COMMERCE: FORM TWO: Topic 4 - WHOLESALE TRADE

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TOPIC 4: WHOLESALE TRADE

Wholesale Trade

Meaning of Wholesale Trade

Define wholesale trade

Wholesale trade is a form of trade in which goods are purchased and stored in large quantities and sold, in batches of a designated quantity, to resellers, professional users or groups, but not to final consumers. Also wholesale trade may be defined as marketing and selling merchandise to retailers, to other wholesalers, or to industrial,commercial,professional or other institutional users in contract to selling to household consumers, to individuals for personal use or farmers.

Wholesaler:

A Person or firm that buys large quantity of goods from various producers or vendors, warehouses them, and resells to retailers. OR A wholesaler is an intermediary entity in the distribution channel that buys in bulk and sells to resellers rather than to consumers. In its simplest form, a distributor performs a similar role but often provides more complex services. Distributors and wholesalersoften work together as channel partners.

Characteristics of a Wholesaler:

1. He buys in bulk quantities from producers and resells them to retailers in small quantities.
2. He usually deals in a few types of products.
3. He is a vital link between the producer and the retailer.
4. He operates in a specific area determined by producers.
5. He does not display his goods but keeps them in god owns. Only samples are shown to intending buyers.
6. A wholesaler may be an individual or otherwise a firm.
7. A wholesaler generally sets up distribution centre in parts of the country to make available goods to the retailers.
8. He sets up own warehouses to store goods for ready supply.

Difference between Wholesaler and Retailer

Distinguish between wholesaler and retailer

MIDDLEMEN IN DISTRIBUTION CHANNELS

Merchant intermediaries are those channels member who take both title to and position of goods from the preceding member (s) and channel them to the subsequence. These may classify as follows:

• Wholesalers : A merchants wholesalers may be defined as that intermediary who buys goods in bulk from manufactures and sells them largely to subsequent intermediaries participating in the channel, namely, semi-wholesalers and retailers, they buy the goods and sees the same on their own account and risk. They take title of goods and they resell the goods at a profit with commission.
• Retailers: A retailer may be defined as that merchant intermediary who buys product from preceding challes members in smaller assorted lots to suit individuals' consumer requirements. Retail in the final middlemen in the channel of distribution as he is going to sell products to households consumers for non- business use.

Retailers are further classified as institutional and non institutional retailers.

The institutional retailers are:

• Consumer Co- operative stores.
• Fair price shops.
• Departmental stores.
• Chain / multiple stores.
• Mail order houses.

The non-institutional buyers are:

• Stress sellers.
• Peddlers.
• Hawkers.

The Functions of Wholesaler

Mention the functions of wholesaler

A wholesaler performs the following functions:

1. Assembling:A wholesaler buys goods from producers who are scattered far and wide and assembles them in his warehouse for the purpose of the retailers.
2. Storage:After arranging and assembling the products from producers, wholesaler stores them in his warehouse and releases them in proper and required quantities as and when they are required by retailers. Since there is always a time-lag between production and consumption, therefore, the manufactured goods are to be stored carefully till they are demanded by retailers. Thus, a wholesaler performs the storage function in order to save the goods from deterioration and also to make these goods available when they are demanded.
3. Transportation:Wholesalers buy goods in bulk from the producers and transport them to their own godowns. Also, they provide transportation facility to retailers’ by transporting the goods from their warehouses to the retailers’ shops. Some wholesalers purchase in bulk, therefore, they can avail the economies of freight on bulk purchases.
4. Financing:A wholesaler provides credit facility to retailers who are in need of financial assistance.
5. Risk-bearing:A wholesaler bears all the trade risks arising out of the sudden fall in prices of goods or by way of damage/spoilage or destruction of goods in his warehouse. The risk of bad debt as a result of nonpayment by retailers who have purchased on credit, also falls on the wholesalers. Thus a wholesaler bears all the trade and financial risks of the business.
6. Grading and Packing:A wholesaler sorts out the goods according to their quality and then packs them in appropriate containers. Thus, he performs the marketing function of grading and packing also.
7. Providing Marketing Information:Wholesalers provide valuable market information to retailers and manufacturers. The retailers are informed about the quality and type of goods available in the market for sale, whereas the manufacturers are informed about the changes in tastes and fashions of consumers so that they may produce the goods of the desired level of taste and fashion.
8. Facilitating Disbursement and Sale:Wholesalers sell their goods to retailers who are scattered far and wide. Retailers approach them when their stocks are exhausted from further replenishment. Thus, wholesalers help in the dispersion process of marketing.

