WHOLESALERS

Wholesaling refers to all of the transactions in which
products are bought for resale, for the making of other
products, or for general business operations. A wholesaler
is the individual or organization that facilitates these
wholesaling activities by buying products and reselling
them to yet another reseller, government agency, or an
institutional user. In 2005 there were approximately
620,000 wholesaling companies in the United States, with
more than half of all products sold in the country passing
through these wholesaling firms. Approximately 400,000
independent firms handled close to $2 trillion worth of
merchandise and employed close to 6 million workers.
Wholesaling is an important aspect of a company’s
marketing-channel strategy because it essentially involves
the planning associated with industrial customers that
need to distribute their products to manufacturers, retailers,
government agencies, schools, hospitals, and other
wholesalers.
SERVICES PROVIDED BY
WHOLESALERS
Because wholesalers are in the business of buying in large
quantities and delivering to customers in smaller
amounts, they are able to perform physical distribution
activities more effectively, including materials handling,
warehousing, and inventory management. They often
offer quick and frequent pickup and deliveries, as needed,
which allows both the producers of the goods and wholesale
customers to avoid the risks associated with holding
large inventories.
Wholesalers support retailers by assisting them in
their overall integrated market planning through pricing
and promotion assistance. In addition, because they enter
into sales contracts with a producer and because they can
sell different amounts of the product to retailers, wholesalers
serve as an extension of the producer’s workforce.
They often provide financial assistance and extend credit
as needed.
Keeping producers up to date on market conditions
is a critical component of wholesalers’ services. Their
assessment and analysis of changing market conditions are
important for producers who are concentrating on market
development and strategies for growth.
Because of their position in the marketing channel,
wholesalers have closer contact with retail customers than
do producers. Wholesalers can spread their sales costs over
more products than can most producers, which results in
lower costs per product. Because of this, many producers
shift their financing and distribution activities to wholesalers.
Because they are often specialists in understanding
market conditions and experts at negotiating final purchases,
wholesalers are a critical component in retail distribution
strategies.
The distinction between services performed by
wholesalers and those provided by other businesses has
changed over the years. Retailers are discovering that they
may be able to deal directly with producers and they may
also be able to perform wholesalers’ functions themselves.
Because of the increased use of computers, retailers have
been able to expedite ordering, delivering, and handling
of goods more effectively than in the past. Nevertheless,
not all functions of wholesalers can be eliminated; these

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Wholesalers
functions still have to be performed by some member of
the marketing channel—producer, retailer, or wholesaler—
because they are vital components of supply-chain
management.
TYPES OF WHOLESALERS
There are three basic categories of wholesalers: merchant
wholesalers; agents, brokers, and commission merchants;
and manufacturers’ sales branches and offices.
Merchant Wholesalers. Merchant wholesalers are independent
wholesalers that take title to the products they
sell. This type of wholesaling accounts for a large percent
of all wholesale establishments in the United States. Since
merchant wholesalers take title to the products that they
resell, their earnings are obtained through markup of these
goods. Merchant wholesalers are often called distributors
and can be categorized as either full-service or limitedfunction
wholesalers (see Figure 1).
Full-service wholesalers often provide a wide range of
services to the customers for which they purchase products.
Customers rely on them for product availability, suitable
assortments, breaking of large quantities into smaller
ones, financial assistance, and technical advice and service.
Although full-service wholesalers often earn higher gross
margins than other wholesalers, their operating expenses
are also higher because they perform a wide range of functions.
There are four types of full-service wholesalers:
1. General-merchandise wholesalers
2. Limited-line wholesalers
3. Specialty-merchandise wholesalers
4. Rack jobbers
General-merchandise wholesalers carry an extensive line
of products and provide a wide variety of services.
Although these wholesalers may carry many different
product lines, they do not carry an extensive variety
within them. Most general-merchandise wholesalers deal
in such products as drugs, nonperishable foods, cosmetics,
detergents, and tobacco.
Limited-line wholesalers carry only a few product
lines, such as groceries, lighting fixtures, or oil-well
drilling equipment, but offer an extensive assortment of
products within those lines. They also offer fewer marketing
services than general-merchandise wholesalers because
they specialize in just a few functions that are associated
with the product lines they carry. Limited-line wholesalers
often take title to the products, but they may not deliver
Rice wholesalers in Hong Kong. © JAMES MARSHALL/CORBIS

