Wholesaling refers to all of the transactions in which products are bought for resale, for the making of other products, or for general business operations. A wholesaler is the individual or organization that facilitates these wholesaling activities by buying products and reselling them to yet another reseller, government agency, or an institutional user. In 2005 there were approximately 620,000 wholesaling companies in the United States, with more than half of all products sold in the country passing through these wholesaling firms. Approximately 400,000 independent firms handled close to $2 trillion worth of merchandise and employed close to 6 million workers.
Wholesaling is an important aspect of a company's marketing-channel strategy because it essentially involves the planning associated with industrial customers that need to distribute their products to manufacturers, retailers, government agencies, schools, hospitals, and other wholesalers.
SERVICES PROVIDED BY WHOLESALERS
Because wholesalers are in the business of buying in large quantities and delivering to customers in smaller amounts, they are able to perform physical distribution activities more effectively, including materials handling, warehousing, and inventory management. They often offer quick and frequent pickup and deliveries, as needed, which allows both the producers of the goods and wholesale customers to avoid the risks associated with holding large inventories.
Wholesalers support retailers by assisting them in their overall integrated market planning through pricing and promotion assistance. In addition, because they enter into sales contracts with a producer and because they can sell different amounts of the product to retailers, wholesalers serve as an extension of the producer's workforce. They often provide financial assistance and extend credit as needed.
Keeping producers up to date on market conditions is a critical component of wholesalers' services. Their assessment and analysis of changing market conditions are important for producers who are concentrating on market development and strategies for growth.
Because of their position in the marketing channel, wholesalers have closer contact with retail customers than do producers. Wholesalers can spread their sales costs over more products than can most producers, which results in lower costs per product. Because of this, many producers shift their financing and distribution activities to wholesalers. Because they are often specialists in understanding market conditions and experts at negotiating final purchases, wholesalers are a critical component in retail distribution strategies.
The distinction between services performed by wholesalers and those provided by other businesses has changed over the years. Retailers are discovering that they may be able to deal directly with producers and they may also be able to perform wholesalers' functions themselves. Because of the increased use of computers, retailers have been able to expedite ordering, delivering, and handling of goods more effectively than in the past. Nevertheless, not all functions of wholesalers can be eliminated; these
functions still have to be performed by some member of the marketing channel—producer, retailer, or wholesaler—because they are vital components of supply-chain management.
TYPES OF WHOLESALERS
There are three basic categories of wholesalers: merchant wholesalers; agents, brokers, and commission merchants; and manufacturers' sales branches and offices.
Merchant wholesalers are independent wholesalers that take title to the products they sell. This type of wholesaling accounts for a large percent of all wholesale establishments in the United States. Since merchant wholesalers take title to the products that they resell, their earnings are obtained through markup of these goods. Merchant wholesalers are often called distributors and can be categorized as either full-service or limited-function wholesalers (see Figure 1).
Full-service wholesalers often provide a wide range of services to the customers for which they purchase products. Customers rely on them for product availability, suitable assortments, breaking of large quantities into smaller ones, financial assistance, and technical advice and service. Although full-service wholesalers often earn higher gross margins than other wholesalers, their operating expenses are also higher because they perform a wide range of functions.
There are four types of full-service wholesalers:
- General-merchandise wholesalers
- Limited-line wholesalers
- Specialty-merchandise wholesalers
- Rack jobbers
General-merchandise wholesalers carry an extensive line of products and provide a wide variety of services. Although these wholesalers may carry many different product lines, they do not carry an extensive variety within them. Most general-merchandise wholesalers deal in such products as drugs, nonperishable foods, cosmetics, detergents, and tobacco.
Limited-line wholesalers carry only a few product lines, such as groceries, lighting fixtures, or oil-well drilling equipment, but offer an extensive assortment of products within those lines. They also offer fewer marketing services than general-merchandise wholesalers because they specialize in just a few functions that are associated with the product lines they carry. Limited-line wholesalers often take title to the products, but they may not deliver
merchandise, grant credit, provide essential marketing information, or store inventory. This results in smaller profit margins as compared to general-merchandise wholesalers.
The decision as to whether a company should use a limited-line wholesaler depends on the structure of the marketing channel and the need to manage the supply chain in order to obtain a competitive advantage, that is, do a "good" job so that competitors do not "steal" the business. Although the number of limited-line wholesalers is relatively small, they are important in the distribution of such products as specialty foods, perishable items, construction materials, and coal.
Specialty-line wholesalers carry the most narrow product assortment, usually consisting of a single product line or part of one. Because specialty-line wholesalers are product experts, they can offer extensive sales and product support.
