How to start up a wholesaling business

Wholesalers act as middlemen between manufacturers and businesses like shops and hairdressers. You'll need suitable premises and plenty of capital when you're setting up your business. Check out our practical guide for help.

Research your target market

When you plan your wholesale business it's important to make an estimate of how much demand there will be and think about what will distinguish your business from its competitors. Doing some market research will help you with this.

Estimating demand

It's very important to find out whether there is room for a business like yours in the area. First check out the competition. Count how many wholesalers there are already in your area which offer goods similar to yours. Note how many of these are single depot operators and how many are part of a larger group. Have a look on Yell.com for a start, although bear in mind that it's possible that not every wholesaler in your area is listed. You also can't ignore wholesalers in your chosen sector that sell online and deliver to businesses in your area (for example by sending goods via courier), although you may find it nearly impossible to quantify the level of competition that they'll have on your business until you're actually trading. Remember too that many manufacturers sell direct to their business customers - this increases competition for your proposed business even more.

The next step is to count the number of businesses in your area which might become your customers. For example, if you are planning to open a food wholesaling business your potential customers would include:

  • newsagents, convenience stores, ethnic food shops
  • petrol filling station forecourt shops
  • all types of catering establishment, including pubs, restaurants and cafes, fast-food takeaways, sandwich bars, nursing and residential care homes, schools and nurseries, office canteens
  • guest houses, hotels, bed and breakfasts
  • social clubs

Use Record sheet 1 to help you record the results of your research. If you note down the full address of each of your potential customers you will be able to use this if you plan a mail shot when you open.

Why will customers choose your business

Bear in mind that the majority of existing businesses that you identify as potential customers will already have wholesale suppliers that they use. So it's likely that you'll need to attract customers away from your competitors, which makes it a good idea to check out the competition to see:

  • which and how many product ranges they offer
  • what services they offer
  • what prices they charge
  • what their opening hours are
  • what type of customer are they attracting
  • if the premises are modern and smart
  • if there is ample car parking and easy access
  • whether they offer online ordering and free delivery

Use Record sheet 2 to help you record your research.

Find out what customers want

It can be an excellent idea to get in touch with some potential customers to find out:

  • if they would be interested in the service you are proposing
  • what product ranges they would like you to offer
  • what opening hours would suit them best
  • whether they would like to be able to order online and have goods delivered
  • what, if anything, don't they like about their existing suppliers

Your market research will help you to identify whether there is a gap in the market for the goods and services to be provided by your business. Bear in mind when doing your market research that online ordering is seen by many B2B customers as a great convenience. Many business customers welcome having their order delivered too.

Research current trends, plus legal and tax issues

Estimating sales income

To make an estimate of your monthly sales income, you'll need to decide how many regular customers you are likely to have and how much they will spend with you.

Although your customers might buy a significant proportion of their stock from you, they are also likely to use several other suppliers. You might try offering your customers various incentives such as free display racks or assistance with refurbishment in return for a commitment to buy a certain proportion of their stock from you.

You will have identified the number of potential customers in your area as part of your market research. Now estimate how many of them will be your customers. Obviously you hope to attract all of them, but it would be more realistic to divide the number of potential customers by the number of wholesalers serving them, including your business.

Alternatively, your trade association (or similar body) may be able to give you industry statistics for your sector showing average sales per square foot per week - for example, the Institute of Grocery Distribution (IGD) produces this type of information for the grocery wholesaling sector. Once you have established the sales area of your premises this will help you estimate your sales income.

Decide what to sell

A number of factors will influence the range of products your business will offer:

  • the size of your premises
  • the nature of your target market. Will your customers want cheaper, own-label ranges or will they want exclusive product ranges. Maybe they would be interested in buying fairly traded or organic products
  • the need to provide specialist storage for some ranges - for example, tight security for cigarettes and alcohol, screening for all tobacco products, or temperature controlled conditions for pharmaceuticals
  • the product ranges stocked by your competitors

You will be buying in bulk from manufacturers and breaking pack sizes down for retailers, hospitality businesses and so on. Consider whether you will also repackage some lines, either with your own labels or with your customers' branding.

