What Is Wholesale? Understanding Its Value in Supply Chain

Ever wondered how the products you find on store shelves make their way from factories to your local supermarket?

It's not a magical journey; it's a complex process involving numerous intermediaries, one of which is wholesale. 

This collaborative approach benefits all parties involved. Manufacturers can focus on their core competencies—creating and developing products—while wholesalers handle the complexities of distribution.

However, the wholesale business is not without its challenges. Managing inventory, tracking orders, and ensuring timely deliveries can be daunting, especially for large-scale operations. This is where distribution ERP software comes into play. These powerful tools streamline the wholesale process, providing businesses with the visibility and control they need to thrive in a competitive market.

Understanding wholesale

The wholesale process involves three main players: the manufacturer, the wholesaler, and the retailer. All three are essential in making, distributing, and selling goods. 

Manufacturer

In the wholesale process, the manufacturer starts our whole saga by creating something to sell. A manufacturer begins with raw materials and uses employees and machinery to work through the supply chain to build a finished product.  

Say we’re selling cauliflower, one of my favorite vegetables. The manufacturer is the gardener. They till the soil, nurture the sprouts and harvest the final veggie. They then collaborate with a wholesaler who takes on the distribution responsibilities.

Wholesaler

A wholesaler is an intermediary who distributes products in bulk from manufacturers to retailers. Buying in bulk allows them to purchase the products at a discount and resell them to retailers at a higher price. 

In my cauliflower analogy, the wholesaler is the one who picks up the cauliflowers and loads them in a truck to transport them to the retailers. They also take the responsibility of scoping out grocery stores that may be interested in the product and getting those products to them.

Retailer

In wholesaling, the retailer purchases a specific quantity of a product from a wholesaler and sells it to their customers. 

In the cauliflower wholesale lifecycle, the retailer is the grocery store. Employees receive the cauliflower from the wholesaler and put it on display for the end-user to buy. The end-user is a customer like me who buys the cauliflower and roasts it for dinner at least once a week. 

The retailer has the tough challenge of getting the customer to want the product. If it’s about me and cauliflower, this is easy. But for other products and industries, retailers have to understand the target audience and purchase wholesale goods they know they can sell. 

Wholesale price

A wholesale price is the amount at which manufacturers or distributors sell goods to retailers rather than directly to consumers.

This price is generally lower than the retail price because retailers purchase in bulk, reducing per-unit costs through economies of scale and saving on packaging and shipping.

Wholesalers also minimize costs by cutting out intermediaries and bypassing the marketing and customer service expenses that retailers face.

Wholesale pricing reflects these cost efficiencies, allowing businesses in the supply chain to profit while keeping retail prices competitive.

A wholesale electronics distributor offers Bluetooth speakers at a wholesale price of $45 per unit to a retailer specializing in tech gadgets. The retailer then sells these speakers to customers at $65 per unit, making a $20 profit on each speaker sold. This price difference allows the retailer to cover its own costs, such as marketing and customer service, while still earning a margin on each sale.

How does wholesale fit into the supply chain?

Wholesalers serve as essential intermediaries in the supply chain, enhancing efficiency and facilitating the flow of goods from manufacturers to retailers.

They break bulk by purchasing products in large quantities and selling them in smaller amounts, allowing retailers to order only what they need. This reduces excess stock and storage costs while providing a diverse selection of products from various manufacturers.

Additionally, wholesalers maintain significant inventories to act as buffers between manufacturers and retailers, ensuring products are readily available even during demand fluctuations. By absorbing the risk of stockouts, they help stabilize the supply chain.

In terms of distribution and logistics, wholesalers often have established networks that enable efficient product delivery to retailers. They consolidate orders from multiple retailers, optimizing transportation routes and reducing shipping costs.

Their deep understanding of market trends and consumer preferences allows them to provide valuable insights to both manufacturers and retailers, aiding in demand forecasting and production adjustments.

Furthermore, wholesalers offer financial support through credit terms, enabling retailers to purchase products without immediate payment. This support is especially beneficial for smaller retailers with limited resources, further enhancing overall supply chain management.

Wholesaler vs. distributor vs. retailer

Wholesalers, distributors, and retailers are three positions that work closely together in the commerce space. Some may not find it very clear how these roles differ, so let’s examine them.

A wholesaler works as a connection between a manufacturer and a retailer. They can participate in the reselling of multiple products within various industries. 

A distributor is an independent contractor hired by a manufacturer to sell their products to a wholesaler or retailer. Unlike a common wholesaler, a distributor works within tight boundaries of their industry and cannot sell competing products. A wholesaler who chooses to stick to one particular industry and avoid competing products could be referred to as a type of distributor. 

A retailer is a person or company that sells products directly to the end-user. They purchase their goods from a manufacturer or wholesaler and mark up the prices to increase their profit margin. They can purchase products in bulk or in smaller quantities depending on their target audience’s needs. 

