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So You Want to Get into the Wholesale Business

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by Claudia Bruemmer

Yes, the wholesale business sounds great − buy low; sell high. It may not be easy, but it could be worthwhile if you have some sales background, a head for business and a nose for what sells. If you’ve been laid off and can’t find suitable employment, this might be an opportunity to investigate. Consumers are always buying all kinds of needed goods; the secret is to know what type of goods sell.

Starting a wholesale business can be profitable for certain people. As you may know, manufacturers produce products and retailers sell them to end users. However, there is a middleman in between, also known as a distributor, who moves the product from manufacturer to market. Wholesale distributors buy products from the manufacturer and then ship them from their warehouses to retailers.

There are various types of wholesalers: wholesale distributors; manufacturers’ sales offices; and agents, brokers and commission agents. Many wholesale distributors run an independently owned business that buys and sells products, taking ownership of the goods. Such operations are typically run from a warehouse where inventory goods are received and later shipped to customers.
As an owner of a wholesale distributorship, you would be buying goods to sell at a profit as a business-to-business organization selling to retailers and other wholesalers, but not to the buying public.

The field of wholesale distribution is a buying and selling endeavor that requires good negotiation skills, ability to predict “hot” items in specific product categories, good people skills, business skills and top sales skills. The object is to buy the products at a low price, and then make a profit by adding a dollar amount that makes it a good deal for customers.

In addition to the above skills, the owner of a new wholesale distributorship will need the operational skills such as finance and business management skills for running a company, as well as back end skills like warehouse setup and organization, shipping and receiving, customer service skills, etc. The back-end functions can be handled by experienced employees if budgeting allows.

Operating efficiently and turning inventory over quickly are the keys to success. Because wholesaling is a service business that deals with business customers rather than the general public, a startup entrepreneur must understand the business customer’s needs and know how to serve them.

When starting up, your needs may vary according to the type of product chosen. You could conceivably run a successful wholesale distribution business from your basement, but storage would eventually be a problem, requiring a move to a warehouse. Wholesale distributorships are usually started in areas where rent is cheap and warehouse space is affordable rather than downtown shopping areas.

Actually, you could run a distribution company from home as a broker rather than a distributor. The difference is that a distributor takes title and legal ownership of the products; whereas, a broker simply arranges for the transfer of products via dropshipping.

Today, we have approximately 300,000 distributors in the United States, representing $3.2 trillion in annual revenue. Wholesale distribution contributes 7 percent to the value of the nation’s private industry GDP. Most distribution channels comprise of many small, privately held companies. A small percentage of distributors in the USA have revenues greater than $100 million (about 2,000 national distributors).

Every year, U.S. retailers and online merchants make approximately $3.6 trillion in sales. Of that, about one-quarter is from general merchandise, apparel and furniture sales (GAF). To imagine the scope of GAF, think of every consumer item sold, and then remove cars, building materials and food. The rest, including computers, clothing, sporting equipment and other items, fall into the GAF total. All these goods come directly from manufacturers or through wholesalers and brokers. They are sold to the public in department stores, high-volume and specialty stores, which make up the client base for wholesale distribution firms.

While all this sounds good, there are a few things you should be aware of. Consolidation is common in the wholesale industry. Some sectors are doing this more than others. For example, pharmaceutical wholesaling has consolidated more than any other sector. Mergers and acquisitions have reduced the number of U.S. companies in that sector from 200 to about 50. The largest four companies control over 80 percent of the distribution market.

To avoid consolidation, many independent distributors are going into the specialty market. These entrepreneurs are being successful by picking up what the national companies don’t want. As distribution evolves from a local to a regional or national business, the national companies don’t want to service certain types of customers because it’s not cost effective. That leaves small customers behind, and that’s where the opportunity lies.


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