1391 wholesale dist_bus_ch1

So you want to start a wholesale dis-tributorship.Whether you’re currentlya white-collar professional, a manag-er worried about being downsized, orbored with your current job, this maybe the right business for you.Much likethe merchant traders of the 18th cen-tury, you’ll be trading goods for profit.And while the romantic notion of standingon a dock in the dead of night haggling overa tea shipment may be a bit far-fetched, themodern-day wholesale distributor evolvedfrom those hardy traders who bought andsold goods hundreds of years ago.

The Distributor’s RoleAs you probably know, man-

ufacturers produce products

and retailers sell them to end users. A canof motor oil, for example, is manufacturedand packaged, then sold to automobileowners through retail outlets and/or repairshops. In between, however, there are afew key operators—also known as distrib-utors—that serve to move the product frommanufacturer to market. Some are retail dis-tributors, the kind that sell directly to con-sumers (end users). Others are known asmerchant wholesale distributors; they buyproducts from the manufacturer or othersource, then move them from their ware-houses to companies that either want to re-sell the products to end users or use themin their own operations.

According to U.S. Industry andTrade Outlook, published by TheMcGraw-Hill Companies and theU.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,

Entrepreneur Magazine’s

Wholesale Distribution Business

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Chapter 1

Introduction To Wholesale Distribution

institutional and commercial users. Whole-sale distribution firms, which sell bothdurable goods (furniture, office equipment,industrial supplies and other goods that canbe used repeatedly) and nondurable goods(printing and writing paper, groceries, chem-icals and periodicals), don’t sell to ultimatehousehold consumers.

Three types of operations can performthe functions of wholesale trade: wholesaledistributors; manufacturers’ sales branchesand offices; and agents, brokers and com-mission agents. As a wholesale distributor,you will probably run an independentlyowned and operated firm that buys and sellsproducts of which you have taken owner-ship. Generally, such operations are runfrom one or more warehouses where in-ventory goods are received and latershipped to customers.

Put simply, as the owner of a wholesaledistributorship, you will be buying goodsto sell at a profit, much like a retailer would.The only difference is that you’ll be work-ing in a business-to-business realm by sell-ing to retail companies and other whole-sale firms like your own, and not to thebuying public. This is, however, somewhatof a traditional definition. For example, com-panies like Sam’s Club and BJ’s Warehousehave been using warehouse membershipclubs, where consumers are able to buy atwhat appear to be wholesale prices, forsome time now, thus blurring the lines.However, the traditional wholesale distrib-utor is still the one who buys “from thesource” and sells to a reseller.

Getting Into The GameToday, total U.S. wholesale distributor

sales are approximately $3.2 trillion. Since1987, wholesale distributors’ share of U.S.private industry gross domestic product(GDP) has remained steady at 7 percent,with segments ranging from grocery andfood-service distributors (which make up

13 percent of the total, or $424.7 billion inrevenues) to furniture and home furnish-ings wholesalers (comprising 2 percent ofthe total, or $48.7 billion in revenues). That’sa big chunk of change, and one that you cantap into with the help of this book.

The field of wholesale distribution is atrue buying and selling game—one that re-quires good negotiation skills, a nose forsniffing out the next “hot” item in your par-ticular category, and keen salesmanship.The idea is to buy the product at a lowprice, then make a profit by tacking on adollar amount that still makes the deal at-tractive to your customer.

Experts agree that to succeed in thewholesale distribution business, an indi-vidual should possess a varied job back-ground. Most experts feel a sales back-ground is necessary, as are the “peopleskills” that go with being an outside sales-person who hits the streets and/or picks upthe phone and goes on a cold-calling spreeto search for new customers.

In addition to sales skills, the owner ofa new wholesale distribution company willneed the operational skills necessary forrunning such a company. For example, fi-nance and business management skills andexperience are necessary, as is the abilityto handle the “back end” (those activitiesthat go on behind the scenes, like ware-

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Beware!Remember that

as a wholesale dis-tributor, your cus-tomers have their own customersto satisfy. Because of this, theyhave more at stake than the typi-cal customer who is shopping ata discount distributor that servesmainstream consumers.



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house setup and organization, shipping andreceiving, customer service, etc.). Of course,these back-end functions can also be han-dled by employees with experience in theseareas if your budget allows.

