Wholesaling: Definition, How It Works, and Role in Supply Chain

What Is Wholesaling?

Wholesaling is the act of buying goods in bulk from a manufacturer at a discounted price and selling to a retailer for a higher price, for them to repackage and in turn resell in smaller quantities at an even higher price to consumers. Due to the large quantities purchased from the manufacturer at a discounted price, the wholesaler can also pass on this discount to retailers. The retailer sells at a price that reflects the overall cost of doing business.

Key Takeaways

  • Wholesalers are not manufacturers. Their business is distributing the end products. They purchase goods from manufacturers in bulk at a discount and sell to retailers.
  • Wholesalers also provide cost savings to retailers when retailers buy in bulk from the wholesaler. The retailer then repackages the bulk items into smaller quantities for sale directly to consumers.
  • Wholesaling is one step in the supply chain that starts with a supplier of raw materials and ends with a sale to an end-user.
  • In banking, the term wholesaling refers to financial services provided to large institutional clients rather than individual retail customers.

Understanding Wholesaling

Most wholesalers do not manufacture the goods they sell but rather buy them from the source and concentrate on the business of sales and delivery to retailers. They are known as the intermediary in the supply chain. It is more cost-effective for a wholesaler to buy in bulk from a manufacturer and receive a discount than it would be to buy items individually.

The wholesaler will then sell to a retailer at a higher price than it paid for the goods but are still able to provide a similar discount to the retailer as they received when the retailer buys in bulk. For example, Walmart will purchase its products from wholesalers in bulk; they may buy thousands of bottles of hand moisturizer. It will receive a discount on buying such a large volume than if it were to just buy a few. Walmart then stocks its shelves with the moisturizers and continuously restocks from its large inventory when the shelves are empty.

A wholesaler may specialize in a single product or product category or may offer a variety of goods. It can be anything from milk to electricity. Some wholesalers also broker deals between other wholesalers and retail businesses that require a variety of goods, or components of goods, that can be more efficiently obtained from a single source.

A wholesaler should not be confused with an "official distributor" for a brand's product line. The wholesaler does not generally offer product support, may not be connected directly to the company from which it purchases products, and may even have limited familiarity with the products. Moreover, unlike distributors, many wholesalers sell competing products.

Where Wholesaling Fits into the Supply Chain

Wholesaling is one step in the supply chain, which also includes suppliers of raw materials, manufacturers of finished goods, and retailers to end-users. Retailers purchase goods from wholesalers and then sell them at a high enough price to cover their costs and generate profits.

Supply chain management (SCM) was developed in the 1980s to address the need to maximize efficiency in the business processes involved in moving goods from the original suppliers to end-users.

Wholesaling in Banking and Finance

In banking, the term wholesaling refers to financial services provided to large institutional clients such as real estate developers, pension funds, and large corporate clients rather than individual retail customers.

In the financial services industry, a wholesaler can also be a sponsor of a mutual fund or act as an underwriter in a new issue.

An asset management company, which creates and manages mutual funds, employs a mutual fund wholesaler, also known as a mutual fund representative, to sell the product to resellers. Typically, the wholesaler is a salesperson.

In this case, the wholesaler distributes access to mutual funds to companies that wish to make them available to investors. For example, a company that has a 401(k) plan may meet with wholesalers before choosing the asset management company, such as Fidelity Investments or the Vanguard Group, that will offer its products to the company's employees. Mutual fund wholesalers are compensated from the fees of the mutual funds they sell.

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