209 Reading: The Role of Intermediaries
Introduction
While the retail channel is most familiar to students, wholesalers play an important role as intermediaries. Intermediaries act as a link in the distribution process, but the roles they fill are broader than simply connecting the different channel partners. Wholesalers, often called “merchant wholesalers,” help move goods between producers and retailers.
For example, McLane Company Inc. is among the largest wholesalers in the United States. The breadth of its operations is described on the company website:
McLane Foodservice and wholly owned subsidiary, Meadowbrook Meat Company, Inc., operates 80 distribution centers across the U.S. and one of the nation’s largest private fleets. The company buys, sells, and delivers more than 50,000 different consumer products to nearly 90,000 locations across the U.S. In addition, McLane provides alcoholic beverage distribution through its wholly owned subsidiary, Empire Distributors, Inc. McLane is a wholly owned unit of Berkshire Hathaway Inc. and employs more than 20,000 teammates.[1]
Let’s look at each of the functions that a merchant wholesaler fulfills.
Purchasing
Wholesalers purchase very large quantities of goods directly from producers or from other wholesalers. By purchasing large quantities or volumes, wholesalers are able to secure significantly lower prices.
Imagine a situation in which a farmer grows a very large crop of potatoes. If the farmer sells all of the potatoes to a single wholesaler, they will negotiate one price and make one sale. Because this is an efficient process that allows the farmer to focus on farming (rather than searching for additional buyers), they will likely be willing to negotiate a lower price. Even more important, because the wholesaler has such strong buying power, the wholesaler is able to force a lower price on every farmer who is selling potatoes.
The same is true for almost all mass-produced goods. When a producer creates a large quantity of goods, it is most efficient to sell all of them to one wholesaler, rather than negotiating prices and making sales with many retailers or an even larger number of consumers. Also, the bigger the wholesaler is, the more likely it will have significant power to set attractive prices.
Warehousing and Transportation
Once the wholesaler has purchased a mass quantity of goods, it needs to get them to a place where they can be purchased by consumers. This is a complex and expensive process. McLane has invested more than $1 billion in their national network of 24 modern distribution centers covering the entire U.S., and in maintaining a modern fleet of more than 3,000 multi-temperature trailers.[2] Having outfitted centers with state-of-the-art inventory tracking systems allows McLane to manage the diverse products that move through the center. It relies on its own vast trucking fleet to handle the transportation.
Grading and Packaging
Wholesalers buy a very large quantity of goods a