“Operating very efficiently and turningyour inventory over quickly are the keys tomaking money,” says Adam Fein, presidentof Pembroke Consulting Inc., a Philadelphiastrategic consulting firm. “It’s a service busi-ness that deals with business customers, asopposed to general consumers. The startupentrepreneur must be able to understandcustomer needs and learn how to servethem well.”

According to Fein, hundreds of newwholesale distribution businesses are start-ed every year, typically by ex-salespeoplefrom larger distributors who break out ontheir own with a few clients in tow.“Whether they can grow the firm and re-ally become a long-term entity is the muchmore difficult guess,” says Fein. “Success inwholesale distribution involves moving froma customer service/sales orientation to theoperational process of managing a verycomplex business.” Luckily, the book inyour hands will help take the guessworkout of this transition by giving you the toolsyou need to succeed.

Setting Up ShopWhen it comes to setting up shop, your

needs will vary according to what type ofproduct you choose to specialize in. Some-one could conceivably run a successfulwholesale distribution business from theirbasement, but storage needs would even-tually hamper the company’s success. “Ifyou’re running a distribution company fromhome, then you’re much more of a brokerthan a distributor,” says Fein, noting thatwhile a distributor takes title and legal own-ership of the products, a broker simply fa-cilitates the transfer of products. “Howev-er, through the use of the internet, there are

some very interesting alternatives to be-coming a distributor [who takes] physicalpossession of the product.” (Read moreabout using the internet in your operationsin Chapter 10 of this book.)

According to Fein, wholesale distributioncompanies are frequently started in areaswhere land is not too expensive and wherebuying or renting warehouse space is af-fordable. “Generally, wholesale distributorsare not located in downtown shopping ar-eas, but off the beaten path,” says Fein. “If,for example, you’re serving building or elec-trical contractors, you’ll need to choose alocation in close proximity to them in orderto be accessible as they go about their jobs.”

Finding Your NicheUpon opening the doors of your whole-

sale distribution business, you will certain-ly find yourself in good company. To date,there are approximately 300,000 distribu-tors in the United States, representing $3.2 trillion in annual revenues. Wholesaledistribution contributes 7 percent to the val-ue of the nation’s private industry GDP, andmost distribution channels are still highlyfragmented and comprise many small, pri-vately held companies. “My research showsthat there are only 2,000 distributors in the

Beware!Consolidation is

running rampant inmany industries. Be-fore choosing your niche, dosome market research on yourcustomer base (especially ifyou’re going to limit yourself to aparticular region) to be sure thosecustomers aren’t ripe for consoli-dation. If they are, you could seeyour client base shrink quickly.

United States with revenues greater than$100 million,” comments Fein.

And that’s not all: Every year, U.S. retailcash registers and online merchants ring upabout $3.6 trillion in sales, and of that, abouta quarter comes from general merchandise,apparel and furniture sales (GAF). This is apositive for wholesale distributors, who relyheavily on retailers as customers. To meas-ure the scope of GAF, try to imagine everyconsumer item sold, then remove the cars,building materials and food. The rest, in-cluding computers, clothing, sports equip-ment and other items, fall into the GAF total. Such goods come directly from man-ufacturers or through wholesalers and bro-kers. Then they are sold in department,high-volume and specialty stores—all ofwhich will make up your client base onceyou open the doors of your wholesale dis-tribution firm.

All this is good news for the startup en-trepreneur looking to launch a wholesaledistribution company. However, there area few dangers that you should be aware of.For starters, consolidation is rampant in thisindustry. Some sectors are contracting morequickly than others. For example, pharma-ceutical wholesaling has consolidated morethan just about any other sector, accord-ing to Fein. Since 1975, mergers and ac-quisitions have reduced the number of U.S.companies in that sector from 200 to about50. And the largest four companies con-trol more than 80 percent of the distribu-tion market.

To combat the consolidation trend, manyindependent distributors are turning to thespecialty market. “Many entrepreneurs arefinding success by picking up the goldencrumbs that are left on the table by the na-tional companies,” Fein says. “As distribu-tion has evolved from a local to a regionalto a national business, the national com-panies [can’t or don’t want to] cost-effec-tively service certain types of customers. Of-

ten, small customers get left behind or arejust not [profitable] for the large distributorsto serve.”

