Wholesale middlemen of consumer goods *

The function of the wholesale middleman

The wholesale middleman is the link between the manufacturer and the retailer. His purpose is to bring the one into contact with the other, either directly or indirectly, to facilitate the distribution of manufactured goods. He is not, as some erroneously believe, a newcomer or the result of twentieth century methods of mass-production. The middleman has been with us since the dawn of commerce. He performs a definite and necessary function in the field of selling. Retailers depend upon him to fill their orders. Manufacturers depend upon him to secure buyers for their products.

How middlemen are classified

There are a number of ways in which manufacturers and retailers are kept in touch with each other. Consequently, middlemen are classified according to the particular methods of contact which they employ. There are commission merchants, brokers, manufacturers' representatives or sales agents, and jobbers or wholesalers. These names are indicative of the type of work which the middlemen perform. There are, however, various sub-classifications. For instance, brokers are divided into three groups : Buying brokers, selling brokers, and merchandising brokers. Another classification can be set up according to the number and variety of products handled, that is, there are general and specialty jobbers.

The definitions given below must not be too strictly construed. Business has little respect for dictionaries. Changes in local conditions often bring about corresponding changes in the functions which a middleman performs. They do not necessarily effect a change in the name of his service. Many middlemen are designated as brokers, yet they carry stocks of goods and bill in their own name. Many who merely make collections for the manufacturer are listed as commission merchants. This rather loose use of terms need not cause confusion, because the terms are quite elastic. A commission merchant performs one type of service, a broker another, and a sales-agent still another. If a man who starts in business as a broker really becomes a commission merchant but prefers to call himself by his original designation, nothing can be done about it. It is enough for our purpose to say that the designation is a misnomer.

The role of the commission merchant

A commission merchant is a middleman who receives consignments of merchandise from a principal, sells them and returns the proceeds of the sale to the owner, collecting for himself a commission. All of his business, however, is transacted in his own name, which heads his bill of sale. Prior to sale and delivery he has actual possession of the goods in which he deals. Though bound to follow the instructions of the principal for whom he acts, he is allowed a certain amount of leeway in quoting prices and making terms. As a rule all selling costs come out of his commission. Other expenses such as storage, handling and insurance of the goods while in his possession, are paid by the principal.

Some commission merchants prefer to operate under a system whereby they assume all expenses incurred from the point of shipment to the actual delivery of goods to the retailer. In these cases the rate of commission is higher. It is higher, also, if the commission merchant guarantees collections on his sales. Rates of commission vary from trade to trade. In some lines the rate is as high as 10 per cent, in others as low as two per cent. In those cases where the principal pays all the expenses of handling, the rate is low, usually two or three per cent. It is, however, gross profit. The rate is necessarily high when the commission merchant has to pay these various costs himself.

The role of the broker

A broker differs from a commission merchant in two respects. He does not possess the goods which he sells and he does not bill in his own name. His responsibilities do not extend to the handling or delivery of the goods. He may operate on his own account and may relay the order of a buyer to the principal who pays him the highest commission. If he limits his sales to the output of a single factory, as frequently happens, he is scarcely distinguishable from a sales agent. Because of his proximity to the market and his knowledge of supply and demand, a broker can frequently get very good prices for his principal. He may sell to jobbers as well as to retailers. He has nothing to do with collections. The purchaser makes all payments to the principal unless special authority to receive payment has been given to the broker. Prices and terms of payment are likewise under the control of the principal.

A broker's operating expenses are usually very small. He does not require an office nor even desk room. He may divide his time between the office of his principal and the offices of his prospective customers. The telephone offers ample facility for most of his activities. He spends a large part of the day calling manufacturers and relaying the bids of his customers or calling customers and quoting the prices of manufacturers. His work is completed with the signing of the customer's order or the acceptance of the bid by the manufacturer. Cancellation of the order, on the other hand, may deprive the broker of his commission.

Three types of brokers

Not all brokers do both buying and selling. Some specialize in buying, others in selling. Another class not only buys and sells but does a little merchandising as well. For this reason we have to-day buying brokers, selling brokers, and merchandising brokers.

