Wholesaling - Industry Overview

Total sales of the entire wholesale industry are estimated at $3.1 trillion in 1992 and will increase about 5 percent (in current dollars) in 1993.

The wholesale industry, a large and diverse sector of the US. economy, has about 364,000 firms that employ 6.1 million persons and sell an estimated $3.1 trillion in raw materials and manufactured products. The industry is highly fragmented, consisting of a few large companies and many small firms.

The products that wholesalers distribute to their customers are supplied by other firms in the manufacturing, mining, agricultural, and wholesale sectors of the economy. According to the Distribution Research & Education Foundation study Facing the Forces of Change, a majority of these products are more than five years old and are undifferentiated by quality. The customers of wholesale establishments are mainly in the retailing, wholesaling, manufacturing, farming, exporting, construction, commercial, and professional business sectors of the economy.

Before reading this chapter, please see "How to Get the Most Out of this Book" on page 1. It will clarify 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).

According to the Census of Wholesaling reports, a typical wholesale transaction involves a merchant wholesaler who takes title to the goods supplied by others for resale to retailers or other wholesalers at a profit. Merchant wholesalers account for roughly 60 percent of all wholesale sales and at least a majority of all sales in each product line. 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. Agents occasionally take title to the products they sell, and manufacturers' sales branches occasionally sell products not manufactured by the parent firm.

Merchant wholesale sales, the only data available on an annual basis, will be used to illustrate the economic health and long-term competitive changes underway in the entire industry.

Industry Adjustments

The wholesale industry is slowly recovering from the effects of the 1987-90 slowdown, a drop in sales in 1991, and the lowest margins in a decade. This experience has resulted in a flurry of industry-wide adjustments in strategies to increase sales and improve margins (discussed below). Merchant wholesalers saw their annual gains in total sales decline from nearly 9 percent in 1988 to almost 4 percent in 1990; sales actually dropped almost 3 percent in 1991. Sales of durable and nondurable products showed a roughly similar pattern.

In 1992, total merchant wholesale sales were up an estimated 2.6 percent over 1991, but not quite equal to the 1990 total. Durable goods sales grew an estimated 4 percent in 1992, and nondurable goods sales increased about 1 percent. The most important merchant wholesale industries (in terms of 1992 sales) are groceries, machinery and equipment, and motor vehicles. Sales of professional communications equipment have grown rapidly during the past five years.

A majority of the sales and product sales of merchant wholesalers are sensitive to changes in business conditions. Between 1987 and 1991, 9 of the 18 product lines that make up the Census monthly reports on merchant wholesale sales showed the same cyclical pattern as overall business activity. The nine product lines are motor vehicles, furniture, metals and minerals, plumbing and heating equipment, machinery and equipment, miscellaneous durables, paper, apparel, and petroleum. Lumber and farm material product lines also are sensitive to changes in the business environment, although they exhibit a different cyclical pattern.

In contrast, seven product lines appear to be relatively insensitive to changing business conditions. Sales of these product lines continued to increase annually throughout the 1987-91 period. These product lines are professional and commercial equipment, electrical goods, drugs, groceries, chemicals, alcoholic beverages, and miscellaneous nondurables.

According to the Facing the Forces of Change study, the dominant type of product handled by wholesalers is more than five years old and undifferentiated by quality. About 55 percent of all wholesale sales are now from sales of these products. Consequently, competition is intense in all wholesale markets because hundreds of thousands of firms distribute products that are similar in quality.

Strategies to Increase Sales

Many wholesalers handling product lines sensitive to changes in business conditions develop diversification strategies to increase sales and improve profit margins by minimizing sales fluctuations due to a changing business environment. In addition, they cope with other challenges, the most difficult of which relate to the dominance of mature products in wholesale sales and the intense competition common to all wholesale distribution markets. One strategy for increasing sales and improving margins is to add new products or product lines. Another is to undertake new activities.