In addition to consolidating, the whole-sale distribution industry is also evolvingrapidly, which translates to both positiveand negative changes. For instance, thereare indications of disintermediation trendsacross various industries. Several years ago,strategists and futurists began predicting thatcompanies would increasingly sell directlyto consumers, cutting out distributors andany other distribution intermediaries, in-cluding some retailers. The predictedchange was given a fancy term: disinter-mediation. It has yet to happen, but thethreat persists as an increasing number ofmanufacturers and end users find one an-other directly. However, no matter whatchanges may be in store, smart wholesaledistributors will always find a way to adapt.

The Technological EdgeToday, more than 800 million people

around the globe have access to the inter-net. This is good news for the wholesaledistributor who is willing to be flexible inthe information age. While traditional play-ers once felt threatened by the internet asa growing sales channel, the startups willbe more apt to grab technology by thehorns and use it to their advantage.

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Bright IdeaYou can take a trip on

the information super-highway to visit a few ofyour potential competitors. Keythe words “wholesale distributor”into your favorite search engine,or narrow it down geographicallyby adding your city and/or stateto the search string.

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As e-commerce has evolved into morethan just a business opportunity, tradition-al “brick and mortar” businesses are nolonger able to rely on traditional forms ofselling products to their customers. Prod-uct distribution and delivery trends havebeen impacted as the internet has grown inpopularity. They must also be available totheir customers via the internet. For this rea-son, wholesale distributors—like their ven-dors—can grab the opportunity to positionthemselves as internet-savvy firms. Mosthave set up their up their own informationalwebsites; others have listed their compa-nies and offerings on mall-type sites de-voted to wholesale distributors; and manymore have created e-commerce-enabledsites where customers can buy directlythrough the web.

E-commerce is undoubtedly a major con-sideration for all wholesale distributors. TheGartner Group, an information technolo-gy advisory firm in Stamford, Connecticut,has outlined two possible scenarios to de-scribe how the internet could negatively af-fect wholesalers: 1. Manufacturers post products on the in-ternet with a bulletin board system, thus let-ting customers source globally with onlinesearch engines.

2. Manufacturers use the internet to gain di-rect access to customers, thus bypassing thewholesale distributor altogether.

As with fighting the trend toward con-solidation, a smart wholesaler can combatboth of these scenarios with a bit of inge-nuity and creativity. Finding a unique nicheis one sharp move, whether it’s serving agroup of consumers that manufacturers orlarger distributors can’t be bothered with,or perhaps buying in bulk and then sellingreduced quantities to smaller firms that don’twant to make big inventory investments.

Including value-added services can alsogive you a competitive edge. These include(but are not limited to): simplifying thetransfer of product, helping smooth out pos-sible glitches in the information flow, andmaking transfer of payment easier. In oth-er words, rather than going directly to themanufacturer—who is often more con-cerned with producing the hard goods thandealing with customer needs—retailers andother distributors can deal with a whole-saler who specializes in customer needs.Wholesalers can also make themselves valu-able by keeping goods on hand for cus-tomers who would otherwise have to dealwith long lead times when buying direct.“That availability very often makes the



It’s no secret that technology has become a major force in the world, sowhy not try your hand at reselling computers and related equipment? Whilesome computer manufacturers, like Gateway and Dell, prefer to sell direct tothe consumer, many others rely on the wholesale distribution channel to gettheir products to market. The numbers look good: According to a recent Accen-ture study, the majority of business and information technology (IT) executivesin the United States anticipate increases in IT expenditures between 2005 and2007. The investment is sure to include a mix of hardware (such as computersor telecommunications equipment) and software, both of which present oppor-tunities for new wholesale distributors looking for a high-tech niche.

Ride The High-Tech Wave

wholesale distributor a backup for, and ex-tension of, the customer’s own inventorysystem,” says Fein. And e-commerce itselfcan be a boon to the wholesale distributor,especially when it comes to finding newcustomers and hunting down new productmanufacturers and vendors to buy from.

