COMMERCE

Introduction
It’s a system where raw materials are distributed from their source to the industries
and finished goods are transported from the manufacturer to the market/customers.
Production is a process whereby raw materials are transformed into finished goods
through the process of manufacturing.
In modern economic society producers accumulate surplus that they do not need for
themselves. These surpluses are then exchanged for money.
Production can be divided into three stages:
a) Primary Production- This is the stage where the raw materials are extracted
from their natural state e.g. mining, fishing, farming, etc.
b) Secondary Production- This is the stage where the raw materials are
transformed into finished goods e.g. building and construction, oil refining
etc.
c) Tertiary Production- This involves offering services to both primary and
secondary stages e.g. transport of finished goods to customers or transporting
raw materials to the producers.
Commercial activities
The main purpose of commercial occupations is to facilitate trade or trading
activities. Without commercial activities e.g. transport of raw materials would not
reach the producer or finished goods would not reach the market.
Commercial activities are also known as Aids to trade.
These are those activities that support trade.
Trade is buying and selling of goods and services with a view of making profit.
Examples of aid to trade include:
 1) Transport - This helps the transfer of raw materials from the primary sector
to the manufacturing sector and finished goods from the manufacturing sector
to the tertiary sector.
2) Finance - The banks and other financial organizations play an important role
in providing finances that are required to facilitate trade. They also facilitate
payments between traders.
3) Insurance - It helps producers to overcome the danger that goods will be
stolen, damaged or spoilt either during production or when on transit to the
market.
4) Warehousing - Warehousing is storage of goods. It is important that goods
are stored after they are produced before being transported to the market or
due to seasonal demand.
5) Communication - This is vital or important between businesses.
6) Advertising - This is the creation of awareness among the potential and
existing customers.
7) Post office - It provided the business with the means of written
communication with others so that they can keep permanent records.
Organizations of production
Specialization and division of labour
Specialization is when a firm or a whole country concentrates in making a limited
range of products or provides a specific service.
Within the three stages of production we can identify specific range of activities and
industries. Specialization has taken place due to increasing levels of competition.
By concentrating on a limited range of products and services, the organizations
become highly efficient and effective.
Divisions of labour
This is the selection and placing of workers within organizations according to their
skills and experience. Division of labour enables workers to build up specific skills
through long experience and therefore become efficient and effective.
Advantages of specialization
1. An organization and its workers can specialize on what they can do best and
this helps them to become better and faster.
2. Goods and services can be produced at lower cost and less time.
3. Equipment and machinery can be divided to allow workers to gain efficiency.
 4. Goods and services produced are of high quality.
Disadvantages of specialization
1. As machines become more elaborate/common it replaces workers and this can
cause unemployment.
2. Goods produced by a range of manufacturers become standardized making it
difficult to differentiate between competitor’s goods.
3. Small scale producers are not able to compete with large producers.
4. Standardization of goods reduces choice of goods.
Advantages of division of labour
1. As work is broken down into individual tasks it is likely that new and more
efficient techniques will be developed.
2. Training of new jobs is easier and quicker because duties assigned do not
allow the workers to move from one place to another.
3. Division of labour normally allows great saving of tools and equipment.
Disadvantages of division of labour
1. Workers can become bored because of doing repetitive works and this can
lead to inefficiency.
2. If there is a breakdown in one section, it quickly spreads into other sections.
This causes delays and unemployment.
3. The spread of division of labour normally reduces labour mobility. This
means that the workers are not flexible.
Forms of specialization
1. Country- Different countries have specialized in producing specific
goods/services due to:
a) Favourable weather conditions- in case of agricultural goods e.g. Kenya
produces tea and coffee which can’t be produced in Saudi Arabia.
b) Availability of modern technology and human expertise e.g. Japan produces
electronics which are not produced in Kenya.
c) There are some raw materials that occur naturally in specific countries e.g. oil
is S. Arabia soda ash in Kenya etc.
2. Region- in most countries there are regions associated with specific activities
e.g. Tourism, which is found in the coastal regions of various countries or
other regions that have natural beauty due to topographical.
 3. Town- a town in a country can specialize in production of certain goods and
services e.g. Pineapple in Thika, tourism in Mombasa.
4. Firms- Firms can also specialize in production of a particular good or service
e.g. Coco-cola is to soft drinks, sugar is to Mumias, milk is to Brookside
5. Individuals- An individual can also specialize in production of a particular
good or service e.g. Carpenter is to furniture, teacher is to teaching etc.
6. Factories- An organization may focus on the production of a particular good
and service e.g. mumia’s sugar company only produces sugar.
Barter trade
This is the exchange of goods with other goods without the use of money. It is
possible under extremely possible conditions.
Difficulties of barter trade
1. Lack of double coincidence- This means that you have to look for somebody
who has what you want and is ready to exchange with what you have.
2. Lack of common measure of value- One party is bound to suffer under
conditions where it’s difficult to measure the goods involved.
3. Lack of portability of some items- e.g. houses and other heavy items.
4. Lack of durability of some items- Perishable goods e.g. vegetables.
Chain of distribution
A chain of distribution refers to the way in which goods flow from the producers to
the final consumers’ e.g.
Manufacturers

