Wholesale vs Retail: Everything You Need to Know
Wholesale vs retail – what’s the difference?
If you want to be successful in commerce, it’s essential that you understand the differences between wholesale and retail.
As consumers, we’ve all played a part in wholesale and retail business models our entire lives. Yet it’s easy to find the two business models confusing.
I mean, how do they actually work? And which business model is right for you?
In this article, we’ll take you through everything you need to know about wholesale vs retail to help set the stage for your business success.
Sound good? Alright, let’s dive straight in!
- How Does Wholesale Work?
- How Does Retail Work?
- What is the Difference Between Wholesale and Retail?
- Can You Do Both Wholesale and Retail?
- The Wholesale Business Model
- The Retail Business Model
- 5 Differences Between Wholesale and Retail
- 6 Types of Wholesalers
- 7 Types of Retailers
- Summary: Wholesale vs Retail
How Does Wholesale Work?
Wholesaling is the process of buying goods in large quantities from manufacturers or distributors, storing them in warehouses, and then reselling them to retailers for a profit.
Okay, but how do wholesalers make a profit?
Well, wholesalers purchase enormous amounts of inventory at a time for a low price and then sell the products in smaller quantities at a higher price.
For example, a wholesaler might buy 1,000 water bottles from this manufacturer for $1.58 per bottle. This would cost them $1,580.
Then the wholesaler could sell 50 water bottles to 20 different retailers for $4.74 per bottle – three times the price they originally bought each bottle for.
Once they deduct their expenses, such as warehousing and delivery, they’d be left with a profit.
All in all, wholesalers:
- Buy products from manufacturers and distributors in bulk at a low cost
- Don’t sell directly to the end-user of the product
- Resell these products to other businesses in smaller quantities and at a higher cost than they bought them
Okay, now let’s check out retail vs wholesale.
How Does Retail Work?
Retail is the process of buying goods in bulk from a wholesaler, manufacturer or distributor and selling them to the end-user.
That’s the keyword: end-user.
In other words, retailers are the last business in the supply chain selling directly to consumers.
So whenever you buy something for your own use as a consumer, you’re buying from a retailer. This includes the grocery store, hardware store, and clothes shop.
What’s more, retailers usually sell products individually.
For example, a retailer like Watch Outfitter might purchase 100 watches from a wholesaler for $20 each.
Then, they could sell them to consumers for $55 each.
Simply put, retailers:
- Buy goods in bulk from a wholesaler or distributor
- Market and sell products individually to the end-user
Now that we know what they are, what is the difference between wholesale and retail?
What is the Difference Between Wholesale and Retail?
The primary difference between retailers and wholesalers is that:
- Wholesalers buy bulk goods from manufacturers or distributors and store them. Then they sell them to retailers in smaller quantities.
- Retailers buy smaller amounts of bulk goods from wholesalers or distributors. Then they sell them directly to the end-user.
Below is a diagram showing a typical commerce supply chain.
It starts with the manufacturer who actually creates the products and ends with the end-user of the products:
Another way of explaining the difference between wholesale and retail is by using the business terms “business-to-business” (B2B) and “business-to-consumer” (B2C).
- Wholesalers are B2B because they buy from a manufacturing business and sell to a retail business.
- Retailers are B2C because they buy from wholesale businesses and sell to individual consumers.
So, are wholesale and retail mutually exclusive or…
Can You Do Both Wholesale and Retail?
In a word, yep.
Plenty of larger businesses don’t just stick to wholesale or retail. Many companies take part in every single aspect of the commerce supply chain.
Three examples of companies who do it all are Nike, Cartier, and Apple. These businesses design, manufacture, distribute, wholesale, and retail their own products.
Let’s see it in action with Apple.
First, Apple will purchase materials and parts from wholesalers to manufacture its products:
Once they’ve manufactured the products, they’ll distribute them to their retail stores and warehouses.
From here, they’ll sell their products directly to consumers in-store and online:
Apple also sells its products wholesale to other retailers such as Walmart and T-Mobile.
It’s also worth mentioning that some large retailers often manufacture their best-selling products themselves to profit at each stage of the commerce supply chain.
Let’s check out an example from supermarket chain Whole Foods.
Although they sell products from other brands, they’ve also created many of their own products sold under the brand name Whole Foods 365.
In the case of these products, Whole Foods is working as a manufacturer, distributor, and retailer.
This is called vertical integration.
However, as the supermarket chain doesn’t sell these products in bulk to other retailers, they’re not acting as a wholesaler.
