Wholesalers act as intermediaries between product manufacturers and retailers, often dealing in bulk to negotiate savings and pass these on to other businesses. It can be a very lucrative business if done right, but can also be very costly if things do not go as planned. Start-up costs can be high as there must be sufficient capital available to buy goods in quantity.
What is a wholesale business?
Wholesale businesses buy products in quantity from manufacturers and then sell them on to retailers and distributors. In this way wholesale businesses profit from cost-savings that come from buying in bulk. In turn, they offer products to retailers at a better price than the retailer would get direct from the manufacturer (if the retailer can access the manufacturer at all – in many cases they won’t deal directly with individual retailers).
Wholesale businesses may include purchasing and distribution arms i.e. goods are sent direct to the buyer, or they may just have a purchasing arm, in which case a third party distributor will be needed.
Put simply, wholesalers are to the business world what retailers are to the consumer world – you buy your goods and sell them at a higher price, but you sell them to businesses rather than individuals.
Choosing an industry
Wholesalers exist in many industries – choosing the right one is a crucial step. Think about where your strengths lie, what products and marketplaces you know very well, and what areas of your life you could use to gain a competitive edge in a particular industry. For example, you may have worked in the coffee industry and have built up contacts that need a regular supply of stock.
Generally speaking wholesaling is less forgiving of ‘new’ entrants than some other industries – factors such as trust, favourable terms and personal contacts can make the difference between success and failure, and so going into a new industry without experience or knowledge can be very risky.
Some industries are also more open to new players than others. Infrastructural and clinical industries are likely to have very high standards for their wholesalers. Less critical industries, especially local ones, will be more receptive to new players, particularly if there’s a unique selling point to the offering.
Services on offer
Wholesalers differ in the level of services they offer clients. At a base level, wholesalers offer goods for sale - buyers must make their own arrangements for pick up and transportation. Often these wholesalers will operate on a cash-only basis, and are sometimes called 'cash and carry' businesses.
Bigger wholesalers will typically offer credit facilities, especially for trusted or larger clients, and may also provide basic transportation or distribution services.
Some wholesalers offer a much higher level of service that goes beyond the selling of bulk goods; these include advice and support services, such as information on how to set up a shop including finding premises, using tills etc.
Ownership of goods - 'taking title'
Ownership is an important question when it comes to wholesaling - once the wholesaler takes delivery of goods from the manufactuer, who owns them? The industry term for this is 'taking title,' which means taking legal ownership of goods and agreeing to all associated risks.
Wholesalers that focus their activities predominantly on connecting buyers and sellers are less likely to take title, and are also less likely to actively handle and distribute the goods. In this way they act as middle-men that efficiently connect relevant buyers to manufacturers.
Physical location - do I need a warehouse?
It's not essential to have a warehouse when running a wholesaling business - some companies will simply ship goods directly from the manufacturer to the retailer. The cost implications of this are obviously advantageous, but there are also disadvantages. Firstly, it results in very little operational control and ongoing concerns over stock - essentially you put your trust in the manufacturer to deliver on promises you make to clients.
If you do decide to have a physical location, there are two options. The first is a traditional warehouse where you store and process goods. These are either accessible to customers (i.e.they can come and browse the goods and select what they like) or not accessible to customers, in which case either you offer a delivery-only service or customers can call ahead with their order and pick it up some time later.
The second option is a mobile unit, typically a larger lorry, which you can bring directly to customer premises and they can select what they need. This is advantageous to the customer (quick turnaround time, regular service), but can be risky for you - you're incurring transportation costs without being sure of a sale, and if a customer puts in a large order you'll need to re-stock to make additional rounds.
What skills will I need?
A diverse skillset is needed to run a wholesale business – people skills are obviously essential as you’ll need to cold-call manufacturers, potential retailers, and also haggle with these (and other) parties in a friendly and progressive way.
Operational skills are also needed, as wholesale businesses rely on tight logistics to meet requirements and ensure goods are where they need to be at the right time. Wholesaling is complex – lots of different activities must co-exist effectively.
Because the warehouse is the central backdrop to a wholesaling business, you’ll need to be able to run a warehouse environment efficiently – this includes making sure health and safety procedures are followed and that employees have access to the right equipment.
What training is available?
There’s little organised training available for entrepreneurs looking to enter the wholesaling business. Wholesaler owners often start in a sales background before starting their business, although care must be taken to complement sales skills with operational skills. Experience of the wholesaling industry is key – this experience often brings additional benefits such as relationships with suppliers and cost-cutting ideas.
If you are looking for training opportunities, speak to the most relevant association to your industry. Each sector is likely to have a corresponding wholesale support body e.g. the Flower Wholesale Trade Association (FWTA), which is concerned with wholesale trade in the UK flower industry. These organisations can also offer advice on insurance, start-up costs, employment and other key business areas.
Insurance and compliance
Risk is important in any business but especially so in wholesaling. For all activities and processes, work out where the risk lies, and be sure of your responsibilities at all times e.g. who is responsible for insuring goods in transit? Do you have any responsibilities in the event of a product recall?
Wholesaling is capital-intensive so ensure you have employer’s liability insurance when employing staff – you may need a specialist policy, particularly for staff working in higher-risk conditions such as factories and warehouses.
Public liability insurance and professional indemnity insurance are essential purchases. Because wholesaling success depends on a fast turnover of goods, any interruption can business can stifle cash flow and the ability to turn a profit – you may want to look into business interruption insurance for this reason.
Challenges to success
- Disintermediation - this is the evolution of new channels that more directly connect manufacturer and retailer/customer, effectively removing the need for wholesalers. The most obvious and pervasive example is the internet, which allows manufactuers to establish a central presence and a point of contact for all end-users. In response to growing disintermediation, wholesalers must offer additional value that end-users would not get by approaching the manufacturing directly e.g. training or advice
- Expense of technology - as systems become more computerised, wholesalers gain a greater ability to track shipments, maintain quality control and provide a better service at a reduced cost. However, initial uptake of new technologies is often very expensive, and if a company's balance sheet is not healthy enough to absorb the cost impact, they could quickly lag behind competitors
- Transportation issues - wholesalers that offer full distribution services face a range of challenges including fuel costs, vehicle maintenance costs, and the difficulties of choosing a commercial location that is both affordable and close enough to major routes to make journeys easy and profitable.