Wholesalers

Retailers
Consumers

The chain of distribution must start with the manufacturer/ producer and end with
the consumer.
Traders who handle goods between manufacturers and consumers are known as
middlemen e.g. wholesalers, retailers, marketing boards, agents and commodity
exchange markets.
To enable goods to move from manufacturers to consumers the following activities
must take place:
a) Buying and selling e.g. wholesalers buying from manufacturers and selling to
retailers.
b) Storage/ warehousing- e.g. chain stores or storing goods in regional depots
waiting for demand to arise.
c) Transportation- goods must be moved from the manufacturer to wholesalers
and finally to retailers.
d) Advertising- e.g. retailers and wholesalers informing consumers about
availability of goods in their shops.
Chain of distribution of agricultural goods/products
Route 1
Farmers

Consumers
The farmer sells low quantities to the consumers at the farm. The farmer sells goods
such as vegetables, fruits and cereals using small shops and stalls.
Route 2
Farmers
Retailers

Consumers
The farmer sells grocery to the retailers who then sells to the consumers. E.g. a
green grocery chain may agree to buy all the potatoes produced by a farmer which
he will then sell to consumers.
Route 3
Farmers

Wholesalers

Retailers

Consumers
The farmer sells directly to the wholesalers who buy in large quantities. The
wholesalers later sell to the retailers who will then sell to the consumers in smaller
units or quantities Examples of goods following this route are fruits and cereals.
Route 4
Farmers

Manufacturers

Wholesalers

Retailers

Consumers
A manufacturer buys from the farmers e.g. a vegetable canning firm may sign a
contract with the farmers producing French beans. This will guarantee a market to
farmers for their produce. The canned French beans are then distributed directly to
the wholesalers who will then sell to retailers who sell to the consumers.
Route 5
Farmers

Marketing boards

Wholesalers

Retailers

Consumers
Famers sell their produce to marketing boards who then sells to the wholesalers
who then sells to retailers and finally the retailers will sell to consumers.
Marketing boards
A marketing board is an organisation set up by the government to regulate the
supply of agricultural products such as tea, coffee, milk etc.
Examples
Examples of marketing boards in Kenya are coffee board of Kenya, tea marketing
boards and milk marketing boards.
Benefits of marketing boards
1. They guarantee stable prices for farm produce by buying when there is huge
supply, storing and releasing in times of shortages.
2. They advertise on behalf of famers to create demand for farm produce.
3. They supply farmers with materials and equipment at fair prices.
4. They provide loans to farmers at low interest rates.
5. They collect output from the farmers hence reducing transport costs to the
farmer.
 6. They provide storage facilities especially for perishable goods like fruits and
milk.
Channels of distribution of manufactured goods
Route 1
Manufacturers

Wholesalers
Retailers

Consumers
The manufacturer sells produced goods to the wholesalers who then redistribute
them to the retailers and the retailers sell to consumers.
This method is used where:
a) Where demand is seasonal and production is continuous e.g. fireworks and
Diwali greeting cards.
b) Production is seasonal and demand seasonal e.g. goods manufactured from
agricultural products such as juices.
In each case the wholesalers play an important role of balancing supply and
demand.
Route 2
Manufacturers own retail shop

Consumers
Manufacturers sell their products to consumers through their own retail shops. This
enables the manufacturers to act as wholesalers by trading goods required by a retail
branch.
Examples
Examples of goods using this method are:
a) Perishable goods e.g. bread
 b) Petroleum products e.g. shell petrol is usually sold through filling stations
owned by the company.
Route 3
Manufacturer

Large scale retailer

Consumer
This method became common due to the increase in size of retail shops and the
growth of prepacking and branding. Manufacturer produce retailer’s brands which
are sold to specific large scale retailers who sell them to consumers.
Retailer’s brands examples are:
Nakumatt sugar, Tusky’s rice etc.
Route 4
Manufacturers

Newspaper advertisements

Consumers
In this route manufacturers sells directly to consumers through newspaper
advertisement and catalogues which gives producers’ access to a large number of
customers. Through this method customer do not have personal contact with the
sellers and they may also fail to get aftersales service.
Examples
Examples of products in this route are:
a) Cars
b) Houses
c) Computers etc.
Route 5
Manufacturers

Mail order firms

Consumers
Goods are ordered from an attractive catalogue carried by a sales agent of a mail
order firm who demonstrate on how to use the product.
In this case the mail order firm acts as a wholesaler and a retailer by purchasing
goods in bulk and selling them in small quantities to consumers.
Examples
a) clothes
b) cosmetics
c) kitchen ware
Channels of distribution of raw materials
Route 1
Producers

Commodity exchange market

Manufacturers
Many raw materials such as metals and agricultural products are sold in commodity
exchange markets.
Example
a) tea
b) wheat
c) coffee
d) precious metals
Route 2
Producers
Consumers/ manufacturers
A number of large manufacturers are able to buy directly from the producers
therefore bypassing commodity exchange market.
Route 3
Producers