Buying brokers

Buying brokers keep in close touch with market conditions at all times. Knowing where certain lines and grades of goods are to be found and the probable prices and terms, they can render valuable service to buyers. Their work consists in finding someone who has the amount and kind of goods desired and purchasing them for their principals. They are paid on a commission basis or by a flat rate per month or week of service.

Selling brokers

Selling brokers, as their name indicates, limit their activities to the selling end of the brokerage business. They are kept informed of the amount and kind of goods that their employers have on hand and also what the prices and terms are. With this information they seek buyers. Practically all selling brokers are paid on a commission basis. They may work for one manufacturer or for several in the same line of production.

Merchandising brokers

In buying goods for jobbers or retailers, brokers who buy as well as sell often purchase some items on their own account. These items are stored until a buyer appears for them. It may be that there are a number of small retailers in a district who are frequently in need of small quantities of goods. The broker who buys small lots on his own account can keep these retailers supplied and make a substantial profit in so doing. It is sometimes considered good policy for a broker whose orders call for three-quarters of the space of a freight car to buy the other quarter for himself and dispose of the goods thus received to retailers in small lots. This purchase, storage and resale of goods is a function of merchandising rather than of brokerage. The practitioners of this added function are called merchandising brokers.

A merchandising brokerage business can be conducted on a very profitable basis. By keeping in stock those goods which yield him the greatest return and filling part of his orders from this stock and relaying the other items to be filled by his principal, the merchandising broker can make a substantial income. The cost of operating his business is exceedingly low. A small portion of his profits he may pass on to his customers in the form of lower prices. In this respect he competes with the jobbers or wholesalers in the business and frequently brings condemnation on his head.

The function of the manufacturer's representative

A manufacturer's representative or sales agent differs somewhat from a broker. He enters into a contract with the manufacturer in which the scope of his authority is specifically determined. His dealings with customers are binding on his principal as long as he acts within the scope of his agency. He has nothing to say about prices but does have authority to promise deliveries and to extend credit.

These sales agents are divided into two classes. One group can be called traders. They maintain warehouses in which are stored complete stocks of manufacturers' goods. They have their own shipping services and send goods out as soon as orders are received. They bill the goods and undertake collection of the accounts. Agents of this type are necessary in certain lines. The grocery business, for instance, calls for shipments to retailers on short notice. A sales agent who has the goods on hand offers very attractive accommodation, and thereby increases his business.

The other group confines its activities to selling alone. These agents sell by sample and their orders are subject to the approval of their principal. They have nothing to do with delivery or collections. They are limited in territory also, being allowed to operate in a country, or a city, or even a section of a city. Like brokers and commission merchants, selling agents receive their compensation in the form of a commission.

Because of the diversity in the number and types of service which sales agents render to their principals the function of each individual agent cannot be defined here. One of them may represent as many as forty manufacturers. Of his forty contracts no two may be alike. They may call for a different type of service in each case. As a rule a sales agent will give to a manufacturer whatever type of service the latter desires.

The wholesaler or jobber

The last class of middleman with which we will deal on this page is composed of the wholesalers or jobbers. In some sections of the country and in certain lines of distribution there is a distinction drawn between the wholesaler and jobber. The term wholesaler is applied to those who buy usually in car-lots, the term jobber to those who may buy in less than car-lots. Quite often the jobber buys a part of a carload from a wholesaler and sells it in still smaller lots to retailers. In Pittsburgh the market is a yard. Although Pittsburgh wholesalers have stores, they refer to the yard business as wholesale business and to store business as jobbing business. If any distinction is to be drawn between these two terms it is well to describe the wholesaler as one who sells most of his supplies to jobbers and other middlemen, and the jobber as one who supplies the retail merchants.

Jobbers or wholesalers are merchants. They deal on their own account. The goods which they buy from the manufacturer or producer they pay for whether they sell them or not. As owners of their own goods they can charge whatever they please, unless restricted by war-time regulations. Jobbers are classified in two ways : According to the number and variety of the products which they handle, and according to their adherence or departure from strictly jobbing functions.

