In 2012, wholesale distribution revenues were $4.9 trillion, a 5.1 percent growth from the previous year according to the 2013 Wholesale Distribution Economic Trend Report released by Modern Distribution Management. This amount shows some leveling off, compared to double-digit growth after the Great Recession. Forecast for 2013 growth is 5.4 percent for the wholesale distribution industry.
Since the late 1980s, wholesale distributors have maintained a steady seven percent share of the private GDP in the U.S. Product segments range from food service and grocery distributors to home furnishings and furniture wholesalers. Revenues for food service and grocery distributors was $424.7 billion; home furnishings and furniture wholesalers enjoyed $48.7 billion in revenues.
These numbers are impressive, to say the least, when you consider wholesale distribution is a buying and selling game. Success in this sector requires good negotiation skills, an eye for the next hot item, keen salesmanship and the ability to harness distribution channels.
Of course, wholesale distributors can buy products at a low price and profit from a price that is attractive to consumers. However, the best avenues of success in this business is learning the different channels of wholesale distribution to get products to the consumer.
Generally, there is not a right way, best way or one way to distribute products. Many wholesale businesses adopt one or more methods to successfully market products. Consumer need and product type usually drive decisions about channels of distribution.
Most companies put their energies toward product development and leave sales to consumers up to other sources. The most popular channel is through retail stores, which can be an individual store or a chain of national retailers. Some wholesale distributors can also sell products to big box retailers.
Some wholesalers may choose to buy bulk merchandise from other wholesale distributors and resell those products through different channels. An advantage for the wholesale distributor is they get less competition and minimal involvement compared with selling products to retailers. Some wholesale buyers might even perform basic assembly of certain products before reselling them, if necessary.
Direct Mail and Telemarketing
By using direct mail as a distribution channel, wholesale distributors may charge higher margins or have competitive prices against retailers. However, to use this channel successfully, a wholesaler will need to have customer service and marketing departments. Few are structured in this manner unless they want direct involvement with consumers. There are some nationally-recognized brands that are successful with direct mail marketing.
Telemarketing is similar to direct mail and uses either telephone or web tools to market to consumers. Unlike direct mail, telemarketing requires a substantially larger workforce to handle high volumes of telephone solicitation to consumers.
E-commerce is the up and coming distribution channel that many companies are using. As an alternative to direct mail and telemarketing, distributors can sell products to consumers through the company website. This is a direct sales channel that usually requires a specific skill set even though it is more passive than the two channels discussed previously. Nevertheless, e-commerce allows wholesalers to serve niche markets that were once too small for traditional marketing efforts.
More wholesale distributors are giving e-commerce extra attention as it continues to evolve as more than just the next great business opportunity. Brick and mortar businesses can no longer rely solely on traditional selling options. The Internet has a heavy influence on delivery trends and product distribution practices. Not only must businesses make products available in stores, but consumers also want the option of shopping online.
Because of this, wholesale distributors can save the day, so to speak. Like their vendors, many distributors can use this expanded opportunity to also connect with consumers. Many have set up informational websites, while others choose to list their offerings on mall-type websites. Creating e-commerce enabled websites allows consumers to buy directly from wholesaler.
Drop Ship Distribution
Typically, online and catalog retailers who lack to resources to stock a surplus of inventory use drop ship distribution. Wholesale distributors ship products to retail clients by putting company information for the retailer on labels and packing slips. While this seems like an easy solution, it presents a challenge for retailers who may want to maintain control over the shipping process.
Adding an additional layer between the customer and retailer only works when the wholesaler has good customer service practices. If the wrong product is shipped, the retailer needs to know that the wholesaler will handle the problem properly and promptly. Quality issues such as improper packing or frequent shipping to incorrect addresses can disrupt both retail and wholesale operations.
In some situations, a manufacturer may look for multiple channels of distribution, which includes wholesale. For instance, a sporting goods manufacturer may also produce sports-related clothing and use two different distributors for its merchandise. A retailer might work if it can establish a relationship with both distributors. Often, this is not the case and the retailer only buys from one distributor.
