Wholesalers buy and sell products to make profit and are a key part of many business’ supply chains. Here, we’ll explore the term in more detail – what exactly is a wholesaler and what does their job entail?
What is a wholesaler?
Wholesalers bulk-buy large quantities of a product and sell them on to retailers in smaller quantities. This means that they essentially act as a go-between for manufacturers and retailers. Because the wholesaler purchases a much higher amount of a single product than a retailer, the manufacturer offers them discounts. This means that they have high purchasing power, allowing them to acquire the products for a lower unit price than a retailer could.
This is how the wholesaler makes their profit. By selling the products on for a price that is slightly higher than they bought them for but still lower than the price the manufacturer offers retailers, the wholesaler makes retailers an attractive offer, and can make a profit on the difference.
What does a wholesaler do?
The wholesaler purchases products from manufacturers with the aim of selling them on to various retailers. When the wholesaler receives the products, they sort the batches into smaller bundles and repackages them for resale. The important thing to remember is that the number of products sold in one go diminishes with every stage of the supply chain:
The manufacturer sells a number of batches of a large quantity of products to wholesalers and distributors. Individual wholesalers then divide their shipment and sell them on in smaller batches to retailers. The retailers then sell the products individually to consumers.
At this point you may be thinking: What is the difference between a wholesaler and a distributor then? Ostensibly, they operate very similar models, but both have a few key distinguishing features – and some would say that the function of the distributor is slightly more complex. Let’s compare the role of the wholesaler to that of a distributor; where do the differences lie?
1. Distributors often form a business relationship with the manufacturer. If this is the case, the manufacturer and distributor sign a contractual agreement that specifies elements such as the territory a distributor can trade within or the maximum number of participants in the supply chain. Wholesalers do not do this.
2. Distributors cannot sell products to consumers. On the other hand, wholesalers can eliminate the retailer from the supply chain by trading directly with consumers. However, this is rare; it is far more common for wholesalers to sell to retail businesses.
3. Distributors only sell non-competing products. While a wholesaler can simultaneously sell products made by rival brands, such as two different brands of shampoo, distributors must only sell one brand of each type of product.
4. Distributors have a number of additional responsibilities. This includes organising finances and creating a budget for the selling and transporting of products to buyers. On top of this, distributors can also work to boost the brand awareness surrounding the products they carry in order to maximise their profitability.
However, distributors cannot simply be transplanted into the wholesaler’s position in the supply chain – or vice versa. It is fairly common for distributors to sell products to wholesalers, rather than just taking up the wholesaler’s role. This means that the chain could look like this:
Manufacturer ŕ Distributor ŕ Wholesaler ŕ Retailer ŕ Consumer
Wholesaler vs Retailer
The differences between wholesalers and retailers are a little more distinct. Retailers take the form of stores – either physical or online – that sell products to individual consumers. While distributors and wholesalers are largely B2B (business-to-business) organisations, retailers are B2C organisations. Their role in the supply chain is to source the products they want to sell from a distributor or wholesaler that offers them for a competitive price. Once they have bought a shipment of the product, they sell them to customers at a slightly higher price for a profit.
Becoming a Wholesaler
There are a number of factors you will need to bear in mind if you are interested in becoming a wholesaler.
- Because the entire model of a wholesale business is based around bulk-buying products at a rate that is impossible for retailers, it is vital that you have the capital to purchase a huge quantity of products before you see any income.
- Another result of the wholesaler business model is that you will need a huge amount of space in which to store the products you buy before you sell them on. Therefore, before you purchase any stock, you’ll need to invest in a warehouse and the appropriate security measures to ensure that your stock is safe. This warehouse will be at the centre of your business operations, so you should use your money wisely to invest in a good one, with a solid, weather-proof structure and a temperature-regulated interior. If your stock gets damaged, lost or stolen, you are likely to lose a significant amount of money and, potentially, your business.
- Once a wholesaler has invested in stock, they are responsible for selling it all in order to make a profit. Consumer trends and shopping habits change, and while retailers see this in real time and can alter their stock arrangements as the need arises, wholesalers are not able to be so responsive; they are burdened with a huge amount of stock until it is all sold off. Wholesalers can only rely on market research and sales figures to make decisions about their next investments. What’s more, if demand for the wholesaler’s product decreases and retailers are no longer interested in purchasing the product, the wholesaler could be stuck with shipments that they cannot shift.
- While retailers purchase products sold by wholesalers and market them in their own stores, wholesalers have no control over how the product is presented to consumers. If sub-standard promotional material or negative media attention affect the demand for the product, the wholesaler is likely to suffer.