1391 wholesale dist_bus_ch1


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So you want to start a wholesale distributorship.
Whether you’re currently
a white-collar professional, a manager
worried about being downsized, or
bored with your current job, this may
be the right business for you.Much like
the merchant traders of the 18th century,
you’ll be trading goods for profit.

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1391 wholesale dist_bus_ch1

  1. 1. Entrepreneur Magazine’s Wholesale Distribution Business Chapter 1 Introduction To Wholesale Distribution So you want to start a wholesale dis- and retailers sell them to end users. A cantributorship.Whether you’re currently of motor oil, for example, is manufactureda white-collar professional, a manag- and packaged, then sold to automobileer worried about being downsized, or owners through retail outlets and/or repairbored with your current job, this may shops. In between, however, there are abe the right business for you.Much like few key operators—also known as distrib-the merchant traders of the 18th cen- utors—that serve to move the product fromtury, you’ll be trading goods for profit. manufacturer to market. Some are retail dis-And while the romantic notion of standing tributors, the kind that sell directly to con-on a dock in the dead of night haggling over sumers (end users). Others are known asa tea shipment may be a bit far-fetched, the merchant wholesale distributors; they buymodern-day wholesale distributor evolved products from the manufacturer or otherfrom those hardy traders who bought and source, then move them from their ware-sold goods hundreds of years ago. houses to companies that either want to re- sell the products to end users or use them The Distributor’s Role in their own operations. As you probably know, man- According to U.S. Industry andufacturers produce products Trade Outlook, published by The McGraw-Hill Companies and the U.S. Department of Commerce/In- ternational Trade Administration, wholesale trade includes establish- ments that sell products to re- tailers, merchants, contrac- tors and/or industrial, 1.1
  2. 2. Chapter 1 Introduction To Wholesale Distributioninstitutional and commercial users. Whole-sale distribution firms, which sell bothdurable goods (furniture, office equipment, Beware!industrial supplies and other goods that can Remember thatbe used repeatedly) and nondurable goods as a wholesale dis-(printing and writing paper, groceries, chem- tributor, your cus-icals and periodicals), don’t sell to ultimate tomers have their own customershousehold consumers. to satisfy. Because of this, they Three types of operations can perform have more at stake than the typi- cal customer who is shopping atthe functions of wholesale trade: wholesale a discount distributor that servesdistributors; manufacturers’ sales branches mainstream consumers.and offices; and agents, brokers and com-mission agents. As a wholesale distributor,you will probably run an independentlyowned and operated firm that buys and sells 13 percent of the total, or $424.7 billion inproducts of which you have taken owner- revenues) to furniture and home furnish-ship. Generally, such operations are run ings wholesalers (comprising 2 percent offrom one or more warehouses where in- the total, or $48.7 billion in revenues). That’sventory goods are received and later a big chunk of change, and one that you canshipped to customers. tap into with the help of this book. Put simply, as the owner of a wholesale The field of wholesale distribution is adistributorship, you will be buying goods true buying and selling game—one that re-to sell at a profit, much like a retailer would. quires good negotiation skills, a nose forThe only difference is that you’ll be work- sniffing out the next “hot” item in your par-ing in a business-to-business realm by sell- ticular category, and keen salesmanship.ing to retail companies and other whole- The idea is to buy the product at a lowsale firms like your own, and not to the price, then make a profit by tacking on abuying public. This is, however, somewhat dollar amount that still makes the deal at-of a traditional definition. For example, com- tractive to your customer.panies like Sam’s Club and BJ’s Warehouse Experts agree that to succeed in thehave been using warehouse membership wholesale distribution business, an indi-clubs, where consumers are able to buy at vidual should possess a varied job back-what appear to be wholesale prices, for ground. Most experts feel a sales back-some time now, thus blurring the lines. ground is necessary, as are the “peopleHowever, the traditional wholesale distrib- skills” that go with being an outside sales-utor is still the one who buys “from the person who hits the streets and/or picks upsource” and sells to a reseller. the phone and goes on a cold-calling spree to search for new customers. Getting Into The Game In addition to sales skills, the owner of Today, total U.S. wholesale distributor a new wholesale distribution company willsales are approximately $3.2 trillion. Since need the operational skills necessary for1987, wholesale distributors’ share of U.S. running such a company. For example, fi-private industry gross domestic product nance and business management skills and(GDP) has remained steady at 7 percent, experience are necessary, as is the abilitywith segments ranging from grocery and to handle the “back end” (those activitiesfood-service distributors (which make up that go on behind the scenes, like ware- 1.2