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 765
Wholesalers
merchandise, grant credit, provide essential marketing
information, or store inventory. This results in smaller
profit margins as compared to general-merchandise
wholesalers.
The decision as to whether a company should use a
limited-line wholesaler depends on the structure of the
marketing channel and the need to manage the supply
chain in order to obtain a competitive advantage, that is,
do a “good” job so that competitors do not “steal” the
business. Although the number of limited-line wholesalers
is relatively small, they are important in the distribution of
such products as specialty foods, perishable items, construction
materials, and coal.
Specialty-line wholesalers carry the most narrow
product assortment, usually consisting of a single product
line or part of one. Because specialty-line wholesalers are
product experts, they can offer extensive sales and product
support.
Rack jobbers, sometimes considered a subcategory of
specialty-line wholesalers, concentrate on retail stores.
They set up and maintain displays and stock them with
goods that are sold on consignment. Retailers depend on
rack jobbers for the provision of health and beauty aids,
hosiery, books, greeting cards, and magazines.
The five types of limited-function wholesalers are
truck jobbers, drop shippers, cash-and-carry wholesalers,
catalog wholesalers, and wholesale clubs. Producers of
fast-moving goods, especially those that are perishable and
need frequent replenishment, often use truck jobbers
because they deliver only within a particular geographic
region in order to maintain product freshness. Truck jobbers
are often chosen as the wholesaling method because
they offer quick and frequent delivery, which is especially
crucial for such items as bakery goods, meats, and dairy
products.
Drop shippers arrange for shipments directly from
the factory to the customer; although they do not physically
handle the product, they do take title and responsibility
for all the risks associated with the transport of
goods. In addition, they offer the necessary sales support
for the products they distribute. They operate in a wide
variety of industries, including chemicals, industrial packaging,
lumber, petroleum, and heating products.
Cash-and-carry wholesalers are intermediaries whose
customers are usually small businesses that pay cash and
have to arrange the delivery of these products themselves.
Cash-and-carry wholesalers usually carry a limited line of
products that have a high turnover, such as groceries,
building materials, and electrical or office supplies. They
do not deliver the products they sell, nor do they extend
credit, but they are a vital intermediary for those small
businesses that would be unprofitable for larger wholesalers
to service.
Catalog wholesalers are an alternative to cash-andcarry
wholesalers that serve both major population centers
and remote locations. Prepayment for goods is required,
and delivery is arranged through delivery services such as
UPS and FedEx. A wide range of competitively priced
products are offered, such as office furniture and equipment,
packaging materials, and shelf and storage systems.
Wholesale clubs are organizations that offer customers
a fee-based membership that entitles them to make
purchases at below-retail prices. This particular concept is
a growing phenomenon in the United States because of
the success of such wholesale clubs as Costco and Sam’s
Club.
Agents, Brokers, and Commission Merchants. The second
category of wholesalers is agents and brokers (see Figure
1). Agents represent either buyers or sellers on a
permanent basis, whereas brokers are middlemen that
Types of wholesalers
Merchant wholesalers Agents and Brokers
Full-service wholesalers
• general merchandise
• limited-line
• specialty-line (rack jobbers)
Limited-service wholesalers
• truck
• drop shippers
• cash-and-carry
• catalog
• wholesale club
Agents
• manufacturers agent
• import/export agents
• commission merchants
Brokers
• food brokers
• real estate
• other (securities/insurance)
Figure 1