Because the wholesaling sector is so competitive it is important that you identify what will attract customers to your business. Be wary of competing only on price - you may not make enough profit to remain viable.

Decide which services to offer

Quality standards

Whatever the nature of your proposed business, be aware that the wholesaling sector is very competitive and that your customers will demand high standards. It is important that your business:

  • is clean, smart and professionally fitted out
  • sells good quality products. If you plan to sell perishable products make sure that anything past its best is thrown away or heavily discounted
  • displays are attractive and kept up to date
  • is staffed by well trained and smart employees
  • offers a high standard of customer service

Services to consider

In many sectors wholesalers take active steps to try to help their customers survive. For example, they might offer:

  • trader support such as membership of a symbol group
  • help with displays
  • help with which product ranges to stock
  • sale or return on some lines
  • cash and carry facilities
  • frequent delivery service
  • late night and weekend opening
  • an online ordering facility

Once your business is up and running your customers are likely to ask you if you provide a particular service. If enough people ask it would be worth costing the proposed service to see if it would be viable.

Advertising your business

However you decide to operate, you must make sure that your potential customers know about you.

There are a number of things you might do to promote your business:

  • distribute promotional leaflets to your potential customers
  • advertise in the local media
  • launch your own website
  • use social media and networking services like Facebook and LinkedIn
  • employ a tele-sales team
  • advertise in trade journals, yearbooks and specialist directories
  • buy space in a local directory
  • approach your suppliers for assistance with a promotion
  • contact local retailer associations to announce your opening date
  • have special opening day offers
  • sponsor local charitable events
  • attend trade fairs and exhibitions
  • list your business in an online directory

Establish your customer profiles

Your market

It's likely that the majority of your customers will be independent businesses situated within your local area. Depending on the products you're planning to stock these may be retailers of all types, hospitality businesses like cafés, hotels and restaurants, works canteens, service providers like hairdressing and beauty salons and so on. Sometimes local businesses form buying groups through which they buy in bulk to benefit from better terms.

You may choose to:

  • only offer customers a delivery option using your own fleet of vehicles and not allow them to collect goods from your premises
  • only offer 'cash and carry' with no delivery option
  • offer a combination of both

If you're planning to sell online and use courier firms for delivery then you are likely to have customers all over the UK.

Although some wholesalers do sell to members of the public, very many others consider that this undermines their relationship with their trade customers and so take steps to make sure that all customers are bona fide businesses.

Special offers and discounts

It is normal in the wholesaling sector to offer a variety of discounts to customers, such as:

  • early settlement discounts for paying their bills quickly
  • loyalty bonuses, based on what they have spent over the last few months
  • volume discounts for buying large quantities
  • promotions like 13 for the price of 12

Make sure that you can still make a profit if you offer lots of discounts and promotions. Many wholesaling businesses offer too attractive terms to their customers and do not cover their costs.

Don't forget that, in the cash and carry trade in particular, customers get up to all sorts of tricks to avoid paying for goods. Make sure your employees know that all goods on the trolley must be lifted and checked to prevent items being concealed. Be aware that staff and customers may also try to work scams together.

Fairtrade

Recent years have seen an increase in consumer demand for ethical products in the UK, so more and more retailers and caterers are looking to source Fairtrade labelled goods. By stocking products that carry the Fairtrade Mark you'll be able supply retailers and caterers looking to meet this increase in demand. You may well find that you also attract new customers by demonstrating that your business is ethically aware. Offering Fairtrade products can also be a good way to differentiate your wholesaling business from its competitors.

What is Fairtrade

Fairtrade guarantees a fair deal for producers and farmers in the developing world by making sure they receive a fair price for their work and goods. Fairtrade products are sold slightly more expensively than similar goods to encourage self sufficiency in the developing world. More and more retailers and caterers are stocking Fairtrade marked products. All Fairtrade products are identified by the easy to recognise Fairtrade Mark.

How does it work

The Fairtrade system works by paying producers a set minimum price for their goods, giving them a living wage. On top of this, producers also get an extra sum of money to invest in their business or community. This is called the 'social premium'.

