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Chapter 14: Wholesale Trade

A biscuit factory in Rajasthan produces several lakh packets a month, but it does not sell a single packet to a household. Its entire output moves out in truckloads to a small number of traders, who break the consignment into cartons and pass them on to thousands of neighbourhood shops across the state. Those traders are wholesalers, and without them the factory would have to deal directly with every shopkeeper it supplies — collecting small orders, arranging small deliveries and chasing small payments. Trade that takes place within the boundaries of a country is called internal trade, and it is carried on at two levels: wholesale trade and retail trade. The wholesaler stands first in the chain of middlemen, buying in bulk from producers and selling in smaller lots to retailers. In doing so, the wholesaler stores goods, grades them, finances both sides of the chain, carries the risk of price change and passes market information back to the producer. This chapter explains who a wholesaler is, the features that distinguish wholesale trade from retail trade, the functions a wholesaler performs, and the services rendered to producers, retailers and consumers.

Figure

Fig. 14.0-1 — Bulk Stock In A Wholesaler’s Godown Photograph of a large wholesale godown with cartons stacked on pallets and racks, and a worker moving stock.

14.1 Internal Trade And Its Two Branches

Goods rarely pass straight from the factory gate to the person who finally uses them. Between production and consumption lies trade — the buying and selling of goods for a profit. When this buying and selling is carried on within the boundaries of one country, it is called internal trade, also described as domestic or home trade.

In internal trade both the buyer and the seller are residents of the same country. No customs duty or import duty is levied, because the goods are part of domestic production and are meant for domestic consumption. A sale of cloth by a merchant in Delhi to a merchant in Agra is internal trade, and so is a purchase made from a neighbourhood shop, a departmental store, a mall, a door-to-door salesperson or an exhibition.

NoteDefinition

Internal Trade Internal trade is the buying and selling of goods and services within the geographical boundaries of a country, where both buyer and seller are residents of the same country and no customs duty is levied.

Why Trade Is Divided Into Two Levels

A producer works in large quantities; a household buys in very small ones. If a manufacturer of soap were to supply every shop in the country directly, it would have to accept thousands of tiny orders, arrange thousands of small deliveries and recover payment from thousands of scattered buyers. The gap between bulk production and small consumption is bridged by dividing internal trade into two levels, each handling a different quantity.

  1. Wholesale trade — the purchase of goods in bulk from producers and their sale in smaller lots to retailers or other traders, never in significant quantity to the final consumer.
  2. Retail trade — the sale of goods in small quantities directly to the ultimate consumer for personal use.

The classification is summarised in FC 14.1.

Flowchart

FC 14.1 — Classification Of Internal Trade Internal Trade → Wholesale Trade, Retail Trade; Wholesale Trade → Producer to Wholesaler to Retailer; Retail Trade → Retailer to Consumer

The Wholesaler’s Place In The Chain

The wholesaler is the first link in the chain of middlemen. Goods are collected from producers, held in stock, broken into convenient lots and passed on to retailers, who complete the journey to the consumer. Whether goods are to be routed through a wholesaler at all is a decision of the producer, not an obligation.

In India this link remains important because the retail trade is made up of a very large number of small shops spread over a wide area. A producer cannot economically serve them one by one, and the retailer cannot afford to buy in producer-sized quantities. The wholesaler serves both sides, and the sections that follow examine exactly how.

Internal Trade And Wholesale Trade Internal trade is the whole of trade carried on inside a country. Wholesale trade is only one branch of it, dealing in bulk quantities meant for resale.

14.2 Wholesaler: Meaning And Definitions

Wholesale trade means buying and selling goods in large quantities. The trader who carries it on is the wholesaler — a merchant who purchases in bulk from producers and manufacturers and resells in smaller lots to retailers, to other traders or to industrial and institutional users. What the wholesaler does not do is sell in any significant quantity to the ultimate consumer; that is the retailer’s work.

Breaking Bulk

A producer despatches goods in truckloads or in large cases, because that is the cheapest way to produce and move them. A shopkeeper cannot store or pay for a truckload. The wholesaler buys the large consignment, divides it into quantities a retailer can handle and, where necessary, repacks it into lots suited to different customers. This operation is called breaking bulk, and it is the central economic service the wholesaler performs.

