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Chapter 11

Channel Institutions - Wholesaling

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Learning Objectives

• Understand functions of a wholesaler• Understand various classes of

wholesalers• Major wholesaling decisions• Benefits and limitations of wholesalers• Understand about a – distributor in

more detail• Trends in wholesaling practices

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Need for Wholesalers

• Widespread economy – consumers can only reached by thousands of retailers (except for consumer durables and industrial products)

• Reaching these retailers by a company directly is not possible (except for consumer durables and industrial products)

• Hence the need for wholesalers in two forms:– Well established free-lance wholesalers– Contracted distributors, stockists and agents

Characteristics….

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Characteristics of Wholesalers

• Operate on large volumes but with chosen group of products– Food, grocery, pharma or automobile spares etc

• The company itself, contracted parties or free lancers, can operate as wholesalers

• Mostly B2B business – trade and institutions• Wholesaler could also be a retailer – in rural

markets – W/s sells to other retailers and also to consumers

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Characteristics of Wholesalers

• Sell physical inputs or products – tangible goods ( Ws in some service industries)

• Optimise results, maximise service (effectiveness) and minimise operating costs (efficiency)

• Buy goods for resale, keep inventory, take risks of price changes, negotiate terms, procure orders, deliver and extend credit.

Definition…

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Definition

• Wholesaling is concerned with the activities of those persons or establishments that sell to retailers and other merchants and / or industrial, institutional and commercial users but do not sell in large amounts to consumers – US Bureau of Census

Delivering value…

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Delivering Value

• Keep goods accessible to customers instantly

• At times, get together to bargain for better terms

• Pass on benefits or incentives to their customers

• Have a wide trading area

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Difference with Retailers

• Not too worried about location, ambience or promotions – prefer to be in the main market

• Deal with other businessmen and not consumers

• Deal with a specific group of products only• Much larger trading area• Much larger transactions with suppliers and

customers• Believe in low margins but high volumes.

Functions…

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Functions of Wholesalers

• Varies in degree between free-lance, company distributors and stockists / agents

• Sales and promotion of chosen company products

• Buying the assortment of goods• Breaking bulk to suit customer requirements• Storage and protection of goods till sold

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Functions of Wholesalers

• Grading and packing of commodities• Transportation of goods to customers• Financing the buying of customers• Bearing the risks associated with the

business• Collecting and disseminating market

information to both suppliers and customers

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Types of Wholesalers

• Full service: stocking, selling, offering credit, delivery and business assistance (company distributors, wholesale merchants)

• Limited service: range of service is limited (examples include Metro C&C, mail order)

• Merchant w/s: independent businesses• Brokers and agents: bring buyer and seller

together – do not take possession of goods• Others: agri business, auction companies etc

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Limitations of Wholesalers

• Some of them do not give complete information to suppliers for selfish reasons

• Cannot be relied on to do equitable distribution

• At times, do not want company and customers to meet

• Tend to hoard goods and influence pricing• Consumers have no say in pricing or quality

in a w/s dominated system

Major decisions…

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Major Wholesaling Decisions

• Which markets to operate in• Manpower to employ• What products to sell• Pricing decisions / Promotional support• Credit and collections• Image and customer perception• Warehouse location and design• Inventory Control

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Favourable Factors

• Companies have limitations in market / outlet coverage. Wholesalers are required to fill the gaps

• Hundreds of small companies who cannot afford to set up distribution networks – need to depend on wholesalers

• In food grains, fruits and vegetables – hardly any organised distribution network. Wholesalers help move goods from farm gate to consumers

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Favourable Factors• Big companies also need wholesalers to

get big volumes

• W/s extend credit to customers. Companies cannot match this

• Retailers have to visit w/s markets to buy food grains, cereals and pulses – buy a lot more.

Unfavourable…

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Unfavourable Factors

• Companies coverage focus on retailers and institutions through their distributors

• Using modern retail formats as wholesalers

• More outlets like Metro C&C being encouraged

• Enforcing strict price control so that w/s do not sell below company prices.

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Distributor

• Is a wholesaler nominated by a company to exclusively re-distribute the company products to its customers in a designated territory. He does not deal in competitor’s products. Does not sell from his premises. Extends credit selectively.– A redistribution stockist for HLL– A distributor for Philips lighting division– A distributor for L&T engineering division

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Dealer

• Role similar to a distributor but– May not have a clearly defined territory and may

sell both in the market and from his shop– May deal with competitive products also– Extends credit selectively.– Dealers in industrial products may have better

defined roles.

• Examples:– Dealer for an edible oil company– A dealer for garment brands

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Stockist

• May be working for a company with a designated territory but does not re-distribute the stocks. Sells from his premises. Extends credit selectively.– A stockist for paper products– A stockist for automobile spares

• Re-distribution is visiting customer premises to sell products

Managing distributors….

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Managing Distributors

• The principles are similar across industry verticals. FMCG is the most complex.

• Has the capacity to maximise sales and market shares.

• Has to ensure buying goods from the company and re-distribution to the trade

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Managing Distributors • Distributor responsibilities include:

– Buying adequate quantities by Stock Keeping Unit (SKU) for redistribution

– Ensuring full market coverage of all customers in the territory assigned to him

– Help finance the operations – pays for the goods upfront but extends credit to his customers

– Maintaining inventory of company products adequate at all times to service the market

– Assist company in its promotional efforts

Why necessary?….

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Need for Distributors• Under three circumstances:

– For entering a new town– For additional coverage in the same town– For replacing an existing distributor

• For entering a new town, assess the potential for business to decide:– If the town can sustain a full fledged distributor– The number of distributors required

• Starts with a town profile of potential, number of customers to be serviced and the competition.

Cost of servicing…

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Cost of Servicing• Cost benefit of using distributors to be

assessed– Logistics cost of serving the market– The number of customers to be covered by

category – wholesalers, retailers, institutions– Frequency of visits to markets and outlets– Sales revenue estimate from each visit– Markets to be covered with ready stocks or order

booking for later delivery– Likely collections during each visit – gives an idea

of the credit requirements

Expectations…

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Expectations from a Distributor

• To be stated at the start of the relationship• Helps get the right kind of distributor also

– Achieving sales targets – volume, value and packs– Financial commitment on inventory and credit– Investment in infrastructure – space, vehicles– Manpower – front line and back office– Distribution effort – market and outlet coverage as

per a beat plan with productive calls– Developing new markets and new accounts– Managing key accounts and institutional business

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Expectations from a Distributor

• Merchandising and displays in the market• Secondary sales efforts and tracking – critical

for fmcg and pharma (secondary sales is sales from the distributor to the outlets in the market)

• Effectively handling promotions and schemes initiated by the company

• Managing damaged stocks

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Expectations from a Distributor

• Organising and participation in promotional events

• Assist company in making a success of launching new products and packs

• Handling consumer quality complaints• Handling statutory requirements on behalf of

the company• Payments and remittances promptly to the

company

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Key Learnings

• Wholesalers are required to reach hundreds of customers and retailers

• Wholesaler business is usually B2B• Wholesalers can be free-lance or appointed

by companies – like distributors• Company distributors are bound by strict

operating norms• Future of wholesalers in India still seems

favourable