COMMERCE O LEVEL(FORM TWO) NOTES – WHOLE SALE TRADE

WHOLESALE TRADE

Wholesale trade: is the process of buying goods in very large quantities from producers or manufacturers and selling them mainly to retailers.

A wholesaler: is a person who buys goods in very large quantities from producers or manufacturers and sells them mainly to retailers.

FUNCTION OF A WHOLESALER

1. Provide a link between the retailers and manufacturers: He buys goods from producers or manufacturers and sells them to retailers. By doing so, he creates a bridge connection from producers or manufacturers to many consumers.
2. Bulk breaking: He buys goods in bulk from producers or manufacturers and divides them into smaller packages that are convenient for retailers.
3. Storage: A wholesaler owns a large warehouse for storing the large quantities of goods that he buys from various suppliers before selling to retailers.
4. Financing (Cash paying): A wholesaler buys in large quantities and pays in cash, thus financing the manufacturers.
5. Price stabilizer: When he buys in large quantities, he avoids the problem of price fluctuation (rise and fall of prices). Also, he stabilizes the price of storing goods and releases only the required quantity into the market.
6. Source of information: He supplies market information to both manufacturers and retailers regarding product changes.
7. Risk bearing: He accepts full responsibility for losses due to damage, fall in demand, changes in fashion, theft, fire, etc.
8. Preparing goods for sale: Sometimes the wholesaler packs, grades, or brands goods before handing them to retailers.

SERVICES PROVIDED BY WHOLESALER TO MANUFACTURERS

1. Clears production line by removing goods in large quantities as they are produced.
2. Releases the manufacturers from risks associated with:
   • Lack of sale of goods due to fall in demand.
   • Fall in price due to fall in demand.
   • Fall in price due to an increase in supply.
   • Bad debts resulting from credit sales to retailers.
3. Releases the manufacturers from the need for warehousing.
4. Releases the manufacturer from the trouble of finding markets for his products.
5. Feeds the manufacturer with information from retailers.
6. Contributes positively to the manufacturer’s cash flow position by paying him promptly.
7. Saves the manufacturer from the problem of transporting goods from the factory to the market.
8. Assists the manufacturer in market research.

SERVICES PROVIDED BY WHOLESALERS TO RETAILERS

1. Breaks the bulk of goods into sizes that can be reasonably handled by a retailer.
2. Enables the retailer to obtain stock more conveniently.
3. Offers a retailer a greater variety of goods than any one manufacturer would be able to offer.
4. May prepare goods for sale by grading, branding, and blending.
5. Usually organizes transport from the warehouse to the retailer’s shop.
6. Advises the retailer on new products, their contents, and how to handle them.
7. Often sells goods to retailers at a discount, enabling retailers to sell at a profit.
8. Provides storage facilities, making it unnecessary for the retailer to have their own store. Also, retailers save by avoiding costs of carrying slow-moving items (stocks).
9. Often extends credit facilities to retailers, which increases their operational ability.

SERVICES PROVIDED BY WHOLESALER TO CONSUMERS

1. Enables the consumer to obtain a steady (continuous) flow of goods throughout the year and stable prices by buying and storing goods when they are plentiful and releasing them when they are short in supply.
2. Conveys information from consumers (e.g., complaints, changes in fashion or tastes) to manufacturers or producers and releases consumer information from manufacturers regarding new products or changes in old products.
3. Ensures that consumers’ needs are adequately met by storing a large variety of products.
4. The wholesaler’s convenient location enables consumers to get goods when they want them.

TYPES OF WHOLESALER

There are two types of wholesaler:

1. Merchant wholesaler
2. Agent wholesaler

MERCHANT WHOLESALERS

Is the one who buys and sells goods on his own capital or performs all activities for his profit or loss.

AGENT WHOLESALERS

Is the one who performs the duty of buying and selling on behalf of the owner known as a PRINCIPAL.

