American Wholesaler: Quo Vadis?

A. Coskun Samli

ABSTRACT. The global market environment poses various challenges for its constituent channel members. In particular, the role-set of the wholesaler often differs across transitional, emerging, industrialized, and post-industrialized market settings. Regardless of the variants in market infrastructure and development, the wholesaler remains a critical role-set in global supply chains. The focus of this article is to explore the dynamic channel functions of wholesaling in the United States, a postindustrialized market setting. While wholesalers maintain a paramount position in the distribution of goods and the provision of value-added services in the U.S., the wholesaler has received a paucity of research attention. This paper provides a set of research propositions to facilitate empirical investigation of the wholesalers impact on channel efficiency and effectiveness. doi:10.1300/J049v14n03_06 [Article copies available for
a fee from The Haworth Document Delivery Service: 1-800-HAWORTH. E-mail address: <docdelivery@haworthpress.com> Website: <http://www. HaworthPress.com> 2007 by The Haworth Press, Inc. All rights reserved.]

KEYWORDS. Wholesaling, pareto rule, global supply chains, channel efficiency

A. Coskun Samli is Research Professor of Marketing and International Business, Department of Marketing and Logistics, Coggin College of Business, University of North Florida, Jacksonville, FL. Address correspondence to: A. Coskun Samli, Department of Marketing and Logistics, Coggin College of Business, University of North Florida, 4567 St. Johns Bluff Road, South Jacksonville, FL 32224 (E-mail: jsamli@unf.edu). Journal of Marketing Channels, Vol. 14(3) 2007 Available online at http://jmc.haworthpress.com 2007 by The Haworth Press, Inc. All rights reserved. doi:10.1300/J049v14n03_06

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INTRODUCTION More than one-half century has passed since marketing guru Ted Beckman alerted academicians and practitioners alike to the paucity of knowledge regarding the integral role of wholesaling in the distribution sciences. He maintained that wholesaling is a significant channel role in the U.S. market economy; however, wholesaling as a channel function lacks both stature and visibility. A few years later, Karas (1958, p. 402) asserted that the American wholesaler is a type of middleman who according to so many predictions for the past several decades should have been extinct long before now. The swell of television commercials in the U.S. that promote direct-to-consumer distribution as a rationale for offering lower prices has exacerbated the widespread perception that the middleman is an unnecessary and costly appendage. This is especially attributed to the wholesaler despite its critical role in the total distribution system. In academic circles, the relationship between the wholesaler and the marketing mix has received little research attention (Kotler and Keller 2006). Consequently, wholesaling lacks empirical validation of its preeminent role in the distribution of goods and services. In short, this important functional and institutional entity is under-valued as a critical role-set in the supply chain and as a facilitating force in a market-driven economy. The objective of this paper is multifold. First, it posits that wholesaling is a very resilient component of the modern U.S. economy. Toward that end, the paper provides justification for the continuity of the wholesaling sector in the U.S. economy based on the pareto rule. Finally, channel performance criteria are established to encourage empirical research addressing the wholesalers contribution to supply effectiveness. DYNAMICS OF WHOLESALING IN THE U.S. ECONOMY Just what is, if any, the role of the wholesaling sector in the industrialized world in the U.S. economy? Table 1 demonstrates that wholesaling in a post-industrialized market setting such as the U.S. has shown much resilience despite periodic shifts in the political and economic environment. With the exception of the 2002 U.S. census data, wholesaling occupies a very large proportion of the national economy and (for the most part) shows consistent growth in its share of the national

Channel Insight TABLE 1. Resilience of Wholesaling in American Markets

Year Wholesale Volume as a Percentage of Retail Volume 148 152 174 187 178 167 166 138 Employment as a Percentage of Retail 37 36 39 34 42 31 30 25 Output per Employee (US$000) 131 173 286 400 556 561 624 728 Percentage Increase in Productivity 32.0 65.3 39.8 39.0 0.8 11.2 16.6

