How Do Wholesale Businesses Work

Most people have a basic understanding of wholesaling. That is, they know that retail businesses buy products at wholesale prices from various manufacturers and brands. Many traditional supply chains begin with a manufacturer, run through a wholesaler, and end with a retailer, with no detours along the way.

This common understanding is fine as far as it goes, but today’s retailers want to know more about where the products they buy actually come from. That way, they can pass this information on to inquiring consumers.

For example, many fashion consumers care about buying products from brands that emphasize sustainability. Online wholesale apparel platforms make it easier for retailers to find a wide variety of products from sustainable brands so they can better serve their customers. But that’s just one-way wholesalers work to connect makers and retailers. So let’s peel back the curtain more to see how wholesale businesses really work.

Wholesale Businesses Work
Wholesale Businesses Work

Wholesalers Generally Get Better Pricing Than Other Buyers

Whatever their operational model, wholesale businesses generally enjoy better pricing than other buyers — and certainly better than consumers. They get favorable pricing because they buy in bulk and can therefore negotiate volume rates with their suppliers (the manufacturers).

They may also negotiate longer-term supply contracts, or commitments to buy a set amount of product from the supplier for a set period of time.

In either case, wholesale businesses help manufacturers manage risk. By buying in bulk and over longer periods, they create durable markets for their suppliers and ensure those suppliers don’t produce more products than they can sell.

Wholesalers Traditionally Sell Directly to Retailers But Can Sell Directly to Consumers As Well

Not all wholesale businesses sell directly to retailers — at least not exclusively. Many also sell directly to consumers and make the promise of lower prices a key part of their pitch.

You have probably made a purchase from a direct-to-consumer wholesaler in the past year, even if you don’t realize it. You might have a Costco membership. Perhaps you bought a couch or bed at a furniture company’s factory outlet. Maybe you buy online from “retailers” you didn’t realize acted as their own distributors.

Direct-to-consumer wholesaling has advantages for wholesale businesses and consumers.

Wholesale businesses get access to larger markets than their retail relationships can provide, especially if they sell online. Meanwhile, consumers often get lower pricing than retailers can provide.

Wholesaling Has Lower Overhead Costs Than Retailing But Isn’t Always More Efficient for the End Buyer

Buying directly from wholesale businesses isn’t always more efficient for consumers than buying from retailers. Some direct-to-consumer wholesale businesses rely on commissioned salespeople who act as middlemen between the consumer and the wholesaler and can pocket a lot of the consumer’s potential savings.

Likewise, the direct-to-consumer model can increase costs for wholesale businesses. It’s true that wholesaling generally has lower overhead costs than retailing since it doesn’t require as much of a public presence (or any) or marketing spend. (When was the last time you saw a TV commercial for Costco?)

Wholesale Businesses Are Vulnerable to Supply Chain Issues 

Although they are further upstream in the supply chain than retailers, wholesale businesses are still vulnerable to supply chain issues. Port closures, shipping delays, manufacturing and customs bottlenecks — all these problems and more threaten on-time delivery and product availability.

For this reason, many wholesale businesses establish localized supply chains that are less vulnerable to the challenges of international manufacturing and shipping. “Made in the USA” isn’t simply good branding. It’s often a sign of reliability.

Wholesale Businesses Can Still Work With Middlemen

Some wholesale businesses “cut out the middleman” entirely, buying directly from manufacturers and selling directly to retailers or even end buyers.

Some agree to an extra step in the supply chain, however. These businesses utilize wholesale distributors, which operate sort of like “wholesalers’ wholesalers.” They accept delivery of inventory directly from manufacturers, store it in their own warehouse facilities, and then distribute it to wholesale clients as needed.

Wholesale dispensers need to be paid, so their presence in the supply chain may increase costs. However, they may also operate more efficiently than “regular” wholesalers, creating new efficiencies that result in lower costs to wholesalers and end buyers.

Wholesalers Can Buy Directly From Manufacturers or Manufacture Products Themselves (Vertical Integration)

When most observers think of wholesale businesses, they think of middlemen who buy directly from manufacturers at relatively low prices and store those goods in warehouses they own or lease.

They then sell merchandise stored in their warehouses to retailers for more than they paid for it, pocketing the difference. The retailer sells to consumers or small business buyers for even more, so everyone profits (except the end buyer).

This wholesale model remains common, but it’s not the only way wholesale businesses make money. Some wholesalers have vertically integrated supply chains. This means they control production (manufacturing), distribution (wholesaling), and maybe even retailing.

Vertically integrated companies tend to be more efficient than competitors that aren’t vertically integrated because they don’t have to build in as much profit at each step of the supply chain. They simply have to sell their products for more than it costs to make, distribute, and market them.

There’s a catch. It costs a lot more to start a vertically integrated business than a wholesale or retail operation because in-house manufacturing is expensive. For this reason, many new wholesale businesses (and new retailers) rely on third-party manufacturers.

Know Before You Buy — And Sell

The supply chain is complicated. No one is arguing otherwise. But by understanding how it works and which key players are involved at various points along the way, informed retailers can make the right buying decisions for their businesses and their customers.

That’s a win-win all the way around.

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