Consumers
Some raw materials such as coal can be sold directly to consumers.
Commodity exchange market
It is an organization whereby members buy and sell large and valuable
consignments of agricultural products, metals and other minerals using a variety of
different system of exchange. Members of the commodity exchange market include:
a) brokers
b) agents
c) other businesses that act on behalf of the producers
Different systems used in exchange market
There are three systems used by commodity exchange market. They include:
a) Direct dealing
This is used to sell goods that can be graded such as wheat, salt sugar etc.
b) Auctions
This is used to sell goods that need to be inspected by customers first.
Examples
a) tea
b) coffee
c) Bargaining
This is used to sell goods that cannot be sold by sample since they vary in quality.
In this case a whole consignment has to be inspected by potential buyers who could
then make their own individual agreements with the sellers on prices of these goods
Examples
a) Diamond
Recent development in retailing:
The retail trade is changing all the time and we must not regard it as a rigid
structure. Over the last thirty years there have been many changes in retailing which
can be discussed as follows:
1. Franchising
This refers to an arrangement whereby a well-established and successful business
permits or license another business to use its name, business logo and trading
methods.
A franchisor is a business or a person who permits others to use its name, business
logo and trading methods.
A franchisee is a business or a person who is permitted or licensed to use the name,
business logo and trading methods of another business.
Franchisee pays initial franchise fee and royalty. The royalties are paid on annual
basis and are calculated as a percentage of sale or profits. Franchising is common in
catering businesses e.g. Pizza in, McDonalds, Wimpy etc.
The franchisor helps the franchisee in the following ways:
a) Advising on the location of the business.
b) He gives training on how to run the franchise.
c) Supplying materials and equipment at competitive prices.
d) Advertising on behalf of all franchisees chain.
Advantages of franchising to the franchisee
1) The business gets customers from day one because it uses the name of a well-
known and popular business.
2) Advertising is done by franchisor and this reduces the expenses for the
franchisee.
3) Chances of business failure are very low because the franchisee uses trading
methods that have been tested and found to be successful.
4) Goods and equipment can be obtained from the franchisor at competitive
prices.
 5) The franchisee is given exclusive rights to operate the business in a given
geographical area and this eliminates competition from fellow franchisees.
Disadvantages of franchising to the franchisee
1) A share of the franchisee’s profit is paid to the franchisor in form of royalties.
2) The franchisee pays an initial franchise fee which increases the total cost of
starting the business.
3) The franchisee is restricted on the type and variety of goods he can sell at the
franchise outlet.
4) Anything wrong done by any member of the franchise will negatively affect
all of them.
5) The franchisee may buy goods at higher prices whereas he can obtain the
same goods at a cheaper price from suppliers of his choice.
Advantages of franchising to franchisor
1) The franchisor is able to expand the business without raising the initial capital
required to start a franchise outlet.
2) The franchisor receives additional income in form of royalties and initial
franchise fee.
3) The franchisor makes decisions on products sold, price level and the store
layout or display.
4) The management of the franchise outlet is the responsibility of the franchisee.
Disadvantages of franchising to the franchisor
1) The franchisor incurs high cost on training the staff and advertising.
2) Poor management on one outlet could lead to bad reputation for the whole
business.
3) Distribution of supplies may be difficult due to different location on the outlet
of the goods involved.
2. Shopping centre (Precincts)
This is an area exclusively devoted to shops. Such centres consist of a whole range
of shops such as:
a) Departmental stores
b) Chain stores
c) Super markets
d) Tied shops
e) Small shops
A number of precincts have been purposely built often on a number of floors with
escalators, lifts, car park, and information desk for shoppers, security patrols and
special access roads for vehicles delivering goods to the precinct shops.
Where towns and cities have not been able to have purpose build precincts, a
similar effect has been achieved by banning traffic in shopping areas a process
known as pedestrianization. Examples of shopping centres include:
a) Victory centre in Nottingham.
b) Bull ring centre in Birmingham.
c) Brent cross centre in London.
d) Westgate, Sarit Centre, Yaya Centre, Thika Road Mall in Kenya.
3. Branding
Branding refers to giving the products (goods and services) a recognizable and
unique name and image. There are two types of brands:
a) Manufacturers brand
These are products that bears the manufacturer’s name e.g. Simba cement, Mumias
Sugar.
b) Retailers brand
These are products that bears the retailer’s name e.g. Tuskys Rice, Uchumi sugar,
Nakumatt sugar.
Importance of branding
1) Branded products are easily recognizable and known by consumers’ more
than non-branded products.
2) Branding helps to differentiate similar products and this makes self-service
possible.
3) Consumers prefer branded products because they believe they are of good
quality.
Packaging
It is the physical container or wrapping of the product. The main purpose is to
protect the goods from physical damage. The pre-packing of goods has been
accompanied by branding so that they are readily identified in the market.
Importance of packaging
1) It helps to protect products from physical damage.
 2) It makes transportation of goods easier and convenient in terms of loading and
off-loading.
3) It helps to provide product information to the customers. This information
includes:
a) Ingredients.
b) Methods of use.
c) Caution measures.
d) Manufacturing and expiring date.
4) It helps to keep proper hygiene of the product hence maintaining the quality of
the product.
Disadvantages of branding and packaging
1) Overhead costs increase because brands have to be advertised and the cost of
wrappers and containers has to be incurred.
2) Due to higher costs the prices of branded products may increase.
3) Imitation brands may reduce profits for many companies.
4) Customers get confused as to what brand to buy.
4. Self-service and self-selection
Self-service is a practice of serving one-self or yourself when buying goods and
services at a retail outlet.
It occurs when goods which are clearly marked and priced are set on shelves within
easy reach of customers. Customers select goods they want and place them in the
basket or a trolley which is taken to a check-out or a counter. The customers pay for
all goods at once and take them out of the business premises by themselves.
Self-selection is similar to self-service except that cash points are located
throughout the stores or in each department. In self-selection a customer can pay for
an item at one cash point and then move to another part of the shop select a second
item and pay for it at a different cash point. Self-selection is used by departmental
stores and variety chain stores.
Advantages of self-selection and self-service to the retailers
1) Sales increase because many customers prefer self-service since they can
inspect the goods before they buy.
2) It reduces costs of wages and salaries paid to workers.
3) It attracts more customers as reduced cost of labour leads to reduced prices on
the products.
 4) Impulse buying due to self-service increases total sales.
Disadvantages of self-service and self-selection to retailers
1) Converting a shop to self-service can be expensive e.g. the cost of shelves or
installation of security devices is high.
2) Some customers may be lost because they prefer personal services.
3) Shop lifting may occur and this reduces the retailer’s profits.
Advantages of self-service and self-selection to customers
1) Selection of goods is easy because prices are clearly marked.
2) Shopping is done at the customer’s pace which is convenient.
3) Prices are often low because the business incurs low labour costs or
sometimes may be using loss leaders.
Disadvantages of self-service and self-selection to customers
1) Advice and assistance is difficult to obtain as self-service leads to
impersonalized ways of sales.
2) Impulse buying could lead to overspending.
3) There could be delays at checkouts due to long queues.
4) There are no delivery services provided to customers apart from special cases