NoteDefinition

Wholesaler A wholesaler is a trader who buys goods in large quantities from producers or manufacturers and sells them in comparatively smaller quantities to retailers, other traders or industrial users, according to their needs.

A Narrow Line, Many Varieties

Wholesalers generally confine themselves to a narrow range of products — cloth, sugar, edible oil, stationery, pharmaceuticals — and are commonly known by the line they deal in, such as a grain wholesaler or a hardware wholesaler. Within that narrow line they carry many varieties and grades, so that a retailer can obtain a full assortment from a single source.

Specialisation of this kind is deliberate. Judging quality, forecasting demand and negotiating with producers all require detailed knowledge of one trade, and that knowledge cannot be spread thinly across every kind of good.

Wholesale Markets For Farm Produce Much of India’s wholesale trade in agricultural produce is conducted through regulated market yards, or mandis, set up under state agricultural produce marketing laws. Farmers bring their produce to the yard, licensed wholesale traders bid for it in bulk, and the produce is then distributed onward to retailers in surrounding towns.

How Writers Have Defined The Wholesaler

Different writers have described the wholesaler from slightly different angles, but all of them settle on the same idea — a trader standing between the producer and the retailer.

  1. Evelyn Thomas — a true wholesaler is neither a manufacturer nor a retailer, but acts as a link between the two.
  2. Stanton — a wholesaler is a trader whose business is to supply goods of a certain class to the trade, buying from producers in large quantities in order to resell to retailers or other traders in small quantities.
  3. Cundiff and Still — a wholesaler buys and resells merchandise to retailers, to other merchants and to industrial, institutional and commercial users, but does not sell in significant amount to ultimate consumers.
  4. Mason and Rath — a person or firm buying merchandise and reselling it either to retailers for later sale to consumers, or to business firms for industrial use, is a wholesaler.

Taken together, these definitions establish three tests of a wholesaler: purchase in bulk, sale in smaller quantities for resale or business use, and a position squarely between producer and retailer.

Wholesale Trade And Wholesaler Wholesale trade is the activity of buying and selling in bulk for resale. The wholesaler is the trader who carries on that activity as a business.

14.3 Characteristics Of Wholesale Trade

Wholesale trade is recognised not by the goods dealt in but by the manner of dealing in them. A wholesaler and a retailer may both sell soap; what separates them is the quantity handled, the customer served, the capital employed and the way stock is kept. The features described below follow from the wholesaler’s position between a producer working in bulk and a retailer working in small lots.

Buying, Selling And The Line Of Goods
  1. Purchase in bulk quantities — the wholesaler buys from producers in large lots, because bulk buying secures a lower price per unit and assures the producer of a firm order.
  2. Sale to retailers, not to consumers — goods are sold onward in small quantities to retailers, and occasionally to large institutional buyers. Direct sale to households is not the wholesaler’s business.
  3. A particular line of trade — dealing is confined to a few specialised goods, since judging quality and forecasting demand require close knowledge of one trade.
Capital, Credit And Storage
  1. Large capital requirement — stock is bought in bulk and held until retailers demand it, so a substantial amount of money remains locked up in goods at any given time.
  2. Sale mainly on credit — retailers are usually supplied on credit and pay after their own sales are realised. This lengthens the wholesaler’s working-capital cycle and is one reason the capital needed is so large.
  3. Financial help to producers — payment to the producer is often made promptly, or part of it in advance of production, which releases the producer from waiting for the money.
  4. Goods kept in godowns — stock is stored in a godown or warehouse rather than in a display shop, because the wholesaler needs storage space, not a shop front that attracts passing customers.
Market Functions Carried Alongside
  1. Grading and standardisation — goods collected from several producers are sorted by quality, size and weight before being passed on, so that the retailer receives uniform lots.
  2. Coordination between demand and supply — by holding stock and releasing it as required, the wholesaler absorbs the difference in timing between steady production and uneven demand.
  3. More expenditure on advertising than on display — spending goes into advertising and sales promotion aimed at the trade, not into decorating a shopping outlet, because the customer is a retailer placing a planned order rather than a shopper walking in.

Taken together, these features distinguish wholesale trade from retail trade at every point of the transaction, as Table 14.1 shows.

