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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, mercantile 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 4
W h o le s a le r S o le A g e n t

R e ta ile r R e ta ile r R e ta ile r

C onsum er C onsum er C onsum er C onsum er

e .g . V e g e t a b le s a t e .g . B re a d a n d e .g . F is h , lo c a lly e .g . Im p o rte d c a rs ,
p ro d u c e rs ’ m a rk e t re a d y m a d e m a n u fa c tu re d c o s m e t ic s
a n d m a d e -to -o rd e r fu r n it u r e h o u s e h o ld
fu r n it u r e ite m s

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

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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 aero planes, 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

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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, paddy, 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. paddy.
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

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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.

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3. Warehousing
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 wholesaler 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.
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Specialist Wholesaler:
• 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,
and 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 shop fitting for retail
members who have to keep their shops to a certain standard. Goods are
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delivered direct to the retailer. Advice on pricing, display and stock may be given.
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.

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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 himself {he will incur a

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lot of expenses for transport, advertising as well as administration since it is

conceivable that some of the smaller retailers would prefer credit.
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. Wholesaler 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
repacked 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 up-
to-date on the latest products available. The information supplied by the

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wholesaler 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 retailer
goods at cut prices 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
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reaches the manufacturer, with whom he too has close contact. In this way,
products can be improved in line with consumer demand.

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
engaged 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
mercantile 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.

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• Can sell in his own name.

• Can sell at his own price.
• 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.

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