where a customer buys a bulk item.
5. Use of technology
Retail trade has been characterized by increased use of modern electronic
equipment such as:
a) Electronic check-outs
i. This comprises of laser beam and computer terminal with an electronic
cash register. Many shops attach barcodes on goods this convey
information about the item e.g. manufacturer’s name or the brand name of
the product.
ii. At the check-out the barcode is passed through a laser beam which reads
the information and transmits it to the electronic cash register. The register
then produces for each customer an accurate and detailed list of all items
bought.
iii. With this type of cash register the cashier will have key information about
goods purchased.
b) Light pen
 This is used to scan barcodes of products on shelves of a shop or a store in
order to take count of goods in store. The information scanned. The
information scanned by the light pen is used to retrieve other important
details about the goods from the electronic cash register.
Advantages of electronic equipment in shops
1) There are fewer mistakes at the check-outs.
2) Customers can move through check-outs quickly.
3) Shops can have precise information about what type of goods in store.
4) There is less likelihood of stock shortages and surpluses.
Disadvantages of electronic equipment in shops
1) It is expensive to install technology equipment.
2) In case of power breakdown, the equipment will not work.
3) It is expensive to train the staff who use these technologies.
6. Use of loyalty cards
Loyalty cards are issued in large scale retailers such as supermarkets or
hypermarkets. Customers who hold these cards accumulate points on every
purchase they make from a specific retailer who issues the card. The points earned
can later be exchanged or redeemed for goods or they can enable the customer to
enjoy special discounts on goods and services offered by the retailer or associate
businesses. These cards are used to promote customer loyalty and guarantee repeat
sales for a business. Examples of loyalty cards are:
a) Uchumi’s U-card
b) Ukwala zawadi
c) Chandrana’s bonus card
Loyalty cards are an example of loyalty schemes that can be used by a business to
attract and retain customers.
7. Special offers
This refers to the benefit that a customer will receive for buying products from a
specified retailer. They are used to increase sales of a business and they take a
variety of forms e.g.
a) Buy 2 get 1 free
b) Reduction of prices such as was 100 now 90
 c) Additional related free products on the purchase of a certain good e.g. buy a
mathematical set and get colours free.
Special offers are meant to increase and stimulate sales of a given product. They
can be used in case where the sales of the products are seasonal or when a business
is experiencing low turnover. Special offers can also be used to clear stock of
products that are likely to be outdated or to clear dormant stock.
8. E-commerce (internet commerce)
This refers to carrying out trading and commercial activities around the world
electronically via internet. Through internet customers access website of online
shops and order for goods they need to buy. To make payments, customers are
required to quote the credit card number and the expected date of delivery while
making an order. When payment is completed goods are delivered to customer’s
residence.
Advantages of e-commerce to retailers
1) E-commerce provides an opportunity for a business to expand their market
globally.
2) The cost of labour is low because there is no need for employing sale persons.
3) There is no requirement of constructing or hiring retail outlets.
4) It saves time and money on other forms of advertising because products can
be displayed and specified on the website.
Disadvantages of e-commerce to retailers
1) The retailer incurs expenses on developing and operating websites.
2) The website might be insecure due to hacking.
3) E-commerce depends on skilled labour which is very expensive.
4) E-commerce market is limited to computer-literate people.
5) Capital cost of starting a business increases due to equipment and experts
required in e-commerce.
Advantages of e-commerce to customers
1) Customers can access wide variety of goods all over the world.
2) Travelling costs are reduced because they do not have to travel to do
shopping.
3) It is suitable for disabled people who are bound in the house and also for those
who work for long hours.
4) It saves time.
Disadvantages of e-commerce to customers
1) Customers cannot inspect goods when making a purchase.
2) E-commerce does not provide room for advice, consultation and personal
advice to customers this is because the seller and the buyer do not meet in
person.
3) E-commerce requires only those customers who are computer-literate.
4) Fraud cases have been on the increase and this has affected customers of e-
commerce.
Large scale retailers
Advantages of large scale retailers
1) Accessibility to new technology – large scale retailers can afford and make
use of modern technology. Examples of such technologies include:
a) Use of electronic cash till with computer terminals- this sophisticated
cash till can be used for the following reasons:
i. It reads directly the prices of goods from barcodes attached thus
saving time and eliminating the possibility of transferring price
tags to obtain goods at low prices.
ii. Record the movement of stock which makes it possible to re-
order automatically from the warehouse.
iii. Recording and calculating sales achieved by an individual staff.
2) Convenience of shopping - most large scale retailers offers a large variety of
goods under one roof. This makes it convenient by saving the customer’s time
and effort which they could have used to search for goods in different outlets.
3) Wide choice of products- large scale retailers can afford to stock large
amounts of goods from different manufacturers. This makes it easy for the
consumer to choose their brand from their preferred manufacturer.
4) Increased efficiency- increased use of self-service and modern technology has
resulted in reduction of labour cost and increased volume of scales.
5) Economies of scale- refers to the benefits that a firm gets when it expands its
operation in the business. The size of large scale retailers enables them to
obtain trade discounts due to bulk buying from the manufacturer. The self-
service helps to save labour costs therefore reducing the total cost.
6) Specialization- large scale retailers can afford to employ experts to make
decisions in various departments and sub departments of the retail shop.
Experts can work in purchasing transport, warehousing, financial control etc.
 Specialization increases efficiency thus increasing the profits and ensuring a
continuous expansion.
Disadvantages of large scale retailers
1) Decline in personal service- large scale retailers do not offer personal services
such as consultation, advice and instructions to customers because they utilize
self-service. This means that:
a) Large scale retailers do not accept special orders.
b) Delivery and after sale services are not usually provided.
c) The customer has to work hard looking for goods in a large scale
retailer.
2) Staffing/employee problem- due to large amount of stock handled by large
scale retailers, it experiences problems with employees who perform routine
and manual jobs such as:
- Management of warehouse
- Transportation
- Branding and repacking of goods
o The number of such workers is high and they keep on asking for
better wages or salaries therefore increasing operational costs
greatly.
3) Pilfering/shop lifting- most retail outlets such as supermarkets experience
shortage and loses due to shop lifting. To stop this large scale retailer use
CCTV camera technology which is very expensive.
4) Heavy investment- retailers require large initial capital and other resources to
start and sustain their large scale retail shop.
5) No credit facilities- most of the large scale retailers sell their goods on cash
basis. This makes them lose customers who prefer to buy goods on credit.
Wholesaling/wholesale trade
Wholesale trade refers to the buying of goods in large quantities from the
manufacturer and selling them in smaller quantities to retailers. The wholesaler is a
trader who buys goods from the producer or manufacturer and sells them to
retailers.
The wholesaler can be important at two stages in the chain of production:
a) In the early stage of production, the wholesaler buys raw material from the
primary sector and then sells the materials to the manufacturer.
 b) In the second stage, the wholesaler buys finished goods from the manufacturer
and then sells them to the retailer.
Stage I Stage II
Farmers Manufacturers
Wholesaler Wholesaler
Manufacturer Retailer
Consumer