Table 14.1 — Wholesale Trade And Retail Trade | Basis | Wholesale Trade | Retail Trade | |—|—|—| | Quantity handled | Bought and sold in large lots | Sold in small quantities | | Customer served | Retailers, traders and industrial users | The ultimate consumer | | Range of goods | Narrow line, many varieties within it | Wide variety of different lines | | Capital required | Large, since bulk stock is held | Comparatively small | | Storage | Goods kept in godowns | Goods kept in the shop itself | | Credit | Goods usually sold on credit to retailers | Sales largely for cash | | Location and appearance | Located near markets or transport hubs; display unimportant | Located near customers; display important |

Visit a nearby wholesale market and note down three goods sold there. For each, find out the smallest quantity a retailer is allowed to buy.

Q. If a wholesaler occasionally sells a carton of biscuits to a large hostel, does the firm stop being a wholesaler?

A. No. Occasional sale to a large institutional buyer is permitted; the firm would cease to be a wholesaler only if selling to ultimate consumers became the main part of its business.

14.4 Necessity And Functions Of A Wholesaler

A wholesaler earns a margin on goods that were already made by someone else and will be sold by someone else. That margin is justified only if real work is done in between. The wholesaler is necessary because a set of marketing functions — collecting, storing, grading, financing, moving and informing — must be performed by somebody, and it is cheaper for one specialist to perform them for many producers and many retailers than for each firm to perform them alone.

The ten functions usually listed are grouped in FC 14.2.

Flowchart

FC 14.2 — Functions Of A Wholesaler Functions Of A Wholesaler → Handling Of Goods, Financial Functions, Market Functions; Handling Of Goods → Assembling, Dispersion, Grading, Storing, Transport; Financial Functions → Financing, Risk Bearing; Market Functions → Market Survey, Pricing, Providing Information

Assembling And Dispersion
  1. Assembling of goods — the wholesaler places large orders with several manufacturers producing different types and varieties of a commodity, and gathers the goods at one place. Assembling is the first task, because nothing else can be done until the stock is collected together.
  2. Dispersion of goods — the assembled stock is then broken down and sold to retailers in small quantities, supported by advertising and sales promotion. Assembling gathers goods from many producers; dispersion spreads them out among many retailers.

Assembling And Dispersion Assembling is collecting goods from many producers into one place. Dispersion is distributing that collected stock outward to many retailers in small lots. The two functions run in opposite directions.

Preparing The Goods For Sale
  1. Grading — goods collected from different sources are not of the same quality, so the wholesaler classifies them on the basis of quality, size and weight, and often packs and brands them as well. Uniform lots are easier for a retailer to price and sell.
  2. Storing — since purchase is in huge quantities and sale is spread over months, the wholesaler must keep the goods in a godown until they are demanded. Storage protects the goods and keeps them available when the market needs them.
  3. Transport facility — many wholesalers arrange transport of their own, bringing goods in from producers and delivering them to retailers’ premises, often without a separate charge.
Finance And Risk
  1. Financing — the producer is paid promptly or in advance, and the retailer is supplied on credit. The wholesaler therefore finances both ends of the chain out of its own capital.
  2. Risk bearing — goods are bought long before they are sold, so the wholesaler carries the risk of a change in fashion, a fall in demand, a fall in prices, and loss by theft, fire or spoilage. Because this risk is shifted away from the producer, production can continue steadily through the year.
Reading And Steadying The Market
  1. Market survey — surveys are undertaken from time to time so that changes in demand are known in advance and orders can be placed with producers before the shortage appears.
  2. Pricing — by releasing stock when supply is short and buying when prices fall, the wholesaler regulates supply against demand and so gives stability to prices.
  3. Providing information — retailers report what consumers are asking for, and the wholesaler passes this back to the producer, who can then adjust design, size, quality and quantity to match actual preferences.

Case 14.1 — A Season That Comes Only Twice A Year Vasant Woollens manufactures blankets throughout the year, though demand appears only in winter. A wholesaler, Kamath Traders, places its order in June, takes delivery through the monsoon into its own godown, and supplies retailers in small lots from October onwards. Prices in the retail market stay steady even in peak weeks. Q. Identify the two functions of a wholesaler at work here and state how each helps Vasant Woollens.