General and specialty jobbers

A general jobber is one who carries a complete line of merchandise. His goods may be hardware, groceries, boots and shoes, or drugs. He handles practically all items in these lines and can, if necessary, supply all the local stores with a. complete stock. The specialty jobber handles only a limited number of articles in each line, perhaps coffees and teas, or hosiery and gloves. If he is a specialty jobber in the hardware line his commodities may be only cutlery, or pots, pans, and other kitchen utensils. While the general shoe jobber handles anything from bedroom slippers to hunting boots, the specialty jobber may handle only ladies' dress shoes or men's work shoes.

It can readily be seen that the general jobber handles an innumerable variety of articles. A general jobber in the grocery line often carries ten thousand different items. In the boot and shoe business, if sizes are counted, the number may exceed fifty thousand. The specialty jobber who handles less than a hundred different items has far simpler problems to solve than the general jobber. However, there is not always a clear distinction between the general and the specialty jobber. The former may drop a large number of commodities from his lists and the latter may continually add to his. In these days of specialization, a dealer in cheese, specialized as that type of jobbing seems, is less a specialist than one who deals only in foreign-made cheese.

True, semi-, and manufacturing jobbers

The second classification of jobbers, according to functions performed, divides them into three classes : (a) True jobbers, (b) semi-jobbers, and (c) manufacturing jobbers. The first we have already discussed. For the sake of clarity it should be repeated here that a true jobber is one who buys in large quantities from a manufacturer and sells in small lots to a retailer.

The development of the semi-jobber

A semi-jobber is a merchant who sells to both the wholesale and the retail trade. Very few start in business as semi-jobbers. Semi-jobbers are for the most part men who began as retailers and have added wholesaling to their original function. They are numerous in the hardware business. In the clothing business their number is growing daily. In this line, however, the average semi-jobber was originally a true jobber who added retailing to his wholesale business.

The rise of the semi-jobber can be attributed to many causes. There is, first of all, the opportunity for a double profit. The added expense of operating a retail department is covered amply by the retail profit. Such a department serves also as an outlet for odd or broken lots of stock. In addition, it keeps the jobber in close contact with the ultimate consumer. His buying and selling can be done on a much sounder basis if he knows from day to day the attitude of the consumer. If the merchant has become a semi-jobber through the addition of a wholesale department to his already established retail department the incentive has been different. To secure the best prices from a manufacturer he has had to buy in large quantities, or get his name on the jobbers' list. A limited number of retail sales precluded his buying in large quantities, so he added to his list of customers the small shopkeepers in his neighbourhood. In this way he was able to dispose of surplus stocks.

His name appeared on the jobbers' list and he received the benefit of large discounts.

The rise of the manufacturing jobber

We have seen that the effort to combine wholesale and retail trading resulted in the advent of the semi-jobber. A similar combination, that of manufacturing and jobbing, is responsible for the existence of the manufacturing jobber. He is, in general, a jobber who does some manufacturing on his own account. Many of the candy, clothing, grocery, drug and jewellery jobbers have added the manufacturing feature to their wholesaling. In important distributing centres there are usually a large number of manufacturing jobbers. In the Cleveland area at least 80 per cent of the drug jobbers handle some goods which they manufacture especially for themselves. In New York probably 50 per cent of the jewellery jobbers may be termed manufacturing wholesalers.

The combination of these two functions has many advantages. Close contact with the ultimate source of supply results in economy of operation. Goods are prepared for shipment only when ordered. At other times they are stored in bulk. Another advantage is that the manufacturing jobber is not forced to secure an outlet for his goods. He manufactures only as much as he can dispose of to his customers. Jobbers who have their private brands can be assured of uniform quality of goods through their control of the manufacturing processes. Most important of all, the combination entitles the manufacturing jobber to two profits.

The value of the middleman

Wholesale middlemen have been the subject of much criticism. The layman, unfamiliar with methods of distribution, is prone to regard commission merchants, brokers, and jobbers as unnecessary units between the producer and the ultimate consumer, and their profits as one of the principal reasons for the high cost of commodities. A careful survey of modern business methods will prove the facts to be otherwise. Middlemen do make profits. But in return for their profits they render valuable service to both manufacturers and retailers. The efficient operation of a wholesale business generally results in bringing commodities to the retailer at a price lower than when they are sold to him directly by the manufacturer.