The wholesaler therefore provides important services to both the manufacturer and
retailer although in some chains of production the wholesaler is not used.
Services provided by wholesalers to manufacturers
1) Bulk buying- wholesalers buy goods in bulk from the manufacturer and sell
them in smaller quantities to the retailer. Bulk buying reduces cost of
manufacturer because they only deal with large orders.
2) Warehousing services- wholesalers buy goods in bulk from the manufacturer
and store it in their own warehouses. This reduces storage expenses that the
manufacturer would have to incur.
3) Delivery services- wholesalers collect goods from the manufacturer to their
warehouses. This reduces transport cost to the manufacturer.
4) Financing- wholesalers pay in advance for the goods they buy from
manufacturers. This provides the manufacturer with capital required to carry
out their operations.
5) Price stability of raw materials- price fluctuations are evened out by the
wholesalers when they buy and sell raw materials. When the price of a raw
material is increasing the wholesaler already storing a large quantity of this
material can release some to the market therefore preventing the rise from
rising too much. When the price of raw material is falling the wholesaler will
store the surplus of this material therefore preventing the price falling too
much.
6) Risk bearing-the wholesaler takes over some of the risk that would be bared
by the manufacturer. There is the risk that the price of a finished product may
fall or the product may go out of fashion and they may not be sold. If the
wholesaler buys the goods immediately, that have been manufactured, then
this risk will no longer be incurred by the manufacturer but rather by the
wholesaler.
 7) Marketing finished goods- the wholesaler seeks market to manufacturer’s
finished goods by persuading retailers to purchase such goods. They use
promotion methods such as advertising, special offer holds and free samples.
8) Useful information- wholesalers provide useful information to the
manufacturer. This information is obtained from the customers since they deal
directly with the retailers.
Services provided by wholesalers to retailers
1) Bulk breaking- the wholesaler buys finished goods from the manufacturer in
very large quantities and sells them to retailers in smaller quantities. Retailers
may not be able to handle such goods in large quantities from the
manufacturers.
2) Credit facilities- wholesalers provide credit facilities to the retailers therefore
reducing the need for retailers to look for other sources of finance such as
loans from banks. This normally takes form of trade credit whereby
wholesalers give goods to a retailer and then the retailer pays for the goods
after selling the goods.
3) Wide variety of products- a wholesaler stock a wide variety of products from
different producers which means that the retailers do not have to make long
journeys to different producers to get a variety of goods.
- Consider the cases below where the producers and retailers are not
linked by the wholesalers.
- In case I, the retailer buys directly from the producer thereby the
retailer incurs high costs of transportation.
- In case II, the wholesaler obtains the goods from all the producers a,
b, c and d and makes them available to each of the retailers p, q, r and
s. This reduces the cost of transport and time to the retailer.
4) Risk bearing- wholesaler take up some of the risk that could be faced by the
retailer e.g. goods in the warehouse of the wholesaler may get damaged or go
out of fashion or even prices may fall while they are still in the warehouse.
5) Delivery of goods- the wholesalers may deliver goods to the retailer’s
business therefore reducing transport costs that could have been incurred by
the retailer.
6) Important information- the wholesaler provides important information to the
retailer e.g. they give retailers details of new products been introduced in the
market by manufacturers.
 7) Availability of goods- wholesalers ensure that goods are available at
convenient locations for the retailers. This enables retailers to buy goods
regularly when the demand increases.
8) Price stability of finished goods- when the prices of finished goods is
increasing, the wholesaler who already has large quantities of these goods can
release some of them in the market, this prevents prices from rising too much.
When the prices of finished goods are falling due to excess production of the
good, the wholesaler buys and stores the surplus therefore preventing the
prices from falling too much.
9) The wholesaler grades, sorts, blends and packs and brands the finished goods.
This saves the retailers from the cost of performing such functions in their
outlets.
Types of wholesalers
Wholesale trade can be classified in two different ways:
a) According to the method of operation:
1) General wholesalers
2) Cash and carry wholesalers
3) Specialized wholesalers
b) Classified based on location:
1) Regional wholesalers
2) National wholesalers
a) General wholesalers
This refers to the wholesalers who deal with a wide range of goods such as
electronic, cloth, hardware, food stuff etc. They normally operate on national or
regional bases. General wholesalers provide credit facilities, delivery and after sales
services to the customer.
Advantages of general wholesalers
1) The total sales/revenue/turnover is usually high because of selling goods on
credit.
2) After sale services lead to retailers becoming loyal to one wholesaler.
3) The market for the product increases because of selling either nationally or
regional levels.
4) Retailers do not incur transport costs.
5) Retailers can purchase goods on credit and make the payment later.
Disadvantages of general wholesalers
1) The administrative and overhead costs increase because the wholesalers
provide after sale services.
2) The wholesaler incurs bad debts because retailers may end up not paying for
