Is Wholesale Over? The Death of the Middleman

Business.com / Sales / Last Modified: February 22, 2017

An underlying principle of e-commerce is to skip the costs and logistics of using a retail middleman to sell directly.

Skip the middleman.

Buy direct.

Save money by eliminating the wholesale distribution link of the supply chain.

The Internet didn’t invent the idea of cutting out the middleman. But it has certainly facilitated the growth and practicality of the practice, and it’s popular. 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 percent or more of the total retail economy will be conducted online by 2025. Which means that much fewer people needing to go to actual retail stores. Indeed, Gap’s recent 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.”

Related Article: Why Some Customers Prefer Online Business to Traditional Retail Stores

Finding and Keeping 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 could sell directly to customers for the cost of $95 a pair that would otherwise sell for as much as $700 through traditional retail outlets.

Warby Parker Glasses

Image via The New York Times

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 18-34 demographic, comfortable with ordering online and, while brand conscious, is price sensitive (after all, they’ve got all those student loans to pay off).
  • Establishing bona fides as a socially responsible (the Chinese manufacturers are approved by labor watchdog Verité 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 once nerdy product, eyeglasses, seem as cool as your iPhone.

Related Article: 5 Common Mistakes Internet Retailers Make

As New York notes, Warby Parker is valued at $300 million following a financing round earlier this year. 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 Wal-Mart 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 Nasty Gal, Bonobos and JustFab are also 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.

Article image via Jezebel

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