Wholesale: everything you need to know about this business model
Wholesale is one of the global economic sectors that is showing signs of early recovery from the pandemic.
According to Research and Markets, the 2021 value of the industry is just over $49 billion USD ($4 billion more than in 2020) with a compound annual growth rate of 9.7%.
This growth comes in the context of recovery from the pandemic, now that business activity is starting to pick up and health regulations are easing.
Research and Markets currently estimates that the market size will reach $64 billion USD by 2025 with a compound annual growth rate of 7%.
Considering that the future of the sector is promising, we set ourselves the task of gathering valuable information about the different models that exist within wholesale, how they work, what aspects you should consider when buying and selling products, as well as a list of things to do before getting down to work.
What is wholesale?
To understand what wholesale is and how it works, it is worth noting that there are three different meanings, each with value in its own context. Generally speaking, wholesale means the sale of products in bulk at low cost to stores and businesses, rather than directly to consumers.
In addition to this generic definition, one of the meanings of wholesale is the acquisition of all or part of a product directly from the manufacturer.
Secondly, there is the more common definition of wholesale: B2B (or business-to-business) sales, in which the wholesaler acts as an intermediary between the manufacturer and the retailer. The way these intermediaries (also known as brokers) operate is by moving merchandise from the manufacturer to the retailer.
For instance, suppose the wholesaler in question specializes in animal proteins. The way in which his business can become prosperous is by supplying several retailers; to do this, he gets a preferential price directly from the farmers for buying large quantities of product, which he then resells at a markup to his network of retailers.
In this case, the wholesaler's profit comes from the low cost of buying products in volume, as well as not relying on logistics management, i.e., ensuring that third parties store and distribute the product.
Now, at this point, you are probably asking yourself: where does Costco —perhaps the best-known wholesaler in the West— fit into these definitions? Well, the third definition is that of a wholesaler that sells products directly from the manufacturer to individual consumers.
The particularity of the DTC (Direct To Consumer) wholesaler business model is that their distribution chains are usually short, so they can offer a wide range of products, from fresh produce and household appliances to electronics and clothing. DTC wholesalers have their own stores, warehouses ( or, like Costco, use their warehouse as a point of sale), and website.
In short, wholesaling consists of a variety of business models that are based on the principle that the retailer offers a variety of products, sells them in volume, and makes a profit by dividing large quantities into smaller purchases.
How does wholesale work?
Now that we are clearer about the different models involved in the wholesale sector, it is worth understanding in detail how they work.
Generally, it is a series of structured steps by which the different wholesale models source products, distribute them, and generate profits.
1. The raw material supplier sells its product to the manufacturer. By manufacturer, we mean a company that uses raw materials to partially or totally manufacture a product.
2. The manufacturer sells a high volume of its product to the wholesaler. The wholesaler may be a DTC or a broker, but, in any case, he will pay for a product that he will sell later.
3. The middleman sells the products wholesale to another manufacturer, to the consumer, business, or online. This step depends entirely on the wholesale model in question.
4. Final sale. If the wholesaler is a middleman, he will arrange for the merchandise to reach a retailer, who will then sell it at a higher price to the individual consumer. If it is a DTC, the final recipient is the individual consumer, who obtains an advantage similar to that of the wholesaler: by purchasing in volume rather than at retail, he obtains a better price.
Let's now look at how to get the right product acquisition and pricing right for the customer, regardless of size.
Supply and demand: acquisition and wholesale pricing
One of the hallmarks we have observed so far has to do with where the margins come from in each model and the advantages it offers to the consumer or retailer. For this, there are two fundamental instances: how you get the product and at what price you sell it.
Basics for buying wholesale
- Do the paperwork: wholesaling is a long-established and well-established industry, so it has specific requirements that vary from country to country. They range from articles of incorporation, tax compliance, licenses, insurance, and resale permits. Also, now that e-commerce is booming, many countries require permits to conduct online wholesale sales.
- Get involved in the community: directories, forums, groups... There are a number of sources you can tap into and contact more experienced wholesalers if you need advice on how to deal with a supplier mishap.
- Stick to the budget: this may seem like a no-brainer, because it's a principle that applies to virtually any business. However, wholesale models have the peculiarity that they need to sell in large quantities to generate profits, so the worst thing that can happen to them is to buy in excessive quantities that result in dead inventory.
- Make sure of the legitimacy and ethics of your suppliers: we are not saying that you should make judgments about the work of your suppliers, but you should consider that a trend among consumers is to know where the products they buy come from. Do your due diligence before deciding on one supplier or another.
Keys to determine the wholesale price
While each company has its specific factors that lead it to offer a certain price, some of those that we can identify as constants throughout the industry are as follows.
- Raw materials: Whether the wholesaler sells imported products directly to retailers, or assembles parts and then distributes the product, the cost of raw materials must be evaluated. A wholesaler seeking a healthy cash flow should keep this cost as low as possible.
- Labor: Any product that requires assembly or packaging involves a labor force. For many wholesalers, this is one of the main expenses on their books, so operational efficiency is pursued.
- Overhead: these are expenses that are not directly related to product or labor. These include warehousing, advertising, benefits, and utilities; and, especially for e-commerce wholesalers, should include packaging for shipments.
- Shrinkage: the percentage of products counted in inventory, but lost, damaged, or stolen. Shrinkage should always be present in your estimates because any product that you acquire and fail to sell undermines your profits.
- Competitors' prices: any experienced wholesaler knows that he must take into account the price offered by the competition. Your price should be similar to what is available in the market.
What I need to start wholesaling
- Define your target: whether you sell directly to the consumer, to retailers, or through e-commerce, you need to be clear about the target market you are aiming for. Before you start, you need to be almost obsessive about what needs you can meet for your customers, where their pain-points are, and so on.
- Develop a retailer network: a robust relationship with multiple retailers is critical for you to achieve the sales volume your business requires. Approach them and consult them about the products they have the most difficulties in stocking and, if you can, look for a solution that will help you position yourself. Knowing the retail world in detail will be of great help in detecting your own areas of opportunity.
- Design a pricing structure: We cannot stress enough the importance of having a solid pricing structure. Basically, the profits of your business depend on it. Some wholesalers have a ratio of 2.5 times their production costs, but this is not set in stone. Study your options and include your fixed and variable costs in the structure.
- Experiment and attract more customers: Offers not only help you stand out from the competition but can also be an interesting starting point to begin to position yourself. In the wholesale sector, volume discounts are preferred; however, when starting out, it will be difficult to match your prices to those of larger competitors. An alternative to maintaining a steady flow of customers is to offer a customized service in exchange for an MOQ (Minimum Order Quantity) as you grow your capacity.
Tribal, the right partner
We know that wholesale is a highly competitive industry involving giant corporations with a huge market share.
However, the opportunities for growth are there, and at Tribal we are confident that our solutions can help any wholesale company differentiate itself from its competition.
Tell us how we can help you and do better business with Tribal.