Rack jobbers, sometimes considered a subcategory of specialty-line wholesalers, concentrate on retail stores. They set up and maintain displays and stock them with goods that are sold on consignment. Retailers depend on rack jobbers for the provision of health and beauty aids, hosiery, books, greeting cards, and magazines.
The five types of limited-function wholesalers are truck jobbers, drop shippers, cash-and-carry wholesalers, catalog wholesalers, and wholesale clubs. Producers of fast-moving goods, especially those that are perishable and need frequent replenishment, often use truck jobbers because they deliver only within a particular geographic region in order to maintain product freshness. Truck jobbers are often chosen as the wholesaling method because they offer quick and frequent delivery, which is especially crucial for such items as bakery goods, meats, and dairy products.
Drop shippers arrange for shipments directly from the factory to the customer; although they do not physically handle the product, they do take title and responsibility for all the risks associated with the transport of goods. In addition, they offer the necessary sales support for the products they distribute. They operate in a wide variety of industries, including chemicals, industrial packaging, lumber, petroleum, and heating products.
Cash-and-carry wholesalers are intermediaries whose customers are usually small businesses that pay cash and have to arrange the delivery of these products themselves. Cash-and-carry wholesalers usually carry a limited line of products that have a high turnover, such as groceries, building materials, and electrical or office supplies. They do not deliver the products they sell, nor do they extend credit, but they are a vital intermediary for those small businesses that would be unprofitable for larger wholesalers to service.
Catalog wholesalers are an alternative to cash-and-carry wholesalers that serve both major population centers and remote locations. Prepayment for goods is required, and delivery is arranged through delivery services such as UPS and FedEx. A wide range of competitively priced products are offered, such as office furniture and equipment, packaging materials, and shelf and storage systems.
Wholesale clubs are organizations that offer customers a fee-based membership that entitles them to make purchases at below-retail prices. This particular concept is a growing phenomenon in the United States because of the success of such wholesale clubs as Costco and Sam's Club.
Agents, Brokers, and Commission Merchants
The second category of wholesalers is agents and brokers (see Figure 1). Agents represent either buyers or sellers on a permanent basis, whereas brokers are middlemen that buyers or sellers employ temporarily. Both agents and brokers perform fewer functions than limited-service wholesalers but they are usually more specific in their product selection, and thus can provide valuable sales expertise. Using agents and brokers allows companies to benefit from the expertise of a trained sales force, which results in a decrease in personal selling costs. Often called functional middlemen, agents and brokers perform a limited number of services in exchange for a commission that is based on the selling price.
One type of agent is called a manufacturer's agent; this type accounts for half of all agent wholesalers. They are independent middlemen who represent more than one seller and offer complete product lines. A manufacturer's agent is restricted to a particular territory and sells and takes orders year-round. There is a contractual agreement between the agent and the manufacturer that outlines territories, selling prices, order handling, delivery, service, and warranties. In service-based manufacturer's agent companies, the more services that are offered, the higher the commission. These types of agents are commonly used in the sales of apparel, machinery and equipment, steel, furniture, and automotive products.
Two other types of agents, import and export agents, specialize in international trade. Import agents find products in foreign markets and sell them in their home countries. In many countries, it is extremely difficult and sometimes illegal to try to sell products from another country without going through an import agent. Export agents locate and develop markets abroad for products that are manufactured in their home countries.
Selling agents are middlemen who market a whole product line or a manufacturer's entire output. They perform all the functions of wholesaling, except that they do not take title of the product. Frequently, companies opt to use selling agents in place of marketing departments. To avoid conflicts of interest, selling agents represent noncompeting product lines and have the authority for pricing, promotion, and distribution of those products.
Finally, there are commission merchants. These are agents who receive goods on consignment and negotiate sales in large central markets. Their specialty is securing the best price possible under market conditions. These agents are primarily found in agricultural industries, taking possession of truckloads of commodities and arranging for grading, storage, and transportation. Commission merchants deduct commission and the expense of making the sale, and then turn over the profits to the producer. Although they provide planning and assistance with credit, they do not provide any promotional support.
Since brokers are the intermediaries that bring buyers and sellers together, they are paid a commission on the transaction. Brokers do not enter into contracts for extended periods; rather they work on a transaction-bytransaction basis. There are thousands of wholesale brokers in the United States, with most of them concentrated in food and agricultural industries. Brokers are especially useful to sellers of supermarket products and real estate. Food brokers, for example, sell food and general merchandise to retailer-owned stores and merchant wholesalers, grocery chains, food processors, and organizational buyers. Since brokers perform fewer functions than other intermediaries, they are not involved in financing, physical possession, pricing, or risk taking. What they offer instead is expertise in a particular commodity and a network of established products.