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1967 1972 1977 1982 1987 1992 1997 2002

Source: Calculated by the author from data presented in various Censuses of Retailing and Wholesaling.

economy. Similarly, employment in the wholesale sector constitutes a stable and considerable portion of total employment in the distribution sector of the economy. The anomaly in the Year 2002 figures may be attributable to several concurrent shifts in the channel environment. The expansion of the manufacturing sector coupled with the emergence of giant retail conglomerates likely impacted the wholesaler rolesets proportional impact on the U.S. economy. Mergers and acquisitions in both the manufacturing and retail sectors further concentrated power, thereby reducing wholesalers leverage to negotiate margins and distribution agreements. Technologies ranging from enterprise resource planning (ERP) to radio-frequency identification (RFID) facilitated direct communication linkages between the back-end and front-end of the supply chain. This resulted in greater capabilities for both sectors to bypass the wholesaler. Additionally, the emergence of warehousing clubs also cut into the volume of wholesaling trade (Zellner 2001). Finally, third-party logistics providers (3PLs) activities further diminished conventional wholesaling functions. Despite these noteworthy pressures from both ends of the distribution system, wholesaling has maintained a substantially large proportion in the U.S. economy (see Table 1). Perhaps the most important indicator of the resilience of the wholesaling sector is demonstrated by the steady growth in the U.S. employee output data. The data suggest that wholesaling has continued to be a productive channel function. Over the past 30 years, the average percentage increase in productivity (based on 5-year interval data) is over

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29.2 percent. During this same period, wholesale volume as a percent of retail volume increased 166 percent (based on 5-year interval data). These data illustrate that an associative variation may exist between wholesaling and channel efficiency; however, the data further demonstrate that this association has occurred in a non-linear fashion. In the first decade (Years 1972-1982), the growth of employee output was about 45.7 percent; the decade between Years 1982 and 1992 lessened to just over 25.5 percent (based on 5-year interval data). In the third decade of analysis, the percentage increase in productivity has dropped more than 50 percent (based on 5-year interval data). While the percentage increase in productivity has decreased, the wholesaling sector continues to demonstrate a formidable contribution to the productivity. A trend analysis illuminates the compelling need for researchers to critically evaluate the underlying determinants of wholesale sectors impact on productivity and channel efficiency. However, few can argue that wholesaling still maintains a preeminent position in the supply chain. Accordingly, the following research proposition is offered: RP1: Wholesaling in the U.S. illustrates a high level of resiliency due to its employee productivity. It is possible that the wholesaling sector has been neglected in academic circles because it represents a relatively small percentage of current employment when compared with the front-end of the supply chain. When compared to the retailing sector, wholesaling has not been a driver of job growth in the U.S. economy. Samli and El-Ansary (2007) have asserted that wholesaling abdicated its role as the channel captain in industrial countries around the nineteenth century. However, wholesaling was a prominent facilitator of manufacturing sector growth and manufacturers emerging supply chain leadership (e.g., channel captain) (Rosenbloom 1987). In putting special emphasis on helping the manufacturer, the modern wholesaler started concentrating on special services such as financing, promotion, warehousing, inventory control, and logistics, among others (Samli 1964, 1997). Manufacturing giants, as stated earlier, with the help of advanced e-trade, information technology and third party logistics have started cutting into the wholesaling activities. As a result, modern U.S. wholesalers are shifting their marketing activities toward smaller retailers, re-positioning their channel role as proactive conduits between manufacturers and an oft-overlooked but sizeable component of the retail

