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Wholesale trade deals with the bulk buying of goods from various manufacturers either locally or from overseas and the breaking down of this bulk into smaller quantities which are then sold to the retailer. Middlemen, be they wholesale merchants, merchantile agents or wholesalers provide this intermediate link in the chain of distribution before the goods are sold to the retailers.

THE ROLE OF THE WHOLESALER IN THE CHAIN OF DISTRIBUTION CHANNELS OF DISTRIBUTION 1. There are four main channels of distribution and many 'intermediaries' or middlemen involved before goods can finally reach the consumers as shown in the following table:

M a n u fa c tu re r 1 2 3 W h o le s a le r 4 S o le A g e n t

R e ta ile r C onsum er e .g . B re a d a n d re a d y m a d e fu r n it u r e

R e ta ile r C onsum er e .g . F is h , lo c a lly m a n u fa c tu re d h o u s e h o ld ite m s

R e ta ile r C onsum er e .g . Im p o rte d c a rs , c o s m e t ic s

C onsum er e .g . V e g e t a b le s a t p ro d u c e rs m a rk e t a n d m a d e -to -o rd e r f u r n it u r e

2. In reality, the channels used are very varied and often complex, and there is much overlapping.

Channel 1: When a manufacturer sells direct to the consumer


1. This occurs when customers post orders for books or magazines direct to the publishers who then send them their orders direct as in mail order or e-commerce. This ensures the publisher of selling to as many people as possible, including those who live far away. In this way, they increase their sales. Consumers, too, benefit since they are assured of getting the latest issue or publication early. 2. It also occurs when something is made specially for a customer such as a suit or made-to-order furniture. Consumers who demand individuality in design for such personal effects normally have to pay more than what they have to pay for the same type of good which is mass-produced. 3. It also occurs in the case of expensive and highly specialized goods which are purchased only occasionally by governments or big private companies. Examples of these kinds of goods are aeroplanes, ships, railway rolling stock, and the like. Buyers prefer to go direct to the manufacturers so that they may be able to discuss their individual requirements as well as the terms of purchase. 4. This channel of distribution, however, is not suitable for all kinds of goods. Channel 2: When a manufacturer sells to the retailers who in turn sell to the consumers 1. Most of these retailers are large stores that have the financial resources to buy in bulk direct from the manufacturers. The main advantage of bulk buying is the large discounts given that enable these retailers to compete successfully with the small retailers in terms of ability to offer a greater variety of goods at competitive prices. 2. In many cases, manufacturers open their own retail shops, for example, those selling footwear and medicine. These manufacturers have resources large enough to open retail outlets of their own throughout the country. 3. Sometimes, the retailers may be 'tied' to the manufacturer. For example, petrol stations sell only one brand of petrol.

Channel 3: When a manufacturer sells to a wholesaler or a wholesale


Wholesale Trade

merchant who in turn sells in smaller quantities to retailers (shops), who in turn sell to the consumers 1. This occurs when producers themselves are unable to market the excess goods themselves because of financial constraints or the lack of access to widely dispersed markets due to a lack of contacts, commercial know-how and the like or owing to the fact that it is just not commercially profitable for the producers to do so themselves. This is true of most rural produce like fish, padi, vegetables, eggs, poultry, etc. which are easily perishable. These are often sold to dealers (wholesalers) who then pack them properly and transport them quickly to the big towns and cities either in the same country or overseas, where they are sold to various retailers, who in turn sell them to the consumers. 2. Locally manufactured goods like ordinary household essentials which are stocked by small retailers are often distributed in this way since the retailers buy in too small a quantity to make it viable for the manufacturer to sell direct to them. 3. This method of distribution is especially important where the demand for the product is seasonal but production takes place throughout the year, e.g. fireworks and Christmas cards. It is the same if the demand for the product is fairly even throughout the year, but output is concentrated during specific periods of the year, e.g. padi. In such cases, the wholesaler's function of acting like a reservoir in order to balance demand and supply becomes very important. 4. Goods which are sold in this way become more expensive because of the cost of distribution and profit margins required by the wholesaler and retailer. Moreover, consumers have no direct contact with manufacturers or producers. However, consumers are assured of a wide variety of goods produced by many producers. 5. The producer is free to devote all his attention and resources to the actual work of producing the goods since the marketing aspect of his goods is already in the hands of the wholesaler. At the same time, the producer is assured that his goods are marketed over a wide geographical area. 6.The retailer needs little capital as he needs to maintain only a small stock. He does not need to keep large stocks because it is easy for him to get new and, hence, fresher stocks from his supplier (wholesaler) once his stocks are depleted. 7. General wholesalers normally stock a wide range of goods and need a substantial amount of capital to finance their large warehouses, stocks and 3