Thousands of manufacturer-owned wholesalers operate in the United States. These wholesalers maintain inventory and perform a wide variety of functions, such as providing delivery, credit, market feedback, and assistance with promotional planning. Manufacturer's sales offices are the other type of producer-owned wholesaler. They do not maintain inventory, but they assist with sales and service, market analysis, and the billing and collection of funds for products sold. Both sales branches and sales offices are located away from the manufacturing plants and closer to customers because the producers are attempting to reach their customers more effectively in an effort to create a competitive edge in the marketplace.
DEVELOPMENTS IN WHOLESALING
In the early years of the twenty-first century, wholesaling gross profits declined. Because of the economic recession, a decrease in new store construction, and competition, wholesaling growth declined. Chains, which usually prefer to buy directly from manufacturers, grabbed a larger part of the market in areas such as home-improvement products. But, while tough economic conditions can affect wholesalers adversely, a booming economy can do the same thing. Retailers, experiencing rapid sales growth, may opt to buy directly from manufacturers, thus cutting wholesalers from the supply chain.
Both retailers and producers are eager to improve their profitability, and the wholesalers are caught in the middle. Industry observers see the power in the channel shifting more toward the retailer, who may choose to reevaluate the current supply-chain members.
Because of these changing market conditions, wholesalers are concentrating on strategies to improve service by adding more value-added concepts. Even though wholesaling has traditionally involved the handling of goods, the activities and functions of wholesalers are being applied more and more in service industries. Access Graphics in Boulder, Colorado, for example, takes an active role in pursuing new business for its vendors by providing them with customer databases that help resellers in identifying sales prospects. In addition, it also provides in-house graphic departments that produce the promotional materials needed by resellers and their customers. Access Graphics believes in adding value to its supply-chain relationships; as a result, it has established a staff of system engineers who help resellers with installation, system design, and computer-memory testing.
Tough market conditions in the United States have forced many wholesalers to adopt a global perspective. Wholesalers have been encouraged by the North American Free Trade Agreement to expand their operations into Mexico and Canada. It was expected that by 2010, 25 percent of wholesalers' business would come from foreign markets.
International wholesalers will experience stages of growth depending on the economic development of foreign economies. All-purpose wholesale merchants will dominate in simple economic conditions, while an expanding economy will see the emergence of interregional wholesalers. As foreign economic conditions mature, there will be a growth of specialized wholesalers, with product-line and functionally specialized wholesalers dominating the chain. In an advanced economy, channels become controlled by large-scale retailers and manufacturers, thus causing a decline in the need for conventional wholesalers.
Wholesalers that expand through globalization will face the challenge of competition against current wholesalers, new languages, an array of different legal systems, and a multitude of cultural differences. Nevertheless, a decision to stick with domestic markets only could hamper the growth of a wholesaler.
ELECTRONIC MARKETING CHANNELS
Advances in electronic commerce have opened new avenues for reaching buyers and creating customer values. This interactive technology has been made possible by electronic marketing channels, which use the Internet to make goods and services available for consumption for use by both end consumers and business buyers.
Pelton, Lou E., Strutton, David, and Lumpkin, James R. (2002). Marketing channels: A relationship management approach (2nd ed.). Boston: McGraw-Hill/Irwin.
Pride, William M., and Ferrell, O. C. (2006). Marketing concepts and strategies (Rev. ed.). Boston: Houghton Mifflin.
Rosenbloom, Bert (2004). Marketing channels: A management view (7th ed.). Mason, OH: Thomson South-Western.
U.S. Bureau of the Census. (2006). Statistical abstract of the United States. Washington, DC: Author.
Patricia A. Spirou
Selling in the New Marketplace
Selling in the New Marketplace
Toward Mass Distribution. With the spread of the railroads, shipments of goods began crisscrossing the country more swiftly, in larger volumes, and on steadier schedules than ever before—a development that rapidly worked structural commercial change. Mass distribution, in short, accompanied the rise of mass production; the new landscape of railroads, factories, and industrial cities grew a new commercial network of distributors, department stores, and mail-order houses. It was a far-reaching transformation, and it would take decades longer to complete, but it was well underway by the end of the 1870s. Already the nascent outlines of a modern consumer economy were growing clear.
