Wholesaling - Industry Overview

The wholesale industry, a large and diverse sector of the U.S. economy, employs approximately 6 million people and sells an estimated $3.2 trillion in raw materials and manufactured products. The industry is highly fragmented, consisting of a few large companies and many small firms. The number of wholesalers has dropped from the 364,000 firms counted by the Census Bureau in 1987 - the most recent official estimate - to approximately 280,000 companies in 1993 due to mergers, acquisitions, and business failures, according to industry sources.

The products that wholesalers distribute to their customers are supplied by other firms in the manufacturing, mining, agricultural, and wholesale sectors of the economy. The wholesale industry has three categories - merchant wholesalers; manufacturers' sales branches and offices; and agents, brokers, and commission merchants. Of the three, merchant wholesalers account for the largest share of sales, employment, and number of firms.

Before reading this chapter, please see "Getting the Most Out of Outlook '94" on page 1. It will answer questions you may have concerning data collection procedures, forecasting methodology, sources and references, and the Standard Industrial Classification (SIC) system. For other topics related to this chapter, see Chapters 39 (Retailing) and 40 (Transportation Services).

Merchant wholesalers account for about 60 percent of all wholesale sales, and at least a majority of all sales in each major product line, except motor vehicles and parts. Merchant wholesalers are distinguished from other types of wholesalers in that they actually take title to the goods. They may also sort, assemble, grade, and store them. Some also provide certain "value-added" services, such as packaging and labeling - a business strategy that is becoming increasingly important as thousands of wholesalers, selling products that are similar in quality and design, compete for customers.

Sales of merchant wholesalers, the only data available on an annual basis, will be used to illustrate the industry trends and structural changes underway in the entire wholesale industry.

Other wholesale transactions involve agents or brokers, who sell supplier-owned products primarily to retailers and other wholesalers for a commission or fee, and manufacturers' sales branches and offices, which sell the parent manufacturer's products mainly to retailers and industrial users.

But the Census Bureau does not collect monthly sales data for these wholesalers. Reports are issued only every 5 years. According to the 1987 Census of Wholesale Trade, the latest report available, sales by manufacturers' sales branches and agents accounted for approximately 40 percent of all sales by wholesalers. Agents, brokers, and manufacturers' sales branches represent only a minor portion of total sales for each of the major wholesale product lines, with the exception of motor vehicles and parts.

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Industry Trends

Merchant wholesaling firms now account for nearly 90 percent of all wholesaling firms and constitute the dominant wholesale distribution channel for each of the major product lines carried by wholesalers: bulk commodities, capital goods, and all consumer goods, except motor vehicles and parts.

Sales by merchant wholesalers reached nearly $1.9 trillion in 1993, up approximately 4 percent from the 1992 total of $1.8 trillion. After adjusting for inflation, the year-to-year gain was a less impressive 2.2 percent. Indeed, during the past 5 years, "real" sales of merchant wholesalers have barely changed from the nearly $1.6 trillion posted for 1988.

A significant part of the nearly stagnant level of "real" sales by merchant wholesalers over the last 5 years may be attributed to the restructuring of the wholesale distribution industry that started during the early 1980's and continues today. The principal features of this restructuring are the increasing use of alternative channels of distribution and the growing importance of consumer goods in the product mix of merchant wholesalers sales receipts.

Alternative Channels of Distribution

The most important alternative channels of wholesale distribution are direct manufacturer-to-retail arrangements, usually made under strategic alliances with major retail chain stores, warehouse clubs, discount stores, and home center stores. Other alternative channels include mail order, catalog sales, and direct sales from manufacturer to industrial user or from retailer to industrial users.

The value of products distributed through these alternative channels are lost sales as far as most wholesalers are concerned. Indeed, they are no longer included in the Census Bureau's sales totals for wholesale establishments. Thus the size of the current and potential market for wholesalers is diminished by the volume of products distributed through the alternative channels.

According to industry specialists, about one-fourth of all merchandise usually handled by merchant wholesalers, agents, or manufacturer's branch offices is now being distributed through alternative channels. All three major types of wholesalers have lost sales as a result.

Since the last Census of Wholesale Trade in 1987, merchant wholesalers' share of the total wholesale market has dropped from 58 percent in 1987 to 46 percent in 1992. Industry analysts attribute the entire 12-point drop to the shift to alternative distribution channels which increased their share of the wholesale market to an estimated 24 percent by 1992. (See Table 1.)

