Managing Wholesalers

and Franchises

Aayushi Mahajan (02-MBA-15)

Anupam Sharma (12-MBA-15)
Tikshan Langer (59-MBA-15)
 Introduction
Wholesaler : A wholesaler is an intermediary
entity in the distribution channel that buys in bulk
and sells to resellers rather than to consumers.
Example : Wall-Mart, Best-Price, Metro, Road-side
Wholesalers, etc

Franchise : It is the practice of the right to use a

firm's business model and brand for a prescribed
period of time.
Example : Subway, KFC, McDonalds, VLCC, etc.
Defining Wholesalers
Wholesaling comprises all transactions in which the
purchaser intends to use the product for
- Resale
- Making other products
- General business operations

Wholesalers do not indulge in any direct transactions

with end customers.

Wholesalers have limited retail operations.

Wholesalers typically buy & sell in bulk quantities.

Some basic wholesale transactions:
The sale of computer units for office use.

The sale of sugar as a raw materials for making candies.

The sale of an electric guitar to a professional guitarist.

The sale of custodian services to a office.

The sale of a bus to a transportation company.

The sale of books to a university .

The sale of vegetables to a retailer.

Functions of a Wholesaler

Wholesalers serve as an important link between the

manufacturers and the retailers. They perform all or
any of the following functions :

Anticipating customers needs

Sales promotion
Financing
Storage
Breaking bulk
Transportation
Risk taking
Services provided by Wholesalers :
1. Services to Manufacturer :

Bulk buying : Wholesalers buy merchandise in bulk or large

volumes.

Market coverage : Wholesalers provide market coverage to

manufacturers to achieve higher volume operation through an
intensive distribution of the merchandise at the retail level.

Inventory holding : Wholesalers serve manufacturers by holding

large inventories of merchandise. This allows manufacturers to
meet the market demand as and when they arise.

Financing : Manufacturers need a constant cash flow to conduct

their operation.
 Order processing : Manufacturers maintain a small order
processing system while the wholesalers provide large
system for receiving and execution numerous orders from
customers. This saves manufacturers costs of maintaining
a large order processing system.

Promotion : Wholesalers often participate in the

advertising and sales promotion campaigns launched by
the manufacturer.

Market information : Wholesalers are major source of

general market information as they operate closer to the
market place and come into direct contact with hundreds
of retailers every day.
Services provided by Wholesalers :
2. Services to Retailers

Bulk breaking : Wholesalers buy merchandise in large

volumes and sell them to retailers in small lots.

Product assortments : Retailers prefer to deal on a large

assortments of merchandise in order to be able to meet the
varieties of product demand of the final consumers.

Credit : Wholesalers normally provide a short term credit

facility to the retailer. The credit facility relieves the retailer
from excessive cash flow pressures.
 Technical support : Wholesalers often provide
technical support to retailers in store and
window displays, training of sales personnel and
choice of product assortments. Retailers can
seek expert advice from wholesalers in these
matters.

Promotional support : Wholesalers provide

promotional materials for the campaigns.
Types of Wholesalers :
Merchant Wholesalers These wholesale suppliers own and
produce a product or service and resell their products to
resellers, retailers, distributors and other wholesalers. If you can
buy directly from the supplier you will be able to obtain the best
prices and profit margins.

General Wholesalers - Wholesalers that fall into this category

usually buy large quantities of products from one or more
suppliers and intend to add value to them by reselling in
smaller quantities to distributors, retailers and resellers. This
type of wholesale supplier will often have multiple suppliers
adding diversity to their product range and choice for their
customers. These type of wholesalers may resell products from a
number of different industries and in several different categories.
 Types of Wholesalers :
Specific Product Wholesalers - These are wholesalers who
only supply 1 type of product for example footwear or
computers. They may supply several brands but only within
one product category.

Discount Wholesalers This type of wholesaler will supply

significantly discounted stock. Generally the stock is
discounted because the products are discontinued lines,
returned goods or refurbished goods.

Drop Ship Wholesalers - This type of wholesaler will have

the product dispatched from their supplier directly to their
customer without actually handling the goods.
Types of Wholesalers :
On-line Wholesaler - Wholesalers who sell their
products on-line and offer discounted prices as they can
reduce their overheads such as rent and rates of physical
premises. This type of wholesaler is therefore able to add
a lower percentage to their purchase price and still make
margin.