Pre-Railroad. In the early nineteenthth century, few Americans were plugged into anything like a consumer-goods economy. Most clothing was made in family households, and products such as tools, shoes, furniture, and even firearms were usually made by local craftspeople and acquired by means of barter or book credit. Those goods that came from beyond the village or surrounding countryside typically came by way of traveling peddlers or through country stores. Keeping a country store during this period meant stocking a general assortment of goods, accepting farmers’ crops and produce in payment, and extending long credits to local customers to get them through harvest times. It also required making annual buying trips to a commercial entrepot like New York City, Philadelphia, or Baltimore, to stock up for each coming year.
Wholesaling. The railroads undid this world in several stages. The first stage of change happened behind the counter, in the wholesaling of goods. As manufactured goods began to flow out of American factories, a new group of middlemen—“jobbers”—positioned themselves to buy them up in bulk and distribute them to country stores. The jobbers first infiltrated the northern and middle Atlantic states, then developed midwestern territories as rail connections hooked hinterlands into cities such as Cincinnati, Saint Louis, and above all Chicago. By 1866 Chicago, at the railroad hub of the Midwest, had fifty-nine jobbers handling sales of more than $1 million. After the war, Southern systems proliferated along much the same lines, networking the country stores that were then forming (in the wake of the dismantling of the plantations) as the region’s rural commercial nodes. With the coming of the wholesalers, storekeepers left off their annual buying trips; now the jobbers dispatched traveling salesmen to them, men called “drummers,” who carried trunks full of samples and catalogues, and telegraphed a storekeeper’s orders into the home office. The largest of the jobbers was A. T. Stewart, who by 1870 had amassed a business with sales of $50 million ($42 million wholesale, $8 million retail) and a workforce of two thousand drummers, clerks, managers, and other employees.
Department Stores. Meanwhile, in urban areas, denser market concentrations permitted even more direct connections between manufacturers and customers. Here innovation happened at the retail level, in the form of the department store. Rowland H. Macy was an important early example. His early career was checkered: four times he started stores; four times he went under, the last failure (in Haverhill, Massachusetts) forcing him into bankruptcy. But when he moved his efforts to New York City, the largest urban market in the country, Macy’s fortunes turned. He set up his fifth store in 1858 on Sixth Avenue near Fourteenth Street, and business quickly thrived. Like other successful department stores, Macy’s sold a widening assortment of goods at low prices, maintaining low profit margins and counting on high volume to make profits. It also sold its products at set prices, clearly labeled on affixed tags; earlier retail establishments had tended to set prices in negotiations with customers, but for the department stores, where dozens or even hundreds of clerks handled customers’
purchases, uniform price systems became the rule. Macy’s operated on a cash-only basis, both in its sales and its stock purchases, enabling the company to more easily weather the economy’s periodic financial panics. By 1870 the store was stocking an impressive array of goods—including dry goods, men’s hosiery and ties, linens and towels, costume jewelry, silver, and clocks—and was doing more than $1 million worth of business.
Merchandise. The department stores depended on their urban locations to concentrate client bases. But their impact was ultimately felt beyond the cities, for they prefigured an even wider dispersal of mass retailing via the mail-order houses and the chain stores such as Woolworth’s that emerged later in the nineteenth century. The department stores represented not just new kinds of commercial establishments, but new patterns of selling and of buying—indeed, new concepts of consumer goods as store merchandise, arrayed in windows and advertisements, priced and tagged. Department stores competed in creating lavish displays and environments that stimulated customers’ appetites. Wanamakers, for example, Philadelphia’s grandest department store, erected a huge silk tent in the center of the store and created within it a luxurious, carpeted, and chandeliered ballroom setting where ladies could shop for evening gowns.
One of the key figures in Macy’s early years was Margaret Getchell, who rose to become a central manager and, very possibly, one of the first woman business executives in America. Originally a schoolteacher, she came into the company (she was Macy’s cousin) as a cashier and was quickly promoted to the position of bookkeeper. As her management potential became clear, Macy elevated her again in 1866, to the job of superintendent, which put her in a position directly under his own in the store’s managerial hierarchy. Three years later, she married Abiel LaForge, a salesman with the company. Initially after marrying she kept her position at the company, working alongside her husband, running the store while he focused on merchandising. But when the couple had their first child, Getchell’s status within the company shifted: while LaForge became a partner in the firm, Getchell gave up her job as superintendent. She continued sporadically to assist in managing the store; for one three-month period while Macy and LaForge traveled to Europe on a buying trip she ran operations single-handedly (and pregnant with her third child). But she received only token presents from Macy for this work. Executive business responsibilities remained the domain of men during this period, even when women displayed unmistakable managerial competence.
