In Start Your Own Wholesale Distribution Business, the staff at Entrepreneur Press and writer Bridget McCrea explain how to begin and run an effective wholesale distribution business. In this edited excerpt, the authors provide a glance at the competitive industry of wholesale distribution.
Distributors serve to go product from manufacturer to advertise. Some are retail distributors, who sell right to consumers (customers). Others are referred to as merchant wholesale distributors; they buy products from the maker, or another source, then move them from their warehouses to companies that either want to resell the merchandise to get rid of users or utilize them within their own operations.
Based on the National Association of Wholesale-Distributors (NAW), wholesale trade increased by 5.8 percent in 2012 (when compared to prior year) with sales reaching $4.9 trillion. The NAW says wholesale trade itself makes up about about 5.6 percent of U.S. GDP and can be an integral part of other larger sectors of the economy-retail trade and manufacturing.
The field of wholesale distribution is a genuine investing game-one that will require good negotiation skills, a nose for sniffing out another “hot” item in your unique category, and keen salesmanship. The theory is to buy the merchandise at a minimal price, then make money by tacking on a dollar amount low enough that it still makes the offer appealing to your customer.
Industry experts agree that to achieve the wholesale distribution business, you must have a very varied job background. Most experts feel a sales background is essential, too, as will be the people skills that go with as an outside salesperson who hits the streets or accumulates the phone and continues on a cold-calling spree to find clients.
“Operating very efficiently and turning your inventory over quickly will be the keys to earning money,” says Adam Fein, president of Pembroke Consulting Inc., a Philadelphia strategic consulting firm. “It’s something business that handles business customers, instead of general consumers. The startup entrepreneur should be in a position to understand customer needs and understand how to serve them well.”
While brick-and-mortar sales still command a the greater part of the retail market-nearly $4.27 trillion in 2013-ecommerce sales are increasing considerably faster, contributing significantly to retail’s overall growth in the U.S. That growth will represent a lot more than 20 percent of the full total $199.4 billion upsurge in total retail sales for the existing year.
There are many dangers you ought to know of whenever starting a wholesale distribution business. To begin with, consolidation is rampant in this industry, with some sectors contracting quicker than others. For instance, pharmaceutical wholesaling has consolidated a lot more than virtually any other sector, according to Fein.
To combat the consolidation trend, many independent distributors are embracing the specialty market. “Many entrepreneurs have found success by picking right up the golden crumbs left up for grabs by the national companies,” Fein says. “As distribution has evolved from an area to a regional to a national business, the national companies [can’t or don’t want to] cost effectively service certain types of customers. Often, small customers get left out or are simply not [profitable] for the large distributors to serve.”
For entrepreneurs seeking to start their own wholesale distributorship, there are basically three avenues available: buy a preexisting business, begin from scratch or buy right into a home based business.
Buying a preexisting business could be costly and could even be risky, according to the degree of success and trustworthiness of the distributorship you wish to buy. The positive side of shopping for a business is you could probably utilize the seller’s knowledge bank, and you’ll even inherit their existing clientele, that could prove extremely valuable.
Beginning with scratch may also be costly, nonetheless it allows for a genuine “make it or break it” scenario that’s guaranteed never to be preceded by a preexisting owner’s reputation. On the downside, you will be creating a reputation from scratch, this means plenty of sales and marketing for at least the first 2 yrs or until your clientele is large enough to attain critical mass.
The latter could very well be the most risky, as all work at home opportunities should be thoroughly explored before hardly any money or time is invested. However, the proper opportunity often means support, training and quick success if the originating company has recently proven itself to be profitable, reputable, and durable.
As the amount of startup capital necessary will be highly reliant on what you choose to market, the numbers vary. For example, an Ohio-based wholesale distributor of men’s ties and belts, Keith Schwartz started On Target Promotions with $700 worth of closeout ties bought from a manufacturer and some basic bits of office equipment. At the bigger end of the spectrum, a Virginia-based distributor of fine wines started with $1.5 million mainly used for inventory, a big warehouse, internal necessities (pallet racking, pallets, forklift), and some Chevrolet Astro vans for delivery.
Like the majority of startups, the common wholesale distributor should maintain business two to five years to be profitable. There are exceptions, of course. Take, for instance, the ambitious entrepreneur who creates his garage as a warehouse to stock small hand tools. Using his own vehicle and counting on the reduced overhead that his home provides, he could conceivably start earning money within six to 12 months.
“There are various subsegments and industries within the realm of wholesale distribution," says Pembroke Consulting Inc.’s Fein, "plus some offer much greater opportunities than others.” Among those subsegments are wholesale distributors who focus on a distinctive niche (e.g., the distributor who sells specialty foods to food markets); larger distributors who sell from soup to nuts (e.g., the distributor with warehouses nationwide and a big stock of varied, unrelated closeout items); and midsized distributors who choose a business (e.g., hand tools) and provide a number of p