How the wholesaler serves the manufacturer

The services which the wholesaler renders to the manufacturer are numerous. In the first place, the wholesaler is a specialist and hence can perform services for the manufacturer more cheaply than the latter can perform them for himself. The wholesaler knows what styles are most in demand, what quality of goods will be purchased, what sizes should be made in large quantities, and how large a volume can be sold. His knowledge extends even to the type of package that will be most suitable and attractive. Without this aid, the manufacturer would be compelled to make a detailed periodic study of market conditions. This trouble and expense is saved for him by the middleman.

Providing steady customers

Through the wholesaler the manufacturer is provided with a clientele of steady customers whose patronage the dealer has solicited. The wholesaler's catalogue is a form of advertising from which the manufacturer profits. Few manufacturers can handle the small orders of retailers as economically as the wholesaler. A hardware storekeeper, for example, may need fifty dollars' worth of goods the original source of which may be a dozen different factories scattered all over the country. A wholesaler can fill the entire bill from stock, ship the goods, and still make a profit. The individual manufacturers of the goods could not handle the separate two-dollar or three-dollar orders involved and cover the cost of shipment without incurring a loss.

In the United States there are over 100,000 towns and villages with a population of less than 1,000. Manufacturers cannot canvass these towns for orders. The wholesaler, on the other hand, can cover these districts intensively. Small as the orders are, a sufficient number of them will assure him of profits. In this respect the wholesaler renders important service to the manufacturer. He does his soliciting for him.

Transportation and storage savings

Because he purchases his goods in large quantities the wholesaler saves the manufacturer large amounts in the cost of transportation, and in the packing, shipping, accounting, and mailing departments of his business. Collection is made easier. It is less difficult to handle the accounts of 1,000 wholesalers than those of 100,000 retailers.

By providing storage for the manufacturer's goods the wholesaler renders indispensable service. Factories cannot be operated efficiently or economically under a succession of rush and slack periods. Yet these would occur if wholesalers did not purchase regularly in fairly large amounts. Otherwise, to even up the production schedule and at the same time maintain stocks of goods, the manufacturers would have to establish storage houses in different parts of the country. Such storage houses would entail a great expense which is saved to the manufacturer by the wholesaler.

Wholesalers give manufacturers financial assistance

Manufacturers are often in need of financial assistance. Such assistance is at times given by the wholesaler who advances funds and accepts in return a contract for future delivery of the goods which he needs. This is a common practice in the canning industry. The wholesaler extends a loan at the beginning of the production season. He is repaid in canned fruits and vegetables four or six months later. The wholesaler may also render indirect financial aid to the manufacturer. He may pay his bills promptly in an effort to get a cash discount.

The most important indirect method of financial assistance given by the wholesaler to the manufacturer is often overlooked—that of carrying the accounts of retail dealers. In the grocery business, for example, as much money is tied up in accounts receivable as in merchandise. In other lines these uncollected items vary in amount, often running as high as 30 to 50 per cent of the value of the merchandise. The amount of money saved to the manufacturer in this way is considerable.

How the wholesaler serves the retailer

One of the principal functions of the wholesaler is assembling. The thousands of articles which he handles come from hundreds of factories in different parts of the country—sometimes even from abroad. He stores these products in his warehouses and sells them to retailers when they are wanted. The value of this service can be realized if we consider the number of manufacturers whose goods find their way into some one retail store. In the United States there are hundreds of manufacturers of food products and hundreds of manufacturers of drugs. A retail grocer carrying in stock as many as 2,000 items, can purchase them all from three or four wholesalers. If he purchased directly from the manufacturer he would probably have to make out 1,500 different orders. The drug store with its stock `of 10,000 items is a more striking example. All of these items can be purchased from two or three wholesalers, for the average drug jobber carries 50,000 different items in stock.

