The Wholesaler

The Middleman and the Speculative Inventory

Assumptions: Wholesalers

• Largest portion of business is to retailers• Appear in a channel of distribution due a cost

efficiency associated with:– Economies of assorting functions– Hold an inventory– Spatial convenience for retailers– Bulk breaking functions

• Illustrate the importance of channel functions and function shifting

Channel “Length”

• Appearance of the wholesaler is the determinant of whether a channel is referred to as a “long” or “short” channel.

• Survive only as long as a sufficient scale exists with a retail format:– Independently owned hardware store– Independently owned grocery store

Product Characteristics

• Physical deterioration, perishables

• Number of manufacturers

• Number of retailers

• Variations in product qualities, grades

• Product bulk and weight, significance of shipping cost.

Types of Ownership Arrangements in Physical Distribution

• Corporate Systems

• Wholesaler Sponsored Voluntary Chains

• Retail Sponsored Cooperatives

• Franchise Systems

Corporate Channel

• Vertical integration into warehousing and distribution.

• Grocery chain achieves sufficient scale to own (make) its warehousing function.

For vertical integration to compete effectively

• Must operate both sides of “channel” at an efficient scale: retail and wholesale– “Unbalanced throughput”– Inefficiencies emerge

• Overcome “dulled incentives” for the “not for profit” side of operation.

Contractual: Cooperative

• Coalition at one level in the channel (retailers) pool resources to own and operate the supplying function (wholesaling).

• This cooperative level is operated at "not-for-profit" or provides "dividends" to members based on volume.

Cooperatives

• Avoids the successive markup problem by having markup at the retail end.

• Frequently criticized for not being able to manage costs effectively.

• Examples:– Associated Grocer, Kansas City– Affiliated Foods Southwest – Farmland Industries

UNIFIED WESTERN GROCERS, INC.

• Unified is a cooperative organization that conducts business principally with its members. Unified's Bylaws provide for:

• Member-patrons, that are the shareholders of the Company and participate in the patronage dividend programs; and .

• Associate patrons that do not own shares but do participate in the patronage dividend programs.

Contractual: Wholesaler Sponsored Voluntary Chains

• Independent Grocers Alliance, i.e., (IGA Food Stores) = Fleming Foods

• Ace Hardware• Independently owned stores• Wholesaler coordinates pricing, specials, private

labels, and supplier relations.• Successive markup present, supplier dependent on a

mark-up.• Efficiently managed supply.