As an investor, you have a lot of different options when it comes to businesses to invest in. You can choose manufacturers, real estate companies, and yes, even retailers. Although you probably can think of some retailers off the top of your head, there's a lot more to retail than what most people imagine. Read to get the full picture.
Retailer vs. wholesaler vs. distributor
Retailers are often the last stop on the road for products, but they aren't the only stop in many supply chains. There are other players, too, including the wholesaler and distributor.
Distributors often partner directly with manufacturers as a dedicated distributor of a particular product or type of product. It's considered a business-to-business (B2B) relationship, and is often the first link in the supply chain after the manufacturer. Distributors may sell to retailers or wholesalers, but don't really sell to the public.
Wholesalers are similar to retailers in that they buy products from distributors and may sell directly to the public, but with a twist. Wholesalers generally buy in huge bulk from the distributor (products are also generally packaged in bulk), then sell to consumers in bulk. Wholesalers are both B2B and business-to-consumer (B2C). Sometimes they sell to retailers (B2B), and sometimes they sell directly to consumers, such as at warehouse clubs (B2C).
Why retailers matter to investors
Retailers are the backbone of many investment strategies. In fact, consumer staples are generally considered good hedges against downturns in the economic cycle, and retailers that focus on these areas can be good offsets to segments that struggle during these times, like many areas of the tech industry. However, retailers aren't good investments simply because they're retailers -- some are much better than others, and you should consider the consumer base and how the retailer markets itself, among other things.
Related investing topics
You should also think about retailer performance when investing in certain types of real estate investment trusts (REITs), especially those that use retail stores as anchors, or that solely manage retail stores, such as malls. For example, if the economy is in a downturn, retailers that occupy malls may do poorly as consumer spending retracts, dragging down a REIT that only owns full-price retail space.
On the other hand, retailers like outlet stores may perform well under the same conditions, given that consumers still need certain products, like clothing and shoes, and may be trading full-price retail for discounters that are set up in outlet stores. The same can be said for discount box stores versus more premium stores. The fancy grocery store may be great when money is easy and fast, but the market that offers good coupons and discounts its groceries, relying on lots of consumers rather than wider margins, can be a good choice in leaner times.
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