Why do retailers buy from wholesalers when you can buy from manufacturers at a cheaper price?

Answer by Peter Baskerville:

There is a reason why the following supply chain has developed over the past 150 years – it has proved to be the most efficient and therefore the most profitable way for businesses to convert raw materials into saleable goods and for consumers to purchase those goods for the lowest possible price.

Each participant in the supply chain provides a specific value-adding service that through focused specialisation in systems, equipment and management, delivers their particular service in the most efficient and cost effective way.

A retailer can skip the distribution/wholesale participant and go directly to the manufacturer, but that won’t negate the work that the wholesaler performs in the supply chain which must now be performed by the retailer who does not have the wholesaler’s specialised systems, equipment and management expertise. This lack of specialised skills and infrastructure adds a difficulty that may not be obvious at first to the retailer enticed only by the cheaper price.

Many retailers have looked at the cost/benefit of taking this step and the vast majority find it far more profitable to stay with the status quo (above) than to skip the wholesaler and go directly to the manufacturer. When the benefit of lower price from the manufacturer is weighed against the increased costs, quite often a less profitable result is the outcome.

Here are the increased costs that the specialist retailer must face, if they go direct to the manufacturer:

  • The manufacturer’s business model is built on selling high volume lots that are usually far greater than a retailer sells in a reasonable time – increased stock holding and storage costs is the result and in the most expensive space possible … retail space.
  • Manufacturing businesses are usually few, large scale and located remotely, away from typical retail zones, making lead times longer and delivery more expensive.
  • Where wholesalers deliver good to a wide range of retailers via efficient daily small vehicle logistics, your purchase from the manufacturer will be a one-off costly one if you pick up the goods and a nightmare for the manufacturer’s semi-trailer when trying to deliver to a busy retail area.
  • To obtain the same range of goods that a wholesaler sources from many different manufacturers, a retailer would be spending all their time managing deliveries from multiple supply contracts rather than just outsource this function to one wholesaler who has developed the expertise to do it well. In retail as in any business … time is money.
  • While you as a specialist retailer are attending to the delivery, storage and management of goods from manufacturer, you are incurring a hidden opportunity costs due to the lost revenue from not attending to what you do best – selling goods to customers.

Anyway, whatever price you are paying from the manufacturer, your wholesaler would be paying considerably less due to their higher volume discounts. Adding to this is the fact that in the mix of mostly high volume wholesalers you are an insignificant customer to the manufacture and so are likely to be treated as such. Furthermore, many manufactures to protect their own profits and markets have a policy of only supplying wholesalers, making the direct purchase by retailers impossible.

Looking at all the increased costs and management hassles, it’s easy to see why the vast majority of retailers stay with the long established supply chain and buy their goods from distributors/wholesalers.

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