Starting OutFor entrepreneurs looking to start their

own wholesale distributorship, there are ba-sically three avenues to choose from: buyan 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 successand reputation of the distributorship youwant to buy. The positive side of buying abusiness is that you can probably tap intothe seller’s knowledge bank, and you mayeven inherit his or her existing client base,which could prove extremely valuable.

The second option, starting from scratch,can also be costly, but it allows for a true“make or break it yourself” scenario thatis guaranteed not to be preceded by an ex-isting owner’s reputation. On the downside,you will be building a reputation fromscratch, which means lots of sales and mar-keting for at least the first two years or un-

til your client base is large enough to reachcritical mass.

The last option is perhaps the most risky,as all business opportunities must be thor-oughly explored before any money or pre-cious time is invested. However, the rightopportunity can mean support, training andquick success if the originating companyhas already proven itself to be profitable,reputable and durable.

Regardless of which avenue you choose,a new distributorship will require a fewkey pieces of equipment to get started. Inthe office, a personal computer, severalphone lines, a fax machine and access toa reliable shipping method will all be nec-essary. Most wholesalers drop-ship theirproducts through the use of shipping serv-ices (UPS, Airborne, FedEx, etc.), thoughsome who deliver to their local areas usetheir own leased or purchased delivery ve-hicles. In the end, it truly depends on theproduct, lead times and proximity of yourcustomer base. With the exception of theentrepreneur who is wholesaling T-shirtsfrom his or her basement, a generousamount of warehouse space will be nec-essary, as will a location that is in close

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Beware!If you’re planning

to start a wholesaledistribution business

from home, check with your lo-cal zoning board about the legali-ty of shipping and receiving mer-chandise at your home. Forexample, many cities do not al-low the delivery of goods fromvehicles like tractor-trailers in res-idential neighborhoods.

Dollar StretcherTo avoid spending

excess money dur-ing the startup phase,list everything youthink you need and then askyourself: Why do I need thisitem? How will it help me bemore productive? Can I do with-out it for six months or a yearwhile my business is gettingstarted? Do this for every pur-chase, and you’ll avoid the urgeto spend on impulse items.



1.7

proximity to your customers. During the startup process, you’ll also

need to assess your own financial situationand decide if you’re going to start your busi-ness on a full- or part-time basis. A full-timecommitment probably means quicker suc-cess, mainly because you will be devotingall your time to the new company’s success.

Because the amount of startup capitalnecessary will be highly dependent on whatyou choose to sell, the numbers vary. Forinstance, an Ohio-based wholesale distrib-utor of men’s ties and belts started his com-pany with $700 worth of closeout tiesbought from the manufacturer and a fewbasic pieces of office equipment. At thehigher end of the spectrum, a Virginia-baseddistributor of fine wines started with $1.5million used mainly for inventory, a largewarehouse, internal necessities (pallet rack-

ing, pallets, forklift), and a few ChevroletAstro vans for delivery.

Like most startups, the average whole-sale distributor will need to be in businesstwo to five years to be profitable. There areexceptions, of course. Take, for example,the ambitious entrepreneur who sets up hisgarage as a warehouse to stock full of smallhand tools. Using his own vehicle and re-lying on the low overhead that his homeprovides, he could conceivably start mak-ing money within six to 12 months.

“Wholesale distribution is a very largesegment of the economy and constitutesabout 7 percent of the nation’s GDP,” saysPembroke Consulting Inc.’s Fein. “That said,there are many different subsegments andindustries within the realm of wholesale dis-tribution, and some offer much greater op-portunities than others.”

Industry At A GlanceThis trend report indicates the number of U.S. wholesale distribution companies,

by company size, from 1995 to 2004.

1 10 20 50 100 500 1,000 Total Totalto 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.

Number of Employees

Totalfor Year

Among those subsegments are whole-sale distributors that specialize in a uniqueniche (e.g., the distributor that sells spe-cialty foods to grocery stores), larger dis-tributors that sell everything from soup tonuts (e.g., the distributor with warehousesnationwide and a large stock of various, un-related closeout items), and midsized dis-tributors who choose an industry (hand

tools, for example) and offer a variety ofproducts to myriad customers.

Regardless of which subsegment youchoose, this book will give you the infor-mation you need to realize your dreams ofowning a wholesale distribution business.In the next chapter, we’ll examine the op-erational aspect of owning a wholesale dis-tribution business.

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