The Services Rendered by Wholesaler to Manufacturers, Retailers, and the Public

Point the services rendered by wholesaler to manufactures, retailers, and the public

Services of Wholesaler:

(A) Services to Manufacturers/Producers:

1. Wholesaler furnishes information to the manufacturer about consumer behaviour, the changes in the tastes and fashions and also the latest demands of the customers.
2. Wholesaler enables a manufacturer to get benefit of economies of large-scale production by manufacturing on a large-scale basis.
3. Wholesalers relieve producers from keeping stock since they usually make forward dealings with producers.
4. Wholesalers render financial assistance to manufacturers and also provide long-term soft loans to them.
5. Wholesaler helps manufacturers in maintaining an even place of production by placing advance orders for periods which are usually characterised by slack demand.
6. Wholesalers help in price stabilisation since they stock goods in the slack season and S’ 11 them when the demand is high.
7. Wholesalers enable the manufacturers to save their capital by not tying it up in stocks. Instead, capital can be utilised for production activities.
8. Wholesalers are an important link between the manufacturers and the retailers.
9. Wholesalers provide warehousing facilities for goods till they are required by the retailers.
10. Wholesalers take over the marketing functions from the manufacturers, thereby enabling them to concentrate on production.

(B) Services to Retailers:

1. Wholesalers relieve retailers from keeping huge stocks with themselves since a retailer can approach a wholesaler for the replenishment of his stocks whenever they are exhausted.
2. Wholesalers provide financial assistance to retailers by selling goods to them on credit.
3. Wholesalers provide necessary market information to retailers regarding the type, quality and price of goods.
4. Wholesalers enable retailers to obtain supplies more quickly than they could by placing orders directly to manufacturers,
5. Wholesalers provide the benefits of specialisation to retailers.
6. Wholesalers help retailers to take favourable advantage of price fluctuations.
7. Wholesalers enable retailers to share the economies of transport.
8. Wholesalers bring to retailers in bulk, but charging less prices.
9. Wholesalers bring to the notice of retailers new products through advertisements and travelling salesmen.
10. Wholesalers give trade discounts on the bulk purchases to retailers.

(C) Services to Consumers:

1. Wholesalers make available the goods according to consumers’ needs, tastes, fashion and demand.
2. Wholesalers maintain stability of price by adjusting demand and supply and factors in the economy.
3. Wholesalers make large-scale production of goods possible, thereby keeping the overall price level low.
4. Wholesalers have always ready stocks with them and the consumers do not have to wait for the replenishment of stocks.
5. Wholesalers provide knowledge of new products to consumers.

The Types of Wholesalers (Merchant, National, Agents)

Identify the types of wholesalers (merchant, national, agents)

The wholesalers may be classified under the following headings:

(A) On the basis of area covered:

1. Local wholesalers, who distribute the goods from the producer to the consumer of a particular locality or area.
2. State wholesalers, who function in a particular state or province.
3. Country-wide wholesales who are located at the main business centres of the country and who distribute goods throughout the length and breadth of the country.

(B) On the basis of the goods they deal in:

It is the most used grouping of wholesale concerns. According to T.N. Backman, ‘it is not easy to define their limits of operations on any particular basis or criterion, but usually three bases are selected:

1. Methods of distributing goods:
2. sources of supply; and
3. the use of the goods by the consumers.

(C) On the basis of methods of operation:

(a) Full-function wholesales-who perform the entire range of wholesale functions, viz., assembling, storage, transportation, packing, financing and risk-bearing.

(b) Limited function wholesalers-who perform only limited or specific functions out of the full range of wholesale functions. They include:

1. Rack Jobbers-wholesalers who sell special products viz., household wares and cosmetic/toiletries to retailers.
2. Truck wholesalers-who combine selling, delivery, and collection in one operation. They carry only specific type of products, usually perishable and semi-perishable goods.
3. Cash-and-carry wholesalers-who sell their stocks to retailers on ‘cash and carry’ basis. The retailers come to the wholesalers’ godown, select their requirements and pay cash on the spot and take away the goods.
4. Drop shipping wholesalers-who do not actually handle the goods in which they deal in but leave the storage and transportation functions for the producers whom they represent to perform. Here, the producer directly dispatches the goods to the retailers, but the bill is forwarded through the wholesaler, who, in turn, claims it from the retailers. Such wholesalers deal in goods which bear high cost of transportation.