The 50 wholesaling firms with the greatest sales volume in 1990 were surveyed, and the results were reported in the May 1991 issue of Industrial Distribution. Without exception, the top wholesale firms use a combination of price and nonprice strategies, with emphasis on the latter. The principal nonprice strategies being implemented are reducing the geographic distance between the wholesaling firm and its customer and increasing the value added offered with each product line handled. Other plans to increase sales include broadening the number of product lines or enhancing niche marketing advantages.

According to the National Association of Wholesaler-Distributors, wholesale distribution is a local or regional service, so the competitive edge goes to the wholesaler with the shortest distance between the firm and its customer. Therefore, many large wholesalers locate as near as possible to a targeted market or valued customer by setting up branches. Some top wholesalers acquire or merge with a firm with favorably located branches. Others establish their own branches. Most of the top wholesalers surveyed used a combination of these two methods, although the cheaper approach is to acquire a firm with already established branches.

One half of the top 50 wholesalers (including those firms ranking highest in sales) plan to add more branches. In fact, the companies with the greatest sales volume are also those with the highest number of branches.

Another major strategy. is to increase the number of services provided with each product. The top wholesalers provide the following value-added services to their customers: special financing arrangements; engineering consultations and technical expertise on call; customer assistance in controlling materials management costs; inventories and product lines tailored to targeted customers; products specially designed, assembled, labeled, repaired, and/or customized for customers; quality controls; over-night delivery; aftermarket products and services; just-in-time inventory controls; and partnering contracts. The list of services added to the products supplied by wholesalers is limited only by the needs of the customer and the imagination of the supplier. There is no single set of value-added services that will assure any wholesaler an automatic competitive edge.

Other strategies implemented by the top wholesalers include expansion of the number of product lines handled (almost one-third surveyed mentioned this method) or concentrating on niche marketing (about one-quarter indicated this). The most frequently mentioned method of expanding into other product lines was to acquire or merge with another wholesaler.

Strategies to Improve Margins

The top wholesalers also reported that they implement a combination of strategies to improve their low margins. Most of these plans concentrate on cutting operating costs by more efficiently using available resources, improving productivity, selecting the most efficient channels of distribution, setting realistic prices for value-added services, and achieving economies of scale through mergers and acquisitions.

The National Association of Wholesaler-Distributors views significant productivity gains resulting from the applications of advanced computer technology as the key to improving margins. Implementation of this technology has led to substantial improvements in the productivity of the major wholesaling operations, including purchasing, delivery, storage, picking, and shipping. The use of advanced computer systems has also improved inventory and credit management, the selection of the most efficient channels of distribution, and market information flows.

For example, a computer-generated cost analysis of the different distribution channels showed that the cost of maintaining a manufacturer's branch office is significantly higher than the cost of using a merchant wholesaler. This analysis has led to a discernable drop in the proportion of manufacturers' sales channeled through manufacturers' sales branches or offices and a significant increase in sales distributed through merchant wholesalers.

To implement advanced computer technology, wholesalers place significant emphasis on better and more extensive training programs. The top wholesalers have inaugurated these programs to improve the technical knowledge of their sales force so that they may stay on top of technical advances and provide technical counseling services to customers. Other training programs enable staff to use advanced computer systems to apply sophisticated buying techniques, manage inventory control more efficiently, help management personnel use more advanced management techniques, and improve the productivity of the salesforce.

However, some areas will be more resistant to improvements in productivity. The cost of value-added services remains the most difficult to control. Each of these services, which are introduced to increase sales, raises costs and decreases profits. The most appropriate solution would be to charge a fee to cover the cost of these services, but intense competitive markets discourage firms from adding a fee for the services offered. According to Industrial Distribution, wholesalers accept the costs of value-added services as a part of doing business, despite their detrimental effect on margins. Industry associations are developing programs to encourage wholesalers to charge for their value-added services, but the industry has been slow to implement them.