  3. 3. Entrepreneur Magazine’s Wholesale Distribution Businesshouse setup and organization, shipping and some very interesting alternatives to be-receiving, customer service, etc.). Of course, coming a distributor [who takes] physicalthese back-end functions can also be han- possession of the product.” (Read moredled by employees with experience in these about using the internet in your operationsareas if your budget allows. in Chapter 10 of this book.) “Operating very efficiently and turning According to Fein, wholesale distributionyour inventory over quickly are the keys to companies are frequently started in areasmaking money,” says Adam Fein, president where land is not too expensive and whereof Pembroke Consulting Inc., a Philadelphia buying or renting warehouse space is af-strategic consulting firm. “It’s a service busi- fordable. “Generally, wholesale distributorsness that deals with business customers, as are not located in downtown shopping ar-opposed to general consumers. The startup eas, but off the beaten path,” says Fein. “If,entrepreneur must be able to understand for example, you’re serving building or elec-customer needs and learn how to serve trical contractors, you’ll need to choose athem well.” location in close proximity to them in order According to Fein, hundreds of new to be accessible as they go about their jobs.”wholesale distribution businesses are start-ed every year, typically by ex-salespeople Finding Your Nichefrom larger distributors who break out on Upon opening the doors of your whole-their own with a few clients in tow. sale distribution business, you will certain-“Whether they can grow the firm and re- ly find yourself in good company. To date,ally become a long-term entity is the much there are approximately 300,000 distribu-more difficult guess,” says Fein. “Success in tors in the United States, representingwholesale distribution involves moving from $3.2 trillion in annual revenues. Wholesalea customer service/sales orientation to the distribution contributes 7 percent to the val-operational process of managing a very ue of the nation’s private industry GDP, andcomplex business.” Luckily, the book in most distribution channels are still highlyyour hands will help take the guesswork fragmented and comprise many small, pri-out of this transition by giving you the tools vately held companies. “My research showsyou need to succeed. that there are only 2,000 distributors in the Setting Up Shop When it comes to setting up shop, yourneeds will vary according to what type of Beware!product you choose to specialize in. Some- Consolidation isone could conceivably run a successful running rampant inwholesale distribution business from their many industries. Be-basement, but storage needs would even- fore choosing your niche, do some market research on yourtually hamper the company’s success. “If customer base (especially ifyou’re running a distribution company from you’re going to limit yourself to ahome, then you’re much more of a broker particular region) to be sure thosethan a distributor,” says Fein, noting that customers aren’t ripe for consoli-while a distributor takes title and legal own- dation. If they are, you could seeership of the products, a broker simply fa- your client base shrink quickly.cilitates the transfer of products. “Howev-er, through the use of the internet, there are 1.3
  4. 4. Chapter 1 Introduction To Wholesale DistributionUnited States with revenues greater than ten, small customers get left behind or are$100 million,” comments Fein. just not [profitable] for the large distributors And that’s not all: Every year, U.S. retail to serve.”cash registers and online merchants ring up In addition to consolidating, the whole-about $3.6 trillion in sales, and of that, about sale distribution industry is also evolvinga quarter comes from general merchandise, rapidly, which translates to both positiveapparel and furniture sales (GAF). This is a and negative changes. For instance, therepositive for wholesale distributors, who rely are indications of disintermediation trendsheavily on retailers as customers. To meas- across various industries. Several years ago,ure the scope of GAF, try to imagine every strategists and futurists began predicting thatconsumer item sold, then remove the cars, companies would increasingly sell directlybuilding materials and food. The rest, in- to consumers, cutting out distributors andcluding computers, clothing, sports equip- any other distribution intermediaries, in-ment and other items, fall into the GAF cluding some retailers. The predictedtotal. Such goods come directly from man- change was given a fancy term: disinter-ufacturers or through wholesalers and bro- mediation. It has yet to happen, but thekers. Then they are sold in department, threat persists as an increasing number ofhigh-volume and specialty stores—all of manufacturers and end users find one an-which will make up your client base once other directly. However, no matter whatyou open the doors of your wholesale dis- changes may be in store, smart wholesaletribution firm. distributors will always find a way to adapt. All this is good news for the startup en-trepreneur looking to launch a wholesale The Technological Edgedistribution company. However, there are Today, more than 800 million peoplea few dangers that you should be aware of. around the globe have access to the inter-For starters, consolidation is rampant in this net. This is good news for the wholesaleindustry. Some sectors are contracting more distributor who is willing to be