Speciality Wholesalers - These type of wholesalers will

resell products in a specific industry or product
category, but may have products from multiple
suppliers. Because specialty wholesalers specialize in a
specific industry or product type as they tend to have good
product knowledge and good pricing.
AGENTS AND BROKERS
Agents and brokers provide sales support for the
manufacturers by offering the services of a sale force
network and related infrastructure.

They enable manufacturers to expand their markets

without the overhead associated with establishing a sales
force.

They can represent just one manufacturer or a group of

manufacturers who have complementary products.

They do not take title to the goods, but they make

physical possession of the goods.
MANAGING WHOLSALE
OPERATIONS
Manufacturers may not always have direct
contact with retailers.
Wholesalers do not have much interface
with the end consumers, therefore both
manufacturers and retailers have
absolutely commercial and economic
motives in their interactions and a
wholesaler needs to balance these
relationships in the most profitable and
sustainable manner.
 Strategic issues that are of importance to
wholesaler are:-
1. Fixing the operational margin

2. Tackling issues of asset specificity and

opportunism
1. FIXING THE OPERATIONAL
MARGINS
A wholesaler makes profit through the margins
provided by either the manufacturer or the
retailer/customer.
In channel systems where manufacturers are the
most powerful, wholesalers are supplied items at a
discounted price.
Then the wholesaler has to sell the items to the
retailer at attractive prices such that the retailer
maintains profits by selling them at retail prices(MRP).
Therefore, the wholesaler not only has to cover the
direct expenditure and a small profit but also has to
keep an extra margin for unanticipated losses.
2. TACKLING ISSUES OF ASSET
SPECIFICITY AND OPPORTUNISM
Sometimes wholesalers are forced to invest in
assets that are very specific to their
relationship but become worthless outside
their relationship.
Electronic data interchange(EDI)
This commitment restricts the wholesaler from
breaking the relationship if the deal seems less
attractive in future.
Therefore, a wholesaler should adopt long-
term policies towards asset-specific investment.
Also wholesaler should prevent manufacturer
from indulging in opportunism(appointing other
wholesalers in the same market).
 Also wholesaler should share least
information of retailers in the market
with the manufacturer so that the
manufacturer may not be able to
independently establish itself in the
market.
MEASURING WHOLESALER
PERFORMANCE

Well defined set of objectives that are in

line with the overall objectives of the
channel system.
Performance measures corresponding to
each objective should also be defined.
Establish larger information system that
gathers precise and accurate information
about these performance measures.
PERFORMANCE MEASURES COMMONLY USED IN
MANAGING WHOLESALERS

PERFORMANCE TYPICAL PERFORMANCE

OBJECTIVE MEASURES
Product availability
Coverage of retailers Percentage of retailers
covered for a
specific period.
In-store positioning
Percentage of display space
gained by product.
Coverage of geographic
market Frequency of sales calls by
customer type; average
delivery time.
PERFORMANCE MEASURES COMMONLY USED IN
MANAGING WHOLESALERS

PERFORMANCE TYPICAL
OBJECTIVE PERFORMANCE
Physical distribution MEASURES
Warehousing
Percentage of goods lost
due to damage.
Transportation
Percentage of goods
arrived on time at
retailers destination.
PERFORMANCE MEASURES COMMONLY USED IN
MANAGING WHOLESALERS

PERFORMANCE TYPICAL
OBJECTIVE PERFORMANCE
Promotional effort MEASURES
Effective point of
purchase Percentage of stores
using special
displays.
Effective personal
selling Percentage of
salespeoples time
devoted on product.
PERFORMANCE MEASURES COMMONLY USED IN
MANAGING WHOLESALERS

PERFORMANCE TYPICAL PERFORMANCE

OBJECTIVE
Customer support
Installation, training repair
MEASURES
Number of technicians receiving
technical training; monitoring
of customer complaints.

