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.
With direct-to-consumer sales margins reported at 62 % vs 38% achieved via wholesale sales, it made sense to cut out the middleman. In fact, Nike’s share price jumped 5% based solely on its announcement. Retail and consumer products companies are increasingly embracing the D2C model, making them a direct competitor to wholesale distributors.
Technology-driven new entrants are challenging the status quo in wholesale distribution and setting the bar for the competitive landscape with digital marketplaces. The biggest disruptors are the digital leaders and big-box retailers who are looking to expand their share of the customer wallet — eBay, Target and Walmart, to name a few. These new entrants bring massive scale and top-tier digital capabilities to differentiate themselves from traditional wholesale distribution firms.
Given the prevailing competitive and technology circumstances, here are three ways that wholesale distribution companies can continue to strategically drive growth.
1. Build scale through strategic mergers and acquisitions. Wesco’s recent acquisition of Anixter has created a $17 billion company that has provided tremendous scale and cost synergies to compete smarter and more effectively.
2. Deliver value-added services beyond product distribution. Most wholesale distributors are providing services such as credit financing, inventory management, and product expertise. Building differentiated offerings is the only way to fend off competition from traditional players as well as online distributors. Having a consistent, real-time look into your business ecosystem can give you viable avenues for alternative revenue.
3. Prioritize digital transformation. Wholesalers are still lagging most logistics companies in terms of digital adoption. B2B purchasers expect omnichannel experiences (website, mobile, in-store), easy access to product information, online ordering, order tracking, and inventory management. Distributors investing in digital strategies such as ecosystem integration are accelerating sales growth, expanding customer reach, and improving customer retention.
Faced with a myriad of disruptive forces, the industry is aggressively embracing technology for data-driven decision-making, more agile supply-chain management, better overall visibility, and differentiating customer experiences in order to thrive. While it’s clear that the industry is undergoing several challenges, a new normal will emerge for those willing to adapt.
Mahesh Rajasekharan is CEO of Cleo.
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