The wholesaler also offers buying facilities. His large stock, usually stored in one building, gives the retailer the opportunity of choosing from thousands of items. No factory or group of factories offers such accommodation. The wholesaler's catalogue with its pictures, descriptions and prices of stock, also facilitates buying for the retailer.

Wholesale economies are retail benefits

Quantity purchasing always entails low prices. The wholesaler buys in car-lots, thus obtaining his goods at a discount and saving in freight rates. Economies of this nature are usually passed on to the retailer. The ability to buy in small amounts and yet at reasonably low prices is an advantage for which the retailer must thank the wholesaler.

The small merchant who carries a large number of items can operate at a profit only if he has a quick turnover of stocks. Frequent purchasing in small quantities would be an impossibility if the wholesaler did not exist. Usually factories fill only large orders and the small retailer's capital would be tied up in large quantities of a few commodities. Were these conditions to prevail many retailers could not stay in business.

Credit extended to retailers

Many retailers have been able to start in business because of the credit extended to them by the wholesalers. Many, already in business, would be forced to suspend operations if wholesalers were unwilling to grant long-term credit. The policy of wholesalers has always been to render whatever financial aid they possibly can to the honest and efficient retailer. This the manufacturer is unable to do because he is so far ,removed from the retailer that he is not acquainted with his credit standing. The wholesaler, on the other hand, operating within a limited territory, knows intimately almost every one of his customers. In the rare cases of uncertainty he can very easily ascertain the reliability of any particular individual or company.

The wholesaler a market adviser

The average retailer does not always know how rapidly certain commodities will sell. He is in doubt as to what items he should place in his stock. Valuable advice is often given on this point by the wholesaler. Through his numerous contacts with hundreds of other retailers the wholesaler knows what goods are most in demand. In fact, he can keep a well-balanced stock on the shelves of his retail customers. The salesmen of wholesale houses are often specialists in their fields. Realizing that the success of their own concerns depends upon the success of the retailer consumers, they naturally endeavour to give advice that will be to the best interests of the retailers.

Services of the broker

The broker is limited in the services he can render because of the narrower scope of his activities. The buying broker can relieve the manufacturer periodically of his stock and at the same time serve the retailers by purchasing for them quantities of goods about which otherwise they might have no knowledge. He can also apprise them of special bargains existing in the producing field with which he maintains an intimate acquaintanceship. For example, manufacturers sometimes sell their products at a very low figure to acquire ready cash. The broker by acquainting his clients with this fact gives them an opportunity to take advantage of bargains.

The selling-broker's services are also twofold. He aids the manufacturer by placing him in close contact with the people who wish to buy his goods. He aids the retailer by informing him of what the manufacturers have to sell, and what the prices and terms will be. The merchandising broker adds one more kind of service. Through the maintenance of stock on his own account he can fill the orders of small retailers with whom manufacturers cannot deal at a profit.

The services of the manufacturer's representative

The manufacturer who sells through representatives or sales agents has the advantage usually of a live, aggressive representative in the important centres of business. Operating, as they do, on a commission basis, the sales agents are paid only for the number of sales which they make. In an arrangement of this type there is no overhead, hence the manufacturer saves money. He also avoids the expense of maintaining district offices. Because the sales agent has an office in the local community the retailer is saved the trouble of going to a distant point to look at samples and to place his orders. Usually the sales agent carries samples of all the goods he sells. The knowledge that from these samples he can select and order goods in any desired quantity and at definite prices and terms of credit means much to the retailer.

Commission merchants add further services

Commission merchants add still other services. Like the jobbers they store goods and thus relieve the manufacturer of the necessity of maintaining huge warehouses. In those cases in which they make collections they save the manufacturer the cost of maintaining a collection department. The commission merchant's knowledge of the market gives him the opportunity to make better business deals than his principal could make.

The commission merchant's service to retailers includes all the services which the ordinary brokers and sales agents give, plus the possession of stock from which ready deliveries can be made. In addition, a commission merchant finds it profitable to fill small orders. Retailers are thus enabled to buy in small quantities goods which they cannot purchase directly from the manufacturer.

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