Producer Price Index U.S. Wholesale Trade

NAICS Sector 42

Author: James J. Gorko

US Bureau of Labor Statistics

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

Creation of Utility

Time and place utilityMaking products available when and where customers are likely to find them

Possession utilityAllowing customers to take ownership of products as needed

Information utilityProviding details about the products sold

Channeling Function

Selling and promotingBuying and assortment buildingBulk breakingWarehousingTransportationRisk bearingMarket informationManagement services and advice

Types of Wholesalers

Merchant WholesalersGenerally take title to goods

Sales Branches and Offices of Manufacturing Operations

Title generally stays with manufacturer until sale is complete

Agents and BrokersGenerally do not take title to goods

Classification Issues

NAICS versus ISICConceptual 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

Classification Issues

Wholesale versus retailNAICS 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

Classification Issues

Wholesale versus manufacturingManufacturers 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

Classification Issues

Wholesale versus ManufacturingExamples:

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

Classification Issues

Scrap/Recyclable material merchant wholesales

Service ISIC 4 NAICS

Wholesaling of scrap without further product transformation

4669 423930

Processing of metal and non – metal waste into secondary raw materials usually involving a mechanical or chemical transformation process

3830 423930

Sorting and separating metal and non-metal waste

3830 562920

Wholesale Trade Pricing

No direct ‘fee for service’ price existGross margin is used to quantify the value of the trade services provided to the consumer of those same servicesGross margin is defined in national accounts as the selling price of a good less the cost of replacing the good soldExcludes clearance prices

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)

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

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

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

Wholesale Trade Pricing

Prices as defined in SPPI Thesaurus

Margin Price ??? Direct use of prices of repeated services ????

Dollar Value of Commission ???? Percentage fees ????

Wholesale Trade Pricing

Average Margin PricingHomogeneous 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

Quality adjustment

Necessary when marketing characteristics change not when product features changeMarketing characteristics are difficult to quantify without hedonic modelCurrently only able to quality adjust if respondent identifies a marketing change and provides a quality adjustment value for that change

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

National Accounts

Currently, U.S. national accounts publish at the three digit NAICS level only but deflate at lower levelsU.S. national accounts requesting PPIs at the 4-5 digit NAICS level to use as deflatorsWithout PPIs for wholesale, then PPI goods prices are used assuming that margin data will equate with gross sales price data (bad assumption)

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