The basics of starting a wholesale business

If you’re a good negotiator and salesperson, have an eye for popular trends and attention to detail, then the wholesaling business may be for you.

In simple terms, wholesalers are the intermediaries between the manufacturer of a product and the retailers who sell it to consumers. In the not-too-distant past, this typically meant sprawling warehouses and fleets of expensive delivery trucks. But more recent factors like consolidation among big warehousing companies, the advent of ‘drop shipping’, and the growth of the internet have changed the game and, in many cases, significantly lowered the barriers to entry.

With the big warehousing companies often finding it profitable to service only larger clients, opportunities for smaller, niche wholesalers have opened up. And with some manufacturers now prepared to ‘drop ship’ (deliver direct from the factory to retailers or consumers), entrepreneurs who were once considering starting a wholesaling business now set themselves up as a broker, which requires little more than a phone, internet access and a savvy business brain.

The following are some of the basics of starting a wholesale business:

  • Decide on the nature and structure of your operation. In many cases your budget and access to capital may be the determining factor. If money’s tight your options will be limited to becoming a niche wholesaler carrying limited stock, or a broker with no stock whatsoever, except for a selection of product samples.
  • If funds aren’t a problem, you can consider a more traditional wholesaling operation with a warehouse, large volumes of stock, forklifts, trucks and accompanying staff levels. But be aware that your upfront costs are high, theft, security and labour issues are ongoing, and you must be able to extend credit to your retail clients, who may order in large quantities and only pay you up to 90 days later.
  • Consider your geographical location. If you’re based in a small town on the Garden Route and your retail clients will be mainly in Johannesburg and the manufacturer is in Pinetown, there’s clearly going to be a problem. Supply lines will be long, shipping and transport costs high, and you won’t be able to keep your finger on the pulse of what is a very complex business. You need to either change your location or source retailers and manufacturers close by.
  • Keeping all of the above factors in mind, turn your thoughts to what is probably the most important part of starting a wholesale business what are you going to sell? This is where the skill of a salesperson and an eye for trends and changes in customer demand come into play. What does the market (whether commercial, industrial or consumer) want and will it pay enough to make it worthwhile? Look out for products which are going to be the ‘next big thing’ and ones likely to fade away. That said, don’t gamble everything on one product line; rather spread your risk across several products. Successful niche wholesalers will typically be the ones who are best at spotting and taking advantage of the latest trends and fads. ‘Hip and happening’ products usually also have the advantage of being able to command a price premium, as are rare and luxury branded items.
  • If you’re not one for trends, opt for products you know people will always need – clothes, food, furniture, car parts, etc – but be aware that the established wholesalers will already be active in these markets and it may be difficult to break their stranglehold unless you have something ‘different’ to offer. Common, everyday, products also suffer from the problem of being ‘commoditised’ – consumers are more interested in price than product features or brand name and will frequently change to whichever item is the cheapest or most easily available. This results in low margins unless you can move large volumes of stock which, in turn, requires a bigger investment in warehouse space, transport and staff.
  • Boost your product line-up from time to time with ‘one-off specials’. You can do this by keeping an eye out for volume items being sold at auction, via liquidators, etc. They’re a great way to drum up interest and expose yourself to a new group of potential clients.
  • Ensure your supply chain strategy is watertight. In the wholesale business, you rely on factors outside your control: the factory producing the right products on schedule; trains, trucks, airlines and courier companies delivering on time and without pilferage and damage. Choose these partners carefully and monitor them on a daily basis – after all, you live and die by their actions.
  • Pay careful attention to your stocking. Author Bridget McCrea, in her book entitled Start Your Own Wholesale Distribution Business (2006, Entrepreneur Press), sums up a successful stocking strategy thus:
    1. Don’t overdo it when it comes to buying inventory. Try to get a grasp on your customers’ needs before you invest in inventory;
    2. If you can get away with doing it cheaply at first (especially those with low overhead), then go for it;
    3. Be wary of investing too much in short lifecycle products, which you may get stuck with if they don’t sell right away;
    4. Stock up to a level where you can sell the product before you have to pay for it.

Lastly, remember the ultimate mantra of the wholesaler: ‘Buy low and sell high’!

References:

www.entrepreneur.com

www.smallbusinessbrief.com

www.wholesalesourcereviews.com

Start Your Own Wholesale Distribution Businessby Bridget McCrea