Table 1: Wholesale Channels of Distribution,
1987-2000
(by type of wholesaler, in percent)

                                         Percent
     Item                       1987   1992   1995(1)   2000(1)

Merchant wholesalers             58     46      45        45
Manufacturers' sales branches    31     23      22        21
Agents, brokers                  11      7       7         7
Alternative channels             NA     24      26        27

(1) Projection.
NA=Not available.

SOURCE: Facing the Force of Change 2000, National Association of
Wholesaler-Distributors.

A recent study by Chain Store Age Executive magazine identified many product lines being sold through alternative distribution channels, such as retail outlets that carry limited lines of consumer durable goods, including sports equipment, toys, jewelry, furniture, and electrical appliances. An extensive line of nondurable consumer products, especially clothing, is the product line most frequently distributed through alternative channels.

The trade publication, Building Supply Home Centers, identified another alternative channel of distribution during its 1992 survey of 366 discount stores. The survey was designed to identify the products and the value of the purchases made by contractors and other industrial users buying from discount stores, rather than from their traditional wholesale suppliers. The results showed that discount stores sold approximately $800 million worth of power tools and hand tools to contractors and other industrial users who traditionally had purchased them from industrial suppliers.

Other Structural Changes

Merchant wholesalers have been challenged by the changing mix of products they have carried over the past decade. Specifically, sales of consumer goods account for an increasing portion of all sales by merchant wholesalers, rising from 52 percent of all sales in 1988 to nearly 54 percent in 1992. This means that merchant wholesalers are becoming more dependent on product lines, such as consumer goods, that are increasingly being distributed through alternative channels and therefore represent a shrinking market for wholesalers.

Conversely, wholesalers are not major participants in the market with the strongest growth record, namely capital goods. Although merchant wholesale sales of capital goods increased from 1988 to 1992, they still represent only about one-fifth of total sales.

During the same period, sales of bulk commodities remained relatively flat, accounting for approximately 26 percent of all sales revenue for merchant wholesalers in 1992. This section will examine some of the changes in product line sales which are contributing to the structural changes underway in merchant wholesaling.

The market for bulk commodities is a mature market with little or no growth. For example, sales of farm raw materials, a major bulk commodity line, dropped more than 12 percent from $124.2 billion in 1988 to $109.1 billion in 1992. Metals and minerals also showed a drop in sales over the period, declining more than 5 percent from $78.0 billion in 1988 to $73.8 billion in 1992. The other bulk commodity lines showed minor growth during the same period. (See Table 2).

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In contrast, the major capital goods product lines carried by merchant wholesalers generally showed significant growth rates and now represent approximately 21 percent of total sales by merchant wholesalers.

For instance, the largest revenue producer of the capital goods line is machinery and equipment, which showed a nearly 20 percent increase in sales from $142.2 billion in 1988 to $170.1 billion in 1992, partly reflecting rising business expenditures as the U.S. economy continued to rebound from the recession. Electrical goods also increased significantly, from $100.7 billion to $119.9 billion, mainly due to sales of television sets and other consumer electronic and electrical appliances. Sales of professional equipment by merchant wholesalers also posted gains, increasing from $93.5 billion in 1988 to $130.7 billion in 1992, largely due to expanded sales of cameras and related consumer products.

The consumer product group is of increasing importance for merchant wholesalers, now accounting for nearly 54 percent of all sales revenue for merchant wholesalers, up from 52 percent in 1988.

The major product lines within this group, in terms of sales volume, are groceries; durables not elsewhere classified (NEC), such as sporting goods, toys, and jewelry; and motor vehicles and parts. Grocery sales and sales of durables (NEC) showed significant growth during die 1988-92 period, with grocery sales rising more than 16 percent to $274.8 billion in 1992, and durables (NEC) increasing nearly the same rate to $131.1 billion. Nearly all of the consumer products handled by merchant wholesalers are also distributed through alternative channels, but the size of this market is not known since government statistics are not available. The increasing dependence of merchant wholesalers on consumer product lines challenges merchant wholesalers to make viable competitive adjustments in a structurally changing market.