Wholesalers, distributors, and retailers cross paths more than you might think. In fact, in many cases, companies could act as more than one at a time. If a manufacturer chooses to become a sales and distribution manufacturer, they may even be considered all three.

Types of wholesalers

There are three wholesalers that conduct business in the wholesale market. The three are very different, and companies should take extra care when deciding which wholesaler they’d like to be or work with.

Merchant wholesalers

Merchant wholesalers are probably what you think of when you hear the word “wholesaler.” Merchant wholesalers simply focus on purchasing, storing, and reselling wholesale products they get straight from the manufacturer.

They prefer to buy in bulk and take over the entire selling approach. Once the manufacturer hands over the product, they bear the burden of all responsibilities and are on their own in the resale process. 

Agents and brokers

Agents and brokers are different types of wholesalers who are less hands-on. Instead of purchasing the product and reselling it themselves, they act as representatives of the manufacturer.

They do this by leading negotiations and contractual conversations with the retailer on behalf of the manufacturer. They never take any ownership over the product and simply represent them in communications. 

Sales and distribution manufacturers

Sales and distribution manufacturers are distributors that wholesale their own products. Basically, if a manufacturer prefers to wholesale their own products but wishes to have the wholesaling process separate from production, they may create a wholesale branch within their company.

It’s a bit confusing but beneficial for those who want control over their distribution process but want it to live as its own entity. 

Wholesale vs. dropshipping

It’s common for sellers to confuse wholesale and dropshipping because they both involve buying in bulk and reselling and are both very popular product sourcing and distribution methods. Learning the difference is essential to determine which makes the most sense for your business model. 

Wholesale is the process of selling goods, generally in large quantities, to retailers who then distribute them onward to the end-user. Wholesale buyers purchase products from the manufacturer at a lower price and sell them to retailers at a higher price.

Dropshipping is a popular way to start an online business because it allows companies to sell products without carrying any inventory. With drop shipping, retailers require customers to place an order directly with their supplier, who then ships the product to the buyer. With this method, sellers don’t have to purchase and store products themselves.

Companies use drop shipping software to connect with drop shippers, utilize e-commerce solutions, provide order tracking capabilities to customers, and adjust pricing along the way.

Dropshipping and wholesale differ primarily in how much the manufacturer is involved in the order fulfillment process. A considerable advantage of dropshipping is that the seller doesn’t need to worry about inventory space. Managing inventory and stock can be highly tedious, and that whole process is on you when wholesaling a product.

Because no inventory needs to be held, companies that participate in dropshipping also don’t need to pay for products in advance. Products are created as they are ordered. 

However, dropshipping isn't always a walk in the park. Because dropshipping goes straight from manufacturer to customer, there’s no third party to quality check the items before they get to the end-user. Companies may find wholesaling more favorable if they wish to keep a closer eye on the products being delivered and ensure high quality every time. 

Pros of selling wholesale

There are many benefits to adding wholesale to your business process. If done correctly, wholesaling can save a lot of people a lot of time and money.

• Save money on marketing. Companies that work with wholesalers can save a pretty penny on marketing efforts. That’s because instead of advertising to the end user, a manufacturer simply needs to sell to a wholesaler.
• Profits are fixed. Because wholesaling is a streamlined process, the profits associated are very predictable. Manufacturers and wholesalers reap the benefits of fixed profits from participating in wholesaling. Since neither entity sells directly to the customer, they don’t need to worry about inconsistent sales. 
• Leverage other audiences. Wholesaling doesn’t work without all the people involved. Manufacturers benefit from utilizing the materials and customer base of those other people. 
• Enter new industries with less risk. When wholesaling, you don’t have to put yourself into the market as aggressively as usual. The wholesaler and retailer take on a lot of that responsibility. Wholesaling allows you to get your product into industries that may not usually be interested in your brand by using connections from wholesalers.
• Build a network. These connections are arguably more valuable than anything else in the wholesale process. The more you work with talented individuals in the same industry as you, the stronger your network and reach. 

Cons of selling wholesale

What goes up must come down. What seems easy can become difficult. Although the benefits are great for wholesaling, there are a few challenges that a company can face at any stage of the process. 

