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Apr 6, 2012

Wholesalers - are they your friends or enemies ?

Wholesalers are spirited, ruthless and self appointed re-sellers of products they choose to deal in. Product marketers must carefully weigh how they wish to align themselves to these Robin Hoods. If they become your complementors, they will help you grow. If you cross swords, they can bleed you - sometimes to death as the example of a Chennai based CTV company shows. 

DEPENDS ON WHO YOU ASK

Who are these wholesalers - and what do they do? The question gets different answers from different people. At worst, they are mercenary, parasitic, self-willed and exasperating. At best they are symbiotic complementors, entrepreneurial and helpful.  Just like Sherwood's Robin Hood - depends on who you  ask.

At their best, wholesalers create new sales opportunities for your products on their own; thereby boosting your sales volumes and shares. At their worst, they are parasites who will  subvert your distribution set-up and take you to the cleaners. In the marketing textbooks and in the Business Schools, they are neatly tucked away under a classification called  “channel partners”  but you must speak to the foot soldiers of marketing to get the real picture.

THE SAD EPISODE IN CHENNAI

Can you believe that a single wholesaler was responsible for ruining a big colour TV firm based in Chennai during the 80s by falling into his trap? It is a true and interesting tale of what a wholesaler can do to a company. This wholesaler, based in the busy T Nagar locality of Chennai, must have initially seemed like an angel to this company when he must have first showed up on the company's tracking system as a wholesale with continuously increasing sales; month after month.

As a reward for this good performance,  the wholesaler negotiated -  and obtained - higher and higher extra discounts on his purchases. Most of us may not see anything wrong with this. In fact, such discounting is justified by the "Cost to Serve" model. This model says that, since the cost of servicing a Rs 100,000 order is not very much more than the cost of servicing a Rs 10,000 order, the former /  bigger customer deserves to share the cost saved in servicing a large order. However, this model does not  adequately capture the reality of what actually happened in the marketplace for the CTV company.

The wholesaler used these discounts to create his own pricelist for the company's  products in such a way that it was more attractive than the original price list of thye company! As a result, customers who used to buy directly from the company now started buying from the wholesaler. The sales volume, which would have come at the regular price through the dealers through direct transactions, now came indirectly via the wholesaler at a discounted price. The more the wholesaler sold, the less margins the company made.

This was the beginning of the end.  Slowly a stage came when most of the dealers switched to buying from the wholesaler instead of from the company and the company became over-dependant on the wholesaler. One day, the wholesaler became so greedy that the fresh tranche of extra margin he demanded made the whole company unviable. The company refused further reductions in the margin but the company had to downsize its operations. It never recovered and slowly the brand went into oblivion. But the wholesaler prospered. He used the dealer network he had created using the company's products and discounts - to generate  sales volumes for other companies. He built up a large retail chain spanning several cities in Tamilnadu and lived happily afterwards. 

NO-WIN SITUATION ?

We all know the importance of the product, price, positioning, advertising and the distribution but the role played by the wholesalers in making or breaking of the companies has neither been fully analysed nor appreciated. Most of us from the organized marketing industry see ourselves in a no-win situation vis-à-vis these party-spoilers. The principle objective of most wholesalers is to create their own loyal sub-networks - by breaking into your original network - using your own extra discounts against you. In short, they use your money to turn your own dealers against you. A “parasitic operation”!

Some time ago there was an article in the Business Standard describing the success of Whirlpool in India. It said that one of the strategies of the company was to stop the typically white goods style “informal wholesaling” and replace it with FMCG style organized , multi-tiered distribution with clear and transparent pricing. In short, the company’s strategy was to bust the wholesale mafia . From my perspective this is NOT a universal and failsafe strategy.

It would work only if there is a high degree of support given to the distribution channel by way of advertising, brand-building and field force coverage. It is only when you are sure of finding, convincing and driving a sufficient number of customers to your stores; that the stores will “fall in line” and listen to whatever you want them to do - including organized, multi-tier operation, with transparent FMCG style pricing - if that’s what you want !

WHOLESALERS - ARE THEY ALWAYS THE VILLAINS? 

If the above has given you an impression that wholesalers are a problem; let me give you instances where they come across as angels. Like Robin Hood, they are foes of the high and mighty but friends of the ordinary. If you do not have big resources - or if you do not wish to put in such resources - the wholesalers are your best option. Somewhat like Robin Hood, they help the small firms distribute their products while riding on the widespread market demand of big-league items. The wholesalers build their networks by dealing in big-league items, and may sustain and bind these networks by negotiating extra discounts from these big-ticket suppliers but they survive on the profits they make through the margins they get from small and medium league marketers. They have a symbiotic relationship with both the big league firms and mid / small league firms. Without the biggies, they would not be able to create networks. Without the smaller firms they will not be able to make profits.

For small start-ups who know how to make a good and competitive product but cannot afford big-budget marketing; wholesalers may be saviors. The wholesalers can give them access to the networks they have created using the big brands. The wholesale channel is absolutely indispensable even if you are not a start-up but just want to “feel” how a new market responds to your product and pricing strategy without spending much on advertising or your own sales force.

But, even large firms benefit from the wholesale channel. For example, a toothpaste brand with a 5% share of the market can afford to cover only about 300,000 outlets per month but, on the other hand, it may be typically available in 600,000 outlets. How does it get such an extra reach of about 300,000 outlets? Through the activity of these wholesalers of course!

The organized sector - which is the source as well as user of marketing knowledge - considers the wholesales as being on the seamier side of the market and many times get classified as belonging to “unorganised”, "grey" or “parallel” segment. But from my perspective, they play an important role in the marketing of products - and stand you in good stead if you are not strong on resources.