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sector. There was a natural transition toward serving small retailers that did not possess the capital resources, technological capabilities and/or the market power to bypass the functions provided by the wholesaling sector. Channel efficiency of wholesale sector employees was achieved as a result of this shift in market focus. It is estimated that about 90 percent of retailers are small and they conduct only about 10 percent of the total retailing business in the U.S. (Samli 2005). These small retailers do not do large-scale business to make a significant difference in the profit picture of the large manufacturing sector. In fact, the manufacturing sector looks upon small retailers as a necessary chore and might otherwise ignore dealing with this group of customers if U.S. legislative initiatives were not in place to protect access to manufacturers. THE NEED FOR WHOLESALING Conventional wisdom and practical experiences strongly imply that many manufacturing firms have 20 percent of the customers accounting for about 80 percent of their sales and profits (Schmittlein, Cooper, and Morrison 1993). Since marketing budgets and capacities are usually quite limited, the 80-20 principle which is also known as the pareto rule becomes the key rationale for why companies should and do focus their marketing efforts on their most profitable customers and not put as much emphasis on 80 percent of their customers that account for 20 percent of the sales and profit (Zeithaml, Rust, and Lemon 2001). Since the pareto rule indicates that companies should implement a differentiated use of their marketing instruments and resources for different tiers of their customer base, such a differentiated marketing effort can lead to higher returns since the firm is becoming more efficient and effective by concentrating on the top-tier customers (Bolton, Lemon, and Verhoef 2004). Thus, a two pronged research proposition can be constructed. RP2a: As long as the conditions for the 80-20 principle exists, wholesaling is necessary for the profitability of the manufacturing sector. RP2b: As long as the conditions for the 80-20 principle exists, wholesaling is necessary for the survival of small retailers.

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A PARADIGM SHIFT As long as there is a second tier of customers, wholesalers become very critical. They can easily take care of the manufacturers lower tier of customers. It is clear that pareto rule is critical for the survival and progress of the wholesaling sector. Unlike in the nineteenth century and early twentieth century, wholesalers must understand that their opportunities lie with small retailers and not necessarily with manufacturers. During the early stages of industrialization in transitional and emerging markets, modern wholesalers are vital functional linkages between manufacturers and various retailers. In newly and post-industrialized market settings, modern wholesaling will need to focus their marketing efforts on small retailers who lack the expertise and/or resources to bypass this channel. These lower tier customers still represent a sizeable part of the retail sector. This is a significant change in the wholesaling orientation but by representing manufacturers to small retailers, wholesaling will do a much better marketing job for the second tier customers and relieve manufacturers from dealing with this group. By doing so, wholesalers give an opportunity to manufacturers to emphasize their top tier customers that happen to be much more profitable than the second tier customers. However, here the needs of small retailers to compete with their gigantic counterparts necessitate the wholesalers special attention. If the wholesaler wants to help the manufacturer and take advantage of pareto condition, the wholesaler will have to be almost totally on the side of the retailer. If the small retailers cannot compete, they cannot survive. As a result, the wholesaler must be performing buying, managing, promotion and most other marketing activities for the small retailer. This whole situation implies the importance of the contemporary U.S. wholesalers being very proactive and enjoying powerful managerial savvy. Thus, two research propositions can be constructed here: RP3: Unless the wholesaler can provide the small retailer very functional advice, the 80-20 principle will not pay off for the wholesaler. RP4: Current wholesalers must be very managerially sophisticated to help the small retailers how to survive the pressures of retailing giants.

