If you’re a brand manufacturer, your retailers are undercutting you and going right to the factories to make their own versions of what you sell. If you’re a retailer, your brands are going direct to the consumers and bypassing the retail supply chain.

This isn’t new, but it still feels fresh doesn’t it? At least that’s the impression I get when I walk into Main Street retailers and talk to the owner/operator. There’s still a lot of talk about what this means for the average retailer and the average brand in the short and long term.

I call this the “cannibalization of the food chain.’ All the battle lines have been blurred and from where I sit there aren’t any rules anymore. Not that there ever were any hard and fast rules, but there were definitely some unspoken ones that most companies followed. It used to be that brands would work with their distribution and retail partners to get products into the hands of consumers. Now, for a whole host of reasons, brands can very easily get in front of their customers directly and bypass the entire supply chain we’ve grown so accustomed to.

Retailers used to buy from their distributors and sometimes directly from brands if they were big enough and bought enough. Now, retailers are increasingly going right to the factory and having their own products manufactured under in-house brands and labels.

Distributors, well, they are a bit stuck. When you look at the business model of your average wholesale distributor they exist because of inefficiencies in our supply chain. Distributors primarily buy up large enough quantities of products from brands/manufacturers and then takes care of selling small-lot quantities to retailers that wouldn’t be able to buy enough from those same brands to “go direct”.

What does this mean for you, the brand, retailer or distributor? Here are the three areas you need to start taking action on:

1) Margin impact

The most simple and obvious impact I see most often is on margins. Without distributors there is more margin for the retailer and the brand since there is at least one less hand in the margin cookie jar. This means that both brands and retailers have an opportunity to capture more margin per order, which means more profit and more profit provides more sanity. If the goal is building a sustainable business, more margin is not a bad thing.

However, capturing more margin also means that brands and retailers are going to have to invest in areas of business they are not used to investing in. For example, things like customer service, small quantity fulfillment and returns management are not areas that brands have decades of experience doing. They’ve trusted retailers to do this. Retailers conversely don’t have muscle built up around manufacturing, things like quality control and work in progress.

Should you capture more margin in this new, modern supply chain? Absolutely, but it’s far from a free lunch.

2) Relationships impact

The second most common impact area is on consumer relationships. Everyone wants to own the relationship with the end customer which means there is going to be more and more conflict amongst retailers, distributors and manufacturers (brands). I’ve seen this play out in countless boardrooms. Brands, in their goals of selling their wares directly to the customer have been very conflicted about how to do this without causing pain in their wholesale/retail channels. Often they are having to create very strict guidelines for themselves on what they can put on promo and when they can run promotions in their direct channels.

Brands and retailers are approaching this new supply chain very carefully and for good reason. If they jeopardize their current supply chain relationships too much, this puts their present day business model at risk, which raises the question—will we even have a future if we kill sacred cows today?

3) Planning impact

The more complex area of impact is on how you plan your business. I’ve always been a believer in understanding where someone has the most incentive as that tells me how they will make decisions and how I will need to react.

 

If we know that the retail supply chain is going to continue to shift, we should have a pretty good idea where each type of business is thinking of going. This can and should absolutely shape your own roadmaps. Taking small steps now that will lay the groundwork for how you move into the future is not just a nice to have, it is critical.

This article originally appeared in the September 2017 issue of Direct Marketing.

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Matthew Bertulli

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