I. TYPES OF AGENT WHOLESALERS

1. Commission Agent:

Is the one who buys and sells goods on behalf of the owner and receives a payment called commission as his remuneration. He is not responsible for any losses resulting, e.g., unsold stock, change in fashion.

2. Del credere Agent:

Is the one who buys and sells goods on behalf of the owner but is paid an extra payment known as del credere commission because they are responsible for the risk of being left with goods on their hands. He arranges with his principal that he will be liable or responsible for any defaults of the customers introduced by him.

3. Broker

Is the one who brings business relationships between the seller and the buyer.

He is only concerned with making bargains and contacts between other parties. He does not take physical possession of goods. Each broker tends to specialize in a particular line of goods or services.

Brokers receive a payment known as brokerage charge.

FACTORS

A factor is the one who sells goods on behalf of his principal. He is referred to as a commission salesman. He receives a payment known as commission.

THE DIFFERENCE BETWEEN FACTOR AND BROKER

II: TYPES OF MERCHANT WHOLESALER

Merchant wholesalers can be classified in different ways as follows:

ACCORDING TO THE RANGE OF PRODUCTS HANDLED BY THEM

The wholesalers under this class are:

• General merchant wholesaler
• General line wholesaler
• Specialized wholesaler

I: GENERAL MERCHANDISE WHOLESALER

These are wholesalers who deal in a variety of goods like foodstuffs, hardware, farm equipment, electrical goods, sports, etc.

II: GENERAL LINE WHOLESALER

These are wholesalers who deal with a wide variety of goods in a single product line, for example, hardware wholesalers, stationery wholesalers.

III: SPECIALIZED WHOLESALER

These are wholesalers who trade in only one type of goods within a given product line, for example, selling cement only, books only, iron sheets only, etc.

ACCORDING TO THE GEOGRAPHICAL SPREAD OF OPERATION

The wholesalers under this class are:

• National wide wholesalers
• Regional wholesalers

I: NATIONAL WIDE WHOLESALER

These are wholesalers who operate on a very large scale and have large warehouses in major towns of the country. They usually carry a large range of products.

II: REGIONAL WHOLESALER

These are wholesalers that sell goods within a particular area or region, for example within a district or province, and may carry a large or specialized range of goods.

ACCORDING TO THE METHOD OF OPERATION

The wholesalers under this class are:

• Truck wholesalers / wagon jobbers
• Rack jobbers / rack merchandisers
• Mail order wholesalers
• Cash and carry wholesalers

I: TRUCK WHOLESALERS / WAGON JOBBERS

These are wholesalers that carry a limited range of stock and combine selling, delivery, and collection functions in one operation.

II: RACK JOBBERS / RACK MERCHANDISERS

These are wholesalers that specialize in marketing a particular type of goods to other specialized wholesalers. Rack jobbers in East Africa include those who buy agricultural foodstuffs and wholesalers in urban areas.

III: MAIL ORDER WHOLESALER

These are wholesalers who sell directly to consumers rather than through retailers. They usually deal in general merchandise and conduct nationwide operations. The bulk of their sales are made on the basis of short-term credits.

IV: CASH AND CARRY WHOLESALER

These are wholesalers who stock a wide variety of goods to enable retailers to visit their premises, pick the goods they want, pay for them, and then transport the goods to the retailers’ premises.

CHANNEL OF DISTRIBUTION

Channel of distribution: is the way through which goods pass from manufacturers to the final consumers. The following diagram shows the channel of distribution.

From the diagram above

1. The manufacturer sells his product either to a wholesaler or to a large-scale retailer; in both cases, the quantities involved are very large.
2. Some manufacturers may operate their own retail outlets.
3. The wholesaler sells goods to retailers in somewhat smaller quantities compared to those from the manufacturer.
4. Some small-scale retailers may buy their supply from large-scale retailers or retail shops operated by the producer himself.
5. The retailer sells goods to consumers.