Source: Bruce Levine and others, Who Built America?, 2 volumes (New York: Pantheon, 1989, 1992).
Brand Names and Packaging. It was during this period that trademarks and brand names appeared and quickly began to be a critical part of doing business on a national scale. One early manufacturer to adopt these techniques was the Smith Brothers, who concocted cough drops at their factory in Poughkeepsie, New York, and shipped them to general stores and drugstores nationwide. Finding in the late 1860s that competitors were releasing imitations under names such as “Schmitt Brothers” and “Smythe Brothers,” the Smiths responded by registering their portraits as a trademark and emblazoning the images on the glass bowls in which the cough drops were sold. But this measure still left the company vulnerable to unscrupulous retailers who filled the bowls with cheaper imitations, so in 1872 Smith Brothers began packaging their cough drops in “factory-filled” boxes, each bearing the company’s trademark. (Smith Brothers employed families in Poughkeepsie to fill the boxes, each with sixteen cough drops; every evening a wagon would drop off five-gallon cans of cough drops and stacks of boxes, and pick up the boxes that had been filled the previous day.) The first cough drops to be marketed, Smith Brothers joined a growing number of factory-packaged, trademarked products on store shelves.
Mail Order: Montgomery Ward. The man who devised the nation’s first mail-order company had experienced business at each step in the commercial chain on the path to market. As a young man Aaron Montgomery Ward ran a general store in Saint Joseph, Michigan, then worked for Field, Palmer, and Leiter, Chicago’s largest wholesale dry-goods house, then traveled as a drummer for another jobber based in Saint Louis. He thus developed a working sense of both how goods moved through the modern economy and how they were received by customers in the countryside. At some point in his early career, Ward conceived of a new way of marketing goods that cut out the jobber and the country store, namely, doing business by connecting directly with customers through the mails. It was a radical stroke, and it fit neatly with the spirit of the times: just as Ward opened his business in 1872, rural, agrarian hostility toward “parasitic middlemen” such as jobbers and grain warehouse men was driving farmers to organize marketing and purchasing cooperatives of their own. Ward started off with one partner, capital of only $2,400, and a “catalogue” that consisted of a single sheet listing 163 items. Within a few years, the purchasing agencies of the National Grange endorsed the company and began placing orders. Ward emblazoned the endorsement, advertising his firm as “THE ORIGINAL WHOLESALE GRANGE SUPPLY HOUSE” and vowing to sell to “Patrons of Husbandry, Farmers and Mechanics at Wholesale Prices.” His prices were low, and business boomed. Within two years the catalogue had grown to eight pages; two years after that it was 150 pages and illustrated with woodcut engravings. By the end of the 1880s the company was doing more than $1 million worth of business a year.
Farmers adjusted uneasily to being enmeshed in distant markets. Tensions flared over railroad and grain elevator rates, grain price fluctations, banks and interest rates. Agrarian politics grew especially heated in the decades following the Civil War, when falling grain prices and deflationary pressures squeezed farmers who had to repay loans with currency that was worth substantially more than it had been when they borrowed it. Late in 1867, these impulses found organized political expression in the Patrons of Husbandry, a secret association organizing in Washington, D.C. The Grangers, as they were popularly known, quickly grew in numbers and spread across the agricultural heartland. A Farmers’ Convention held in Springfield, Illinois, adopted typical resolutions, including a denouncement of “all chartered monopolies” and a call for legislation “fixing reasonable maximum rates” for railroad freights and passengers. In the same vein, the Declaration of Purpose of the National Grange in 1874 advocated cooperative marketing and purchasing ventures among farmers, the elimination of the middlemen who seemed to stand between farmers and their ultimate customers, and the establishment of agricultural and technical colleges. Meanwhile, calls for state regulation of railroad and warehouse rates first came to fruition in Illinois in 1871, followed by Wisconsin and Iowa several years later. Intrastate railroad regulation proved ineffective, however, and by the 1880s the agrarians were turning their attention to Congress.
William Cronon, Nature’s Metropolis: Chicago and the Great West (New York: Norton, 1991);
Robert Hendrickson, The Grand Emporiums: The Illustrated History of America’s Great Department Stores (New York: Stein &Day, 1979);
Glenn Porter and Harold C. Livesay, Merchants and Manufacturers: Studies in the Changing Structure of Nineteenth-Century Marketing (Baltimore: Johns Hopkins University Press, 1971).