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Chapter 11, channel institutions - Wholesaling. After studying this chapter you will be able: Understand functions of a wholesaler, understand various classes of wholesalers, major wholesaling decisions, benefits and limitations of wholesalers, understand about a – distributor in more detail, trends in wholesaling practices.
Chapter 11 Channel Institutions - Wholesaling SDM Ch 11 Tata McGraw Hill Learning Objectives • Understand functions of a wholesaler • Understand various classes of wholesalers • Major wholesaling decisions • Benefits and limitations of wholesalers • Understand about a – distributor in more detail • Trends in wholesaling practices SDM Ch 11 Tata McGraw Hill Need for Wholesalers • Widespread economy – consumers can only reached by thousands of retailers (except for consumer durables and industrial products) • Reaching these retailers by a company directly is not possible (except for consumer durables and industrial products) • Hence the need for wholesalers in two forms: – Well established free-lance wholesalers – Contracted distributors, stockists and agents Characteristics… SDM Ch 11 Tata McGraw Hill Characteristics of Wholesalers • Operate on large volumes but with chosen group of products – Food, grocery, pharma or automobile spares etc • The company itself, contracted parties or free lancers, can operate as wholesalers • Mostly B2B business – trade and institutions • Wholesaler could also be a retailer – in rural markets – W/s sells to other retailers and also to consumers SDM Ch 11 Tata McGraw Hill Characteristics of Wholesalers • Sell physical inputs or products – tangible goods ( Ws in some service industries) • Optimise results, maximise service (effectiveness) and minimise operating costs (efficiency) • Buy goods for resale, keep inventory, take risks of price changes, negotiate terms, procure orders, deliver and extend credit Definition… SDM Ch 11 Tata McGraw Hill Definition • Wholesaling is concerned with the activities of those persons or establishments that sell to retailers and other merchants and / or industrial, institutional and commercial users but not sell in large amounts to consumers – US Bureau of Census Delivering value… SDM Ch 11 Tata McGraw Hill Delivering Value • Keep goods accessible to customers instantly • At times, get together to bargain for better terms • Pass on benefits or incentives to their customers • Have a wide trading area SDM Ch 11 Tata McGraw Hill Functions… Difference with Retailers • Not too worried about location, ambience or promotions – prefer to be in the main market • Deal with other businessmen and not consumers • Deal with a specific group of products only • Much larger trading area • Much larger transactions with suppliers and customers • Believe in low margins but high volumes SDM Ch 11 Tata McGraw Hill Functions of Wholesalers • Varies in degree between free-lance, company distributors and stockists / agents • Sales and promotion of chosen company products • Buying the assortment of goods • Breaking bulk to suit customer requirements • Storage and protection of goods till sold SDM Ch 11 Tata McGraw Hill Functions of Wholesalers • • • • Grading and packing of commodities Transportation of goods to customers Financing the buying of customers Bearing the risks associated with the business • Collecting and disseminating market information to both suppliers and customers SDM Ch 11 Tata McGraw Hill 10 Major Wholesaling Decisions • • • • • • • • Which markets to operate in Manpower to employ What products to sell Pricing decisions / Promotional support Credit and collections Image and customer perception Warehouse location and design Inventory Control SDM Ch 11 Tata McGraw Hill 13 Favourable Factors • Companies have limitations in market / outlet coverage Wholesalers are required to fill the gaps • Hundreds of small companies who cannot afford to set up distribution networks – need to depend on wholesalers • In food grains, fruits and vegetables – hardly any organised distribution network Wholesalers help move goods from farm gate to consumers SDM Ch 11 Tata McGraw Hill 14 Favourable Factors • Big companies also need wholesalers to get big volumes • W/s extend credit to customers Companies cannot match this • Retailers have to visit w/s markets to buy food grains, cereals and pulses – buy a lot more Unfavourable… SDM Ch 11 Tata McGraw Hill 15 Unfavourable Factors • Companies coverage focus on retailers and institutions through their distributors • Using modern retail formats as wholesalers • More outlets like Metro C&C being encouraged • Enforcing strict price control so that w/s not sell below company prices SDM Ch 11 Tata McGraw Hill 16 Distributor • Is a wholesaler nominated by a company to exclusively re-distribute the company products to its customers in a designated