Wholesale distributors are companies that distribute products from manufacturers to retailers and/or customers. They are essentially a middle-man and are responsible for shipping large wholesale shipments directly to either retailers or customers. As such, they don’t engage in the small day-to-day individual transactions that a retail store would. Instead, wholesalers focus on distributing products in large quantities in bulk shipments.
Wholesale distributors are typically the only businesses that engage in direct transactions with manufacturers, purchasing products at their wholesale price directly from the manufacturers themselves.
In this article, we will discuss the various types of wholesale suppliers and how they operate and provide a few great tips on developing a business plan and business model for a wholesale distribution business.
What are the Various Types of Wholesale Distributors?
There are several different types of wholesale distributors specializing in various kinds of service for clients. In particular, they are broken up into three distinct categories.
This most common of all wholesalers are merchant wholesalers. Merchant wholesalers are wholesalers who buy directly from the manufacturer, move the product now to one of their warehouses, and then sell it to retailers or directly to customers.
Of course, this kind of wholesale operation comes with the inherent risk that the wholesaler may not be able to unload the product in its entirety or at a price high enough to merit its acquisition in the first place. The wholesaler, in their entirety, bears any losses.
Agents, Brokers, and Commission Merchants
Agents, brokers, and commission merchants are wholesalers serve manufacturers and producers who do not have in-house sales teams by locating retailers and other customers to buy their products. These wholesalers charge a commission on purchases, paid to them by the supplier typically as a percentage of the total sale. Unlike with merchants, wholesalers, agents, brokers, and commission merchants are not responsible for losses incurred by being unable to sell products at a high enough margin. Any losses are typically borne in their entirety by the manufacturer of the product that is contracting with the merchant.
Manufacturers and Producers
It is not uncommon for manufactures and producers themselves to be in the wholesale process.
Manufacturers that are large enough to be able to afford and operate an in-house sales team often sell their products to retailers and other customers themselves. Some of them even have wholesale e-commerce platforms. This enables them to cut out the “middle-man,” allowing them to achieve higher profit margins on their products and make more money in the long-run.
Some manufacturers will sell only a specific product by themselves if the product is extremely popular and, as a result, doesn’t require a great deal of effort for a sales team to place the product with retail businesses and other customers.
What is a Business Plan?
A business plan is an organized guide or template that includes the plans your business hopes to achieve as well as how you plan to achieve them. Typically, a business plan includes the following:
- Executive Summary and Overview of the Company – This is a basic overview of the business idea (if you are about to start your business) or business you are operating.
- Product and/or Service Details – Here, you will go into a little depth about the products and/or services you are offering, how they benefit the consumer, etc. Why are they quality products? What need are you fulfilling? What is your pricing scheme?
- Target Market – This is where you will discuss what your target or ideal customer base is. If you are a wholesaler, this should focus on, for example, the ideal retailers you are aiming to place your products with.
- Goals and Milestones and a Plan o Achieve Them – In this section, you will outline a basic plan of action for achieving specific goals for your company. Here, you should discuss strategy, such as your marketing strategy for how you plan to market your products, plan to get to scale your business, and plan to get your products to your customers (i.e., e-commerce, store, etc.). You can also discuss your supply chain, distribution plan, and inventory management. Planning is everything, and a good marketing plan, distribution plan, etc. will pay dividends – literally!
- Company Financial Plan – This is where you will break down your financial projections, cash flow, financing plans, and response plans for either positive or negative forecast miscalculations. We cannot stress enough how important this section of your business plan is. When you are applying for financing or any sort, whether that is applying for a loan or pitching your business to potential investors, your company’s financial plan and standing are almost always going to be the center of attention. Bankers and investors want to see clear, detailed, and accurate forecasts that are transparent and realistic.
- Company Management Information – This should include a short bio and each member of your company’s management and contact information. Though the section seems basic, it should not be overlooked. You will want to talk about what experience each team member has, what they bring to the team, and how they are positioned to excel in the business. If they have relevant industry experience, make sure to emphasize it. Bankers and investors want to know that they are giving money to capable individuals who are well-equipped to manage a successful business.
Business plans allow businesses to make better decisions and identify inherent risks. At the same time, they are crucial for raising funds and obtaining loans since most financial lenders will want to see a business plan that clearly outlines your company’s profitability and viability.
Additionally, business plans should be concise. You want them to be short and sweet and get right to the point. The goal of designing a business plan is that you will be able to look back at in the future as a guide to assessing your business’ progress and achievement and deciding how best to move forward. If it is a massive document, this will be significantly harder and more difficult.
At the end of the day, you should look at your business plan as a step-by-step guide to achieving both short-term and long-term goals for your business. Having a clear idea of where you are going and where you have been will allow you to make much more effective decisions in the long-run that work toward achieving your end goals. This way, you can ensure you aren’t just aimlessly operating your business or making decisions that either don’t contribute to your goals or, worse, impede your goals.
A Few Tips for Wholesale Distribution Business Plans
Just as when you start or operate any small business, business plans are extremely important for both startup wholesale businesses and well-established wholesale business. Remember, you can make a business plan at any stage in your company’s development. In fact, business plans are better late than never, so if you are an established business owner, don’t hesitate to break out a notepad and start building one now.