In return, Fairtrade producers must meet certain standards. These are set by Fairtrade International, which is the global umbrella organisation for Fairtrade. Producers must be certified by FLO-CERT before they can mark their products with the international Fairtrade Mark. You'll probably buy your Fairtrade goods direct from registered manufacturers, importers and distributors in the UK. A list of registered importers and licensees is available from the Fairtrade Foundation.

Pricing

When you buy Fairtrade goods from a registered manufacturer or importer, you can probably expect to pay a little more than you normally would for similar products. The slightly higher trade prices cover the set price and social premium that are paid to the farmer or producer, as well as supply chain costs and the cost of certification and product licensing.

Although you'll pay your suppliers more for Fairtrade goods, you'll be able to sell them on at a higher price to the retailer or caterer. People are often prepared to pay a little extra for Fairtrade goods in the knowledge that they are helping the disadvantaged producer or farmer. The Fairtrade Foundation has no control over prices in the supply chain, aside from setting the price to be paid to the producer or farmer. While you'll want to cover your costs and retain a healthy profit margin bear in mind the purpose and aims of Fairtrade when you set your prices. The Fairtrade Foundation makes it clear that profit margins on Fairtrade items shouldn't be higher than on similar products.

Promoting Fairtrade goods

The Fairtrade Foundation is responsible for promoting Fairtrade in the UK and can provide useful materials and advice to help you to advertise your Fairtrade ranges. Any promotional materials that contain the Fairtrade Mark, like posters or leaflets, must be approved by the Foundation.

The Fairtrade Foundation organises a Fairtrade Fortnight each year to promote the Fairtrade system. This could be a good time for you to attract new customers and to encourage existing customers to buy Fairtrade products from you. Why not produce a leaflet explaining how the Fairtrade system works and how it could benefit their business? You could distribute these to both existing and potential customers. You could also put up posters in your wholesale outlet promoting the benefits of Fairtrade and informing customers what Fairtrade products you stock. It may be worthwhile registering with the Foundation to receive a listing in their online directory of retail wholesalers and catering distributors.

Where to find out more

The Fairtrade Foundation is part of the international Fairtrade movement and oversees all aspects of Fairtrade in the UK - including wholesale retailing. For more information on Fairtrade, the range of products available and how you can get involved visit the Fairtrade Foundation website.

Buy an existing business

You might decide to buy an existing wholesaling business rather than start your own venture from scratch. Buying a going concern can mean that:

  • the premises, fixtures and fittings, vehicles and equipment are already in place
  • there are established customers
  • the business can generate income immediately
  • suppliers have been identified and relationships established with them
  • the business has a track record which can help if you are looking for finance
  • staff are already in place
  • a business website has already been set up, possibly ecommerce enabled

However, look critically at any business that you are interested in to make sure that the price you negotiate with the seller is a fair one. Try to establish why the business is for sale - for example, is the owner keen to retire or is there another personal reason for selling up.

Your market research into the sector as a whole and the locality in particular will help you to establish whether or not the owner is selling because he or she can no longer generate enough income from the business. This may not necessarily deter you - many business people are confident that they can turn a failing business around. The important thing is to have established the current position so that the price you pay for the business is not too high.

Other matters to consider include:

  • the state of the premises, equipment and so on. Will you have to spend money refurbishing or replacing assets? Remember that the tobacco display ban means that only tobacco retailers and their employees should be able to access displays of tobacco products. If this hasn't already been done, you're likely to have to spend money on screening off your tobacco room to comply with this requirement if you sell tobacco products
  • the condition of any stock you are buying. Check this over carefully before agreeing a price, particularly if the goods are perishable, or affected by fashion trends
  • existing staff rights
  • how to retain key personnel once you've taken over
  • does the business owe money that you will be responsible for
  • do existing trade customers settle their accounts promptly
  • if you are paying for goodwill, to what extent does this depend on the skills and personality of the seller

Ask your accountant to look critically at the business accounts for the past three years and discuss with him or her the selling price in the light of what the accounts reveal. Make sure you budget for other professional fees such as legal fees and valuation and survey costs.

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