territory He does not deal in competitor’s products Does not sell from his premises Extends credit selectively – A redistribution stockist for HLL – A distributor for Philips lighting division – A distributor for L&T engineering division SDM Ch 11 Tata McGraw Hill 17 Dealer • Role similar to a distributor but – May not have a clearly defined territory and may sell both in the market and from his shop – May deal with competitive products also – Extends credit selectively – Dealers in industrial products may have better defined roles • Examples: – Dealer for an edible oil company – A dealer for garment brands SDM Ch 11 Tata McGraw Hill 18 Stockist • May be working for a company with a designated territory but does not redistribute the stocks Sells from his premises Extends credit selectively – A stockist for paper products – A stockist for automobile spares • Re-distribution is visiting customer premises to sell products Managing distributors… SDM Ch 11 Tata McGraw Hill 19 Managing Distributors • The principles are similar across industry verticals FMCG is the most complex • Has the capacity to maximise sales and market shares • Has to ensure buying goods from the company and re-distribution to the trade SDM Ch 11 Tata McGraw Hill 20 Why necessary?… Managing Distributors • Distributor responsibilities include: – Buying adequate quantities by Stock Keeping Unit (SKU) for redistribution – Ensuring full market coverage of all customers in the territory assigned to him – Help finance the operations – pays for the goods upfront but extends credit to his customers – Maintaining inventory of company products adequate at all times to service the market – Assist company in its promotional efforts SDM Ch 11 Tata McGraw Hill 21 Need for Distributors • Under three circumstances: – For entering a new town – For additional coverage in the same town – For replacing an existing distributor • For entering a new town, assess the potential for business to decide: – If the town can sustain a full fledged distributor – The number of distributors required • Starts with a town profile of potential, number of customers to be serviced and the competition SDM Ch 11 Tata McGraw Hill 22 Cost of servicing… Cost of Servicing • Cost benefit of using distributors to be assessed – Logistics cost of serving the market – The number of customers to be covered by category – wholesalers, retailers, institutions – Frequency of visits to markets and outlets – Sales revenue estimate from each visit – Markets to be covered with ready stocks or order booking for later delivery – Likely collections during each visit – gives an idea of the credit requirements SDM Ch 11 Tata McGraw Hill Expectations… 23 Expectations from a Distributor • To be stated at the start of the relationship • Helps get the right kind of distributor also – – – – – Achieving sales targets – volume, value and packs Financial commitment on inventory and credit Investment in infrastructure – space, vehicles Manpower – front line and back office Distribution effort – market and outlet coverage as per a beat plan with productive calls – Developing new markets and new accounts – Managing key accounts and institutional business SDM Ch 11 Tata McGraw Hill 24 Expectations from a Distributor • Merchandising and displays in the market • Secondary sales efforts and tracking – critical for fmcg and pharma (secondary sales is sales from the distributor to the outlets in the market) • Effectively handling promotions and schemes initiated by the company • Managing damaged stocks SDM Ch 11 Tata McGraw Hill 25 Expectations from a Distributor • Organising and participation in promotional events • Assist company in making a success of launching new products and packs • Handling consumer quality complaints • Handling statutory requirements on behalf of the company • Payments and remittances promptly to the company SDM Ch 11 Tata McGraw Hill 26 Key Learnings • Wholesalers are required to reach hundreds of customers and retailers • Wholesaler business is usually B2B • Wholesalers can be free-lance or appointed by companies – like distributors • Company distributors are bound by strict operating norms • Future of wholesalers in India still seems favourable SDM Ch 11 Tata McGraw Hill 27 ... SDM Ch 11 Tata McGraw Hill 24 Expectations from a Distributor • Merchandising and displays in the market • Secondary sales efforts and tracking – critical for fmcg and pharma (secondary sales. .. (secondary sales is sales from the distributor to the outlets in the market) • Effectively handling promotions and schemes initiated by the company • Managing damaged stocks SDM Ch 11 Tata McGraw Hill ... Managing distributors… SDM Ch 11 Tata McGraw Hill 19 Managing Distributors • The principles are similar across industry verticals FMCG is the most complex • Has the capacity to maximise sales and market shares