How To Buy Wholesale For A Retail Businesses – Everything You Need To Know
A tale as old as time. When you, as a business, buy in bulk for resale, you are using an old model that has succeeded from time immemorial. If you do it right, this business method is practically guaranteed to make money. You can run your retail business from virtually anywhere, using just any business model (provided you are keen to a few determining factors — we’ll discuss it below). You could do it online as an eCommerce operation or you could do it offline, and have a physical shop, or you could combine the two into an omnichannel business.
You might not know, but the majority of retailers don’t actually manufacture their products. In most cases, they are sourcing the products from a wholesale business. In a sense, they are white-labeling someone else’s product. Wholesale businesses typically purchase products in large quantities from the manufacturer, as they typically have larger facilities and resources for handling and distributing products in bulk.
I. The basics of sourcing from wholesalers
Buying retail and wholesale are entirely different in nature. Wholesale purchases are almost always made in bulk, and because of that, you pay a discounted price for the purchase, and in most cases with different taxation rules. You can then take those products and sell them at your own store at a higher price. This higher price is called the retail price, and it’s what customers will pay when they shop in your store.
Profit Margin, Gross Profit, and COGS
The difference between the retail and the wholesale prices is called the margin, which refers to the amount of profit that a retailer makes from a sale. The retail price typically varies between businesses, and there are a few different pricing strategies that can be used to determine the best retail price for you. Once you do this, you can then determine your gross profit.
Formula for Gross Profit = Revenue – Cost of Goods Sold (COGS)
In the above formula, revenue is equal to what you make from the retail price you charge to your customers. COGS is a high-level metric that covers all of the variable costs associated with producing and selling goods, and do note gross profit excludes fixed costs from the equation. The types of variable costs associated include:
- direct labor
- commissions for sales staff
- credit card fees on customer purchases
- equipment, including usage-based depreciation
- utilities for the production site
For the sake of simplicity, since you’re buying from a wholesaler instead of producing a product yourself, you can estimate that your COGS is the price you pay for a product.
So why are these important? Simple, you should always be aware of how much margin you’re making on a product. For example, if you buy t-shirts for $2 per unit from your wholesaler, and your mark-up is $8, you will be selling your t-shirts at $10 retail price. If your wholesaler is charging too much, it might be ideal to look for other options!
One major consideration to make when it comes to purchasing from wholesalers is their minimum order requirement. Wholesaler pricing is a different ball-game to retail, but some comparisons can be made. Wholesalers have different wholesale rates depending on how much volume or quantity you purchase from them regularly. Often times, they will require their retail customers to purchase a minimum amount (units or pieces) of a product. Typically speaking, the more you buy, and consistently buy, the lower your costs and higher your discounts.
II. How to find suppliers or distributors
The challenge is on, finding wholesale suppliers used to be a difficult task, but with the advent of technology and the Internet age, this isn’t quite the case anymore. Although networking with other business owners and going to trade shows is a good option, there are several online wholesale companies which you can buy directly from! Provided you have the capital and meet the wholesaler’s requirements (e.g. a retail business license), you can find wholesalers on sites such as Alibaba.com.
Here’s a list of other popular wholesale sites:
- Alibaba US – Although newer than its Chinese counterpart, this is an exclusive US-only wholesale marketplace. This is an ideal option if you want faster shipping and less of a communication gap. You can easily identify location-based suppliers. Although this is a great option, the product costs are typically higher than their Chinese counterparts, and the selection of products are much more limited.
- Chinabrands – Chinabrands is an Alibaba alternative with a massive selection of goods sourced from Asia. The catalog is extensive and the prices are great, if not better than Alibaba. You’ll also find that there isn’t a swath of duplicate and redundant products, which can become annoying when browsing Alibaba.
- EC21 – This website lets you sort suppliers by country, so if you’re looking for Korean suppliers, then you can drill-down your search to Korea-only suppliers. Other countries include China, Korea, and the US.
- ExportHub – With a wide selection of product categories, this rather-crowded marketplace has many products to choose from — ranging from fruits to industrial machinery, consumer electronics, apparel, and more!
- Made-in-China – Quality B2B marketplace with a nice catalog of products. Suppliers are christened with badges and display if they have ISO certifications. Do keep in mind, some companies will show they were audited (whether it’s for general business information, financial audits, or working conditions).
- QualityTrade – A nice feature about this marketplace is that all suppliers and businesses are vetted. Businesses listed are ISO-certified, and there are other B2B services offered through the site. This, in turn, does limit the selection compared to sites like Alibaba.
- FG Market – Floral and Gift Market is a wholesale directory for a wide selection of products and goods. Despite the name, you can find everything from personal care products to novelty, apparel, fashion, toys, and pet products. The wholesale companies are all US-based too.