goods sold on credit.
3) The wholesaler may face managerial problems due to their large scale
operation especially at national level.
4) Goods take long time before they are delivered to the consumer.
b) Cash and carry wholesalers
This refers to wholesalers who sell goods on cash basis and they do not offer free
delivery services to the retailers. They usually sell to the local markets because
retailers transport their own goods. Their outlets are basically warehouses which are
operated like a supermarket with self-service and checkouts. They operate from
large decorated premises which attracts many retailers.
Advantages to small scale retailers
1) The retailer will purchase goods at lower price because the wholesaler’s
expenses are low.
2) The small shops can easily and quickly buy goods from the wholesalers and
replace their stocks. This is because of the following reasons:
i. The retailer does not have to wait for delivery.
ii. The retailers can conveniently access wholesalers in their local
markets.
iii. Retailers will do their shopping at their own pace or speed due to
self-service.
Disadvantages to small retailers
1) The retailers will have to pay all the transport costs to the wholesaler to his
premises.
2) The retailers cannot access credit facilities from cash and carry wholesalers.
Therefore, the retailer may be forced to borrow expensive funds from other
sourced to buy the goods.
3) The retailers do not receive additional information and advice from the
wholesaler.
 c) Specialized wholesaler
These are wholesalers who specialize in selling a specific type of good in a region.
They sell goods such as stationary, electronics, clothes etc. However, they offer
great variety within their specific line. They are specialized in a particular area such
as a town, city or province. They normally provide delivery services and offer
goods on credit to retailers.
Advantages of specialized wholesalers
1) They usually offer goods in high quality because of specialization.
2) Efficiency is high in specialized wholesalers.
3) Retailers are able to obtain goods on credit.
Disadvantages of specialized wholesalers
1) Some customers may be lost because of selling a narrow range of goods.
2) Expansion/growth of specialized wholesalers is limited.
3) The wholesalers may incur bad debts due to non-payment of debts.
4) Goods will take a long time before they are delivered to customers as
compared to cash and carry wholesalers.
d) National wholesalers
These wholesalers distribute their products to all parts of a country. They have
depots in major town from which they supply the retailer e.g. Kenya National
Trading Corporation.
e) Regional wholesalers
These are wholesalers who supply goods to certain parts of the country. These parts
may be regions, districts or divisions.
Decreasing importance of wholesalers
The importance of wholesalers in the distribution of goods from manufacturers to
retailers has decreases because of other ways in which goods can be distributed.
These are:
1) Manufacturers selling to large scale retailers who sell to consumers.
2) Manufacturers selling goods to consumers through their own retail shops e.g.
tied shops such as Bata.
3) Manufacturers selling goods directly to customers through newspaper
advertisements e.g. motor industries.
4) Manufacturers selling to mail order firms which sell to consumers directly.
All of the above reasons have led to a decreases in wholesalers.
Reasons for the decline of the wholesalers
1) The growth of large scale retailers who buy goods in bulk directly from the
manufacturer establishing their own retail shops therefore eliminating
wholesalers from the chain.
2) The tendency of some manufacturers establishing their own retail shops
therefore eliminating wholesalers from the chain.
3) The growth of goods which have been pre-packed and branded by the
manufacturer. Such goods can only be handled by selected retailers therefore
eliminating wholesalers.
4) The decisions by many manufacturers to sell directly to the consumers so that
they can push their products into the market more than wholesalers.
5) The growth of mail order firm who buys directly from the manufacturer and
thereby eliminating wholesalers.
Home trade
This is the exchange of goods and services for money within the country. A
transaction is an event which involves the transfer of ownership of a property or
property rights from one person to another. It involves the exchange of goods and
services for money or promise to pay money at a future date.
When money is paid for goods and services immediately, we have a cash
transaction. When goods and services are given away now and payment is made on
a later date, we have a credit transaction.
Transactions are evidenced by certain documents which are used to record business
activities in the journals and subsequently in the ledgers. The number of documents
for different transactions may vary according to the length of negotiation and the
terms of payments agreed upon between the buyer and the seller.
This document can be broadly divided into two:
a) Those that relate to the purchase and sell of goods and services.
b) Those that relates to the payment of goods and services.
Businesses have developed number of documents where they can record
transactions to make the process of exchanging products or information simple,
quick and efficient.
Importance of business documents
1) They provide written record of business transactions between
firms therefore providing records for future reference.
2) They provide information which allows taxes to be assessed
or calculated e.g. info on the receipt and invoices is used to
calculate VAT.
3) It is a legal requirement.
4) They provide basis publication of government statistic on a
wide range of business activity in a country e.g. the number
of cars sold.
5) It is important when claiming for compensation from
insurance companies in case of a risk occurring.
