Wholesalers
SIC 5000, 5100
NAICS 42
The broad wholesale industry generally serves as an intermediary between commercial buyers and sellers of commodities and merchandise. A common example is buying a manufacturer's products and selling them to a retailer. The industry consists of three types of firms: wholesale merchants; manufacturers' sales branches or sales offices; and agents or brokers. Wholesale merchants buy merchandise for resale to three types of resellers: retailers, contractors or professional business users, and other wholesalers. The second group of wholesalers, manufacturers' sales offices, includes separate sales subsidiaries or sales offices maintained by manufacturing, refining, or mining enterprises for the purpose of marketing their products. The third group includes firms that act as agents or brokers in buying merchandise for, or selling merchandise to, individuals or companies on a commission basis.
With the implementation of automated ordering, shipping, and inventory control systems, wholesalers were able to increase their output and revenues without having to increase their workforces. This technology made the industry more efficient and cost effective. To remain competitive, wholesalers offered retailers the convenience of dealing with one supplier by forming consortia that allowed companies offering complementary products to cooperatively supply their array of goods. In addition, wholesalers started to stock and maintain inventories on their customers' sites, which created an extra value to the customers doing business with wholesalers. Such an emphasis on value derived in part from a trend in retailing toward eliminating wholesale agreements and dealing directly with manufacturers. The U.S. wholesale industry remained one of the largest and most advanced in the world, with US$2.9 trillion in 2003 revenues.
Wholesalers not only buy and sell goods, they also provide a wide range of services designed to add value and facilitate smooth functioning of the market. For retail clients, wholesalers anticipate their needs and demands and stock large quantities of goods at locations convenient to the retailer. Wholesalers assemble shipments, deliver merchandise, extend credit, service goods sold, assist with sales promotion and publicity, and provide marketing information and sales assistance. In support of retailers, they also offer billing, collections, and record keeping services. For the manufacturer, wholesalers buy, sell, and store merchandise, finance production by purchasing in advance, and reduce risk by screening customers and providing market information.
Wholesalers are a key link between manufacturers and the marketplace—a position that historically gave them enormous power over both their customers and their suppliers. Their ability to anticipate consumer needs and demands, combined with their purchasing power and wide distribution abilities, made many wholesalers much more than mere "middlemen." Wholesalers could influence retail buying decisions, create new markets, and make or break a new product. They were so powerful that producers often had to adjust manufacturing priorities, product design and development, and marketing strategies in accordance with the wishes of their wholesale customers. However, manufacturers and retailers were not resigned to the power of the wholesalers. By the 1990s major manufacturers and retailers alike were actively seeking ways to bypass wholesalers, a movement facilitated by new advancements in transportation and delivery systems, heightened competition, falling prices, and computerized technologies. Retail giant Wal-Mart started a retail revolution when it demanded just-in-time delivery from suppliers. The rise of electronic commerce in the late 1990s prompted many industry analysts to predict that the Internet would eventually eliminate the need for traditional distributors. However, by the early 2000s most experts had come to view the Internet as a distribution management tool, albeit an unpredictable one.
Under pressure from suppliers and customers, wholesalers saw their market gradually eroded by alternative channels of distribution such as warehouse clubs, mail order, and giant retailers that dealt directly with manufacturers. Costco Wholesale Corporation, for example, buys the majority of its merchandise directly from manufacturers and sells to business and consumer members, earning revenues of more than US$48 billion in 2004. Manufacturers, eager to increase their profit margins, welcomed these new distribution channels, as did price-conscious consumers. This trend was particularly evident in consumer goods, a market that was simultaneously shrinking for wholesalers while also accounting for increased portions of their total sales. These changes were not only apparent in the United States, but also in Europe, Canada, and Japan.
Faced with these challenges, wholesalers were forced to reexamine their competitive strategies, and they began to reorient their services and product mix. Many wholesalers determined that in order to survive they would have to provide value-added services, improve productivity, expand geographically, diversify into new product lines, enlarge existing lines, and develop new markets. Rising competition prompted strategic alliances and consolidation among the largest wholesale and distribution firms. Although the total number of wholesalers continued to fall in the mid-2000s, the market for small niche players that could target specialized needs remained open, and overall employment was expected to rise.
Virtually all goods sold in all but the most underdeveloped economies pass through at least one wholesaler. Although under increasing pressure from newly emergent economic and technological forces, the wholesale industry was still one of the largest and most diverse sectors in the economies of most countries.
The trend toward integration of manufacturing, retailing, and wholesaling functions in many industries can make it difficult to develop an accurate overall picture of the wholesale industry. Despite the emergence of some very large global companies, the industry remains extremely fragmented. The wholesale industry sells everything from raw materials such as petroleum, minerals, and forest products, to manufactured goods such as packaged food, automobiles, and consumer electronics. Wholesalers obtain the products they sell from manufacturers, mining operations, agricultural concerns, and other wholesalers. Consequently, the level of wholesale trade activity depends on a wide variety of factors including the health of the economy, international commodity prices, and the rates of growth in employment, income, investment, and trade. Moreover, because wholesalers sell to each other, sales figures generated by the industry are not equivalent to the value of goods it actually handles.
The largest group in the industry is wholesale merchants. This group accounted for roughly 60 percent of all sales and 85 percent of all firms in both the United States and Canada. With the possible exception of Japan, which maintains a rather complicated distribution system compared to most industrial countries, the parallels between wholesale industries in different nations suggest that wholesale merchants accounted for similar shares in other countries.
Wholesale merchants, also known as jobbers, include several subcategories such as industrial distributors, voluntary group wholesalers, exporters, importers, cash-and-carry wholesalers, drop shippers, truck distributors, retailer cooperative warehouses, terminal elevators, cooperative buying associations, assemblers, buyers, and cooperatives engaged in the marketing of farm products. Merchant wholesaling firms are the primary distribution channel for all major products carried by wholesalers, with the exception of motor vehicles and parts.
Merchants are distinguished from brokers because they actually buy and take ownership of the goods they distribute, whereas brokers do not. Agents and commission brokers sell goods on a commission basis and tend to be more specialized than merchant wholesalers. Auction companies, manufacturing agents, food brokers, and import/export agents and brokers all fall into the category of agents and brokers. The types of products most often sold by agents and brokers include farm products, food, petroleum products, apparel, and dry goods.
Manufacturers' sales subsidiaries, on the other hand, are often indistinguishable from merchants in that they also usually "buy" the products they sell from their parent company. Because major international industries such as petroleum refining and automobile manufacturing maintain their own wholesalers, these types of firms, though small in number, account for a sizable portion of total wholesale sales. They are also prominent in the international realm of wholesaling. For example, foreign-owned wholesale establishments in Canada amounted to less than 5 percent of all firms in the late 1990s. However, because these firms were concentrated in the petroleum, automotive, machinery and equipment, hardware, and plumbing and heating products sectors, they accounted for 27 percent of the industry's sales. Of that, about half was generated by U.S.-owned establishments.
The chief function of wholesale merchants is to sell goods to trading establishments; industrial, commercial, institutional, farm, or construction contractors; or professional business users. The chief function of brokers is to bring buyer and seller together. In addition to selling or setting up deals, wholesale establishments often carry...
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