advertising and to pay the salaries of their salesmen. These tend to operate on a national or regional basis. Specialist wholesalers, however, deal mainly in a particular trade in a particular area, for example, a wholesaler of building materials, in fruit, in vegetables, etc. 8. Sometimes, a wholesale merchant may import directly from an overseas supplier. Like the wholesaler, he then sells it to the retailers in smaller quantities. Channel 4: When an overseas manufacturer appoints a sole agent 1. This is done in the home market to manage the sale and distribution of goods as well as to provide after-sale services. The sole agent is responsible for getting reliable retailers to market the goods throughout the country. Such sole agents are appointed to sell imported cars, cosmetics and electrical goods. FUNCTIONS OF THE WHOLESALER 1. Bulk buying 1. The wholesaler buys goods in bulk from the producers or manufacturers in the hope that he will be able to resell them at a profit. 2. Sometimes, he may import the goods from foreign countries, but he usually buys from importers or their brokers, or from commission agents acting for overseas exporters. 3. A wholesaler has specialist buyers who are in very close contact with the market and who know the various sources of supply. 2. Risk bearing 1. The wholesaler makes his purchases based on up-to-date and reliable information on the likely tastes and preferences of consumers. He buys in advance of demand. 2. He will make huge profits if he anticipates demand correctly. 3. He bears the risk of loss in cases where anticipated demand for his purchases does not materialize, if products are damaged, spoilt or stolen, or if retailers default. In case tastes change, he may even have to sell off the goods at a loss. Prices may fall or goods may go out of fashion before they can be passed on to the consumers.

3. Warehousing

Wholesale Trade

1.The wholesaler stores the goods which are purchased in advance before they are distributed to the retailers This would even out the flow of goods. In times of glut, they can be kept off the market, and in times of shortage, released. This would prevent severe fluctuations in prices. 2. In some trades, the wholes~er grades, sorts, packs or prepares the goods for sale. He may sell under his own brand name. 4. Breaking bulk 1. The wholesaler breaks bulk or divides the goods bought into smaller quantities. 2. He sells the goods in smaller quantities to various retailers. 5. Transportation 1. The wholesaler provides transport for goods from the suppliers to suitable depots in the various cities, and from there, to the retailers' shops. 2. If retailers were to buy from a cash-and-carry wholesaler, they have to provide their own transport. 6. Finance 1. The wholesaler finances the retailer by allowing him extended credit. 2. He finances the producer indirectly by paying him promptly. 7. Information 1. The wholesaler acts as a liaison between the retailers and producers by informing producers of the retailers' reactions to their goods, and acquainting retailers with new products and other developments in the market. TYPES OF WHOLESALERS: General Wholesaler: They operate on national and regional basis. They stock a large variety of goods in their warehouses and thus need large capital. They advertise nationally. They employ salesmen to obtain orders from retailers and pay them salaries. Specialist Wholesaler: 5

They restrict their activities to a particular trade and to a particular area. They offer credit facilities and delivery service. Examples are wholesale fruit and vegetables markets.

Cash-and-Carry Wholesaler: They do not allow credit facilities. They do not provide delivery services. They sometimes sell even to the general public. They sell mostly low-priced goods, which sell quickly.

