SCB: Cutting out the middleman – suppliers adopt direct-to-consumer

SUPPLY CHAIN BRAIN reports:

The U.S. wholesale distribution industry is massive, with annual revenues of $6 trillion, consisting of over 300,000 companies, employing 6 million people, and accounting for 28% percent of GDP. However, the industry today faces a number of difficult challenges, ranging from COVID-19 complications, Chinese tariffs, rising shipping costs, the growth of e-commerce, and the increasing desire of manufacturers and retailers to completely bypass the wholesale distribution channel, and instead do business directly with one another under a direct-to-consumer business model.

Disintermediation is the process of removing the middleman or intermediary from future transactions. Instead of going through traditional channels such as a distributor or wholesaler, companies serve consumers directly. As an industry, wholesale distribution has historically benefited by providing manufacturing partners with fulfillment services and the ability to reach a large set of customers through capital-intensive networks. Now, it’s being actively disintermediated by companies like Amazon and eBay.

Year-over-year growth in the wholesale distribution category has slipped from the 16% achieved in 2006 to just 3% in more recent years, and this trend has crucial implications in terms of financial performance and consolidation.

Given the sophistication of today’s buyers, serving customers across all product lines and geographies remains an expensive proposition for suppliers. As such, many apply data-driven segmentation based on size, growth potential, and cost to serve priority buyers.

Through such advanced segmentation techniques, suppliers can partially disintermediate distributors by taking a tailored approach to sales and fulfillment. Rather than deciding whether to go direct or sell through distribution, suppliers are focused on determining which customers and products to serve direct, and which to deliver through other distribution channels. This partial disintermediation allows suppliers to select those customers and value-added activities that are most profitable based on their growth strategy.

Suppliers are also finding ways to disintermediate distributors fully or partially by adopting direct-to-buyer and direct-to-consumer business models, to improve margins and become “stickier” with customers at the expense of distributors. Nike made a surprising decision in January 2018 when it announced plans to “go direct,” electing to cut out wholesalers in favor of selling via its own stores and selected retailers. As part of its new direct-to-consumer model, Nike announced that it’s planning to reduce the number of distribution partners from 30,000 to just 40.

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