What is driving wholesale bypass?
Wholesalers have long acted as a kind of “middleman” between manufacturers and retailers.
Historically, wholesalers purchased large volumes of inventories, which they then reassembled, repackaged and distributed in smaller lots to retailers, who then on-sold individual products to consumers.
However, industry projections have identified a significant decline in wholesale revenues as more businesses bypass the middleman.
A recent Deloitte report determined the wholesaling industry had exhibited deteriorating performance for an extended period across a number of key metrics and indicators. Concerningly, global year-over-year growth has slipped from 16 per cent in 2006 to only 3 per cent in more recent years.
There are a number of emergent and interrelated issues that have impacted the traditional manufacturer–wholesaler–retailer supply chain model: a lack of price competitiveness; the growth of direct-from-manufacturer-to-retailer disintermediation, facilitated by e-commerce aggregator organisations like Amazon or Alibaba; and the development of group purchasing organisations (GPO).
The market has shrunk
The global outlook for wholesalers looks challenging, with many brands like Ferragamo and Nike reporting declining revenues from their wholesaling channel. It is suggested e-commerce will rapidly reshape the entire economic model of retail, potentially spelling the end of wholesale in its current form.
Here in Australia, general line grocery wholesaler revenue is expected to contract 0.6 per cent in 2017–18. Long term, industry value added (IVA), a measure of the industry’s contribution to the overall economy, is forecast to grow at an annualised 1.1 per cent through to 2022–23. However, this is considered an underperformance relative to the wider economy, with GDP projected to grow at an annualised 2.6 per cent over the same period.
Footwear wholesaling profitability has declined over the past five years and is expected to contract by a further 3.2 per cent in 2017–18. The rise of online clothing stores has undermined demand for products sold through traditional retail channels, undercutting retailers’ demand for products sold by wholesalers. Revenue is expected to fall by 1.0 per cent in 2017–18, to total $7.5 billion, with a projected further 2.1 per cent decline between 2018 and 2023. Toy and sporting goods wholesalers have experienced difficult trading conditions over the past five years. Increasing wholesale bypass has led to a 1.4 per cent decline in revenue between 2017–18.
It is not just retail wholesalers experiencing disruption. In an attempt to reduce the costs and exert control over the supply chain, hospitals and healthcare organisations are moving to a self-distribution model, bypassing wholesalers. Paper product wholesaling industry will continue to struggle against wholesale bypass and declining downstream demand, with revenue anticipated to fall by 0.2 per cent over the five years. In automotive parts, it is predicted e-commerce revenue will grow 20–30 per cent by 2035, capturing sales from traditional wholesalers.
Lack of price competitiveness
Wholesaling once allowed smaller business to access price economies of scale. Wholesalers attained price discounts from bulk buying, then distributed these inventories to smaller businesses at prices they could not negotiate individually themselves. However, as logistics costs continue to increase, wholesalers need to cover their costs of doing business.
One of the reasons Metcash-owned IGA/Foodland supermarkets struggle to compete on price with Coles, Woolworths and Aldi is the wholesale model they operate under. Here, Metcash acts as the wholesaler, distributing products exclusively to the 1600 or so IGA and Foodland businesses. Metcash obviously needs to apply a margin to those inventories to cover logistics and warehousing costs and produce profit for shareholders
This inability to compete on price, in a highly competitive FMCG environment, is best illustrated by the decline in market share over the past few years. Roy Morgan determined the between April 2016 and March 2017 that IGA/Foodland had about 9.3 per cent market share. However, in the 12 months ending in December 2017, that market share had contracted to 7.7 per cent. The recent Metcash annual report found ‘food and grocery’ sales declined 1.3 per cent between 2016 and 2017, and net profit for 2017 dropped from $215 million to $171 million. While other areas of their business appear strong, food and groceries continue to be a challenge.
Viable alternative supply models
As above, wholesaling attracts procurement, warehousing and distribution costs, which get passed down the supply chain to the retailer and ultimately the customer. To remove these costs, innovative GPO start-ups like irexchange are providing new platforms that remove the role and associated costs of conventional wholesalers. Herein, individual businesses place multiple orders through a cloud-based GPO; those orders are then aggregated and one large order is placed with the manufacturer. Inventory is then directly distributed, rather than warehoused, by a third party logistics provider, like DHL. Such models remove the need for warehousing, handling, insurance and storage.
The growth of e-commerce
Wholesalers traditionally did the “heavy lifting” for small businesses that didn’t have the space, procurement experience or sales volume to justify bulk buying direct from manufacturers. However, in recent times these same businesses are moving away from dealing with wholesalers and doing their own sourcing through the myriad of online marketplaces. With “minimum order quantities” set as low as five units, even the very smallest retail businesses can self-source product.
Commercial reports project the global business-to-business (B2B) e-commerce market will reach US$6.7 trillion by 2020. In the US alone, e-commerce marketplace revenue will top $1.1 trillion and account for 12.1 per cent of all B2B sales by 2020. According to Digital Commerce 360’s 2017 Online Marketplaces Report, US$1.09 trillion worth of goods were sold on the world’s largest 18 e-marketplaces in 2016, accounting for 44 per cent of all e-commerce actually globally.
The growth and size of online marketplaces, like Alibaba (US$39.8 billion, 2018), JD.com (US$55.6 billion, 2017) and Amazon (US$177.9 billion, 2017) is significant. So commercially viable is the e-commerce marketplace today, traditional retailers like Costco are moving into the sector. What we are seeing is the gradual move away from dealing with wholesalers, to direct sourcing from aggregators like Alibaba, JD.com and Amazon.
The future for wholesaling
When e-commerce aggregators and GPOs continue to grow, capturing revenue from wholesalers, and small retailers continue to seek to reduce their costs by cutting out the “middleman”, wholesalers may be left with only three options. Already, 62 per cent of mid-market B2B sellers intend to adopt an integrated solution – accordingly, wholesalers may simply be forced to embrace online. A move away from traditional bulk buying and warehousing to order aggregation and distribution. Alternatively, they could move to a niche “exclusive wholesale agreement” with key brands. Finally, they could reduce internal costs by adopting a cloud-based enterprise resource planning (ERP) that leverages big data, enables omni-channel operations by encompassing all elements of the business, and allows informed inventory and financial decisions based on real-time data.
Gary Mortimer is an associate professor in marketing and international business at Queensland University of Technology.
This article was originally featured in the July edition of Inside FMCG magazine. Sign up here to receive our magazine.