Alternative channels of distribution also adversely affect the sales of another category of wholesalers - agents and brokers. According to industry estimates, agents' and brokers' share of the total wholesale market dropped from 11 percent in 1987 to about 7 percent in 1992. Although these losses were not across the board, some agents and brokers have been adversely affected by the shift to alternative distribution channels such as discount stores and warehouse clubs - especially those wholesalers selling groceries, apparel, and miscellaneous nondurable consumer products.

Competitive Adjustments

The structural changes that continue to take place in distribution channels are forcing wholesalers to re-examine and readjust their strategies for maintaining a competitive edge, including reorienting their services and product mix.

A 1993 survey of more than 700 manufacturing and distribution executives conducted by the National Association of Wholesale-Distributors (NAW), and compiled in the report Facing The Forces of Change 2000, concluded that to meet the challenges of the 1990's, wholesalers must improve and expand value-added services, improve productivity, expand geographically, enlarge existing lines, diversify into new product lines, and develop new markets.

Historically, wholesalers were known for the products and brands they carried and the basic services they provided. However, this traditional competitive edge has been blunted by a similarity of quality among brands and the tendency of wholesalers to expand geographically and by product line until the market is saturated, creating a surplus of intermediary firms that tend to look alike.

In addition, the basic services traditionally offered by wholesalers-in-stock inventory, small order handling, credit terms, and product training for their employees and customers - are no longer sufficient. In response to these changes, wholesalers are offering more value-added services such as free delivery, relabeling, repackaging, and applying bar codes - in short, whatever it takes to keep the customer satisfied.

When asked how wholesalers might reverse - or at least reduce - the surge toward alternative distribution channels, the consensus of the NAW panel of experts was: "become invaluable to your customer and establish closer partnering arrangements with your manufacturing supplier." In other words, adopt an aggressive program to improve and expand value-added services by anticipating the needs of the customer, and utilizing the technologies now available to improve productivity, reliability, and service quality. Much of this can be done by implementing bar coding and a system of electronic data interaction to assure next-day delivery, product lot tracking, and comprehensive inventory controls. Other competitive strategies recommended for the 1990's include developing markets for manufacturers and servicing manufacturers' warranties.

In its annual report on the top 50 industrial distributors, Industrial Distributor magazine asked the companies' chief executive officers (CEOs) to describe the key strategies that contributed to their continued competitive strength in a nearly stagnant market. A majority of the responding CEOs cited their adoption of electronic data interaction systems, bar coding, and automation of their shipping and receiving activities.

They also cited strategic alliances with their vendors, expanded geographic coverage, and more diversified product lines, mainly through mergers with other wholesale firms, as other important elements of their success.

A few of the top 50 CEOs mentioned increased exports as their source of competitive strength. Exports create an additional source of revenue that can be used to provide capital to implement many of the additional value-added services required to maintain a competitive edge in the markets of the 1990's.

INTERNATIONAL COMPETITIVENESS

Wholesalers demonstrate their international competitiveness by establishing and maintaining a position in foreign markets and by delivering the products and services where needed, at the fight time, and at a reasonable price. However, to maintain a competitive position in a foreign market, a wholesaler must continuously adjust to the ever increasing demands of the foreign customer for additional value-added services. Some are able to do this while exporting. Others establish affiliated firms in foreign markets to be close to the customer.

A recent Commerce Department study on the importance of wholesalers as exporters revealed that 43,616 independent wholesale firms filled at least one export order from a foreign buyer in 1987 - the latest year for which figures are available - with a total value of $68.5 billion. The majority of the exports were manufactured goods, as illustrated in Table 3.

Table 3: Wholesale Exports in 1987
(by product line)

     Item               Number of Firms   Exports(*)   Percent

All products              43,616            68.5        100.0
Agricultural products      1,740            12.6         18.4
Manufactured products     40,863            54.3         79.3
Other products             1,013             1.6          2.3

(*) In billions of dollars.

SOURCE: A Profile of United States Exporters, U.S. Department of Commerce,
Office of Trade and Economic Analysis.

More than three-quarters of these exporting wholesalers were small firms, employing fewer than 20 employees. They accounted for 25 percent of all exports of manufactured products from wholesalers with a total value of $13.6 billion in 1987. However, the export market was dominated by fewer than 300 large wholesalers, which although they represent less than 1 percent of the total number of wholesaling firms, accounted for more than half of all exports of manufactured products in 1987.