Why The Functions Cannot Simply Be Removed When a producer bypasses wholesalers and supplies retailers directly, the functions do not disappear — the producer must now run its own warehouses, arrange small deliveries, extend credit to shops and carry the stock risk itself. Direct distribution shifts the cost; it does not remove it.

14.5 Services Of Wholesalers

The functions studied in the previous section describe what a wholesaler does. Services describe who benefits from it. Because the wholesaler stands between production and retailing, the same act — buying a truckload and storing it — is a service to the producer, who is relieved of stock, and a service to the retailer, who can now buy a carton at a time.

It is convenient to examine the benefit separately from the point of view of the three parties concerned: producers, retailers, and consumers or society at large.

Figure

Fig. 14.5-1 — Goods Being Loaded For Delivery To Retailers Photograph of cartons being loaded from a wholesale godown into a delivery van parked at the loading bay.

14.5.1 Services To Producers

A manufacturer wants to concentrate on production. Every rupee tied up in finished stock, every small order handled and every doubtful payment chased is a diversion from that work. The wholesaler removes most of these diversions.

  1. Purchase in large quantities — one bulk order replaces hundreds of small ones, so the producer avoids repeated order handling, small packaging and scattered despatch.
  2. Economies of scale — assured bulk demand allows production on a large scale, which lowers the cost per unit and makes long production runs worthwhile.
  3. Prompt payment — wholesalers normally pay within a short period instead of demanding long credit, which protects the producer from a working-capital shortage and keeps production regular.
  4. Insurance of sale — orders are frequently placed before production begins, so the sale is settled in advance and marketing becomes secure.
  5. Better use of capital — the producer need not keep large stocks of finished goods, and the capital that would have been locked up in them can be used more productively.
  6. Warehousing and marketing risks taken over — goods are lifted soon after production and stored by the wholesaler, who thereafter carries the risk of storage loss and of a fall in demand.
  7. Advertising — wholesalers advertise the goods they deal in, sparing the producer part of the promotional expense.
  8. Help to regulate production — information on demand, fashion and consumer choice flows back from retailers through the wholesaler, so the producer can plan how much of what to make.
  9. Stabilisation of prices — buying when prices fall and selling stored stock when prices rise narrows the swing in the producer’s realisation.
  10. Continuity and specialisation — with distribution, storage and collection handled by another party, the producer can give undivided attention to improving the product itself.

Pharmaceutical Distribution Medicines made by a manufacturer typically reach a chemist’s shop through a stockist or wholesale distributor who holds inventory for a district. The manufacturer supplies in bulk to a few distributors instead of servicing thousands of individual chemists, and the distributor carries the stock, the credit and the delivery.

14.5.2 Services To Retailers

A retailer works with limited capital, limited storage space and limited bargaining power. Almost every service the wholesaler renders to a retailer is a way of removing one of these three limitations.

  1. No need to approach producers — the retailer is spared repeated dealings with producers who may be distant or even abroad, and the long waits that such deliveries involve.
  2. Goods available as and when required — the wholesaler already holds bulk stock of many varieties, so the retailer gets the required goods, in the required quantity, at the required time.
  3. No need of large capital — regular supply in small lots means the retailer need not lock money up in big stocks.
  4. Financial help — goods are usually supplied on credit, and payment is made once sales are realised, which is what allows a small shop to trade at all.
  5. No wastage of goods — without wholesalers the retailer would have to hold large stocks, raising the risk of spoilage, damage and obsolescence.
  6. Safety from price fluctuation — because the retailer does not hold big stocks, a fall in prices does not leave it with costly inventory; the wholesaler absorbs that risk by balancing supply and demand.
  7. Help in advertisement — wholesalers advertise on a large scale, so the retailer need not spend separately to create demand for the product.
  8. Knowledge of new products — information about new products travels from the producer to the retailer through the wholesaler, keeping the shop’s range up to date.
  9. Transport facility — large wholesalers deliver to the shop, often free of transport cost, saving the retailer both time and freight.
  10. Grading — goods arrive already sorted by quality, size and weight, which makes them easier to display, price and sell.
  11. Valuable suggestions — experienced wholesalers advise retailers on market conditions, on what is selling and on how much to invest in stock.

