independent middlemen of transactions between clients and service providers, they don’t usually take title to the goods or in most of the cases, services, in which they deal. They don’t carry inventory or bear risk as well. You may wonder, then what are their responsibilities?
Unlike merchant wholesalers, agent middlemen don’t bear any legal obligation of the goods they sell; not the services they promote. Sales agents are given contractual authority to provide market feedback and negotiation between customers and manufacturers. For example, property brokers and insurance agents, they engage in non-competing products of a few manufacturers. They also play an important role in product innovation and development.
3. Manufacturers’ sales branches and offices
Unlike merchant wholesalers, agents, brokers, and commission merchants, manufacturers’ sales branches and offices are not separated from manufacturers. Instead of segregation of ownership, manufacturers’ sales branches and offices are owned and operated by manufacturers also. They are used primarily for the purpose of distributing the manufacturers’ own products at the wholesale level. These types of wholesalers tend to be large companies which they operate in a chain of stores.
For instance, Nestle Hong Kong Ltd. and Nestle Dairy Farm HK Ltd, dairy products sold by Nestle are manufactured by farmers under the title of Nestle. They have warehousing facilities where inventories are maintained. Some other manufacturers’ sales branches and offices are merely sales offices without centralized warehouse and stock storage equipment. Some of them also collaborate with other manufacturers to supplement other products.
How does wholesale work?
After understanding different types of wholesaling, let’s investigate on the key procedures of wholesale transactions to find out how wholesale works. Selling wholesale to retailers is not an easy task. Wholesale can be straightforward, but it can also be complex in some circumstances.
Here we will investigate several operations in wholesale orders. For every business, the business provider asks himself the following questions before beginning – ‘What to serve?’, ‘Who to serve?’ and ‘How to serve?’. Wholesale works in this sense as well.
1) Locating wholesale targeted customers
How does wholesale work? Wholesaling basically begins with identifying who the wholesale customers are. Usually, customers who purchase goods in bulk are identified as ‘wholesale customers. Maintaining existing wholesale customers and discovering new customer segments often require the following five steps. 1) Let customers shop in their currency of choice. 2) Tailor price lists just for those customers. 3) Ramp up and strengthen customer relationship management. 4) Service customers faster, anytime and anywhere. 5) Make it easier for them to buy from wholesalers.
But, back to the point, wholesalers need to first define who they service. This can be done by both pull-through and push-through strategies – wholesalers recommending products to customers and customers sending request to wholesalers. Wholesalers then create a list of potential customers and likely send promotional information to them regularly when there are special offers and super sales. For example, a boutique fashion brand might request orders from clothing manufacturers. Wholesale then begins with the order placement of the boutique fashion brand, or other small businesses, or even institutions in other cases.
Some wholesale companies may adopt product line extension or brand extension to widen the scope of targeted customers a little bit more. For example, a boutique fashion might engage in luxurious clothing items originally. Its main customer group is targeted at high-income group. However, the brand can expand a bit more to luxurious accessories such as watches and bracelets to reach out to more customers in the future. But after all, every wholesale business needs to identify who they hope to serve by locating targeted customers.
2) Defining inventory locations
Inventory locations are the facilities that house your inventory. These can be physical, for instance, warehouse or showroom. These can be intangible as well – online shopping cart would be a case in point. For merchandizes which specialize in selling brick-and-mortar products, inventory locations are mainly warehouses and storage factories. They perform tasks such as counting how many inventories are available for sales, managing the quality control of inventories and as well as controlling the in and out of inventories within the organizational structure and customer’s receiving deck. For merchandizes which engage in transactions of virtual goods, they tend to own a real-time controlling data system to manage the availability of the goods or services they provide.
Quantities of inventories available in the stocks can be divided into two categories – On Hand and On Order. Inventories on hand refers to the total quantity of the item physically in stock. Inventories on order are defined as items expected to be added from purchasing deck to the wholesalers’ receiving decks. Note that inventories on hand is a bit different from inventories available, the latter means the quantity of items ready for sales. However, there is definitely a relationship between inventories on hand and inventories available. Inventories available equals to the number on hand minus number allocated. The number of items allocated refer to the items that have been reserved or sold to customers but not yet picked up or collected by them.
