Wholesaling
Wholesaling includes all the activities involved in selling goods and services to those buying them for resale or business use. Firms engaged primarily in wholesaling activities are called wholesalers.
Wholesalers buy mostly from producers and sell mostly to retailers, industrial consumers, and other wholesalers. As a result, many of the nation’s largest and most important wholesalers are largely unknown to final consumers. For example, how much do you know about McKesson, the huge $179 billion diversified health-care-services provider and the nation’s leading wholesaler of pharmaceutical, health and beauty care, home health-care, and medical supply and equipment products? Or how about wholesaler Arrow Electronics, which supplies $23 billion worth of computer chips, capacitors, and other electronics and computer components annually to more than 100,000 original equipment manufacturers and commercial customers through a global network of more than 460 locations in 56 countries?
And you may never have heard of a company called Grainger, even though it is very well known and much valued by its more than 2 million business and institutional customers in more than 150 countries:37
Wholesaling: Many of the nation’s largest and most important wholesalers—like Grainger—are largely unknown to final consumers. But they are very well known and much valued by the business customers they serve.
TJP / Alamy Stock Photo
Grainger may be the biggest market leader you’ve never heard of. It’s a $10 billion business that offers more than 1.5 million maintenance, repair, and operating (MRO) products from 4,800 manufacturers to more than 2 million active customers. Through its branch network, service centers, sales reps, catalog, and online and social media sites, Grainger links customers with the supplies they need to keep their facilities running smoothly—everything from lightbulbs, cleaners, and display cases to nuts and bolts, motors, valves, power tools, test equipment, and safety supplies. Grainger’s nearly 670 branches, 34 strategically located distribution centers, more than 25,000 employees, and innovative web and mobile sites handle more than 140,000 transactions a day. Grainger’s customers include organizations ranging from factories, garages, and grocers to schools and military bases.
Grainger operates on a simple value proposition: to make it easier and less costly for customers to find and buy MRO supplies. It starts by acting as a one-stop shop for products needed to maintain facilities. On a broader level, it builds lasting relationships with customers by helping them find solutions to their overall MRO problems. Acting as consultants, Grainger sales reps help buyers with everything from improving their supply chain management to reducing inventories and streamlining warehousing operations.
So, how come you’ve never heard of Grainger? Perhaps it’s because the company operates in the not-so-glamorous world of MRO supplies, which are important to every business but not so important to consumers. More likely, it’s because Grainger is a wholesaler. And like most wholesalers, it operates behind the scenes, selling mostly to other businesses.
Why are wholesalers important to sellers? For example, why would a producer use wholesalers rather than selling directly to retailers or consumers? Simply put, wholesalers add value by performing one or more of the following channel functions:
Selling and promoting. Wholesalers’ sales forces help manufacturers reach many small customers at a low cost. The wholesaler has more contacts and is often more trusted by the buyer than the distant manufacturer.
Buying and assortment building. Wholesalers can select items and build assortments needed by their customers, thereby saving much work.
Bulk breaking. Wholesalers save their customers money by buying in carload lots and breaking bulk (breaking large lots into small quantities).
Warehousing. Wholesalers hold inventories, thereby reducing the inventory costs and risks of suppliers and customers.
Transportation. Wholesalers can provide quicker delivery to buyers because they are closer to buyers than are producers.
Financing. Wholesalers finance their customers by giving credit, and they finance their suppliers by ordering early and paying bills on time.
Risk bearing. Wholesalers absorb risk by taking title and bearing the cost of theft, damage, spoilage, and obsolescence.
Market information. Wholesalers give information to suppliers and customers about competitors, new products, and price developments.
Management services and advice. Wholesalers often help retailers train their salesclerks, improve store layouts and displays, and set up accounting and inventory control systems.
Types of Wholesalers
Wholesalers fall into three major groups (see
Table 13.3): merchant wholesalers, brokers and agents, and manufacturers’ and retailers’ branches and offices. Merchant wholesalers are the largest single group of wholesalers, accounting for roughly 50 percent of all wholesaling. Merchant wholesalers include two broad types: full-service wholesalers and limited-service wholesalers. Full-service wholesalers provide a full set of services, whereas the various limited-service wholesalers offer fewer services to their suppliers and customers. The different types of limited-service wholesalers perform varied specialized functions in the distribution channel.
Table 13.3
Major Types of Wholesalers
Brokers and agents differ from merchant wholesalers in two ways: They do not take title to goods, and they perform only a few functions. Like merchant wholesalers, they generally specialize by product line or customer type. A broker brings buyers and sellers together and assists in negotiation. Agents represent buyers or sellers on a more permanent basis. Manufacturers’ agents (also called manufacturers’ representatives) are the most common type of agent wholesaler. The third major type of wholesaling is that done in manufacturers’ and retailers’ branches and offices by sellers or buyers themselves rather than through independent wholesalers.
Wholesaler Marketing Decisions
Wholesalers now face growing competitive pressures, more-demanding customers, new technologies, and more direct-buying programs on the part of large industrial, institutional, and retail buyers. As a result, they have taken a fresh look at their marketing strategies. As with retailers, their marketing decisions include choices of segmentation and targeting, differentiation and positioning, and the marketing mix—product and service assortments, price, promotion, and distribution (see
Figure 13.2).
