17 Jan Death of Wholesale – The need for cutting middle men

Reliance on the internet, particularly in regards to online retail is continuing to grow exponentially. A key result from this is closing the gap between consumers and the creators of their products. Supply chains have tightened as manufacturers start selling directly to customers. While this doesn’t signal the end of all retailers, it is certainly the end of the retailer-wholesaler relationship as we know it.

Online Eyeglasses retailer Warby Parker did some investigation into why eyeglass retailers charge so much for their products. They discovered that everybody involved in the supply chain was taking a cut, with the majority of middle men not adding value reflective of their cut. Warby Parker took ownership of all aspects of the supply chain, working directly with manufacturers in China they were able to offer a premium product for only $95 compared to the $700 their competitors were offering. This allows Warby Parker to have a greater portion of the margin and still pass the savings on to their customers.

An increasing number of offshore manufacturers have also realised the redundancy of middle men further down in the supply chain and have started using a number of online platforms to market directly to consumers at very low prices. Platforms such as AliExpress and Light In The Box allow consumers to order products online directly from the manufacturer at very low prices.

Fortunate for existing local retailers, these manufacturers often have a poor understanding of the unique market requirements and the end consumers. This results in a lot of poor quality products that are often quite a way off the local trends. This means if retailers can add value through relationships with their customers and understanding of their local market, it is still feasible to compete with these manufacturers on factors other than just price (provided their price is still in the same ballpark). If offshore manufacturers are going to sell directly to consumers, retailers (particularly SMEs) will want to make some major cuts to their overheads in order to stay competitive. One of the most significant ways to do this is to cut down on wholesalers that are biting off a major chunk of your margin.

Big box retailers have long understood that taking ownership of as much of the supply chain as possible has a major effect on their bottom line. This has caused a rising popularity of private brand retailing as they work with suppliers to produce their own products. There is no reason SME retailers shouldn’t be able to replicate this model while taking advantage of the strengths and flexibility unique to SMEs to compete with major chains.

In the US a whole wave of online retailers have appeared offering premium quality products at prices lower than the big box retailers. This includes Poppin (office supplies), Crane and Canopy (bedding) and Monoprice (tech accessories). They are all achieving this by taking ownership of their entire supply chain and working directly with manufacturers offshore. As with Warby Parker this results in significantly lower prices for customers and bigger profit margins for the businesses.