Establish What Kind of Wholesaler You are Going to Be
As we discussed, there are a number of types of wholesalers. Obviously, you will want to decide early on as part of your business plan what kind of wholesaler you are going to be.
Be Clear and Use Quantitative Goals
Whenever you are writing a business plan, clarity and brevity are key. So, if you want to achieve $800,000 in first-year sales, and you believe you can, then state so. Plus, make sure you are outlining quantitative goals that can actually be assessed. Don’t say that you “want to make a decent number of extra sales in year two than in year one.” Be clear. State that you want to “double sales in year two and increase sales by 25% in year 3”. Make sure your goals can be analyzed and assessed.
The same goes for estimating your finances and establishing your cash flow estimates. These tasks are highly quantitative in nature, and if you are applying for a loan from a bank, the bankers will want to see real, quantitative data on your financial situation. Saying you expect to “make a lot of sales in Q2” is not going to cut it.
Establish Exactly Who You Plan to Sell To
Wholesale transactions involve large quantities and high-dollar values. This means you cannot afford to get stuck with a batch of products that nobody wants and which there is not a great deal of demand. That means that you need to be diligent in determining who will buy the products and what their demand for the products is.
If you are buying toothbrushes wholesale and you plan to supply them to local convenience stores, then make sure you have contact with these stores beforehand. Make sure you are already building connections and setting up a strong business relationship. Just because you think there is a need that can be fulfilled doesn’t mean retailers will come to you to fill it.
As such, you should be doing a lot of market research. If there are a lot of small coffee shops in your area, and you are planning to become a wholesale distributor of coffee, assess their demand, find out if they are interested in buying your coffee, and making sure you have them lined up as buyers before making large wholesale purchases. All of this information and research will fit into the “target market” section of your business plan.
Decide Exactly How You Plan to Sell Your Products
Wholesalers reach clients in a number of ways. Some wholesalers operate large-scale e-commerce platforms where retailers can come and buy products in bulk from them (Enesco is an example of this). Others rely on relationships they have built with small businesses and small business owners around them. You should be clear about how you plan to sell your products in your business plan.
If you are planning to operate an online e-commerce site, be proactive in detailing how you plan to build out its infrastructure, how you plan to ship items to clients, and how you plan to raise awareness of your offerings.
Build Out a Clear Supply Chain
So you know what you are going to sell, and you know who you are going to sell to, but you need to have a supply of this item as well. Are you going to manufacture it? Are you going to buy it straight from a manufacturer?
If you are going to buy your products straight from a manufacturer, make sure you are already discussing pricing with them. You will need to know if you can sell that at a high-enough markup to have a strong profit margin on the items.
Outline ALL of your Expenses
Remember, a lot goes into your expenses besides the price of the products themselves. You have to consider shipping, gas, warehouse utility fees, and other overhead costs. All of these are costs that have to be factored into your costs before you can determine what your profit margin will be. You can’t just simply subtract the price your pay for the products from the price you sell the products for.
If need be, take an accounting class at a local community college or online. Such a class will help you learn the ins and outs of basic business finance. That way, you can make sure you are able to manage your business effectively. It might also help to hire an accountant for your business who is trained to deal with such financial tasks. Remember, whenever you are running a small business of any kind, numbers and data are key. Without them, you will undoubtedly run astray.
Strategy versus Tactics
One of the key distinctions you should be aware of when designing a business plan is the difference between strategy and tactics. A strategy is your overarching plan and set of goals. Tactics are the specific, short-term steps you plan to undertake to accomplish that overarching strategy.
This is something that you should keep in mind as you design your wholesale distribution business plan. For example, let’s say you goal is to obtain 15 clients by the end of your first year. That would be your business strategy. However, to accomplish that, you may plan to make contact with the business owners of 75 different retail shops in your area and attempt to pitch your products and/or services to them. This would be a tactic for achieving your overall strategy.
Typically, business plans focus more on the overall strategy as opposed to the day-to-day tactics; however, it is not a bad idea to include some of the larger, more significant tactics you plan to use in your business plan. Just be aware of the fact that you want to keep your business plan, as noted, short, and concise.
There is a lot of money to be made in the wholesale industry if a business is managed effectively. Indeed, there is quite a bit of innovation taking plan in the different wholesale industries, such as the wine industry, which for the first time, is beginning to offer direct-to-consumers wholesale wine.
However, at the same time, because of the high-value, bulk purchases that wholesale distribution entails, it can also be risky. As such, more than many other businesses, wholesale distribution requires keen attention to detail. Profit margins are not always very high in the wholesale distribution industry; small mistakes can lead to disastrous results.
As always, starting a business is difficult. There is no doubt about that. But it is better to be over-prepared than under-prepared. By working out all of the aforementioned issues in your business plan, you can ensure that you are going into business with a strong foundation and a clear view of where you want to go.
Whenever you hear about successful entrepreneurs, they always talk about the vision they had. A business plan is simply a way of putting this vision on paper and designing an overall approach that allows you to execute this vision. Successful business owners are meticulous and organized, and a business plan is just one part of that.
As always, we hope you enjoyed the article. Be sure to keep checking back on our blog for more great information about small businesses and how you can take your small business to the next level!