6) It provides information which allows businesses to prepare a
financial statement.
Types of documents used in home trade
1) Letter of inquiry- This is a document send by the potential customer to the
potential seller (manufacturer or wholesaler) asking for the following
details:
a. Whether certain goods are stocked by the supplier.
b. Prices of such goods including discounts given and taxes charged.
c. Whether the goods are sold or offered on credit.
d. The cost of delivery.
e. Whether they can deliver the goods by the date required.
2) Quotation- This is a document sent by the seller or supplier to the customer
in reply to the letter of inquiry. It gives the customer the information which
he specified in the letter of inquiry. It contains the following information:
a. Goods stocked by the supplier.
b. Prices of goods, discounts allowed and taxes charged.
c. Date and cost of delivery.
d. Terms of payment that is when credit is offered or not.
3) Catalogues- It is a printed document that displays pictures, information and
sometimes the prices of goods sold by a particular supplier. A catalogue is
issued if the supplier does not send the quotation. It contains the following
details:
a. The prices of goods.
 b. Detailed description of the good which the firm sells.
c. Pictures of the goods where necessary.
d. The catalogue number of each item.
4) Price list- It is a printed list of all the products which are offered by the
seller and their prices. It contains the following information:
a. Prices of the goods.
b. The sizes of trade discounts. (Quantity discounts)
c. Terms of payment.
d. Terms of delivery.
NB: Separate price list are issues by suppliers because catalogues are expensive to
produce. If changes in prices have to be made, it is cheaper to reprint a price list
than to reprint a catalogue.
5) Pro-forma invoice- It is a document that is sent by the supplier to the
customer. It shows how the actual invoice will look like if the customer
decides to order the goods. The pro-forma invoice may be used by the
supplier when he wants payments to be made before he releases the goods
i.e. payment in advance.
6) Order- This is a document that is sent by the customer requesting the seller
to supply them with the particular goods. It contains the following
information:
a. Name and address of the buyer and the seller.
b. A request to supply particular goods and services.
c. Description of the goods with item codes where available.
d. Quantity of goods requested.
e. Price agreed.
f. Date on which the order was made.
g. Terms of delivery where, how and when goods should be delivered.
NB: The order must be signed and dated by the customer. When customers place
orders by telephone, a written communication is often requested by the supplier.
7) Advice note- It is a document sent by the seller to the buyer. It advices the
buyer that the goods in order are being processed and will be soon be
delivered to him. The main purpose of an advice note is to alert the buyer
so that they can prepare storage spaces, necessary equipment and people
required during off-loading. It usually includes the following information:
 a. The date on which the goods are to be sent out.
b. A description of the goods being dispatched.
c. The quantity of goods dispatched.
d. The relevant order number.
e. The type of delivery e.g. using the services of supplier vehicles or using
services such as postal services.
8) Delivery note- This is a document sent together with the goods and must be
signed by the customer in order to provide a proof that the goods have
actually been delivered. It contains the following:
a. Number of packages.
b. A description of the goods.
c. The quantity of goods sent.
d. An order number.
9) Consignment note- It is a formal instruction to the transport firm to accept
the goods and deliver them in good condition to the customer. It is used
when the firm hires vehicles to transport goods to buyers. The consignment
note is prepared and triplicated (three copies are made). The first copy is
retained by the supplier after the truck driver has signed. The second copy
is retained by the driver after the customer has signed and the third copy is
retained by the buyer once the goods have neem delivered. A consignment
note contains the following:
a. Name and address of the supplier.
b. Name and address of the buyer/customer.
c. Address for the delivery of the goods.
d. Description and quantity of goods being delivered.
10) The invoice- An invoice is a document that is sent by the supplier to the
buyer to claim payments for the goods and services supplied. Features of an
invoice include:
a. VAT registration number- stands for value added tax. It indicates the
amount of tac collected from the goods being supplied.
b. Trade discounts- amount of discount given to the buyer for buying in
large quantity. Trade discounts can also be altered to allow for changes
in the prices of the goods.
c. Cash discounts when goods are sold on credit, suppliers try to encourage
customers to pay promptly, by offering cash discount e.g. 5% given for
 settling the debt within 28 days, and no discount if the debt is settled
after 28 days.
d. Terms of delivery- This includes the following term:
i. Carriage paid- this means that the supplier pays for the cost to the
buyer.
ii. Carriage forward- meaning the buyer pays for the cost of the
delivery.
e. Invoice number- represents the number of invoice that has been sent to a
particular customer. It is important for invoices to be numbered so that
they can be fixed according to their numbers. This makes it easier to
refer/retrieve invoices at a future date.
f. Order number- number given by the customer to the order sent to the
supplier. This is for easy comparison of two documents.
g. Catalogue number- each item sold by the supplier is given an individual
catalogue number. When ordering goods, the customer needs to only
quote this number on the detailed description of goods not necessary.