(c) Merchant wholesalers.

They are of the following types:

1. Wholesalers proper:They are those merchants who deal only in the buying and selling activities and do not engage in manufacturing activities. They buy goods in bulk from the manufacturers and sell them in bulk to retailers. They also maintain their own warehouses for storing the goods.
2. Manufacturer wholesalers:They combine the twin functions of manufacturing and selling and operate as both manufacturers and wholesalers. They usually purchase goods in their crude form, and after processing in their plant, sell them in a refined form to retailers. Their production operations are relatively simple and their main activity is that of selling.
3. Mill-supply wholesalers/Industrial Distributors:Such wholesalers sell a wide range of goods to industrial units, who, in turn, use them for their manufacturing operations. These wholesalers buy goods in bulk quantities from producers/growers and sell them to industrial mills. For example, a wholesaler may purchase raw tobacco from growers and sell them to factories which manufacture cigarettes.

(D) On the basis of their line of product:

1. General merchandise wholesalers:Wholesalers who deal in a number of items of general merchandise, ranging from food products to household appliances.
2. General line wholesalers:Who offer complete stock in one major line, e.g., stationery goods or may be hardware appliances, etc
3. Specialised wholesalers:Who deal only in specialised goods such as food products c: electrical goods, etc. They help those retailers who wish to buy a wide range of goods of the same line.

The Channels of Distribution

Explain the channels of distribution

A distribution channel refers to the path linking the producer or manufacturer of a product with the consumer or user of that product. OR is the chain of businesses or intermediaries through which a good or service passes until it reaches the end consumer. A distribution channel can include wholesalers, retailers, distributors and even the internet. Channels are broken into direct and indirect forms, with a "direct" channel allowing the consumer to buy the good from the manufacturer and an "indirect" channel allowing the consumer to buy the good from a wholesaler. Direct channels are considered "shorter" than "indirect" ones.

ACTIVITIES PERFORMED IN CHANNELS OF DISTRIBUTION

• Selling and promoting. This function is very important to manufacturers. One strategy involves the use of distribution channels to carry out the responsibilities of product deployment. In addition to being marketing experts in their industry, distribution firms usually have direct-selling organizations and a detailed knowledge of their customers and their expectations. The manufacturer utilizing this distributor can then tap into these resources. Also, because of the scale of the distributing firm's operations and its specialized skill in channel management, it can significantly improve the time, place, and possession utilities by housing inventory closer to the market. These advantages mean that the manufacturer can reach many small, distant customers at a relatively low cost, thus allowing the manufacturer to focus its expenditures on product development and its core production processes.
• Buying and building product assortments. This is an extremely important function for retailers. Most retailers prefer to deal with few suppliers providing a wide assortment of products that fit their merchandising strategy rather than many with limited product lines. This, of course, saves on purchasing, transportation, and merchandising costs. Distribution firms have the ability to bring together related products from multiple manufacturers and assemble the right combination of these products in quantities that meet the retailer's requirements in a cost-efficient manner.
• Bulk breaking. This is one of the fundamental functions of distribution. Manufacturers normally produce large quantities of a limited number of products. However, retailers normally require smaller quantities of multiple products. When the distribution function handles this requirement it keeps the manufacturer from having to break bulk and repackage its product to fit individual requirements. Lean manufacturing and JIT techniques are continuously seeking ways to reduce lot sizes, so this function enhances that goal.
• Value-added processing. Postponement specifies that products should be kept at the highest possible level in the pipeline in large, generic quantities that can be customized into their final form as close as possible to the actual final sale. The distributor can facilitate this process by performing sorting, labeling, blending, kitting, packaging, and light final assembly at one or more points within the supply channel. This significantly reduces end-product obsolescence and minimizes the risk inherent with carrying finished goods inventory.
• Transportation. The movement of goods from the manufacturer to the retailer is a critical function of distribution. Delivery encompasses those activities that are necessary to ensure that the right product is available to the customer at the right time and right place. This frequently means that a structure of central, branch, and field warehouses, geographically situated in the appropriate locations, are needed to achieve optimum customer service. Transportation's goal is to ensure that goods are positioned properly in the channel in a quick, cost-effective, and consistent manner.
• Warehousing. Warehousing exists to provide access to sufficient stock in order to satisfy anticipated customer requirements, and to act as a buffer against supply and demand uncertainties. Since demand is often located far from the source (manufacturer), warehousing can provide a wide range of marketplaces that manufacturers, functioning independently, could not penetrate.

