Wholesale distribution plays a significant role in the economy, according to a First Research report. Wholesale distributors are also experiencing rapid change due to a number of factors: new competition, the growth of ecommerce and rising customer expectations, among them. Here’s what you need to know about how wholesale distribution works, including key benefits, challenges and examples, plus tips for running a successful distribution business.
Is Wholesaling or Wholesale Distribution?
Wholesalers operate as middlemen between product manufacturers and retailers or other businesses. They make a profit by buying products in bulk at a discount and reselling them in smaller quantities at a higher price to individual retailers. Many distributors specialize in specific industry sectors or product categories and build up a great deal of valuable industry expertise. This helps them provide value to their suppliers and customers, while distinguishing themselves from competitors.
Wholesale vs. distribution.
The terms “wholesaler” and “distributor” are sometimes used interchangeably to describe any companies that buy products from manufacturers and sell them to retailers and other businesses (as opposed to selling directly to consumers). However, the term “distributor” is often applied more specifically to a narrower subset of companies that have long-term relationships with particular manufacturers and help market and support their products.
Wholesalers play vital roles in the supply chain for most products, buying goods in bulk from manufacturers and selling them to retailers and other businesses. Wholesale distributors are responsible for acquiring goods, storing them, preparing them for sale to their customers and then delivering them. Some distributors have strong relationships with specific manufacturers, acting as their representatives in some markets and supporting their marketing efforts. Working with wholesalers can provide retailers and ecommerce sellers with discount pricing, more consistent product supply and wider product variety. Challenges facing wholesale distributors include new kinds of competition, direct-to-consumer sales models and rising customer expectations.
Wholesale Distribution Explained
Historically, relatively few manufacturers have sold their products directly to retailers or consumers. Wholesale distributors provide that liaison, buying large quantities of products from manufacturers, storing them and then supplying them to retailers and other businesses. This enables manufacturers to focus on designing, building and marketing their products without investing in extensive sales efforts or managing relationships with a large number of small retailers. Wholesalers often stock a wide range of products, which makes life simpler for retailers because they can obtain a broad variety of goods without the added complexity of working with many different suppliers.
Some industries have several levels of distribution, with larger wholesale distributors focusing on supplying smaller, regional or specialist distributors. Some wholesalers also act as suppliers of raw materials to manufacturers.
How Does Wholesale Distribution Work?
Wholesale distributors are responsible for acquiring goods, storing them, preparing them for sale in smaller quantities to their customers and then delivering them.
Success in wholesale distribution hinges on gaining a good understanding of customer needs, market trends, costs and price points; building strong relationships with business partners; and maximizing operational efficiency. Wholesale distributors must build solid “upstream” relationships with the suppliers or manufacturers of the goods they buy in bulk. They must also develop trusted relationships with their own “downstream” customers, be they retailers or businesses.
In some cases, wholesalers may serve as dropshipping providers for brick-and-mortar or ecommerce retailers. In a dropshipping arrangement, the retailer doesn’t actually stock the product it sells to customers. Instead, the retailer accepts payment and then passes the order to the distributor, which ships the product directly to the customer.
Types of Wholesale Distributors
A variety of companies can be involved in wholesale distribution, even within a single market or industry sector. Some of these participants include:
Manufacturers. In addition to making products, some manufacturers distribute them to retailers. This is especially true of boutique manufacturers, which may also sell directly to consumers. But large companies do this, too, and sometimes find themselves competing with traditional distributors.
Exclusive or specialized distributors. Some distributors act as the sole resellers for specific manufacturers. They often help analyze the marketplace and actively market and sell the manufacturers’ products as well.
Regional distributors. These companies focus on a specific country or geographic region. They bring valuable regional knowledge of customer preferences, languages, trends, regulations and import procedures. They may have exclusive rights to distribute products in their territory.
Wholesalers. In some industry sectors, wholesalers are differentiated from distributors, partly because they don’t represent specific manufacturers. They buy a wide selection of products in bulk from a variety of manufacturers or distributors and then resell them. They focus on competitive pricing, storage and order fulfillment.
Agents and brokers. Agents generally don’t own or stock the products they sell; instead, they focus on finding customers, negotiating pricing and making the sale on behalf of the manufacturers or distributors that supply the products. They may work on a commission basis.
Benefits of Wholesale Distribution
Wholesale distribution provides advantages for all businesses involved in the supply chain, including manufacturers and retailers. Those benefits include:
Increased reach. Manufacturers that work with wholesale distributors can invest less to expand their market, since the wholesaler is responsible for distributing the product to far-flung retailers. Manufacturers don’t need to hire, develop or maintain expensive armies of salespeople with the expertise to sell directly to customers.
Simpler operations. Wholesalers simplify business operations for both manufacturers and retailers. Manufacturers can work with a relatively small number of distributors to fulfill several large orders, instead of many small ones. And retailers can get their supplies from just a few distributors, instead of dealing with many individual manufacturers, thus simplifying ordering and reducing shipping costs.
Lower cost of business. Because wholesale distribution simplifies operations for manufacturers and retailers, it can also reduce their operating costs. Retailers that buy from wholesalers may also pay lower prices than when buying small quantities directly from manufacturers.
Storage capability. Wholesalers often have extensive warehouse capacity for storing inventory, freeing manufacturers and retailers from the burden and cost of maintaining large stocks of products.
Supply chain stability and mitigation of risk. By buying and maintaining inventory, wholesalers help secure a stable supply of products and reduce risk of shortages for other companies in the supply chain.