flexible inquickly than others. For example, pharma- the information age. While traditional play-ceutical wholesaling has consolidated more ers once felt threatened by the internet asthan just about any other sector, accord- a growing sales channel, the startups willing to Fein. Since 1975, mergers and ac- be more apt to grab technology by thequisitions have reduced the number of U.S. horns and use it to their advantage.companies in that sector from 200 to about50. And the largest four companies con-trol more than 80 percent of the distribu-tion market. Bright Idea To combat the consolidation trend, many You can take a trip onindependent distributors are turning to the the information super-specialty market. “Many entrepreneurs are highway to visit a few of your potential competitors. Keyfinding success by picking up the golden the words “wholesale distributor”crumbs that are left on the table by the na- into your favorite search engine,tional companies,” Fein says. “As distribu- or narrow it down geographicallytion has evolved from a local to a regional by adding your city and/or stateto a national business, the national com- to the search string.panies [can’t or don’t want to] cost-effec-tively service certain types of customers. Of- 1.4
  5. 5. Entrepreneur Magazine’s Wholesale Distribution Business Ride The High-Tech Wave It’s no secret that technology has become a major force in the world, so why not try your hand at reselling computers and related equipment? While some computer manufacturers, like Gateway and Dell, prefer to sell direct to the consumer, many others rely on the wholesale distribution channel to get their products to market. The numbers look good: According to a recent Accen- ture study, the majority of business and information technology (IT) executives in the United States anticipate increases in IT expenditures between 2005 and 2007. The investment is sure to include a mix of hardware (such as computers or telecommunications equipment) and software, both of which present oppor- tunities for new wholesale distributors looking for a high-tech niche. As e-commerce has evolved into more 2. Manufacturers use the internet to gain di-than just a business opportunity, tradition- rect access to customers, thus bypassing theal “brick and mortar” businesses are no wholesale distributor altogether.longer able to rely on traditional forms of As with fighting the trend toward con-selling products to their customers. Prod- solidation, a smart wholesaler can combatuct distribution and delivery trends have both of these scenarios with a bit of inge-been impacted as the internet has grown in nuity and creativity. Finding a unique nichepopularity. They must also be available to is one sharp move, whether it’s serving atheir customers via the internet. For this rea- group of consumers that manufacturers orson, wholesale distributors—like their ven- larger distributors can’t be bothered with,dors—can grab the opportunity to position or perhaps buying in bulk and then sellingthemselves as internet-savvy firms. Most reduced quantities to smaller firms that don’thave set up their up their own informational want to make big inventory investments.websites; others have listed their compa- Including value-added services can alsonies and offerings on mall-type sites de- give you a competitive edge. These includevoted to wholesale distributors; and many (but are not limited to): simplifying themore have created e-commerce-enabled transfer of product, helping smooth out pos-sites where customers can buy directly sible glitches in the information flow, andthrough the web. making transfer of payment easier. In oth- E-commerce is undoubtedly a major con- er words, rather than going directly to thesideration for all wholesale distributors. The manufacturer—who is often more con-Gartner Group, an information technolo- cerned with producing the hard goods thangy advisory firm in Stamford, Connecticut, dealing with customer needs—retailers andhas outlined two possible scenarios to de- other distributors can deal with a whole-scribe how the internet could negatively af- saler who specializes in customer needs.fect wholesalers: Wholesalers can also make themselves valu-1. Manufacturers post products on the in- able by keeping goods on hand for cus-ternet with a bulletin board system, thus let- tomers who would otherwise have to dealting customers source globally with online with long lead times when buying direct.search engines. “That availability very often makes the 1.5
  6. 6. Chapter 1 Introduction To Wholesale Distribution til your client base is large enough to reach critical mass. Beware! The last option is perhaps the most risky, If you’re planning as all business opportunities must be thor- to start a wholesale oughly explored before any money or pre- distribution business cious time is invested. However, the right from home, check with your lo- opportunity can mean support, training and cal zoning board about the legali- quick success if the originating company ty of shipping and receiving mer- has already proven itself to be profitable, chandise at your home. For reputable and durable. example, many cities do not al- Regardless of which avenue you choose, low the delivery of goods from vehicles like tractor-trailers in res- a new distributorship will require a few idential neighborhoods. key pieces of equipment to get started. In the office, a personal computer, several phone lines, a fax machine and access to a reliable shipping method will all be nec-wholesale distributor