Q. A retailer says the wholesaler’s margin makes goods costlier, so buying direct from the producer must be cheaper. Is that reasoning complete?

A. No. Buying direct would force the retailer to purchase in bulk, arrange transport, hold stock and forgo credit. The margin paid to the wholesaler replaces these costs rather than adding to them.

14.5.3 Services To Consumers And Society

Consumers never meet the wholesaler, yet the benefit reaches them through the retail price they pay and the choice they find on the shelf.

  1. Uniformity in prices — supply to all retailers at the same price brings a measure of uniformity into the prices charged in the retail market.
  2. Cheaper goods — bulk purchase lets producers manufacture on a large scale, and the lower cost of production is ultimately reflected in a reasonable price for the consumer.
  3. Goods of their taste — consumer preferences reported by retailers are carried back to producers, so goods are made to suit what people actually want.
  4. Knowledge through advertisement — advertising by wholesalers informs consumers about new products entering the market.
  5. Market research — surveys conducted by wholesalers help improve existing products and develop new ones, so the goods available get better over time.
  6. Stability in prices — by holding stock and releasing it against demand, wholesalers reduce shortages and sharp price movements, which protects the household budget.

Ask a shopkeeper near you how often stock is delivered and whether payment is made before or after sale. Note which services from this section you can identify.

14.6 Summary

  1. Internal trade is the buying and selling of goods and services within the boundaries of one country, where both buyer and seller are residents of that country and no customs duty is levied.
  2. Internal trade is carried on at two levels:
  1. Wholesale trade — purchase in bulk from producers and sale in smaller lots to retailers, traders or industrial users.
  2. Retail trade — sale in small quantities directly to the ultimate consumer.
  1. The wholesaler is the first link in the chain of middlemen, buying in bulk, breaking bulk into convenient lots and passing goods on to retailers, and is neither a manufacturer nor a retailer.
  2. Wholesalers confine themselves to a narrow line of goods but carry many varieties and grades within that line, because specialised knowledge of one trade is needed to judge quality and forecast demand.
  3. The main characteristics of wholesale trade are purchase in bulk, sale to retailers, a particular line of trade, large capital requirement, sale mainly on credit, financial help to producers, storage in godowns, grading and standardisation, coordination of demand and supply, and greater spending on advertising than on display.
  4. Wholesale trade differs from retail trade in quantity handled, customer served, range of goods, capital required, storage, credit and the importance of display, as set out in Table 14.1.
  5. A wholesaler is necessary because the marketing functions between production and retailing must be performed by somebody, and one specialist can perform them for many producers and retailers more cheaply than each firm can alone. These functions are assembling, dispersion, grading, storing, transport, financing, risk bearing, market survey, pricing and providing information.
  6. Services rendered to producers include bulk purchase, economies of scale, prompt payment, insurance of sale, better use of capital, warehousing, advertising, help to regulate production, price stabilisation and freedom to specialise in manufacturing.
  7. Services rendered to retailers include ready availability of goods, freedom from approaching distant producers, small capital requirement, credit facilities, protection from wastage and price fluctuation, advertising support, knowledge of new products, transport, grading and trade advice.
  8. Services rendered to consumers and society include uniformity of prices, cheaper goods, goods matched to consumer taste, information through advertising, market research and stability of prices.
  9. Eliminating wholesalers does not remove the functions they perform; the producer or the retailer must then take over the storage, finance, transport and risk themselves.

Flowchart

FC 14.3 — The Chain Of Distribution Producer → Wholesaler (buys in bulk, stores, grades, finances, bears risk) → Retailer (buys in small lots, sells locally) → Consumer

14.7 Key Terms

  1. Breaking bulk Dividing a large consignment bought from a producer into smaller lots that retailers can store, pay for and sell.
  2. Economies of scale The saving in cost per unit that a producer obtains by manufacturing on a large scale, made possible when bulk orders are assured.
  3. Godown A warehouse in which a wholesaler stores stock until retailers demand it, as distinct from a shop used for display and sale.
  4. Internal trade The buying and selling of goods and services within the geographical boundaries of a country, where both buyer and seller are residents of that country and no customs duty is levied.
  5. Retail trade The sale of goods in small quantities directly to the ultimate consumer for personal use.
  6. Wholesale trade The purchase of goods in bulk from producers and their sale in smaller lots to retailers or other traders for resale or business use.
  7. Wholesaler A trader who buys goods in large quantities from producers or manufacturers and sells them in comparatively smaller quantities to retailers, other traders or industrial users.

