There are many reasons for this model including the fact that it's much more profitable for wholesalers to deal with a small group of sophisticated distributors than a huge group of individual consumers. One large sale from a wholesaler to a well-established retail distributor is much more profitable for the wholesaler than hundreds or thousands of individual consumer sales.
A wholesaler ships hundreds of items to one location rather than a few items to hundreds of locations.
Wholesalers may handle a customer care issue with one distributor who then handles hundreds of issues for their retail customers. The economies of scale are different, the pricing is different and how manufacturers sell are different than retailers. It's been that way for years.
Many wholesalers sell through closed regional market centers (Dallas, New York, Chicago, Atlanta, Los Angeles) not open to consumers and much less costly then the expense of having a retail brick and morter or a well developed catalog and/or Internet business.
The wholesaler trusts their authorized retail channels to handle direct sales while helping to grow and develop the wholesaler's brand or brands. It's supposed to be a mutually beneficial relationship.
Unfortunately this wholesale model doesn't always work the way it's supposed. In almost 12 years of being in the retail business, I have encountered literally hundreds of fabulous wholesalers. But in every egg basket there are always the risk of a few bad eggs.
The same is true for wholesalers who let greed overtake them and they try to play on both sides of the street.
What happens when an established wholesaler starts to break all established Business To Business (B-B) rules and starts to step on their retail distributors? Yes, it does happen. Not often, but with the rise of the Internet and email marketing some wholesalers could not resist the temptation to screw over their long time retailers.
Unfortunately for the wholesalers this may not always turn out well for them. With everything that happens in business there is always a ripple effect. It is important to consider the resulting consequences to any actions.
Case in point....one of HairBoutique.com's long term accessory wholesalers (you know who you are) started to directly compete with all of their long term retail distributors a few years ago.
The wholesaler first set up a web site initially to provide streamlined wholesale ordering for the retailers (via a password and separate screens) while promoting the brands and directing consumers to the locations of their retailers.
Then the wholesaler (she shall remain nameless) got the idea to sell direct to web site visitors in violation of her original non-compete agreements with retailers. Even worse, the wholesaler started selling to individual consumers at prices notably competitive (if not less than) with all her retailers. As a result, the wholesaler's retail distributors started losing business directly to the wholesaler.
If competing for clients wasn't bad enough, the wholesaler started competing with her retailers for media attention. Whenever press credits were won, the wholesaler insisted on directing all buyers resulting from the press mentions to her website, rather than to those of her retailers. Even when the retailers had arranged the original press attention in the first place by promoting the brand with their own PR budgets.
That's called stealing credits. Whether in the media or not.
Traditionally wholesalers advertise their brands and then provide a list of "Where To Buy" this goods and services. This is how it's done and there are many reasons for this model.
Not only did the wholesaler aggressively grab press credits, she tried to steal retail distributors mailing lists (sneaky, sneaky) for her own customer mailing list. She then offered "special gifts" to her consumer customers (but not her retailers) to motivate them to buy from her directly. She stacked the deck where any consumer in their right mind would definitely see the benefit of cutting out the retailers.
The business world is a place where everyone in the same industries know each other. Or at least they do in mine. Word quickly spread of the wholesalers dirty channel tricks.
As her greed accelerated (selling to all sides of the channel) she then set up a home party plan, with a small financial investment, to encourage her individual retail customers to become mini-distributors. This of course was encouraging small groups of consumers to compete with her existing and loyal retailers.
And no, she didn't stop there.
Pouring salt into the wounds of her retail distributors, she proceeded to send out email blasts to her rapidly decreasing circle of distributors showing off her latest press and encouraging them to place orders for the featured items "before she opened up the items for special pricing to her website customers".
What do you think happened?
You guessed it. Many of the distributors either stopped carrying her line(s) completely or scaled it back significantly. They also started deliberately selling direct competitor brands to weaken her previous strong hold on her niche market.
What did we do? We scaled our orders back to a mere fraction of what it had been before she jumped the channel. We also found all her competitors and bought from them, showcasing them every chance we get and only sending the competitors items for press send outs. As the competitors sales increased, her decreased as her retailers continued stop buying from her.
Finally some of the remaining retail distributors started banning together to form a coalition against the wholesaler and buying directly in quantity from the manufacturer, who was sympathetic to the situation. Ironically as the distributors jumped the wholesaler, they were able to undercut the wholesaler's original pricing. There were more disgruntled retailers who banned together to fight the evil wholesaler.
The wholesaler's original attempt to cut out her distributors through aggressive competition ultimately cost her a hard won channel and is now forcing her to spend even more energy trying to sell direct.
This meant she had to hire more phone operators and customer care consultants. She also had to attend retail sales events because her business fell off so deeply that the wholesale shows were no longer profitable for her and most of her former retailers no longer visit her at the shows.
The wholesaler responded to her business downturn by trying to expand her line from one form of fashion accessory into other accessory products. This attempt also failed since she did not change her competition model. She just started screwing over a new parade of retailers.
To date the majority of the wholesalers original retail distributors have completely abandoned the wholesaler since she basically went from their supplier to their direct competitor. From friend to enemy.
Yep, that ripple effect (aka karma) will get you every time. No good can come to wholesalers who bite the hand of their distributors.
The moral of this story? Know who you are getting into business with before you sign a dotted line with a wholesaler or any other channel member. I must say that the vast majority of my long time wholesalers are wonderful, very supportive and respectful of the established channel protocals. But there is also that one hidden monster.
The other moral to this story? Keep your friends close but your enemies closer. You never know when you will need to form a boycott union with fellow retailers to do business with manufacturers and cut out the wholesaler who is conducting underhanded business.My last words on this topic? It's very difficult in this day and age, especially in the web space, to easily uncover the many unscrupulus dealers as the market becomes more competitive. Take your time to know the difference between a quality distributor and one who is just a sham.
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