While a sporting goods store would not have problems when using a wholesale distributor that specializes in sporting goods. However, the line of sports-related clothing may have one distributor that does not sell to the sporting goods store. This hinders the retailer’s access to the entire line of products.
A wholesale distributor that uses a sales team does not partner with other intermediaries. Instead, the sales team is a salaried or commissioned group of individuals who are responsible for selling wholesale inventory. A classic example of this wholesale distribution method is an auto dealership.
Again, wholesale distribution is not an either/or business. The best fit can be a single channel or multiple channels based on the company structure and needs of the customer base.
Distribution channels serve as a connecting link between the manufacturer and the consumer. Basically, these channels bridge the gap between the time and place where a product is manufactured and where it is consumed. When used properly, channels of distribution can increase marketing efficiency because these channels – or middlemen – are agencies of distribution specialists.
In addition to buying and selling, there are other process flows between distribution channel members. These include promotion, negotiation, ordering, assuming risks and payment. All are essential along the process of physical possession and ownership of goods distributed through wholesale channels.
There are scenarios where the process flows in one direction: directly from the manufacturer to the consumer. Through this process, ownership, physical possession and promotion are involved in the channels of distribution. Ordering products and payments also flow in one direction, from the consumer to the manufacturer.
Negotiating, financing and assuming risks involve a two-way process flow. Each of these components flow between the consumer and manufacturer. The flow of goods run smoother while costs are reduced.
Essentially, agents of distribution channels facilitate searches for buyers and sellers. They remain in touch with both and understand the needs of consumers. Without these middlemen, producers may need to keep large stocks of goods and overhead costs will be passed on to consumers.
If selling between the manufacturer and consumer always occurred efficiently, there would not be a need for a trillion dollar industry. However, reality calls for the use of intermediaries in distribution channels to ensure both parties reap benefits. In addition to improved efficiency, consumers have access to a wider assortment of products and manufacturers have an established procedure to getting their products on the market.
Improved efficiencies often result from using intermediaries in distribution channels. To illustrate, take five manufacturers and 20 retail stores. By selling directly to each retailer, the manufacturers generate 100 contact lines. This soon becomes a complex web for which each manufacturer is responsible.
Replace those 100 contact lines with just one wholesale distributor and the number of contacts are reduced to only 25. That is, the wholesaler makes five contacts to the manufacturers and 20 to the retailers. Obviously, a reduced number of contacts equals better efficiency and less costs for consumers.
Of course, manufacturers might still decide to get rid of intermediaries. However, this does not eliminate the important activities involved. Another agent will have to perform the necessary tasks that may include transporting and storing products.
Some industries have begun a visible march towards consolidating distribution channels. Mergers and acquisitions have resulted in companies having two or more channels of distribution. For instance, a distributor or wholesaler may acquire a retailer. The decision of which one remains often depends on the channel member that is closest to the company’s main consumers.
Historically, the manufacturer had sole responsibility for deciding on and controlling each channel of distribution. Today, distribution channels are dominated by end-user preferences. Look at the explosion of discount outlet malls for some high-end retailers. These malls obtain high-image products from manufacturers and sell them to consumers at a discount.
To counter this trend and maintain some leverage, manufacturers have chosen to open some distribution channels that were closed in the past. This practice has blurred the lines between the manufacturer, retailer and sellers who sell direct to consumers. Name brand personal technology and athletic shoe manufacturers are opening their own retail outlets.
The link between retailers and manufacturers has come close to making wholesale distribution obsolete. Storage and delivery is no longer the function of this distribution channel. While this is an emerging trend, wholesale distribution is still necessary for the flow of products to consumers.
There are also supporting functions that justify using distribution channels. These functions help channel members perform certain tasks that are essential to the distribution process. Consider the importance of transportation systems, storage space, insurance, financing and advertising.
Nevertheless, many wholesale distributors may want to adjust their methods to make sure they remain a viable option. Rapid changes in distribution systems may surpass the value most have found in using intermediaries to serve consumers.