(Side note: “Vertical Integration” sounds like an awesome band name, right?!)
Okay, let’s dive deeper into wholesale and retail business models.
The Wholesale Business Model
What’s it actually like to run a wholesale business?
Well, the wholesale business model is ideal for those who enjoy planning, logistics, and maintaining client relationships.
You’ll need to spend a lot of time managing the supply chain. This includes tasks such as distributing products to clients, overseeing warehouse inventory, and managing client orders.
In wholesale, close client relationships are crucial to success.
This is because the wholesale business model relies on repeat sales to the same retail buyers.
It’s just common sense really: when your business is largely dependent on repeat orders, it pays to have close, long-term partnerships with your clients.
It’s also worth noting that wholesalers tend to sell on credit.
In other words, you won’t receive payment upfront – and there’s always a chance the client won’t pay their invoice.
Again, trustworthy clients are vital to the wholesale business model. Just one bad client could cost you a lot of inventory and create cash-flow problems.
There are two main advantages to these relationships:
- The focus on long-term client partnerships means there’s far less marketing needed in wholesale vs retail.
- These relationships and repeat orders help to create business security.
The Retail Business Model
So, what’s it like to run a retail business?
In general, the retail business model is focused on meeting customer needs.
Wholesale and retail – like all businesses – are dependent on good relationships. However, retail is more concerned with a target market’s needs, as opposed to one particular client.
Because retailers sell products individually, you’ll need to attract far more customers in retail vs wholesale.
This means that you’ll need to spend a lot of your time and budget on marketing activities to generate a large number of customers.
You’ll also need to spend a large proportion of time dealing with customers in-store, on the phone, or through online messaging.
Other tasks essential to the retail business model include ordering new products, tracking inventory and sales, training and managing employees, and keeping ahead of competitors.
There are many moving parts to the retail business model, so retailers need to manage their technological infrastructure.
For example, you need to ensure you have an easy-to-use point of sale (POS) system. This will allow you to complete transactions with customers wherever you sell in person, on the phone, or online.
A good example is Shopify’s POS system.
The system will also be linked to your inventory tracking to make sure you never run out of product.
5 Differences Between Wholesale and Retail
Let’s dive deeper into some of the differences between wholesale and retail.
1. Wholesale vs Retail: Pricing
Both wholesale and retail businesses make a profit from buying products at one price and then selling them for more money.
This price increase is called “markup.”
Specifically, a markup is an amount added to the cost price of goods to pay for expenses and create profit.
For this reason, the cost of goods increases at each step in the commerce supply chain.
The image below demonstrates how manufacturers sell their products for a lot less than retailers.
In this particular example, we’ve used something known as a “keystone markup.” This is when products are marked up by 50 percent. In other words, the product is sold at twice the price it was bought for.
Although there’s no hard and fast rule for pricing strategies, many retailers use this strategy as a baseline.
However, it’s important to note that a keystone markup doesn’t always result in profit.
Remember, the business still needs to pay for expenses such as staff wages, property rent, utilities, insurance, and taxes.
Okay, so how do wholesale and retail compare?
Well, based on the fact that wholesalers buy products for less money than retailers, it might appear as if wholesaling is less expensive than retailing, right?
Sure, however, we need to take into account why this is…
The reason it’s cheaper to buy products wholesale vs retail is because they’re bought in much larger quantities. So, it can be a lot more expensive to start a wholesale business because you need a lot of capital.
On the other hand, it’s relatively easy to start a small retail business and scale up over time.
2. Wholesale vs Retail: Competition
Okay, which is more competitive, wholesale or retail?
In general, the retail business model is far more competitive than the wholesale business model. And competition can be tough.
As we just learned, it can be much harder to start a wholesale business because generally, you need quite a lot of capital.
Remember, you need to purchase large amounts of goods, store them over time, and sell them to retailers on credit to be paid at a later date.
For reasons such as this, there are far more businesses in wholesale vs retail.
For example, Associated Wholesale Grocers serves more than 3,500 independently owned supermarkets and grocery stores alone.
That’s a lot of competitors selling the same products from the same wholesaler!
3. Wholesale vs Retail: Marketing
A key difference between wholesale and retail is that retail depends heavily on marketing.
With so many competitors, retailers must do everything they can to stand out. Take department store Bloomingdales that regularly advertises on Facebook:
This type of advertising is uncommon in wholesale.
Plus, products need to be displayed in a much more desirable way in retail vs wholesale.
