The Wholesaler The Middleman and the Speculative Inventory

Assumptions: Wholesalers Largest portion of business is to retailers Appear in a channel of distribution due a cost efficiency associated with: –Economies of assorting functions –Hold an inventory –Spatial convenience for retailers –Bulk breaking functions Illustrate the importance of channel functions and function shifting

Channel “Length” Appearance of the wholesaler is the determinant of whether a channel is referred to as a “long” or “short” channel. Survive only as long as a sufficient scale exists with a retail format: –Independently owned hardware store –Independently owned grocery store

Product Characteristics Physical deterioration, perishables Number of manufacturers Number of retailers Variations in product qualities, grades Product bulk and weight, significance of shipping cost.

Types of Ownership Arrangements in Physical Distribution Corporate Systems Wholesaler Sponsored Voluntary Chains Retail Sponsored Cooperatives Franchise Systems

Corporate Channel Vertical integration into warehousing and distribution. Grocery chain achieves sufficient scale to own (make) its warehousing function.

For vertical integration to compete effectively Must operate both sides of “channel” at an efficient scale: retail and wholesale –“Unbalanced throughput” –Inefficiencies emerge Overcome “dulled incentives” for the “not for profit” side of operation.

Contractual: Cooperative Coalition at one level in the channel (retailers) pool resources to own and operate the supplying function (wholesaling). This cooperative level is operated at "not-for- profit" or provides "dividends" to members based on volume.

Cooperatives Avoids the successive markup problem by having markup at the retail end. Frequently criticized for not being able to manage costs effectively. Examples: –Associated Grocer, Kansas City –Affiliated Foods Southwest –Farmland Industries

UNIFIED WESTERN GROCERS, INC. Unified is a cooperative organization that conducts business principally with its members. Unified's Bylaws provide for: Member-patrons, that are the shareholders of the Company and participate in the patronage dividend programs; and. Associate patrons that do not own shares but do participate in the patronage dividend programs.

Contractual: Wholesaler Sponsored Voluntary Chains Independent Grocers Alliance, i.e., (IGA Food Stores) = Fleming Foods Ace Hardware Independently owned stores Wholesaler coordinates pricing, specials, private labels, and supplier relations. Successive markup present, supplier dependent on a mark-up. Efficiently managed supply.