Factors influencing the choice of channel of distribution:

1. Product: Perishable goods need speedy movement and shorter route of distribution. For durable and standardized goods, longer and diversified channel may be necessary. Whereas, for custom made product, direct distribution to consumer or industrial user may be desirable.Also, for technical product requiring specialized selling and serving talent, we have the shortest channel. Products of high unit value are sold directly by travelling sales force and not through middlemen.
2. Market: (a) For consumer market, retailer is essential whereas in business market we can eliminate retailing.(b) For large market size, we have many channels, whereas, for small market size direct selling may be profitable.(c) For highly concentrated market, direct selling is preferred whereas for widely scattered and diffused markets, we have many channels of distribution.(d) Size and average frequency of customer’s orders also influence the channel decision. In the sale of food products, we need both wholesaler and retailer.Customer and dealer analysis will provide information on the number, type, location, buying habits of consumers and dealers in this case can also influence the choice of channels. For example, desire for credit, demand for personal service, amount and time and efforts a customer is willing to spend-are all important factors in channels choice.
3. Middlemen: (a) Middlemen who can provide wanted marketing services will be given first preference.(b) The middlemen who can offer maximum co-operation in promotional services are also preferred.(c) The channel generating the largest sales volume at lower unit cost is given top priority.
4. Company: (a) The company’s size determines the size of the market, the size of its larger accounts and its ability to set middleman's co-operation. A large company may have shorter channel.(b) The company’s product-mix influences the pattern of channels. The broader the product- line, the shorter will be the channel.If the product-mix has greater specialization, the company can favor selective or exclusive dealership.(c) A company with substantial financial resources may not rely on middlemen and can afford to reduce the levels of distribution. A financially weak company has to depend on middlemen.(d) New companies rely heavily on middlemen due to lack of experience.(e) A company desiring to exercise greater control over channel will prefer a shorter channel as it will facilitate better co-ordination, communication and control.(f) Heavy advertising and sale promotion can motivate middlemen in the promotional campaign. In such cases, a longer chain of distribution is profitable.Thus, quantity and quality of marketing services provided by the company can influence the channel choice directly.
5. Marketing Environment: During recession or depression, shorter and cheaper channel is preferred. During prosperity, we have a wider choice of channel alternatives. The distribution of perishable goods even in distant markets becomes a reality due to cold storage facilities in transport and warehousing. Hence, this leads to expanded role of intermediaries in the distribution of perishable goods.
6. Competitors: Marketers closely watch the channels used by rivals. Many a time, similar channels may be desirables to bring about distribution of a company’s products. Sometimes, marketers deliberately avoid channels used by competitors. For example, company may by-pass retail store channel (used by rivals) and adopt door-to-door sales (where there is no competition).
7. Customer Characteristics: This refers to geographical distribution, frequency of purchase, average quantity of purchase and numbers of prospective customers.
8. Channel Compensation: This involves cost-benefit analysis. Major elements of distribution cost apart from channel compensation are transportation, warehousing, storage insurance, material handling distribution personnel’s compensation and interest on inventory carried at different selling points. Distribution Cost Analysis is a fast growing and perhaps the most rewarding area in marketing cost analysis and control.

Role of channels of distribution

Channel of Distribution plays a very important role in achieving the marketing objectives of a company. Undoubtedly, the manufacturer of product or services creates involve utility but the distribution channels create time and place utilities. According to Drucker, "both the market and distribution channels are often more crucial than the product. They are primary; the product is secondary.

In an ever widening market, particularly in consumer goods market distribution channels have a distinctive role in the successful implementation of marketing plans and strategies. These channels performing the following marketing functions the machinery of distribution.