3) Validating wholesale prices
Now we understand more about wholesale inventories, but we haven’t met the term ‘wholesale prices’ yet. A lot of people misinterpret ‘wholesale prices’ as ‘distribution or retail price’. ‘Wholesale prices’ reflect the cost of an item when it is sold in bulk to large groups or distributors. ‘Distribution or retail price’ is the price point where business owner opts to extend to vendors who will then distribute the required products.
Validation of wholesale prices often involve cost and profit margin calculating and negotiation with manufacturers. Since wholesale prices are only slightly marked up from the manufacturers price, wholesalers need to double confirm the wholesale prices are accurate to avoid marking the price below manufacturers price, which results in a deficit in business.
4) Creating inventory transactions and invoices
Inventory transactions and invoices creation used to be conducted manually by human hands. However, thanks to the technological advancement, inventory transactions and invoices are tracked and managed by software in this day and age. Cutting-edge automation and advanced software system customize invoice and take care of every transactions. Such a centralized control system creates a real-time database for wholesalers to supervise on supplier’s account and quantity of inventory allocated.
Apart from the convenient automation, wholesalers also create a database template of inventory invoice in excel. The excel spreadsheet can act as a backup. Both of the automation system and spreadsheet allow wholesalers to enter items and corresponding purchasing information, in order to update during inventory.
5) Receiving payment and synchronizing with the system
Being as that, inventory available is not the same as inventory allocated. Once wholesalers receive payments from customers, inventory allocated will then be shipped to the customer’s receiving deck, provided that they are physically tangible products. How to sell wholesale to retailers? Wholesalers synchronize the transaction details by updating the information in the software systems, for instance, Ordoro, TradeGecko and Fishbowl Warehouse, and then start delivering the items to retailers.
Importance of wholesale: Why is wholesale profitable?
From the perspective of a consumer, we might not realize the exact functions of wholesaling but selling wholesale to retailers is not always beneficial. In this section, we will look into the importance of wholesaling, advantages of doing a wholesale business. We will take a look on the downsides as well to better assess the wholesaling business as a whole picture. To those who are thinking about starting a wholesale business, this section might help you better evaluate the benefits and costs of doing a wholesale business.
Two major functions of wholesale
1) Speed up the velocity of the sales chain
Wholesaling requires warehouses and delivery facilities. The wholesaling business can shorten the time making customer contacts and supplier contacts. It is because wholesalers and manufacturers to distribute products directly. They shift products from manufacturers’ hands directly to wholesalers.
Also, wholesalers purchase raw goods in bulk, this often comes with a significant discount percentage, and hence reducing total physical distribution costs. With less back-and-forth between suppliers and customers, wholesaling business speed up the velocity of sales chain.
2) Provide reliable inventories
Being as said, the business is mainly operated by a centralized data base system of real-time control, manufacturers, service providers and retailers can keep an eye of the availability of stocks to sell wholesale online.
In case the warehouse almost runs out of stocks, wholesalers can immediately start replenishing new inventories to ensure seamless operation of businesses. Apart from that, businesses do not need to rent a warehouse for inventory storage because wholesalers do this job for them. Not only can businesses save up warehouse cost, the cost saved can even be used in further online market R&D in order to sell wholesale online. All in all, wholesaling business reduces the likelihood of having supply shocks and improves credibility of the business.
Advantages of using a wholesale business model
Selling wholesale sounds attractive at the first sight, and this is true. Among a myriad of benefits of doing a wholesale business, let’s have a look on two of the greatest merits of doing a wholes business.
1) Reduce the cost of buying
Since the main principal of wholesaling is to buy low in bulk and sell high. Since wholesalers buy a lot, they enjoy the benefits of buying products or raw materials at a relatively low price. Generally, sellers are more likely to grant discounts or cash rebates to those who buy in a large quantity. As a result, it is not difficult for us to understand the reason why wholesalers are doing such a business.
Since they receive huge discount and preference from the producers because they buy in large quantities. They tend to sell in a higher price by marking up a certain proportion of profit. In some cases where wholesale businesses are large enough wholesalers usually make huge profit by selling products from the producers to consumers in high mark-up price.
2) Enjoy economies of scale
After several ordinary business cycles, the average production cost of wholesaling drops to the minimum when the business reaches its optimum. This implies that prices of raw materials or products will fall because the producers end up manufacturing more. Economies of scale occur when a company’s production increases, leading to lower fixed costs.
Despite wholesalers incur variable costs from recruiting employees such as agents, drivers and warehouse workers, economies of scale still apply when the production scale is large enough and the traffic flow of inventories is fast enough.