TRENDS IN WHOLESALING The current retail trade is characterized by an increasing number of large-scale retailers being set up in the traditional market made up largely of small-scale retailers. The wholesale trade, threatened as such by these developments, has had to undergo certain changes in recent years in order to survive. Today the wholesale trade is characterized not only by the independent wholesaler, but by the cash and carry wholesaler as well as the voluntary chain. Voluntary chains Groups of independent retailers or shopkeepers who join with wholesalers to gain the benefits of bulk buying. When ordering goods, all the members put their orders together through the wholesaler who is also a member. The wholesaler is then able to obtain goods in bulk direct from the producer at a discount. It helps small-scale retailers to combat the competition from Large - scale retailers e.g. supermarkets. They are able to offer goods at competitive prices, give special offers and attract more customers. Voluntary chains are found mostly in the grocery trade e.g. SPAR, Square Deal, Wavy Line They are normally organised via the wholesaler. The group will undertake national advertising on behalf of the group. It may provide finance and shopfitting for retail members who have to keep their shops to a certain standard. Goods are delivered direct to the retailer. Advice on pricing, display and stock may be given.

Wholesale Trade

Cash-and-Carry Wholesaler: They do not allow credit facilities. They do not provide delivery services. They sometimes sell even to the general public.

They sell mostly low-priced goods, which sell quickly. INSTANCES WHERE THE WHOLESALER IS STILL NEEDED: In foreign trade, the wholesaler has the experience and contact that an overseas firm cannot do without. The wholesaler is still important where the producers are still small-scale producers. The wholesaler is important where production is seasonal and irregular in quantity. The small retailers who dominate the market do not have large finance to buy directly from the manufacturers. Hence wholesalers are still needed. DECLINE OR ELIMINATION OF THE WHOLESALER: Manufacturers, nowadays, produce branded goods, which are pre-packed into convenient sizes. Through advertisements, manufacturers are able to create and maintain a market for their own products. The establishment of large retailers like multiple stores and departmental stores has the finance to buy goods directly from the manufacturers. The improvement in transport and communication has made it faster and easier for the manufacturer to deliver goods and contact the widely scattered retailers. Some manufacturers open their own retail shops and sell goods directly to the consumers. Manufacturers have decided to sell goods directly to the retailers as the retailers would sell the goods faster than the wholesaler would.

HOW THE WHOLESALER SERVES THE MANUFACTURER, THE RETAILER AND THE CONSUMER By carrying out the above functions, the wholesaler not only helps the manufacturer or primary producer, but also the retailer and the consumer as well. Services to the manufacturer Low storage expenses 1. The wholesaler absorbs the goods produced by the manufacturer as they are being made. The manufacturer is, therefore, relieved from paying the expenses of storage -that is, rent, insurance, wages, utilities as well as the loss of interest due to money capital tied up in stocks. 2. The manufacturer of goods in seasonal demand such as winter clothing, greeting cards for various festivals, etc. is able to continue production throughout the year as the wholesalers are willing to absorb the products when they are being produced. No manufacturer can survive if his factory is forced to close down for a few months in a year for there are costs to be met even if there is no production. These costs include depreciation on plant and equipment, interest on loans and wages of administrative staff. 3. All goods are produced before there are orders for them from the retailers. The manufacturer is relieved of the risk of loss should the anticipated demand for these goods from consumers fail to materialize. It is the wholesaler who has bought the goods in bulk who will have to bear the risk of loss. Reduced cash flow problems 1. By paying the manufacturer promptly, the wholesaler reduces the amount of working capital required by the manufacturer and allows the latter to continue production smoothly. The manufacturer will, therefore, have a regular inflow of cash after selling off each batch of production. This reduces the amount he has to borrow. Low marketing cost 1. Should the manufacturer undertake to market the goods himsel{ he will incur a lot of expenses for transport, advertising as well as administration since it is conceivable that some of the smaller retailers would prefer credit.

