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Understanding Wholesale Trade in the US: Pricing and Classification Insights

Explore the Producer Price Index for Wholesale Trade in NAICS Sector 42, detailing utility creation, channeling functions, types of wholesalers, classification issues, and wholesale trade pricing mechanisms.

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Understanding Wholesale Trade in the US: Pricing and Classification Insights

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  1. Producer Price Index U.S. Wholesale Trade NAICS Sector 42 Author: James J. Gorko US Bureau of Labor Statistics

  2. Wholesale Trade Definition • Efficient transfer of goods from manufacturer to another party for the strict intention of resale • The creation of utility (or efficiency) • Channeling function

  3. Creation of Utility • Time and place utility • Making products available when and where customers are likely to find them • Possession utility • Allowing customers to take ownership of products as needed • Information utility • Providing details about the products sold

  4. Channeling Function • Selling and promoting • Buying and assortment building • Bulk breaking • Warehousing • Transportation • Risk bearing • Market information • Management services and advice

  5. Types of Wholesalers • Merchant Wholesalers • Generally take title to goods • Sales Branches and Offices of Manufacturing Operations • Title generally stays with manufacturer until sale is complete • Agents and Brokers • Generally do not take title to goods

  6. Classification Issues • NAICS versus ISIC • Conceptual difference • ISIC uses class of customer definition • NAICS using method of selling • General concordance at sector level • Only two one-to-one industries (out of 17 4-digit ISIC and 71 6-digit NAICS) • Motor Vehicle – ISIC combines wholesale and retail

  7. Classification Issues • Wholesale versus retail • NAICS classifies units as retail if they have any retail selling space • Majority of turnover could be wholesale but still in retail if they have retail selling space

  8. Classification Issues • Wholesale versus manufacturing • Manufacturers transform materials into new products • Wholesalers generally engage in breaking bulk and redistribution producing a new version of same product • Contract manufacturers are not included in wholesale • Manufacturer sales offices are in wholesale even if prices are set by manufacturer and title held by manufacturer

  9. Classification Issues • Wholesale versus Manufacturing • Examples: • Bottling – all bottling except soft drinks are in wholesale trade – soft drinks manufacturing • Metal service centers saw, shear, bend, level, clean, or edge on a custom basis and are considered wholesalers • Cheese grating – wholesale if they cut, grate and mix cheese. If aging or moisture reduction is included, then manufacturing

  10. Classification Issues • Scrap/Recyclable material merchant wholesales

  11. Wholesale Trade Pricing • No direct ‘fee for service’ price exist • Gross margin is used to quantify the value of the trade services provided to the consumer of those same services • Gross margin is defined in national accounts as the selling price of a good less the cost of replacing the good sold • Excludes clearance prices

  12. Wholesale Trade Pricing • Margin prices are most prevalent prices for merchant wholesalers who generally take title to the goods (also used by manufacturers sales & branch offices) • Dollar value of commission prices are most prevalent prices for agents and brokers who do not take title to the goods (also used by manufacturers sales & branch offices)

  13. Wholesale Trade Pricing • For merchant wholesalers, the margin price is calculated using the incoming acquisition price and the selling price • For agents and brokers, the dollar value of commission is calculated by multiplying sales dollars by the commission percentage

  14. Wholesale Trade Pricing • Margin Pricing • 1. Average gross margin per unit for a comparable customer class and/or supplier class for all sales within a comparable product line. • 2. Average gross margin per unit for all customers and/or suppliers for a comparable product line. • 3. Average gross margin per unit for a particular customer class and/or supplier class for all sales of a particular product. • 4. Average gross margin per unit for all customers and/or suppliers for all sales of a particular product. • 5. Gross margin for a single specific product transaction

  15. Wholesale Trade Pricing • Dollar Value of Commission Prices • 1. Average dollar value of commission per unit for a comparable customer class for all sales within a comparable product line. • 2. Average dollar value of commission per unit for all customers for a comparable product line. • 3. Average dollar value of commission per unit for a particular customer class for all sales of a particular product. • 4. Average dollar value of commission per unit for all customers for all sales of a particular product. • 5. Dollar value of commission for a single specific product transaction

  16. Wholesale Trade Pricing • Prices as defined in SPPI Thesaurus • Margin Price • ??? Direct use of prices of repeated services ???? • Dollar Value of Commission • ???? Percentage fees ????

  17. Wholesale Trade Pricing • Average Margin Pricing • Homogeneous groupings of products with same marketing strategy • 65% of wholesale trade respondents • Particularly useful for wholesalers with rapid product change/seasonal products • Caution: if product groups are not homogeneous enough or too broad, an unknown degree of error is introduced

  18. Quality adjustment • Necessary when marketing characteristics change not when product features change • Marketing characteristics are difficult to quantify without hedonic model • Currently only able to quality adjust if respondent identifies a marketing change and provides a quality adjustment value for that change

  19. Comparability to Turnover Data • Turnover data in greater detail than in PPI in 5-year economic census collections • Annual and monthly turnover data is not as comprehensive as 5-year data

  20. National Accounts • Currently, U.S. national accounts publish at the three digit NAICS level only but deflate at lower levels • U.S. national accounts requesting PPIs at the 4-5 digit NAICS level to use as deflators • Without PPIs for wholesale, then PPI goods prices are used assuming that margin data will equate with gross sales price data (bad assumption)

  21. Summary • Growing sector in U.S. economy • Manufacturing units are outsourcing production so former manufacturing unit becomes a wholesale trade unit • Important for national accounts to have accurate margin data for deflators

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