Wholesale Sector Essay ⋆ Business Essay Examples ⋆ EssayEmpire

Wholesaling bridges the gap between manufacturers and retailers or companies processing goods further, such as food producers. Wholesalers offer services similar to those of retailers but do not serve the end customer. For manufacturers, wholesalers offer access to the markets for selling goods and services, many by offering physical distribution facilities including sophisticated delivery logistics. Wholesalers operate in almost all industries, even distributing gas and electricity as well as package holidays. The main advantages for customers (in comparison to buying from manufacturers directly) are as follows:

A high level of availability, enabling the reduction of own stock and quick responses to demand shifts
A wide range of products
Specialized pricing schemes frequently based on discounts according to monthly or annual buying volume
Technical support and technical instruction of the customers’ employees

Different wholesale formats have emerged in the course of time with varying degrees of importance all over the world:

General merchandisers offer product assortments relevant to smaller retailers and convenience stores not affiliated with a powerful chain.
Specialty merchandisers sell a narrow but deep assortment of goods, that is, they offer few categories but a wide range within those categories—for instance, screws and fasteners of all types and sizes, and pet food catering to all breeds and nutritional requirements, in addition to pet accessories, such as collars, leashes, and toys—and focus on certain types of clients. Mostly, wholesalers are well known within their industry and offer additional product-related services.
Cash-and-carry wholesalers run their core business through selling foods to clients who need to pay immediately (e.g., pub owners or street traders) and handle the delivery on their own.

In addition, the cash-and-carry outlets usually offer a wide range of nonfood assortments.

Truck wholesalers are still common in some parts of the world. They visit their customers regularly in an assigned geographical territory. In contrast to sales representatives, they deliver their products immediately to the business customers.
Rack jobber wholesalers are similar to truck wholesalers, but rack jobbers are responsible for managing a particular space in the outlets of their clients, for example, in-house magazines or the floor space of a supermarket.
Drop shippers or brokers do not engage in the physical distribution process but take ownership of the products or services they provide. Drop shippers act as the interface between the customer and the supplier, receiving orders from the former and placing them with the latter, who deliver directly to the customer. Their services are used mostly for large orders to cut down on transportation and handling costs. Brokers, on the other hand, bring buyers and sellers together in a single transaction, do not take ownership of the goods, and are paid on a commission basis.

Drop shippers and brokers base their business on exploiting information not accessible to their clients. Thus, their business models are threatened by the digital information diffusion e-commerce offers . Customers could bypass the wholesale level of the supply chain, but of course, wholesalers aim to broaden their business scope by adding their own internet-based facilities. Interestingly, the concept of wholesaling was developed and the leading wholesale companies were founded in times of the brick-and-mortar business.

More formally speaking, the existence of the wholesale sector is justified by reducing the contact costs, known as the Baligh-Richartz effect. Theoretically, one might even justify several wholesale levels in the distribution chain, if there are enough vendors and customers and if contact costs are substantial. Digital information processing reduces the contact costs. It is worth noting that modern wholesaling is not restricted to exploiting information but adds a new quality of information available to other agents in the markets. The rationale behind the phenomenon is traced back to the assembling of products from different manufacturers. Because the perceived quality of the whole assortment might be tarnished by offering one low-quality item, wholesalers are motivated to strive for just one quality product. Consequently, the fact that the products of a manufacturer are listed or not listed in wholesalers’ assortments provides the markets’ own quality of information.

Assessment of the most important wholesalers is difficult because different criteria (turnover, number of employees, value of stock shares, etc.) lead to conflicting results. Moreover, some of the criteria are subject to substantial fluctuations (e.g., turnover in different currencies, value of stock shares) and the bigger companies are also engaged in retailing. However, according to the Fortune 500 ranking (in terms of turnover) and the Financial Times ranking (in terms of the values of stock shares), wholesalers like Metro AG (Germany), Costco Wholesale (United States), and Cardinal Health (United States) are among the world’s leading companies. Moreover, some retail trusts operate wholesale outlets, which are not their core business, for example, Prodirect, Promocash of Carrefour (France), and Wal-Mart (United States). This is common practice in Western-type markets, and currently in eastern European transition economies as well, but the Japanese distribution system has a higher complexity and separates wholesalers rigorously from the final customer.

The warehouse clubs in the United States, for example, Costco, Sam’s Club, and BJ’s Wholesale Club, are not wholesalers according to the above definition but serve every client willing to be a member of the club—making no distinction between the final customer and the business customer. The clubs charge an annual membership fee. Therefore, they are not relevant for the majority of final customers. Particularly in Europe, general merchandisers and cash-and-carry wholesalers face competition from the discount retail chains, for example, Aldi and Lidl, offering similar or even better value-for-money ratios, but no delivery service related to grocery products.

One of the main strengths of modern wholesalers is their logistic infrastructure, advancing them to an essential element of the supply chain in many industries. By offering a logistics platform, smoothing the demand by accumulating orders from different regions, and providing a sophisticated information processing capacity, they are often the central partner in supply chain management. Information processing is important to avoid an out-of-stock situation and the “bullwhip effect” occurring in markets with volatility of demand because the variance of retailers’ orders might be higher than the variance of their sales. Moreover, bar codes and radio frequency identification (RFID) tags increased both the data quality for wholesalers’ control of the supply chain and the employees’ productivity in the wholesale sector.

Bibliography:

Aldin and F. Stahre, “Electronic Commerce, Marketing Channels and Logistics Platforms—A Wholesaler Perspective,” European Journal of Operational Research (v.144/2, 2003);
H. Baligh and L. E. Richartz, “An Analysis of Vertical Market Structures,” Management Science (v.10/4, 1964);
L. Lee et al., “Information Distortion in a Supply Chain: The Bullwhip Effect,” Management Science (v.50/12, 2004);
National Retail Federation, Stores 2008 Global Power of Retailing: Standing out from the Crowd (Deloitte, 2008);
Nishimura, “The Linkage of Trades in Terms of Wholesale Business Formats in Japanese Distribution Systems,” Journal of Global Marketing (v.18/1–2, 2005);
Wagner, “Contemporary Marketing Practices in Russia,” European Journal of Marketing (v.39/1–2, 2005).

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