Profit margin of wholesale industries as compared to small scale industries
In the US most of the agricultural products are sold through wholesale channels. In such a system, small farmers either sell their products in wholesale directly to local grocery stores, food service establishments, natural food stores, or food buying co-ops or to buyers who then resell those products, functioning as middlemen in the marketing chain. So, when we say ‘wholesale’ what do we mean by it or simply what is a wholesale market?
Well, a wholesale market can be defined as a market where the customers buy products in bulk or in huge quantities, but need not be the final customers. They are actually middlemen between the manufacturers and retailers or are retailers themselves who buy the manufactured products in large lots to achieve economies of scale. These products are then sold either to the retailers or to the final consumers directly. These middlemen are integral for wholesale marketing, since not every manufacturer has the network or ability to reach the final buyers to sell their products. The most advantageous aspect of wholesale marketing is that the profit margin in this type of business is generally higher than the small scale markets or the retailers who are the ultimate source from whom the final buyers buy their product.
The working of wholesale marketing is a completely ‘buy’ and ‘sell’ process, where there is no scope of stocking the goods and then selling it though in some markets. It is done where the wholesaler is directly intending to sell his product to the final buyer. As discussed earlier, profit margins of wholesalers are normally higher than the small scale industries because of their economies of large scale buying and selling. They also sell their products to the retailers without much time gap because of which there is immediate flow of cash, which avoids any event of liquidity crunch for the wholesalers. As a result, they can keep on rolling money and make profits. On the other hand, small scale industries are not efficient enough to sell their products in a short period of time from the date of manufacturing because of their inadequate networking. This increases inventory level and heightens operating costs, which ultimately affects their bottom line adversely. Therefore, it makes a lot of sense for the small scale Industries to seek the expertise of the middlemen, as discussed above, to reach their target buyers.
There is another advantage that wholesale marketing has over the small scale industries and that is dependence on raw materials. All these small scale industries, depending on what products they are manufacturing, are dependent on some or the other raw material. Moreover, most of them do not have any captive source for such raw material instead they source it from other small and medium-scale industries. In this way, they are exposed to fluctuations in raw material prices, which take its toll on their margins if they are unable to pass these price hikes to the end customers. A wholesaler, being an intermediary only, does not have to worry about any bottom line hit. At the most he can experience some margin contraction, but definitely minimal losses.
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