Wholesale Trade

2. However, if he were to sell through the wholesalers, he would deal with only a few major customers who buy in bulk and who can pay him cash fairly promptly. This would reduce his marketing costs. Services to the retailer Purchase of small quantities 1. A wholesaler's willingness to sell in small quantities is a boon to a small retailer who only places small orders and is unable to get his stock directly from the manufacturer as the latter only sells in bulk. Transporting orders of small quantities all over the country would be costly for the manufacturer. Reduced cash flow problems 1. Awholesaler provides credit to a retailer and reduces the latter's capital requirements. A producer is often not willing to grant credit to a retailer since it would increase his working capital. 2. As a result, the retailers have time to sell the goods before they have to pay for them. Low goods preparation cost 1. A wholesaler simplifies a retailer's work since the goods are already graded and prepacked into convenient quantities and sizes. Low storage expenses 1. A retailer is always assured of delivery of fresh stocks from the wholesaler's warehouse if he runs short. This reduces the amount of stock he needs to hold at a time, hence saving on costs of storage, insurance and risk, in case demand is below expectations. Wide choice of related products 1. A wholesaler offers a variety of goods made by various manufacturers, both local and abroad. This saves the retailer time which would otherwise have to be spent in dealing with each manufacturer individually. The retailer is also kept upto-date on the latest products available. The information supplied by the wh~esaler is much less likely to be biased than that supplied by the manufacturer.

Low wholesale prices 1. A cash-and-carry wholesaler who is a wholesale 'supermarket' offers a retailer goods at cutprices although the latter may have to arrange for his own transport. Lower prices are possible due to savings in cost which are a result of: (a) no credit facility - sales are on 'cash' basis (b) no delivery service (c) self-service - no need to employ huge staff (d) goods stocked are those that sell quickly. Services to the final consumer Regular supply at steady prices 1. Consumers are assured of a regular SUpply of goods throughout the year at steady prices since the wholesaler releases the goods when required. 2. This is particularly important for goods which are produced seasonally such as rice but whose demand is regular. 3. This is because a wholesaler buys goods when they are plentiful, and hence prices are comparatively low, and releases them in times of shortage without raising prices unduly. Convenient shopping and wider choices 1. The wholesaler enables the small retailers to compete with the large retailers, especially in suburban areas where rentals are lower than in the city centre. Thus, consumers are assured of getting the goods they want from the retailer nearest to their homes. Usually, the large retailer is situated in the city centre. 2. The consumer is assured of a wider choice of goods even at the smaller shops, since the retailers get their supplies from a number of wholesalers, who would in turn obtain their supplies from many producers. 3. Since wholesalers encourage the setting up of a number of smaller retailers, consumers have a wider choice of shops. Consumer demand 1. Since the wholesaler is in closer contact with the public through feedback from retailers, he can ensure that a consumer's opinion of a particular good generally reaches the manufacturer, with whom he too has close contact. In this way, products can be improved in line with consumer demand.

Wholesale Trade

INTERMEDIARIES Merchants 1. These middlemen are principals who trade on their own account and therefore own the goods and earn profits from their trading activities. Exporters and importers are the merchants in foreign trade while the wholesalers are merchants engage4 in home trade. Forwarding agents Forwarding agents are middlemen in international trade who specialise in moving goods from country to country. They arrange transport, documentation, customs clearance, insurance, storage so that the owner of the goods does not have to do this e.g. DHL, FED EX.

Mercantile agents 1. These middlemen act on behalf of their principals in finding would-be sellers and would-be buyers of the goods and services of their principals. They do not own the goods and services. They earn commissions for their services. Some merchantile agents act as 'brokers' and some as 'factors. Broker A broker is a middleman who: Finds buyers for the seller. Does not take possession of the goods. Cannot sell in his own name. Cannot sell at his own price. Receives commission for his services.

Factor A factor is a middleman who: Finds buyers for the seller. Takes possession of the goods. Can sell in his own name. Can sell at his own price. 11

Makes a profit out of sale.

Del Credere Agent A del credere agent is a middleman who: Finds buyers for the sellers. Takes possession of the goods. Guarantees to sell all the goods. Receives higher commission for his services.