h. E and OE – If mistakes have been made by the seller on the invoice,

then the statement E and OE allows the supplier to correct such mistakes
afterwards by using credit note or debit note.

11) Credit note

Credit note is issued by suppliers to customers to reduce an overcharge on
the invoice. It is issued when:
a)A mistake has been made by the supplier and the charges shown in the
invoice are too high.
b) Damaged goods have been returned to the supplier and these goods
have not been replaced.
c) Incorrect goods have been supplied and have been returned to the
supplier.
d) A charge has been made for packing cases and the cases have been
returned by the customer.
 NB: Credit notes are normally printed in red to distinguish them from other
documents.
12) Debit note
Debit notes are issued by suppliers to customers to correct under charges. It is
issued when
a) Lower price has been entered on the invoice eg. a product with a
catalogue price of $20 has been entered as $18
b) More goods have been sent than are shown in the invoice.
13) Statement of account
This document is issued by the supplier to inform the customer the
outstanding recoverable balance at the end of every month. The statement of
account is important to customers because:
a) It allows them to check the accuracy of entries of the statement of
account against their own records.
b) It states the amount payable to the supplier at the end of each month.
c) It show the amount of cash discount available if prompt payment is
made
14) Receipt
A receipt is issued by the seller as evidence that payment has been made by
the customer. Receipts are still used when payment is made by cash, but they
have become less important because:
a) Most payment are made by cheque and the cheque together with the
bank slip provides evidence that payment has been made.
b) When payment is made by credit transfer, the bank at which the transfer
was affected will issue a receipt.