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Whereas the second tier customers are not very profitable for the manufacturer, they could be very profitable for the wholesaler who is dealing not with one but with numerous manufacturers and carrying a large variety of products. Table 2 identifies some of the key positions the wholesalers will take in industrialized countries and particularly in the U.S. As can be seen, the modern wholesaler relieves the manufacturer virtually all of the marketing activities to the second tier customers. Here the wholesaler is helping the manufacturer to create the satisfactory 20 percent of the profits without reducing the quality of service. If the American wholesaler is successful in performing the functions displayed in Table 2 the manufacturers will put all of their efforts into satisfying their first tier customers for greater profits. CONCLUSIONS The pareto rule is the key to the wholesaling sector in the U.S. Because there are many small retailers that may be categorized as the second tier customers for the manufacturer, wholesaling takes over and
TABLE 2. The Key Functions of Wholesalers
Functions in the U.S. Primarily being close to channel captains, but representing small retailers Financial help by maintaining inventories for the manufacturer, but more in the form of credit for the retailer Limited promotion, with extensive sales effort to the retailer and generating extensive knowledge for the retailers needs Carrying out merchandise mixes for the retailer. These mixes are based on large variety products in small numbers Working more as a sales agent for manufacturers but more critically as a buying agent for the retailer Limited international buying and selling Being more proactive Detailed Aspects Helping the manufacturer to deal with the second tier customers by representing the small retailer Relieving the manufacturer of excessive financial responsibilities while giving credit to the retailers Having their own sales force and communication systems proactively dealing with both manufacturers and small retailers Developing attractive merchandise mixes from different manufacturers to benefit the small retailer Working hard to establishing the quality relationship marketing for the second tier and keeping them as the focal consideration If necessary, outsourcing for the retailer to help them to survive Playing a critical role in advising the small retailer and contacting the manufacturers

Adapted and revised from Samli (2007), working paper.

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caters to small retailers that are not quite profitable to the manufacturer. Here the modern wholesaler becomes very proactive initiating contacts with multiple manufacturers and manage retail mixes for the small retailer. To the extent that the wholesaler can perform the job of catering small retailers successfully, by representing many manufacturers, they are likely to thrive in a hostile market system where everyone tries to eliminate the middle man. However, it may be hypothesized that the future U.S. wholesaler will have to be much more proactive in small retailing management and may perform a better function by representing a cage group of major manufacturers and carrying a larger variety of products. REFERENCES
Beckman, T.N. and Engle, N.H. (1951), Wholesaling: Principles and Practice, New York: Ronald Press. Bolton, R.N., Lemon, K.N., and Verhoef, P.C. (2004), The Theoretical Underpinnings of Customer Asset Management: A Framework and Propositions for Future Research, Journal of Academy of Marketing Science, 32, 3, 271-292. Kavas, M.R. (1958), The Historical Development of the Wholesaler During the Past 150 Years, American Marketing Association Conference Proceedings, 402-408. Kotler, P. and Keller, K.L. (2006), Marketing Management, Upper Saddle River, NJ: Pearson-Prentice Hall. Mallen, B. (1996), Marketing Channels and Economic Development, International Journal of Physical Development and Logistics, May, 42-49. Rosenbloom, B. (1987), Marketing Functions and Wholesaler-Distributor, Washington, DC: Distribution Research and Education Foundation. Samli, A.C. (2007), Where Is Wholesaling Headed in the Industrial World: A Challenging Status, working paper. Samli, A.C. (2004), Entering and Succeeding in Emerging Countries, Mason, OH: Thomson Publishing. Samli, A.C. (1997), Wholesaling Marketings Forgotten Frontier, in B.J. Dunlop (ed.), Developments in Marketing Science, pp. 77-80. Samli, A.C. (1964), Wholesaling in an Economy of Scarcity: Turkey, Journal of Marketing, July. Samli, A.C. and Browning, J. (1991), Exploring Modern American Wholesaling: An Assessment and Research Agenda, in R.L. King (ed.), Developments in Marketing Science, Vol. XIV, pp. 86-90. Samli, A.C. and El-Ansary, A.I. (2007), The Role of Wholesaling in Developing Countries: The Necessary Link, working paper. Samli, A.C. and Hill, J. (1998), Marketing Globally, Lincolnwood, IL: NTC Books. Schmittlein, D.C., Cooper, L.G., and Morrison, D.G. (1993), Truth in Concentration in the Land of (80/20) Laws, Marketing Science 12, 2, 167-183.

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Zeithaml, V.A., Rust, R.T., and Lemon, K.N. (2001), The Customer Pyramid Creating and Serving Profitable Customers, California Management Review, 43, 4, 118-142. Zellner, W. (2001), Warehousing Clubs: When the Going Gets Tough, Business Week, July 16, 60.

doi:10.1300/J049v14n03_06