14.8 Points To Ponder

  1. If a wholesaler’s margin were removed entirely, would goods actually become cheaper for the consumer, or would the same costs simply reappear elsewhere in the chain?
  2. A wholesaler supplies retailers on credit but pays producers promptly. Who bears the cost of that gap, and what would happen to small retailers if the practice stopped?
  3. Large retail chains buy directly from manufacturers, while small shops still buy from wholesalers. Does this suggest that the wholesaler’s usefulness depends on the size of the buyer rather than on the nature of the goods?
  4. Wholesalers are said to stabilise prices by holding stock and releasing it against demand. At what point does holding stock stop being stabilisation and start being hoarding?
  5. Wholesale trade requires large capital but rests heavily on trust, since goods move on credit and often without written agreements. Is such an arrangement a strength of the trade or a weakness in it?
  6. Information about consumer preferences reaches the producer only after passing through the retailer and then the wholesaler. What is lost along the way, and how might a producer check what it is told?

14.9 Objective Questions

  1. Wholesale trade is best described as the purchase of goods: [1]
  1. in small quantities for personal use
  2. in bulk from producers for resale in smaller lots
  3. from other countries for sale within India
  4. directly by consumers from manufacturers
  1. Read the following statements and choose the correct option. [1] Assertion (A): A wholesaler needs a large amount of capital. Reason (R): A wholesaler buys goods in bulk and supplies retailers on credit.
  1. Both (A) and (R) are true, and (R) is the correct explanation of (A).
  2. Both (A) and (R) are true, but (R) is not the correct explanation of (A).
    1. is true, but (R) is false.
    1. is false, but (R) is true.
  1. Fill in the blank: The function by which a wholesaler collects goods of one commodity from several manufacturers at one place is called ________. [1]
  1. dispersion
  2. grading
  3. assembling
  4. pricing
  1. State whether the following statement is true or false: A wholesaler keeps stock in a godown rather than in a display shop because the customer is a retailer placing a planned order. [1]
  1. True
  2. False
  1. Match Column A with Column B and choose the correct option. [1]
  1. Storing — (A) Sorting goods by quality, size and weight
  2. Grading — (B) Bearing loss from a fall in prices or a change in fashion
  3. Risk bearing — (C) Passing consumer preferences back to the producer
  4. Providing information — (D) Holding goods until the market demands them
  1. (i)–(D), (ii)–(A), (iii)–(B), (iv)–(C)
  2. (i)–(A), (ii)–(D), (iii)–(C), (iv)–(B)
  3. (i)–(D), (ii)–(B), (iii)–(A), (iv)–(C)
  4. (i)–(C), (ii)–(A), (iii)–(D), (iv)–(B)

14.10 Check Your Concepts

  1. Define internal trade and name its two branches. [2]
  2. State any three characteristics of wholesale trade. [3]
  3. Explain, with an example, how a wholesaler performs the function of breaking bulk and why producers find it useful. [3]
  4. Distinguish between wholesale trade and retail trade on any four bases. [4]
  5. ‘Wholesalers add an unnecessary layer of cost between the producer and the consumer.’ Evaluate this claim, giving reasons on both sides and stating your own conclusion. [6]

14.11 Case-Based Questions

  1. Neelkanth Foods manufactures packaged spices at a single plant. Until last year it supplied about four hundred small shops directly, and found that most of its office time went into handling tiny orders, arranging small deliveries and recovering payments. It has now appointed Rohira Traders, a firm that lifts spices in truckloads soon after production, stores them, sorts them into standard packs and supplies shops in the district in cartons, allowing the shopkeepers thirty days to pay. Neelkanth Foods is paid within a week of despatch.
  1. Identify the type of trader Rohira Traders is, and name any three functions it is performing in this situation. [3]
  2. Explain any three services Neelkanth Foods now receives that it did not receive when it supplied shops directly. [3]