Home COMMERCE TOPIC 4: WHOLESALE TRADE | COMMERCE FORM 2

TOPIC 4: WHOLESALE TRADE | COMMERCE FORM 2

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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 wholesalers often 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.

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