Market information
Quality and timeliness of
Sales trends, inventory information required.
levels, competitors
actions

Middlemen margins and

Cost effectiveness
marketing costs as percentage
Cost of channel functions of sales.
relative to sales
FRANCHISING
Franchising is fast emerging in India as a
popular way of establishing distribution
channels.
According to the franchise trade
associations, the total value of sales
through franchising operations in India
amounted to about Rs 73000 crore in
2010.
FRANCHISING
According to Hunt,
Franchising is a vertical marketing system
in which one firm (the franchisor)
provides another individual or firm (the
franchisee), for consideration, a licensed
privilege to do business in a specified
geographic area, along with assistance in
organizing, training, merchandising
and management.
THREE SETS OF
RELATIONSHIPS

Legal Relationships
Business Relationships
Non Business Relationship
LEGAL RELATIONSHIPS
Any franchisee arrangement is based on a
legal contract.
In this a legal contract with different
provisions binds both the parties.
This legal contract gives greater stability
and consistency in the functioning of the
franchisee network.
BUSINESS RELATIONSHIPS
The parties to the franchise network
agree to work together, primarily based
on the attractiveness of the business
proposition that underlies the
relationship.
It is dynamic in nature which means as
the market situation varies, the business
relationship may undergo changes.
NON BUSINESS
RELATIONSHIP
It typically take the form of personal
relationships between entities within the
franchise network.
They often have more impact on the
overall management of the franchise than
the legal and business relationship.
TYPES OF FRANCHISING
SYSTEM

Business Format Franchises

Product Franchises
Tied House Franchising
 BUSINESS FORMAT
FRANCHISES

In business format franchises , a company

expands by supplying independent business
owners with an established business, including
its name and trademark.

The franchiser company generally assists the

independent owners in launching and running
their businesses. In return, the business
owners pay fees and royalties.
Examples
 PRODUCT FRANCHISES

Through this kind of agreement,

manufacturers allow retailers to distribute
their products and to use their names and
trademarks.
To obtain these rights, store owners must
pay fees or buy a minimum amount of
products.
Tire stores, for example, operate under
this kind of franchise agreement.
TIED HOUSE FRANCHISING
In this the franchisee agrees to source
one category of products from one
particular producer.
Such type of franchising is still in
existence with certain hotels advertising
that they use a particular type of oil to
cook products or ingredient brands.
TIED HOUSE FRANCHISING
An example of franchise arrangement is the intel inside
campaign, where manufactures of PCs stick an intel
inside logo in order to promote the intel brand name
jointly with the brand name of the PC manufacturer.
Some examples of franchising
FRANCHISING SUCCESS
FACTORS
The franchisor should present all the
possible investment required and an
honest forecast of the business expected
before the signing of the contract.

A franchisee should be convinced about

the financial strength of the franchiser
before entering into the franchising
agreement.
FRANCHISING SUCCESS
FACTORS
The franchisee should also enquire with
other existing franchisees wherever
possible to understand the operation of
the franchise agreement.

Franchisees should also consider all the

provisions in the contract very carefully
to fully understand the implications.
MAJOR CAUSES OF CONFLICT IN
THE FRANCHISER- FRANCHISEE
RELATIONSHIPS
Release of proprietary information to
outside parties:
Franchisees often get access to some
proprietary information such as formulations
of products and business formats, which
could sometimes be misused.
Non payment or short payment of
royalties:
Often franchisees are unable to pay the
royalties. It is not easy for the franchisor to
use legal provisions to get the outstanding
amounts.
 Refusal to adhere to standardized
conditions:
Often franchisees are short on
complying with several standardized
conditions such as basic requirements of
the premises and appointment of
adequate number of staff.
ADVANTAGES OF
FRANCHISING
From franchisor point of view:
It is the cost effective and fast paced
method to penetrate a geographically
diverse market.
Through a franchising agreement the
knowledge and connections of franchisees
can be tapped at no additional cost.
It can generate significant amount of funds
to the franchiser to promote the brand at
higher price.
ADVANTAGES OF
FRANCHISING
From franchisee point of view:
A franchisee operation is a less risky
proposition than setting up an enterprise
with a completely new brand.
A franchisee also benefits through
exposure to superior management
practices that can be applied to other
business ventures in the future.
DISADVANTAGES
Franchise agreements dictate how you run
the business, so there may be little room for
creativity.
There are usually restrictions on where you
operate, the products you sell and the
suppliers you use.
Bad performances by other franchisees may
affect your franchise's reputation.
Buying a franchise means ongoing sharing of
profit with the franchisor.
THANK YOU