• The searching out of buyers and seller.
• Matching goods to requirements of the market(merchandising)
• Offering products in the form of assortments packages of items usable and acceptable by the consumers /users.
• Persuading and influencing the prospective buyers to favor a certain products and its maker [personal selling /sales promotion].
• Implementing pricing strategies in such a manner that would be acceptable to the buyers and ensure effective distribution functions.
• Participating actively in the creation and establishment of market for a new product.
• Offering pre- and after sales service to customer
• Transferring of new technology to the users along with the supply of products and playing green resolution in our country.
• Providing feels back information, marketing intelligence and sales forecasting services for their regions their suppliers.
• Offering credit to retailers and consumers.
• Risk- bearing with references to stock holding transport.

Agent Intermediaries:

Agent Intermediaries are those channel components who never take title to end usually do not take title to and usually do not take possession of goods but merely assist manufacturers, merchants intermediaries and consumers in carrying out transactions of sale and purchase. There for, unlike merchant intermediaries, they do not buy or sell goods on their own account but merely bring buyers and sellers together in order to strike a transaction. There exist an agency relationship between such an intermediary manufacturers where in the former acts as agent and the latter as his principal, such agent intermediaries solicit orders, sometimes with discretion a fixing prices, and determines the term of sale with buyers.

Agent intermediaries are usually compensable for their services by way of commission on the value of sale affected through them or any other basis naturally agrees upon.

When the Necessity of Eliminating the Wholesaler will Arise

Show when the necessity of eliminating the wholesaler will arise

Arguments in Favour of Elimination of Wholesalers:

1. Wholesalers are middlemen between the manufacturers and the retailers. They increase the cost of marketing and price of the products goes up. The consumers have to pay higher price. By eliminating wholesalers, prices of the products will decrease and the consumer shall benefit. The manufacturers will be earning more profit on account of lesser prices of the products.
2. Wholesalers are unnecessary links between the manufacturers and retailers. Their presence in the distribution channel obstructs the smooth and quick delivery of goods from the manufacturers to the ultimate consumers. If they are eliminated, unrestricted supply of goods takes place from the manufacturers to the retailers and the consumers.
3. During the slack seasons and scarcity in business activities demand, the wholesalers resort to hoarding and stocking of goods and sell them at exorbitant prices charging excessive profits.
4. In certain regions, the wholesaler is the sole distributor of the product. He occupies monopolistic position and exploits both the retailers and the consumers by charging higher prices, if the wholesalers are eliminated it would be in the best interest of both the retailers and the consumers.
5. 5. Big and established retailers such as large departmental stores can afford to make their own purchases directly from the manufacturers without approaching the wholesaler. The wholesalers are easily eliminated.
6. On account of developed means of transportation, the retailers can easily purchase goods directly from the manufacturers without the services of wholesalers.
7. Now-a-days, the manufacturers have started opening their own shops for the distribution of their products. They are establishing direct link with the consumers. The services of the wholesalers can be easily dispensed with.
8. The co-operative movement is gaining immense popularity these days in India. Various co-operative stores and super markets are operating for selling goods to the consumers. They procure their supplies directly from the manufacturers. The presence of the wholesalers is superfluous in the chain of distribution.
9. In order to earn more profits, the wholesalers may take over the products of the manufacturer’s competitors. The manufacturer concerned may face the sudden decline in the sales of his products.

Arguments against the Elimination of Wholesalers

1. The services and functions of a wholesaler are numerous and indispensable for the smooth flow of goods from the manufacturer to the ultimate consumer. He is an important link in the distribution chain of goods so the business cannot do without him.
2. Evelyn Thomas, in his book “Commerce: Its Theory and Practice” says that “Wholesalers by operating on a large scale relieve the manufactures of innumerable duties which they find expensive and difficult to perform.” A wholesaler relieves the producers of the trouble of ware housing and other marketing problems. Hence his services are very important and are always required.
3. Wholesalers provide valuable information regarding the customers tastes, fashions and demand to manufacturers so that the latter may adjust their production accordingly and earn more.
4. Wholesalers create a better demand for goods than retailers since they deal in fewer goods and also possess specialized knowledge in the products they deal in. Thus a wholesaler’s existence is very necessary.
5. Wholesalers enable retailers to carry on their business efficiently. They deal in fewer goods and also posses specialized knowledge about the products
6. Wholesalers help in price stabilization-thus their existence is very essential for both retailers and ultimate consumers.

Exercise 1

QUIZ

• Describe the activities involved in a channel of distribution.
• Explain the function of the Wholesalers.