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Before You Start a Wholesale Distribution Business, Read This

Before You Start a Wholesale Distribution Business, Read This
Image credit: Nomadic Lass | Flickr

In Start Your Own Wholesale Distribution Business, the staff at Entrepreneur Press and writer Bridget McCrea explain how to start and run a successful wholesale distribution business. In this edited excerpt, the authors offer a quick look at the competitive industry of wholesale distribution.

Distributors serve to move product from manufacturer to market. Some are retail distributors, who sell directly to consumers (end users). Others are known as merchant wholesale distributors; they buy products from the manufacturer, or another source, then move them from their warehouses to companies that either want to resell the products to end users or use them in their own operations.

According to the National Association of Wholesale-Distributors (NAW), wholesale trade increased by 5.8 percent in 2012 (compared to the prior year) with sales reaching $4.9 trillion. The NAW says wholesale trade itself accounts for about 5.6 percent of U.S. GDP and is an integral part of other larger sectors of the economy—retail trade and manufacturing.

The field of wholesale distribution is a true buying and selling game—one that requires good negotiation skills, a nose for sniffing out the next “hot” item in your particular category, and keen salesmanship. The idea is to buy the product at a low price, then make a profit by tacking on a dollar amount low enough that it still makes the deal attractive to your customer.

Experts agree that to succeed in the wholesale distribution business, you need to possess a varied job background. Most experts feel a sales background is necessary, too, as are the people skills that go with being an outside salesperson who hits the streets or picks up the phone and goes on a cold-calling spree to search for new customers.

“Operating very efficiently and turning your inventory over quickly are the keys to making money,” says Adam Fein, president of Pembroke Consulting Inc., a Philadelphia strategic consulting firm. “It’s a service business that deals with business customers, as opposed to general consumers. The startup entrepreneur must be able to understand customer needs and learn how to serve them well.”

While brick-and-mortar sales still command a vast majority of the retail market—nearly $4.27 trillion in 2013—ecommerce sales are increasing much faster, contributing significantly to retail’s overall growth in the U.S. That growth will represent more than 20 percent of the total $199.4 billion increase in total retail sales for the current year.

There are a few dangers you should be aware of when starting a wholesale distribution business. For starters, consolidation is rampant in this industry, with some sectors contracting more quickly than others. For example, pharmaceutical wholesaling has consolidated more than just about any other sector, according to Fein.

To combat the consolidation trend, many independent distributors are turning to the specialty market. “Many entrepreneurs are finding success by picking up the golden crumbs left on the table by the national companies,” Fein says. “As distribution has evolved from a local 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 behind or are just not [profitable] for the large distributors to serve.”

Starting out

For entrepreneurs looking to start their own wholesale distributorship, there are basically three avenues to choose from: buy an existing business, start from scratch or buy into a business opportunity.

Buying an existing business can be costly and may even be risky, depending on the level of success and reputation of the distributorship you want to buy. The positive side of buying a business is that you can probably tap into the seller’s knowledge bank, and you may even inherit their existing client base, which could prove extremely valuable.

Starting from scratch can also be costly, but it allows for a true “make it or break it” scenario that's guaranteed not to be preceded by an existing owner’s reputation. On the downside, you'll be building a reputation from scratch, which means lots of sales and marketing for at least the first two years or until your client base is large enough to reach critical mass.

The last option is perhaps the most risky, as all business opportunities must be thoroughly explored before any money or precious time is invested. However, the right opportunity can mean support, training and quick success if the originating company has already proven itself to be profitable, reputable, and durable.

Because the amount of startup capital necessary will be highly dependent on what you choose to sell, the numbers vary. For instance, 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 a few basic pieces of office equipment. At the higher end of the spectrum, a Virginia-based distributor of fine wines started with $1.5 million used mainly for inventory, a large warehouse, internal necessities (pallet racking, pallets, forklift), and a few Chevrolet Astro vans for delivery.

Like most startups, the average wholesale distributor will need to be in business two to five years to be profitable. There are exceptions, of course. Take, for example, the ambitious entrepreneur who sets up his garage as a warehouse to stock small hand tools. Using his own vehicle and relying on the low overhead that his home provides, he could conceivably start making money within six to 12 months.

“There are many different subsegments and industries within the realm of wholesale distribution," says Pembroke Consulting Inc.’s Fein, "and some offer much greater opportunities than others.” Among those subsegments are wholesale distributors who specialize in a unique niche (e.g., the distributor who sells specialty foods to grocery stores); larger distributors who sell everything from soup to nuts (e.g., the distributor with warehouses nationwide and a large stock of various, unrelated closeout items); and midsized distributors who choose an industry (e.g., hand tools) and offer a variety of products to myriad customers.