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Is Wholesale Over? The Death of the Middleman

business.com editorial staff
business.com editorial staff

Companies like Warby Parker are changing the game.

  • Buying directly from a supplier can save money.
  • The internet has reduced the need for physical retail stores and wholesalers.
  • Amazon is a retailer, while eBay is a wholesaler.

The internet didn't invent the idea of cutting out the middleman. But it has certainly facilitated the growth and practicality of the practice. After all, the lack of a retail markup makes products less expensive for the end-user (and potentially more profitable for product makers).

Mobile apps, in particular, provide a convenient and familiar way for end-users to sample products and learn about new trends and applications in ways that were once the sole province of retail stores. Spring, for example, offers the ability to browse more than 700 brands and order with free shipping through a single app.

No wonder, then, that Business of Fashion notes the likelihood that 30% or more of the total retail economy will be conducted online by 2025, which means that much fewer people need to go to actual retail stores. Indeed, Gap's closing of 175 stores was attributed to online shopping, as reported in The Washington Post.

If physical stores are no longer essential to the customer experience required to market your products, you no longer need wholesalers to distribute your products – and retail locations no longer add to the cost for the end user. Another advantage, as pointed out by Neil Kokemuller in Azcentral, is environmental: "By minimizing the number of trucks and travel time moving products from one step to the next, you reduce the pollutants in the air."

What is the role of the middleman?

Middleman is a term that we've heard all our lives, but what is it exactly? What do they do, and why were they once so important to commerce?

According to Investopedia, a middleman is an intermediary in a supply chain or transaction. Wholesalers are a type of middleman. Wholesalers buy products from a manufacturer and then sell them to retail outlets.

There are three basic types of retail businesses: Those that manufacture their own products, those that purchase the products directly from the manufacturer, and those that purchase products through a middleman or wholesaler.

Wholesalers make money because they buy in bulk. The manufacturer offers them a lower price for bulk purchases. The wholesaler then sells the product to retail stores at a higher price than they purchased the items for, and the retail store goes on to sell the items individually, adding their own markup.

Sam's Club and Costco are wholesalers that sell directly to the consumer, instead of selling to retail stores. This can lead to discounts on products, if you are willing to buy in larger quantities than you'll find at your average supermarket.

In the online market, eBay is considered a wholesaler. It often offers deals on bulk items intended to be resold individually. Amazon, on the other hand, is an online retailer, because its target market is the end consumer.

There's another type of middleman. Distributors. In fact, distributors often act as a middleman between the supplier or manufacturer and the wholesale business. Distributors have direct contact with the supplier and essentially work in a sales capacity. They broker deals with wholesalers. 

How to find and keep customers without retail stores

Consider designer eyeglass maker Warby Parker. It not only eliminated the wholesaler, but brand designers and retail outlets as well that all add to the final price. Consequently, as The New York Times reports, by sending their own frame design sketches to the same Chinese factories that manufacture other premium eyeglasses, Warby Parker sells directly to customers a pair of eyeglasses that $95 a pair that would otherwise sell for as much as $700 through traditional retail outlets.

The problem is that many consumers equate high price and brand names with high quality. They also like the ability to get a hands-on feel of a product, particularly one they are going to wear. Warby Parker got around that by establishing a brand identity as a trendy alternative that provides the same, if not higher quality, product with the same custom fit. 

The company found success through:

  • Letting customers try on five pairs of glasses at home for five days, with free two-way shipping, as a way to emulate the service provided at a traditional optical retailer, arguably with even greater convenience.

  • Targeting a hip demographic comprising 18-34-year olds, a segment of the U.S population already comfortable with ordering online, and while brand conscious, is price sensitive. (They have student loans to pay off.)

  • Establishing bona fides as a socially responsible (the Chinese manufacturers are approved by labor watchdog Verite, and the company partners with nonprofits to distribute glasses to the needy) industry disrupter; this not only appeals to its targeted demographic but makes a product, eyeglasses, seem just as cool as your iPhone.

As New York Magazine notes, Warby Parker is valued at $300 million. A number of companies have imitated its model, including established brands such as Jockey. Even Goldman Sachs plans to offer loans directly through a website or an app and function as a virtual bank, according to The New York Times

Is retail dying?

Big stores such as Walmart and Macy's, and even the Gap, aren't going away anytime soon. But their days as the primary retailing model may be numbered.

Then again, once purely online retailers are seeing benefits to having physical locations to provide a customer experience. The Los Angeles Times reports that Birchbox is opening its first store in New York City, and other e-commerce ventures such as Bonobos and JustFab are venturing into physical storefronts. Even Warby Parker operates its own 13 retail shops.

The key difference is that, unlike traditional retailers, these stores needn't rely on wholesale distribution channels to stock their shelves. As Julie Frederickson, co-founder and CEO of Stowaway Cosmetics, notes in The Wall Street Journal's tech blog, the ability to reach consumers directly avoids the inefficiencies built into wholesale. There was a time when these inefficiencies were a necessary part of doing business. They no longer are.

Image Credit: jacoblund / Getty Images
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