There are the manufacturers, and then there are the retailers. Sometimes, though, the manufacturers aren't the ones putting its product on retail shelves. They leave it up to a middle man, their distribution company. These companies buy the product fairly cheap -- generally 65 to 75 percent off retail -- and then sell it at a markup to retailers, or even in their own stores, if they have them.
Why Use a Distribution Company?
Distributors are helpful to small companies that don't have the time or money to develop a widespread sales force. Big companies use them as well, though, usually in unfamiliar markets. A huge international company based in New York, for example, might sell its products through its own employed sales agents in Western Europe, but use a Moldovian distribution company in Moldovia. The distribution company knows the players there, along with the language, the economic climate and business etiquette. It can better penetrate the market with this insider knowledge, which could take a significant investment for a company in New York to fully grasp.
Definition of Profit Margin
The gross profit margin of any business is the gross profit as a percentage of total sales, where gross profit is total sales minus the cost of goods sold. The equation looks like this: (total sales - cost of goods sold) / total sales. The higher the percentage, the more efficient the business is at selling its products. For a distribution company, the cost of goods sold is literally the cost of goods -- what it paid for the product from the manufacturer.
Occasionally you will hear of net profit margin. This is the net profit as a percentage of total sales, where usually the net profit accounts for selling, general and administrative expenses in addition to cost of goods sold. Generally, net profit margin does not take taxes or extraordinary expenses into account.
Margins for Distributors
"Entrepreneur" magazine says that the typical profit margin of a wholesale distributor is around 25 percent. To put it in perspective, a distribution company with a 25 percent margin that reported annual total revenues of $100,000 paid $75,000 for the goods it sold.
Improving the Profit Margin
One way to improve the profit margin is to sell products that have a special value, such as popular brand names or luxury items with cachet. "Entrepreneur" notes that some distribution companies have margins as high as 50 percent, if the end consumers want the product badly enough.
- Ontario Ministry of Agriculture Food & Rural Affairs: Food Broker-Distributor Information Sheet -- 2009
- Barron's Dictionary of Finance and Investment Terms, 7th ed.; John Downes A.B. et al.; 2006
- "Entrepreneur": How to Start a Wholesale Distribution Business