Another measure of the international competitiveness of U.S. wholesalers is the number of affiliated firms they have established in foreign markets in order to respond more quickly to their customers' needs. In 1989, for example, 178 U.S. wholesaling firms established a total of 645 affiliated wholesale firms in one or more foreign markets.

Wholesalers of raw farm materials appear to be very competitive in international markets. The Commerce Department's 1989 Benchmark Survey of U.S. Direct Investment Abroad shows that 10 U.S. wholesalers of raw farm materials have 138 affiliated firms located in several different foreign markets. In contrast, only three U.S. wholesalers of lumber and construction materials established a total of four affiliated firms abroad. Other U.S. wholesalers with a large number of foreign affiliates include those handling consumer electronics and electrical appliances, professional equipment, groceries, and machinery and equipment, NEC.

Of the $3 billion in exports shipped from U.S. parent firms to their affiliated wholesale firms, about 60 percent were ready for immediate resale. The rest needed additional value-added services incorporated, such as repackaging or labeling, before they were ready for resale in the foreign market.

Despite the strong evidence that the competitiveness of wholesalers is best exercised through foreign affiliates, there are few or no wholesaling affiliated firms in certain countries, such as China, because of investment restraints. However, as a result of recent bilateral consultations, China has begun to liberalize its investment rules.

Until recently, Mexico also restricted joint ventures involving foreign firms, but it has liberalized its investment rules in anticipation of congressional approval of the North American Free Trade Agreement. As a result, several U.S. wholesalers are positioning themselves to expand into Mexico.

Multilateral trade negotiations under the auspices of the General Agreement on Tariffs and Trade also are expected to result in fewer restrictions on conducting business in several countries, including the European Community (EC). Currently, there are many foreign affiliates in the EC operating at less-than-full efficiency because of limitations such as restricted business hours or prohibition of sales on Sundays.

Outlook for 1994

Total sales of the entire wholesale industry, estimated at $3.2 trillion in 1993, will increase by approximately 4 percent (in current dollars) in 1994. In real terms, wholesale sales will grow by slightly more than 2 percent. Sales by merchant wholesalers are forecast to increase to nearly $2 trillion (in current dollars) in 1994, up more than 4 percent from the previous year. In real terms, merchant wholesale sales will grow about 2 percent.

Long-Term Prospects

Alternative channels of distribution will continue to siphon off sales of particular wholesale product lines. However, the pace will be slower because the sales trends of discount stores, warehouse clubs, and other major retailers, now heavily involved in strategic alliances and other methods of implementing alternative channels of distribution, are showing signs of weakening.

The number of wholesalers, already down 25 percent since 1987, will continue to decline as firms merge in order to expand geographically and to diversify product lines. By some estimates, the number of merchant wholesalers will decrease by an additional 15 percent by the year 2000.

However, competitive wholesalers will have the opportunity to increase their market share. Investing in the newer technologies, adding services, and opening export markets in Mexico, China, and the EC will provide them with alternative sources of market strength and raise the capital needed to improve productivity and institute the additional value-added services now being demanded by wholesalers' customers.

Additional References

Census of Wholesale Trade, 1987, U.S. Department of Commerce, Bureau of the Census, Washington, DC 20233. Revised Monthly Wholesale Trade, Current Business Report, U.S. Department of Commerce, Bureau of the Census, Washington, DC 20233. Survey of Current Business, U.S. Department of Commerce, Bureau of Economic Analysis, Washington, DC. Telephone: (202) 482-1405. "Distribution's Top 50," industrial Distribution, May 15, 1993, Cahners Publications, 275 Washington St. Newton, Nu 02158. Telephone: (617) 964-3030. Kolarik, W. and Ellsworth, S., A Profile of United States Exporters, U.S Department of Commerce, Office of Trade and Economic Analysis, Washington, DC 20230. Telephone: (202) 482-5131. U.S. Direct Investment Abroad, 1989 Benchmark Survey, U.S. Department of Commerce, Bureau of Economic Analysis, Washington, DC 20230. Telephone: (202) 482-1405. Facing the Forces of Change 2000, Distribution Research and Education Foundation, Washington, DC 20006. Telephone (202) 872-0885. Chain Store Age Executive, Lebhar-Friedman, Inc., 425 Park Ave., New York, NY 10022. Telephone: (212) 756-5252.

COPYRIGHT 1994 U.S. Department of Commerce
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