a backup for, and ex- essary. Most wholesalers drop-ship theirtension of, the customer’s own inventory products through the use of shipping serv-system,” says Fein. And e-commerce itself ices (UPS, Airborne, FedEx, etc.), thoughcan be a boon to the wholesale distributor, some who deliver to their local areas useespecially when it comes to finding new their own leased or purchased delivery ve-customers and hunting down new product hicles. In the end, it truly depends on themanufacturers and vendors to buy from. product, lead times and proximity of your customer base. With the exception of the Starting Out entrepreneur who is wholesaling T-shirts For entrepreneurs looking to start their from his or her basement, a generousown wholesale distributorship, there are ba- amount of warehouse space will be nec-sically three avenues to choose from: buy essary, as will a location that is in closean existing business, start from scratch orbuy into a business opportunity. Buying anexisting business can be costly and may evenbe risky, depending on the level of success Dollar Stretcherand reputation of the distributorship you To avoid spendingwant to buy. The positive side of buying a excess money dur- ing the startup phase,business is that you can probably tap into list everything youthe seller’s knowledge bank, and you may think you need and then askeven inherit his or her existing client base, yourself: Why do I need thiswhich could prove extremely valuable. item? How will it help me be The second option, starting from scratch, more productive? Can I do with-can also be costly, but it allows for a true out it for six months or a year“make or break it yourself” scenario that while my business is gettingis guaranteed not to be preceded by an ex- started? Do this for every pur-isting owner’s reputation. On the downside, chase, and you’ll avoid the urgeyou will be building a reputation from to spend on impulse items.scratch, which means lots of sales and mar-keting for at least the first two years or un- 1.6
  7. 7. Entrepreneur Magazine’s Wholesale Distribution Businessproximity to your customers. ing, pallets, forklift), and a few Chevrolet During the startup process, you’ll also Astro vans for delivery.need to assess your own financial situation Like most startups, the average whole-and decide if you’re going to start your busi- sale distributor will need to be in businessness on a full- or part-time basis. A full-time two to five years to be profitable. There arecommitment probably means quicker suc- exceptions, of course. Take, for example,cess, mainly because you will be devoting the ambitious entrepreneur who sets up hisall your time to the new company’s success. garage as a warehouse to stock full of small Because the amount of startup capital hand tools. Using his own vehicle and re-necessary will be highly dependent on what lying on the low overhead that his homeyou choose to sell, the numbers vary. For provides, he could conceivably start mak-instance, an Ohio-based wholesale distrib- ing money within six to 12 months.utor of men’s ties and belts started his com- “Wholesale distribution is a very largepany with $700 worth of closeout ties segment of the economy and constitutesbought from the manufacturer and a few about 7 percent of the nation’s GDP,” saysbasic pieces of office equipment. At the Pembroke Consulting Inc.’s Fein. “That said,higher end of the spectrum, a Virginia-based there are many different subsegments anddistributor of fine wines started with $1.5 industries within the realm of wholesale dis-million used mainly for inventory, a large tribution, and some offer much greater op-warehouse, internal necessities (pallet rack- portunities than others.” Industry At A Glance This trend report indicates the number of U.S. wholesale distribution companies, by company size, from 1995 to 2004. Number of Employees Total 1 10 20 50 100 500 1,000 Total Total for Year to 9 to 19 to 49 to 99 to 499 to 999 or More Companies Employees 1995 572,087 75,719 44,028 11,305 6,232 304 148 709,823 6,546,287 1996 551,596 74,567 43,394 11,223 6,175 301 130 687,386 6,338,918 1997 502,523 66,723 39,371 10,332 5,760 285 124 625,118 5,783,284 1998 556,346 74,846 44,751 11,916 6,758 338 156 695,111 6,572,421 1999 528,831 75,494 45,193 12,167 6,874 383 165 669,107 6,632,553 2000 507,456 75,960 46,423 12,629 7,331 423 225 650,447 6,779,307 2001 517,556 77,103 47,043 12,770 7,415 430 225 662,542 6,873,837 2002 565,443 78,339 48,802 13,465 8,067 515 243 714,874 7,253,593 2003 529,415 74,651 47,015 13,007 7,633 432 181 672,334 6,726,645 2004 525,212 74,512 46,364 12,481 7,367 433 163 666,532 6,578,696 % Change +7% -2% +5% +9% +20% +25% +7% +7% +3% 1995-2004 © Industrial Market Information Inc. 2004. Used with permission. 1.7
  8. 8. Chapter 1 Introduction To Wholesale Distribution Among those subsegments are whole- tools, for example) and offer a variety ofsale distributors that specialize in a unique products to myriad customers.niche (e.g., the distributor that sells spe- Regardless of which subsegment youcialty foods to grocery stores), larger dis- choose, this book will give you the infor-tributors that sell everything from soup to mation you need to realize your dreams ofnuts (e.g., the distributor with warehouses owning a wholesale distribution business.nationwide and a large stock of various, un- In the next chapter, we’ll examine the op-related closeout items), and midsized dis- erational aspect of owning a wholesale dis-tributors who choose an industry (hand tribution business. 1.8