How Does Wholesale Distribution Work?

by Joseph Nicholson; Updated September 26, 2017
How Does Wholesale Distribution Work?

What is Wholesale Distribution?

Wholesale distribution is the process of selling products to retailers, who will then make the final sale. The proverbial middleman, wholesale distributors are a vital link between manufacturers and retailers. In some cases, the wholesale distribution is conducted by a separate branch of the same company that does the manufacturing. Others are private distributors that must have a keen sense of both the products available for distribution and the retail markets where they will ultimately be bought for consumption. A relatively recent innovation is the spread of wholesale outlets such as Costco or Sam's Club. These wholesale distributors run their own retail operations in large warehouse stores.

How it works

The essentials to success in wholesale distribution is buying quality products in high demand at low prices. This is usually achieved through high volume. By purchasing items in bulk, wholesale distributors are able to get a low price from manufacturers, who themselves are not equipped to either handle retail sales or shipment. Wholesalers then sell, again in bulk, to retailers at a slightly higher unit price and keep the difference, after costs, as profit.

Wholesale distributors account for about 7 percent of U.S. GDP, generating about $3.2 trillion in 2007. They bring vital goods to market including furniture, office equipment, industrial supplies, and groceries. Typical business operations of a wholesale distributor include marketing, accounting, processing orders, customer service and market research.

Risks

Wholesale distributors absorb the costs of shipping from the manufacturer to the retailers. They are therefore sensitive to rises in the price of fuel and transportation costs. In many cases, wholesale distributors have limited room to store inventory. They rely on the efficient movement of goods from manufacturer to retailer. A bottleneck can form if this flow is disrupted by retailers unwilling to carry the products being offered, or high prices set by the retailer. In both cases, the wholesale distributor is forced to lower their selling price, eating into profits or even creating a loss. Distributors can use the opposite strategy and carry a large inventory of goods to always have on hand the products needed by retailers. This, of course, carries the risk that the needs of retailers will shift and large inventories will remain unsold, tying up capital in the process. At times, products have very short lifespans forcing the distributor to lose volume due to spoilage.

About the Author

Joseph Nicholson is an independent analyst whose publishing achievements include a cover feature for "Futures Magazine" and a recurring column in the monthly newsletter of a private mint. He received a Bachelor of Arts in English from the University of Florida and is currently attending law school in San Francisco.

Photo Credits

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