III. Okay found them! Now, how do I choose the right supplier?
Important Questions to Ask or Gauge Every Supplier
When it comes to choosing an ideal wholesale partner to source products from, there are important questions to ask and things to keep in mind. Asking the right questions beforehand helps you make the most informed decisions.
1. What products and merchandise do you sell?
You want to choose a wholesaler that aligns with the kind of store and brand you run. Whether you want to have a general store or move towards a specialty niche, be sure to keep this in mind when choosing a wholesaler.
2. Where are their offices located and where are their warehouses?
You should definitely take into account the time difference and window of communication between your operating hours and theirs. If you have to wake up at 4AM or stay up late to communicate with your supplier, then you should consider a few other options.
Logistics matters a lot in this business, obviously. Find out how their shipping would work should you order from them. What does the time frame look like with a big order versus a small one?
3. What will my total costs and minimum order requirements be?
What you sell from your wholesale suppliers is what brings revenue to your business. Finding out what the wholesaler expects doing business with you is very important. When you choose a supplier, ask them for a quote for x products or a catalog of their entire line. That should be a good foundational point to determine if the prices are comfortable with you or you need to negotiate further.
4. How reliable is the wholesaler?
This one probably seems obvious, but there are many leading questions that can help you determine how reliable the wholesaler is. The first test involves responsiveness in communication. From the moment you contacted the wholesaler, how long did it take for them to respond? How clear was the response based on the question(s) you asked? Based on this simple test, you can sort-of gauge the reliability of the wholesaler, but there are still more to find out.
5. What are my payment terms and are they negotiable?
One of the primary ways retailers sustain their business is by negotiating terms with vendors. While payments for invoices are often due within 30 days, you can talk to your vendor about getting 60 or 90 days. Receiving a discount if you pay in advance should also be part of that discussion, Bader says.
6. Can you give me a liability insurance certificate?
Your suppliers should provide written proof that they have adequate liability insurance in the event that their products or parts malfunction. Request a copy of the liability insurance certificate each year to make sure the policy is being renewed.
7. Are you going to sell direct?
If you’re a distributor buying a finished product, you want to make sure your supplier doesn’t sell it directly to the end-user at such a sharply discounted rate that you can’t compete. Sometimes manufacturers will use distributors to help get their brand established, then cut them out of the picture. Something important to be aware of!
8. Can I have a guaranteed sell-through?
You don’t avoid getting stuck with a finished product that does not sell or have the parts and raw materials for a product that doesn’t sell. Similar to retailers, wholesalers might be willing to negotiate a return policy as well. You want to negotiate what we call a guaranteed sell-through, which gives you the opportunity to return unsold products or materials, whether for credit or cash.
9. What happens if the materials don’t arrive?
It’s inevitable that orders will sometimes arrive late. But what happens then? You want to find out whether your suppliers will offer a discount for goods that don’t arrive on time or pay for goods they didn’t deliver and you had to get from another source.
10. What is my expected gross margin?
If you’re a distributor, ask the manufacturer how much you should expect to make selling particular products. For example, if your company generally averages a 32 percent gross margin and your supplier says you should be getting only 25 percent on its products, it’s probably best to not carry their products.
11. Do you have a volume-based discount?
You want to ask about discounts you could be eligible for, often times suppliers do offer volume-based discounts. If you agree on a certain purchasing goal and reach it, find out if you can receive a rebate or discount for it.
12. Under what circumstance(s) might price change?
You will need to be prepared for suppliers to raise price increases on you. Ask them what determines a change in price. Is it relative to inflation or an industry index? If prices go up, how much notice will you receive? Conversely, if a supplier’s own costs go down, will your price go down, too?
13. When do I take ownership of the product?
Does the product you ordered become yours as soon as it’s delivered or after a certain grace period? You want your supplier to give you time to inspect goods and ensure they are in proper condition. We advise including a delivery and inspection clause in your contract that allows three to five days to check out an order before taking full ownership.
Being organized is key. Having an inventory storage room with adequate shelving makes finding different parts of your inventory that much easier. Keeping things labeled will make sure you don’t lose track of anything. Make a plan and budget on how much money you plan to spend.
With that in mind, research the supplier before you agree to work with them. With a quick Google search, research them and look into other retailers who have also worked with them. That can give you a general understanding of what their prices are and help you determine how to move forward. Look into what they can offer you and what you plan on providing them in this partnership. For example, let the supplier know if your sales are doing well and how much business they can expect from you. Be honest and fair in your negotiations to form a longstanding relationship with your wholesalers.
Once you purchase your goods from your suppliers, you’ll need a proper pos system to help you manage the retail operation!