Disadvantages of creating a wholesale business
As the saying goes – ‘A coin has two sides.’ It is not always smooth sailing to use such a business model. Two of the downsides of forming a wholesale business will be discussed in the following.
1) Potential risks associated
Some wholesalers might not be well-acknowledged regarding the origin of the products they purchase. For example, boutiques are of inferior quality or even counterfeit. Consumers might not have the ability to distinguish the authenticity of that particular brand of boutiques. As a result, wholesalers and sellers might need to bear the responsibility of selling unauthentic products which they did not know beforehand.
In some serious cases, wholesalers might bring out innocent lives. For example, like food containing harmful chemicals or even vaccines without curing effects. Wholesalers may distribute or promote the sale of fake or illegal drugs deliberately or by mistake. The risks of being a wholesaler include such legal responsibilities as well.
2) Low profit margin during downturns
Wholesalers usually utilize warehouses for stocks storage by renting warehouses in different accessible locations. In recent years, rental charge increases and hence production cost increases. This does not bother if the wholesale business generates a high revenue. However, the story can be different if it is in an economic downturn.
Today’s market environment illustrates the point. Under the pandemic, sluggish economic forecasts are made. How to sell wholesale to retailers when many businesses terminate its employees to cut cost in order to respond to shrinking sales? In this case, orders from wholesalers decrease as well. However, wholesalers cannot adjust the production cost immediately as other businesses do. Wholesalers cannot resign the warehouse rent suddenly due to rigidity of rental contract. What’s more, they have to settle the stocks in the warehouses as well.
The rental expense becomes unavoidable to them, which leads to an unsatisfying profit margin during economic downturns, compared to other businesses.
How to sell wholesale? How to become a wholesaler?
As mentioned above, a wholesaler is primarily engaged in purchasing and storing products in bulk. The problem – ‘How to sell wholesale?’ emerges. In the following, we will go through the key procedures in becoming a wholesaler step by step.
1) Acquire knowledge of wholesaling
The first step to embark on your journey of wholesaling is to ask yourself ‘How to sell wholesale products?’. It is to learn the basics of wholesaling, for instance, accounting rules, business management regulations and most importantly, legal terminologies of the industry you are going to engage in.
For example, if you want to become a wholesaler in the F&B industry, you will need to first learn the basics of F&B industry. Taking basic account and business management courses can help you develop your understanding on basic business rules and operations. After having general business knowledge, learning legal terminologies of the industry is also essential. Knowing those potential legal traps can save you from all the hustle and bustle and avoid ending up in a legal issue or even punishment.
2) Determine the scope of products or services
How to become a wholesaler? Upon acquisition of some fundamental business knowledge, determining the categories of products you want to serve is the next step to go. Theoretically, you can basically sell anything related to the F&B industry, but the reality is choosing the most efficient and familiar scope of products or services should be the easiest for you to manage.
Continuing with the aforementioned example, after deciding the industry you wish to engage in, the next step is to determine the scope of products or services provision. In this example, you can choose to sell raw ingredients or premade meals to restaurants and bars. In most of the cases, people choose to sell raw ingredients to restaurants – such as frozen meat and fresh vegetables.
3) Assess the profitability of the industry
The profitability of the industry can be assessed by market research on the market size and total revenue on the relevant market each year. This market information is useful in judging whether the wholesale business is worthy to operate. As a wholesaler, it is inevitable to negotiate with manufacturers and contact logistics companies for purchasing price and shipping cost respectively.
Competition among F&B suppliers is intense because there are market leaders and dominants who have earned competitive advantage already. In this case, although the overall profitability of F&B industry is attractive, each supplier needs to develop his own selling point to persuade restaurants to order raw ingredients from him instead of from other suppliers.
4) Choose your own inventory software
A lot of wholesalers sell wholesale online. That’s why we need an inventory software. There are tons of software available in the market for inventory management and tracking. Out of many order management software, choosing the right one often requires comparison and testing. Most of the inventory management software performs standard functions such as sales tracking, orders, and inventory management in a real-time base.
However, all of them have different selling points. Some of them perform the best in terms of speed, while some of them perform the best in terms of quality control. As a notice, it is better to strike a balance between the start-up cost and other parameters to maximize your profit margin.