Figure 13.2
Wholesaler Marketing Strategies
Segmentation, Targeting, Differentiation, and Positioning Decisions
Like retailers, wholesalers must segment and define their target markets and differentiate and position themselves effectively—they cannot serve everyone. They can choose a target group by size of customer (for example, large retailers only), type of customer (convenience stores only), the need for service (customers who need credit), or other factors. Within the target group, they can identify the more profitable customers, design stronger offers, and build better relationships with them. They can propose automatic reordering systems, establish management-training and advisory systems, or even sponsor a voluntary chain. They can discourage less-profitable customers by requiring larger orders or adding service charges to smaller ones.
Marketing Mix Decisions
Like retailers, wholesalers must decide on product and service assortments, prices, promotion, and place. Wholesalers add customer value though the products and services they offer. They are often under great pressure to carry a full line and stock enough for immediate delivery. But this practice can damage profits. Wholesalers today are cutting down on the number of lines they carry, choosing to carry only the more profitable ones. They are also rethinking which services count most in building strong customer relationships and which should be dropped or paid for by the customer. The key for companies is to find the mix of services most valued by their target customers.
Price is also an important wholesaler decision. Wholesalers usually mark up the cost of goods by a standard percentage and operate on small margins. As retail and industrial customers face increasing costs and margins pressures, they turn to wholesalers, looking for lower prices. Wholesalers may, in turn, cut their margins on some lines to keep important customers. They may also ask suppliers for special price breaks in cases when they can turn them into an increase in the supplier’s sales.
Although promotion can be critical to wholesaler success, most wholesalers are not promotion minded. They have historically used largely scattered and unplanned trade advertising, sales promotion, personal selling, and public relations. Like other business-to-business marketers, wholesalers need to make a team effort to sell, build, and service major accounts. Wholesalers also need to adopt some of the nonpersonal promotion techniques used by retailers. They need to develop an overall promotion strategy and make greater use of supplier promotion materials and programs.
Digital and social media are playing an increasingly important role in wholesaler promotion. For example, Grainger maintains an active presence on Facebook, YouTube, Twitter, LinkedIn, and Google+. It also provides a feature-rich mobile app. On its YouTube channel, Grainger lists more than 500 videos on topics ranging from the company and its products and services to keeping down inventory costs.
Finally, distribution (location) is important. Wholesalers must choose their locations, facilities, and other locations carefully. There was a time when wholesalers could locate in low-rent, low-tax areas and invest little money in their buildings, equipment, and systems. Today, however, as technology zooms forward, such behavior results in outdated systems for material handling, order processing, and delivery.
Instead, today’s large and progressive wholesalers have reacted to rising costs by investing in automated warehouses and IT systems. Orders are fed from the retailer’s information system directly into the wholesaler’s, and the items are picked up by mechanical devices and automatically taken to a shipping platform where they are assembled. Most large wholesalers use technology to carry out accounting, billing, inventory control, and forecasting. Modern wholesalers are adapting their services to the needs of target customers and finding cost-reducing methods of doing business. They are also transacting more business online. For example, e-commerce is Grainger’s fastest-growing sales channel, making Grainger the 13th-largest online seller in the United States and Canada. Online and mobile purchasing now account for 40 percent of the wholesaler’s total sales.38
Trends in Wholesaling
Today’s wholesalers face considerable challenges. The industry remains vulnerable to one of its most enduring trends—the need for ever-greater efficiency. Tight economic conditions have led to demands for even lower prices and the winnowing out of suppliers who are not adding value based on cost and quality. Progressive wholesalers constantly watch for better ways to meet the changing needs of their suppliers and target customers. They recognize that their only reason for existence comes from adding value, which occurs by increasing the efficiency and effectiveness of the entire marketing channel.
As with other types of marketers, the goal is to build value-adding customer relationships. For example, consider Sysco, the $49 billion wholesale food distribution company that operates behind the scenes to supply more than 425,000 restaurants, schools, hospitals, colleges, and other commercial customers that prepare meals away from home.39
Giant food distribution wholesaler Sysco lives up to its “Good things come from Sysco” motto by procuring and delivering food and food service supplies more dependably, efficiently, and cheaply than customers could ever hope to do on their own.
Sysco Corporation
For example, Lowell’s, the iconic restaurant in Seattle’s Pike Place Market, procures almost all of its products conveniently through the Sysco Market online ordering system. Its orders are processed quickly and accurately at Sysco’s automated distribution center. Then, Lowell’s—by itself or with the help of Sysco sales associates and dispatchers—can track the location of individual deliveries via the My Sysco Truck program. Sysco constantly seeks new ways to add more value and build trust, from product traceability for safety to sourcing products from local, small- to mid-sized farms, ranches, and processors to serve the needs of customers whose businesses are positioned on sustainability and community. In short, Sysco more than lives up to its motto: “Good things come from Sysco.”
The distinction between large retailers and large wholesalers continues to blur. Many retailers now operate formats such as wholesale clubs and supercenters that perform many wholesale functions. In return, some large wholesalers are setting up their own retailing operations. For example, SuperValu is the nation’s largest food wholesaler, and it’s also one of the country’s largest food retailers. About half of the company’s sales come from its Cub Foods, Save-A-Lot, Farm Fresh, Hornbacher’s, Shop ’n Save, and Shoppers stores.40
Wholesalers will continue to increase the services they provide to retailers—retail pricing, cooperative advertising, marketing and management information services, accounting services, online transactions, and others. However, both the more value-focused environment and the demand for increased services have put the squeeze on wholesaler profits. Wholesalers that do not find efficient ways to deliver value to their customers will soon drop by the wayside. Fortunately, the increased use of computerized, automated, and internet-based systems will help wholesalers contain the costs of ordering, shipping, and inventory holding, thus boosting their productivity.