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buyers or sellers employ temporarily. Both agents and brokers
perform fewer functions than limited-service wholesalers
but they are usually more specific in their product
selection, and thus can provide valuable sales expertise.
Using agents and brokers allows companies to benefit
from the expertise of a trained sales force, which results in
a decrease in personal selling costs. Often called functional
middlemen, agents and brokers perform a limited number
of services in exchange for a commission that is based on
the selling price.
One type of agent is called a manufacturer’s agent;
this type accounts for half of all agent wholesalers. They
are independent middlemen who represent more than one
seller and offer complete product lines. A manufacturer’s
agent is restricted to a particular territory and sells and
takes orders year-round. There is a contractual agreement
between the agent and the manufacturer that outlines territories,
selling prices, order handling, delivery, service,
and warranties. In service-based manufacturer’s agent
companies, the more services that are offered, the higher
the commission. These types of agents are commonly used
in the sales of apparel, machinery and equipment, steel,
furniture, and automotive products.
Two other types of agents, import and export agents,
specialize in international trade. Import agents find products
in foreign markets and sell them in their home countries.
In many countries, it is extremely difficult and
sometimes illegal to try to sell products from another
country without going through an import agent. Export
agents locate and develop markets abroad for products
that are manufactured in their home countries.
Selling agents are middlemen who market a whole
product line or a manufacturer’s entire output. They perform
all the functions of wholesaling, except that they do
not take title of the product. Frequently, companies opt to
use selling agents in place of marketing departments. To
avoid conflicts of interest, selling agents represent noncompeting
product lines and have the authority for pricing,
promotion, and distribution of those products.
Finally, there are commission merchants. These are
agents who receive goods on consignment and negotiate
sales in large central markets. Their specialty is securing
the best price possible under market conditions. These
agents are primarily found in agricultural industries, taking
possession of truckloads of commodities and arranging
for grading, storage, and transportation. Commission
merchants deduct commission and the expense of making
the sale, and then turn over the profits to the producer.
Although they provide planning and assistance with
credit, they do not provide any promotional support.
Since brokers are the intermediaries that bring buyers
and sellers together, they are paid a commission on the
transaction. Brokers do not enter into contracts for
extended periods; rather they work on a transaction-bytransaction
basis. There are thousands of wholesale brokers
in the United States, with most of them concentrated
in food and agricultural industries. Brokers are especially
useful to sellers of supermarket products and real estate.
Food brokers, for example, sell food and general merchandise
to retailer-owned stores and merchant wholesalers,
grocery chains, food processors, and organizational buyers.
Since brokers perform fewer functions than other
intermediaries, they are not involved in financing, physical
possession, pricing, or risk taking. What they offer
instead is expertise in a particular commodity and a network
of established products.
Manufacturer-Owned Wholesalers. Thousands of manufacturer-
owned wholesalers operate in the United States.
These wholesalers maintain inventory and perform a wide
variety of functions, such as providing delivery, credit,
market feedback, and assistance with promotional planning.
Manufacturer’s sales offices are the other type of
producer-owned wholesaler. They do not maintain inventory,
but they assist with sales and service, market analysis,
and the billing and collection of funds for products
sold. Both sales branches and sales offices are located away
from the manufacturing plants and closer to customers
because the producers are attempting to reach their customers
more effectively in an effort to create a competitive
edge in the marketplace.
DEVELOPMENTS IN WHOLESALING
In the early years of the twenty-first century, wholesaling
gross profits declined. Because of the economic recession,
a decrease in new store construction, and competition,
wholesaling growth declined. Chains, which usually prefer
to buy directly from manufacturers, grabbed a larger
part of the market in areas such as home-improvement
products. But, while tough economic conditions can
affect wholesalers adversely, a booming economy can do
the same thing. Retailers, experiencing rapid sales growth,
may opt to buy directly from manufacturers, thus cutting
wholesalers from the supply chain.
Both retailers and producers are eager to improve
their profitability, and the wholesalers are caught in the
middle. Industry observers see the power in the channel
shifting more toward the retailer, who may choose to
reevaluate the current supply-chain members.
Because of these changing market conditions, wholesalers
are concentrating on strategies to improve service by
adding more value-added concepts. Even though wholesaling
has traditionally involved the handling of goods,
the activities and functions of wholesalers are being
applied more and more in service industries. Access
Graphics in Boulder, Colorado, for example, takes an

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 767
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active role in pursuing new business for its vendors by
providing them with customer databases that help
resellers in identifying sales prospects. In addition, it also
provides in-house graphic departments that produce the
promotional materials needed by resellers and their customers.
Access Graphics believes in adding value to its
supply-chain relationships; as a result, it has established a
staff of system engineers who help resellers with installation,
system design, and computer-memory testing.
Tough market conditions in the United States have
forced many wholesalers to adopt a global perspective.
Wholesalers have been encouraged by the North American
Free Trade Agreement to expand their operations into
Mexico and Canada. It was expected that by 2010, 25 percent
of wholesalers’ business would come from foreign
markets.
International wholesalers will experience stages of
growth depending on the economic development of foreign
economies. All-purpose wholesale merchants will
dominate in simple economic conditions, while an
expanding economy will see the emergence of interregional
wholesalers. As foreign economic conditions
mature, there will be a growth of specialized wholesalers,
with product-line and functionally specialized wholesalers
dominating the chain. In an advanced economy, channels
become controlled by large-scale retailers and manufacturers,
thus causing a decline in the need for conventional
wholesalers.
Wholesalers that expand through globalization will
face the challenge of competition against current wholesalers,
new languages, an array of different legal systems,
and a multitude of cultural differences. Nevertheless, a
decision to stick with domestic markets only could hamper
the growth of a wholesaler.
ELECTRONIC MARKETING
CHANNELS
Advances in electronic commerce have opened new
avenues for reaching buyers and creating customer values.
This interactive technology has been made possible by
electronic marketing channels, which use the Internet to
make goods and services available for consumption for use by both end consumers and business buyers