In retail trade, the main tools of power are the supply side and the relationship with the end customer. Those who control supply and those who control ties with the customer dictate the rules for all the other players in the chain of trade, Paulius Insoda, the CEO of NFQ, writes in Verslo Žinios.
A key factor is that a product’s margin is divided up along the way among all the players in the chain. So, naturally, the fewer intermediaries there are, the bigger the share of the margin each gets. Meanwhile, those holding the levers of power – the supply side and ties with the customer – take the better part of the margin.
In an ideal case, manufacturers themselves would like to interact with the customer and sell to them directly, with no intermediaries. That would let them offer the buyer a smaller price and earn a significantly bigger margin. Many producers are going that route, and digital opportunities make that easier to do than in the past, when the option essentially did not exist.
Of course, there are many challenges, and near term that will not spread to such an extent that the intermediary links, including wholesalers, might disappear. But wholesalers are in a risk group if producers were to jump over the wholesale chain and start working directly with retail. That is not easy, but in a variety of sectors we are seeing efforts by companies to move in that direction.
The same principle of reducing intermediaries applies to all the players in the supply chain. If one of the levels, say wholesalers, finds a way to jump over the next level and move closer to the customer, the margin they earn may increase.
Digital possibilities and e-commerce offer an opportunity for any player in the supply chain to reach the end customer directly.
Of course, not long ago it seemed naïve to expect any quick change of affairs, with wholesalers and manufacturers suddenly learning to work efficiently and well with end customers, using all channel possibilities, not just e-commerce.
But, accelerated by last year’s quarantines, e-commerce showed and taught a huge proportion of consumers to use e-channels, and e-commerce volumes grew as much in 2020 as was forecast for the next five years or more. Not to mention that in stricter quarantine periods it became the only way to sell what you make.
So, naturally, many players in the chain of trade not only discovered e-channels, but also invested in them very seriously. Both for risk management, in case they would have to work remotely and e-channels remained the only way to reach customers, and for the general potential of the e-commerce market, which surged sharply during the year.
On the other hand, many wholesalers realized during the quarantine just how heavily dependent they are on retailers, since if retailing is shut down, then wholesaling loses its channels for selling its goods and lacks instruments of its own for reaching customers.
A good example would be wholesalers of food products who worked exclusively with the HORECA segment. When restaurants and hotels closed, their business simply stopped. Many had to quickly reorient to e-commerce and start making home deliveries of food products. That was not easy, but those lessons, if learned well, will bear good fruit for them in the future. It may also be one of the reasons why wholesale wants to have a plan B for reaching the end customer.
Are retailers happy about wholesalers going into retail trade? I don’t think they are cheering too much about it, especially given the power lever of the supply side, which is in the hands of the wholesaler and not the retailer.
Retailers who do not find a shorter route to manufacturers will also face a risk: if not elimination from the chain of trade, then at least the risk of their margin shrinking.
As long as wholesalers or manufacturers are just exploring and “getting a feel for” the retail side of the market, that does not have much impact on retailers. Only a small fraction of consumers or specific niche customers will likely be taken from them, but that will not have a dramatic impact on the retail business.
With successful learning, though, and over time, the redistribution of retail turnover will likely increase. So in the long-run the same two levers of power remain – the supply of goods and as good as possible a relationship with the customer. Whoever better masters those two areas has brighter long-term future prospects.
As for e-commerce technology systems, e-shops and so on, the needs depend on what business processes are desired to be automated and optimized. We see that both wholesalers and other bigger players no longer view e-commerce as an experiment or chance to acquire new competencies, but as a very important part of their business. So their investments in systems are more serious, covering ever more business activities. Processes and actions increasingly are being automated, systems are being prepared to handle large numbers of orders, and every step of the process – from supply management and optimizing the preparation of product information to marketing automation and, of course, shaping the customer experience – has an important impact on the margin ultimately earned as well as the customer’s experience and the long-term success of the business.
Originally published in Lithuanian on the Verslo Žinios new portal