Public Policy Issues

The industry opposes a long list of employer-mandated benefits, such as family and medical leave. These benefits would require the employer to allow employees to take unpaid leave at the birth or adoption of children or when employees or their children, spouses, or parents are serously ill. Although many of these benefits are already provided voluntarily by wholesale firms, the industry opposes a legislated approach to this issue.

Another policy issue is the industry's anticipation that it will be forced to absorb large health cost increases or to cut back employee benefits. The industry has helped organize a business coalition called the Health Equity Action League that is promoting a set of market-oriented health care reforms.

Product liability claims are another critical issue for wholesalers. Injury claims have accelerated as increasingly higher awards to plaintiffs have been made. According to Industrial Distribution, wholesalers have been forced to protect themselves from these claims by taking on substantial insurance coverage, weeding out products that are subject to heavy claims, and forcefully bringing to the customer's attention all the safety recommendations of the manufacturer. Each of these actions adds to a wholesaler's costs.

INTERNATIONAL COMPETITIVENESS

The international competitiveness of the wholesale industry is difficult to assess because the monetary value of wholesaling services is not separately recorded. Rather, it is included in the value of the merchandise trade recorded in the foreign transactions data in the National Income and Products Accounts. Even the value of merchandise exported by wholesalers is not available annually but is only reported every five years in the Census of Wholesaling. In 1987 (the latest Census report), wholesalers exported products worth $106 billion, down 27 percent from about $146 billion in 1982. More than half of this drop was due to declining exports of agricultural raw materials. Other major exports by wholesalers are metals and minerals, miscellaneous nondurables, and miscellaneous durables. The Department of Labor projects an increase in wholesale exports during the next 15 years, thereby stimulating job growth in the entire wholesale industry.

Outlook for 1993

The outlook for wholesale sales is roughly similar to that for the general economy. Merchant wholesale sales are forecast to increase about 5 percent (in current dollars) in 1993.

Long-Term Prospects

According to Department of Labor projections, the output of the wholesale industry will remain at 5.3 percent of the total output of the economy during 1990-2005. The industry is projected to grow 2.2 percent per year during this period.

According to projections of the Facing the Forces of Change study, merchant wholesalers will handle 63 percent of all wholesaling transactions in 1995, up from 59 percent in 1987. During this same period, the share of all wholesale transactions undertaken by manufacturers' sales offices will drop from 26 percent to 23 percent.

The productivity gains in wholesaling during the past few years are expected to continue in the foreseeable future. Department of Labor projections of the industry's real output per employee, a rough measure of productivity, show productivity increasing almost 19 percent during 1990-2005, more than double the 9 percent rise during 1975-90.--James Walsh, Office of Service Industries, (202) 482-5131, September 1992.

Additional References

(Call the Bureau of the Census at (301) 763-4100 for information about how to order Census documents.) Census of Wholesaling, 1987, Bureau of the Census, U.S. Department of Commerce, Washington, DC 20233. Revised Monthly Wholesale Trade, Current Business Report, Bureau of the Census, U.S. Department of Commerce, Washington, DC 20233. Survey of Current Business, Bureau of Economic Analysis, US. Department of Commerce, Washington, DC 20230. Telephone: (202) 523-0697. Outlook: 1990-2005: Industry Output and Employment, Monthly Labor Review, November 1991, U.S. Department of Labor, Washington, DC 20210. Telephone: (202) 523-4000. Facing the Forces of Change, Distribution Research & Education Foundation, The National Association of Wholesaler-Distributors, 1725 K St. NW, Washington, DC 20006. Telephone: (202) 872-0885. "Distribution's Top 50," Industrial Distribution, May 15, 1991, Cahners Publication, 275 Washington St., Newton, MA 02158. Telephone: (617) 964-3030.

COPYRIGHT 1993 U.S. Department of Commerce
COPYRIGHT 2004 Gale Group