Wholesale doesn’t need to look flashy or run expensive advertising campaigns. Instead, wholesalers rely more on traditional outreach and business partnerships.
The image below shows this difference between wholesale and retail:
4. Wholesale vs Retail: Fulfillment and Expenses
Wholesale and retail must focus on different tasks to succeed.
Wholesaling has fewer expenses to track and worry about. With such large clients and the majority of their income coming from repeat business, they need to focus on warehousing, shipping, and fulfillment.
However, retailers need to focus most on marketing, branding, selling, and customer service.
Both wholesale and retail businesses need to spend time managing things like inventory, cash-flow, and staff.
Last, but not least:
5. Wholesale vs Retail: Location
Finally, location is extremely important to both wholesale and retail businesses – just for very different reasons.
Retailers need to be where consumers spend the most time, such as high streets and shopping malls. These locations are typically extremely expensive per square foot because of the demand.
Wholesalers need no such thing.
This business model requires enormous amounts of storage space to store bulk goods.
What’s more, shipping costs are one of the largest expenses wholesalers have. For this reason, it helps to be located next to a large intersection of highways or near an airport.
6 Types of Wholesalers
There are many different types of wholesale businesses. Let’s take a quick look at six of them.
1. Merchant Wholesalers
This type of wholesaler purchases and stores large quantities of products then resells smaller quantities for a markup.
For example, McLane buys and sells groceries and non-food products to retailers in the U.S.
2. Sales and Distribution for Manufacturers
This type of wholesaler isn’t technically a wholesaler.
This is when manufacturers act as their own wholesalers by creating a distribution department within the company.
They’ll sell their own products to other wholesale and retail businesses.
A good example is GE Appliances who sell their own products to other wholesalers and retail businesses.
3. Discount Wholesalers
This type of wholesaler focuses on buying and selling significantly discounted stock. These goods are discontinued lines, returned or refurbished goods, or inventory liquidation
This is exactly what Quicklotz does online.
4. Dropship Wholesalers
Again, this type of wholesaler isn’t technically a wholesaler.
Here’s how it works: When online retailers make a sale, their distributor or wholesaler will ship the product directly to the consumer.
In this way, the wholesaler is more like a retail partner. You can find tons of dropship wholesalers on platforms like Oberlo.
Brokers don’t actually move or buy products. Instead, they simply arrange deals between manufacturers and retailers.
So this type of wholesaler doesn’t make money from markups – instead, they make money from fees and commissions.
6. Online Wholesalers
This type of wholesaler sells its products in bulk online, as opposed to more traditional channels such as trade shows.
Nike sells its products to retailers in bulk online through its Electronic Retail partnership program.
7 Types of Retailers
Now, let’s check out seven different types of retailers that exist in the marketplace today.
1. Specialty Stores
This type of retailer sells a very narrow product line within a focused niche, such as The Vitamin Shoppe.
2. Online Retailers
Online retailers are simply businesses that sell online through their website or a platform like Amazon or Etsy.
Haus sells home goods through its website.
Online retailers also include those who sell digital products online, such as iTunes and Netflix.
3. Department Stores
This type of retailer sells goods in many different categories.
For example, Macy’s has departments of the store dedicated to categories like clothing, shoes, homeware, bed and bath, and jewelry.
This type of retailer sells a large variety of food and household products. Safeway is a good example of a large supermarket chain in the U.S.
5. Convenience Stores
These small neighborhood stores sell essential food, alcohol, and household items. Here’s an example of a small convenience
Here’s an example of a classic local New York convenience store.
6. Discount Stores
This type of retailer is focused on providing customers with a wide range of products sold at a discount.
Walmart is one of the largest discount store chains in the U.S.
7. Other Media Retailers
Lastly, let’s not forget media retailers who sell through traditional channels such as TV and catalogs.
For example, QVC sells products through its live TV channel.
Summary: Wholesale vs Retail
There are a few key differences between wholesale and retail businesses.
In short, the definition of wholesale vs retail is as follows:
- Wholesalers purchase products in bulk from manufacturers and distributors. Then they resell these products to retailers. This is a B2B ecommerce model.
- Retailers purchase goods in bulk from wholesalers and then work to sell these products directly to consumers. This is a B2C (business-to-consumer) model.
Both wholesale and retail businesses buy goods and then resell them with a price increase, known as “markup,” to cover expenses and make a profit.
Which business model is better? Let us know your thoughts about wholesale vs retail in the comments below!