The Top Disruptor in the Wholesale Distribution Industry

The Turning Point for the Wholesale Distribution Industry

The wholesale distribution industry, facing an existential threat due to the risks of disintermediation, has reached an inflection point.

Disintermediation is when the end customer has direct access to a product or service that a wholesaler would usually provide.

Over this and my next few blogs, I’m going to walk you through the different forms of supplier disintermediation; three critical success factors to overcome disintermediation; and how companies can utilize APIs and ecosystem integration to enable the “distributor of the future.”

This blog takes an in-depth look at what ‘supplier disintermediation’ means, and just how much disruption it, and digital marketplaces, have done to the wholesale distribution industry.

Disintermediation 101

As an industry, one that has historically benefited by providing manufacturing partners (suppliers) with fulfillment services and the ability to reach a large set of customers through their capital-intensive distribution networks, wholesale distribution is being actively disintermediated by the likes of Amazon and eBay.

Suppliers are also finding ways to disintermediate distributors fully or partially by adopting direct-to-buyer and direct-to-consumer business models to help them improve their margins and become “stickier” with their customers at the expense of distributors.

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

Profiting Through Segmentation

Given the sophistication of today’s buyers, serving all customers across all product lines and all geographies remains an expensive proposition for suppliers. So many suppliers 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 rather than binary approach to sales and fulfillment. Hence, rather than deciding whether to go direct or sell through distribution, suppliers are focused on determining -- based on their segmentation model --, which customers and products to serve direct and which ones to cover via other distribution channels.

Partial disintermediation allows suppliers to select those customers and value-added activities that are most profitable based on their growth strategy.

Suppler Disintermediation: Direct to Consumer

Nike made a stunning 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, including Amazon. As part of its new direct-to-consumer model, Nike announced that it is planning to reduce the number of distribution partners from 30,000 to focus on just 40.

With direct to consumer sales margins reported at 62 percent vs 38 percent achieved via wholesale sales, it made clear financial sense to cut out the middleman. In fact, Nike’s share price jumped 5% based solely on its announcement.

There are two sets of players in the industry that benefit from disintermediation:

1. Marketplaces such as eBay, ASOS, and Amazon

2. Fashion houses with strong brand equity and supply chain and e-commerce capabilities to manage direct retail in a way that doesn’t damage that equity.

Retail and consumer products companies are increasingly embracing D2C model which makes them directly compete with the wholesale distribution model.

Growing Threat of Digital Marketplaces

Technology-driven new entrants such as Amazon Business and eBay are disrupting the status quo in wholesale distribution and accelerating competitive intensity.

The biggest disruptors are the digital leaders and big-box retailers who are looking to expand their share of the customer wallet. These new entrants bring massive scale and top-tier digital capabilities to differentiate themselves against traditional wholesale distribution firms.

So what’s next? Probably more of the same, but it’s coming faster. According to a 2019 survey by McKinsey & Co., consumers expect the share of purchases they’ll make through digital players to rise by 50 percent (from a low base) over the next five years, and that stands to have serious consequences for distributors.

about cleo
About Cleo
Struggling with late deliveries, lost orders, and angry customers? Cleo helps organizations take control over their supply chain integrations, automating B2B transactions and providing end-to-end visibility. Predictable revenue, happy partners, a calmer you - it's supply chain sanity, served.
Learn More
watch-demo
Watch a Demo
Have 3 minutes? Watch a quick demo video to help you understand the unprecedented value of our platform.
Watch Demo Video
We hope you enjoyed reading this blog post.
If you’re ready to learn what Cleo can do for you, just reach out!
Contact Us Today