CHARACTERISTICS OF CHANNEL OF DISTRIBUTION

The concept of channel structure identifies three parties that are necessary to enable distribution to be effective. These are:

1. Producers
2. Middlemen
3. Consumers

A Middleman: Is an independent businessman between producers and consumers who buys goods from producers and sells them to consumers.

Function of middleman

1. Concentrating in collecting various products from various producers.
2. Subdividing these products into quantities required or desired by consumers.
3. Distributing subdivided quantities of these products to consumers and industrial users.

Middlemen include:

1. Agent middleman
2. Merchant middleman
3. Wholesaler middleman
4. Retailer middleman

ELIMINATION OF A WHOLESALER IN THE CHANNEL OF DISTRIBUTION

In order to eliminate or bypass the wholesaler in the channel of distribution, the following factors must be considered:

1. A wholesaler can be eliminated if there are many large-scale retailers who can manage to buy directly from producers.
2. A wholesaler can be eliminated if the manufacturers have established many retail outlets (own retail outlets).
3. If the manufacturer has enough storage facilities.
4. A wholesaler can be eliminated where goods are produced and sold in small quantities.
5. If the manufacturer has their own transport facilities to distribute goods to retailers.

FACTORS WHICH DETERMINE THE CHOICE OF A CHANNEL OF DISTRIBUTION

The following are the factors which must be considered in choosing the channel of distribution:

1. The nature or characteristics of the product: This refers to the perishability or durability of a product. For durable goods, a long channel may be used.
2. The value of the product: A long channel means high cost in distributing goods. Care must be taken to avoid unnecessary costs which may result in high prices to final users and reduce the market.
3. Availability of channel distribution: The choice should consider the availability of the channel of distribution.
4. Market consideration: This refers to the general market outlook, including customer preferences, purchasing power, and attitudes towards the products in relation to competition.
5. Middleman attitude: Some middlemen tend to have negative attitudes towards products. The willingness to distribute should be checked carefully; for instance, some middlemen tend to sell goods at higher prices through scarcity which they create themselves.
6. Technical nature of the product: Some technical products demand technical know-how in handling them, e.g., electrical equipment, video sets, music systems. This must be considered if the product falls under this category.

IMPORTANCE OF A WHOLESALER AS A LINK BETWEEN A PRODUCER AND RETAILER

To small retailers and small manufacturers, the wholesaler is very important; otherwise, they face the following difficulties:

1. Holding a large stock of a variety of goods requires a lot of business capital.
2. Assembling goods from a number of manufacturers or producers who are usually widely scattered is very difficult.
3. Arranging for packing and grading of goods.
4. Bearing the risks of price fluctuations and changes in fashion.

ADVANTAGES OF WHOLESALE TRADE

The following are advantages of wholesale trade:

1. Provides services to producers/manufacturers.
2. Provides market research on behalf of the manufacturers.
3. Provides goods to retailers from serious manufacturers.
4. Stabilizes prices and minimizes the problem of price fluctuation.

DISADVANTAGES OF WHOLESALER

1. Sometimes a wholesaler may refuse to buy goods because of the high price and also may refuse to sell goods because of a fall in price, thus causing shortages.
2. Sometimes a wholesaler provides incorrect information to manufacturers regarding market situations.
3. They can create shortages due to selfish motives.

GENERAL PROBLEMS IN HOME TRADE

The following are problems facing home trade:

1. Small scale operation: Due to lack of finance capital, most traders operate on a very small scale and cannot buy goods in large quantities.
2. Lack of capital: There is a problem in getting capital for both initial investment and business expansion.
3. Poor transport and communication: Traders, particularly in rural areas, often have to wait for considerable periods before receiving their supplies due to poor transport facilities.
4. Lack of training (knowledge): Many people lack knowledge about stock control, bookkeeping, selling techniques, costing, etc.
5. Poor warehousing/storage facilities for wholesalers: Some goods are produced seasonally but demanded throughout the year, so warehousing facilities are highly needed.