• Extensive storage: While wholesaling quickly removes products from a manufacturer's hands, wholesalers are left with the task of storing all the bulk items they’ve ordered. When working with smaller quantities, storage is a lot more straightforward. However, in wholesaling, this process can be expensive and tedious when attempting to organize inventory and acquire a suitable warehouse space.
• Smaller profit margin: Although profits are fixed for manufacturers and wholesalers, the profit margin is smaller than what it could be if either were selling directly to consumers. This is because, for wholesaling to be worthwhile, everyone must make money, and for everyone to make money, sacrifices must be made along the way.
• Less communication with customers: Because a product must undergo such a long process to reach the end-user, manufacturers and wholesalers may encounter challenges when connecting to their audience. Wholesaling is a lot less hands-on, so some companies may see that communication limitation as a massive downside to the whole process.
• Fuzzy brand identity: The communication limitations of wholesaling can also come at the cost of creating a clear brand identity. Customers purchasing your product from a retailer most likely associate your product with the retailers rather than your own company. Customers are inclined to connect with brands who they associate with directly. Manufacturers and wholesalers may see a downside in this decrease in visibility. 

How to start a wholesale business

Did I do it? Did I convince you to start a wholesale business? Wow, I’m good.

Starting a wholesale business isn’t too difficult, but it definitely involves some preparation. Follow the steps below to get moving.

1. Determine your target market. Before you do anything, you have to determine where you actually want to wholesale. This includes some extensive research into markets that you're interested in. This research phase never truly ends, by the way. As you dive deeper into your wholesale business, it’s imperative that you keep an eye on how industries are changing to always make sure you’re part of the action.
2. Choose a type of wholesaling. At this stage, you probably have a relatively good idea of what kind of wholesaler you want to be. Perhaps you want to stick to the books and be a classic merchant wholesaler. If you want to be a little more hands-off, you might opt to be an agent or broker. Maybe you have a product of your own, and you’ll be a sales and distribution manufacturer! Whatever you decide can impact what kind of market you enter and what companies may want to work with you.
3. Get your qualifications in order. I hate to break it to you, but unfortunately, you can’t just poof into being a wholesaler. Like anything else in the industry, you have to be qualified. This includes a wholesale license or resale license. Depending on the market you’re entering, you may want an e-commerce license, sales tax permit, or business insurance. These licenses and permits not only allow you to conduct business but also establish credibility. All legal documentation can vary depending on where you plan to wholesale, so make sure you have that stuff ironed out before you get started.
4. Identify potential partnerships. Once you have determined the industry you want to work in and that you have the credentials to do so, it’s research time! Start looking at some successful manufacturers and suppliers in your target industry and prepare to start communicating with them. Take the time to note any retailers that you think would be interested in the product you’ll be wholesaling.
5. Purchase inventory space. As mentioned earlier, wholesalers are responsible for storing all the goods they purchase in bulk. Finding a good space to house all of these materials is essential.
6. Create a marketing plan. As a wholesaler, you take on the responsibility of marketing the products that you’re reselling. Don’t forget to plan out exactly how you’re going to approach getting your brand out there. Your marketing plan should also include a wholesale pitch for those you want to work with.
7. Start selling! Once you have everything in order, get those partnerships together and start wholesaling. Continue keeping your eye on the market and keep all of your documentation up to date. Consider hiring a financial advisor to oversee payments and invoices.

Wholesale best practices

Companies should keep a few things in mind whether they choose to enter the wholesale business as manufacturers, retailers, or wholesalers. 

• Prioritize inventory organization. Many wholesalers will use inventory control software to automate how they organize their wholesale inventory. This organization is key because sloppy storage leads to slower distribution. Slower distribution leads to unhappy retailers and customers.  
• Create the right partnerships. Wholesaling doesn’t work if everyone involved in the process is slacking. That is why choosing the right people to collaborate with is essential. If you’re new to the wholesale game, take your time to pick the right partnerships for you and your mission, wherever you fall within the process.
• Build a pricing strategy. Every member of the wholesale process should take the time to create wholesale prices that work well for buying and selling. If done correctly, every stage will be content with its individual profit margins. 
• Stay updated on the industry. Your product is only successful when someone wants to buy it. Whether you’re the manufacturer, wholesaler, or retailer, industry knowledge is essential if you want your demand to meet supply and vice versa. You must always be ready to offer new products that satisfy your audience. Ignoring this best practice can leave you in a shortage or surplus, and at any stage, that is not a good thing. 
• Consider utilizing e-commerce. Wholesale e-commerce is the process of selling products in bulk online. Many companies look to e-commerce to expand their reach and sell to retailers and customers all over the world. Running more elements of your business digitally can also help lessen the chances of human error and keep documentation as organized as possible. 

Why cut out the middleman when you can use the middleman?

No one ever said selling a product was easy, but I wonder if they tried wholesale.

From a manufacturer's perspective, wholesaling saves time, resources, and money. You go from being a one-person band to relying on a qualified intermediary to distribute for you. As a wholesaler, you get to work with knowledgeable creators and bridge the gap between them and the retailer.

Retailers are waiting to sell your product. Wholesalers are waiting to distribute them for you. The ball is in your court. 

Learn about obstacles companies face when integrating AI and analytics into their supply chains.

This article was originally published in 2022. It has been updated with new information.