5) Look up potential customer segments
How to sell wholesale products? The answer is to find your own groups of customers. One of the most popular ways to search for potential customers is to take a reference on your competitors. Conducting a SWOT matrix allows better assessment and comparison between your business to be started and your competitors’ businesses. Try to approach to similar customer groups and interview their needs. In the meantime, think about how to plug the current loopholes of the products or services provided by your competitors.
At the same time, reaching out to the general public through marketing distribution channels is viable as well, be it traditional marketing channels – brochures and TV ads, or innovative marketing channels – social media platforms.
6) Set up a business bank account
Most business owners start a bank account by opening a business checking account. Setting up a business bank account is vital as you can manage the funding in a handy way. Gather the required documents for example registration proof of your wholesale business and your identity. With the advancement in technology, a business bank account can be set up online or in person. Finally, deposit the funding you have into the account and start managing your business!
7) Manage a warehouse with conscious
How to sell wholesale items? After going through all the preparation works, it comes to warehouse management, space utilization and inventory accuracy rates are the keys. As a beginner of wholesaling business, the first warehouse you rent might not be very spacious because of limited budget. Within a limited area of warehouse, shelf and space utilization becomes very important. It is advisable to assess shelf and space utilization of the warehouse to make sure no space is redundant.
Apart from space utilization, inventory accuracy rates are indispensable as well. In practice, an inventory accuracy rate of 97 percent is a good benchmark. To bring the percentage up, wholesaler needs to keep track of the inflow and outflow of inventories to ensure things are being done properly. Of course, if the budget is not that limited, you can even hire someone to do that job for you. You can therefore pay full attention to seeking for potential customers, which derives income directly.
How are wholesaling and retailing different?
Wholesaling refers to the process of onward sale as discussed above. How about retailing? A retailer is a person or a company who sells products directly to their customers for a profit. The retailer may be the manufacturer of the product or may acquire relevant products from a distributor or a wholesaler.
Why not both?
A lot of people misunderstand ‘wholesaling’ as ‘retailing’, or ‘retailing’ as ‘wholesaling’. In fact, they are two different concepts as mentioned above. In the following, we will take a look on the comparison between ‘wholesaling’ and ‘retailing’, for examples each of their edges over another one.
Benefits of wholesaling over retailing
1) Brand recognition
A wholesaler tends to earn more brand recognition than a retailer. Since consumers and other businesses can directly view a variety of outlets in virtual or physical shop. Since a wholesaler enjoys a higher visibility and exposure than a retailer, wholesaling requires less efforts on brand recognition than retailing. Brand reputation management is the process of amending the way general public views your business to match the way you see it. As origin details are to be printed on the product, wholesaling brand is visible to the customers. Brand recognition can be enhanced.
2) Global progression
While products are sold via online wholesaling system, it has a higher likelihood to expand into global marketplaces due to improvement in technology. When it comes to expanding into global markets, the wholesaler needs to upgrade his accounting system into a multi-currency transaction one. It allows the wholesalers to interact with customers without encumbrances of currency difference. Wholesaling internationally can be a marvelous idea if the scale of operation is large enough.
Edges of retailing over wholesaling
1) Clearer customer segments
Being said that, to answer the question ‘How to sell wholesale products?’, a wholesaler needs to identify the customer base to be served. If a person is able to specifically target a tailored customer segment, retailing might be a better choice than wholesaling, because they are the one directly interacting with the consumers. Hence, retailing allows business providers to locate a more detailed consumer base than that of wholesaling.
2) Higher profit margin
Since retailers are the one who develop retail strategy and sales chain, retailers can decide the selling price and as well as the profit margin. Unlike wholesalers, retailers need not to negotiate with other businesses to compromise a price which satisfies both sides. As a result, we know that retailers can mark up the price a bit higher than that of wholesalers to maximize their profit margins.
To wrap up, wholesale refers to a type of business in which wholesalers buy products in large quantities directly from manufacturers and then resells them to other business users. There are three major types of wholesalers – merchant wholesalers, agents and manufacturers’ sales branches and offices. They differ in the nature of services or products provided by wholesaling. However, they both have their own merits. Wholesaling creates higher extent of brand awareness, while retailing tends to have a higher profit margin.
In a nutshell, wholesaling and retailing are two different concepts after all.
This blog answers the question ‘How to sell wholesale to retailers?’. To sell wholesale products, a wholesaler first needs to acquire the knowledge of wholesale, then determine the scope of products, followed by assessing profitability, and then look for warehouse, inventory software and customers segments.