You’re not really a distributor if you stop adding value.
Distributors worry that Fulfillment by Amazon (FBA) is assuming key distributor roles and erasing them from the equation. The service picks, packs, ships and even manages returns for retailers and distributors, as well as holds inventory in Amazon fulfillment centers.
More manufacturers are also leveraging ecommerce to go direct to the end-user, rather than through the distributor.
How concerned should distributors be? And how can you avoid being eclipsed?
We discussed this issue on our weekly live show, Wholesale Change.
Key Distributor Functions for Customers and Suppliers
Distributors add a great deal of value in the supply chain between suppliers and customers:
- Assortment convenience (wide variety of products)
- Product availability
- Advice and technical support
- Customization (Value-added services)
- Customer service
- Market information
- Market coverage
- Demand generation
- Order processing
- Sales contact
For Customers & Suppliers
- Credit and financing
Why Distributors Risk Being Replaced
With these functions in mind, let’s take a look at why distributors’ traditional roles in the channel may be at risk of being replaced entirely.
Distributors selling through marketplaces. When distributors sell through marketplaces like Amazon, the marketplace owns the relationship and assumes several distributor functions. They limit distributors’ communications with customers, generate or capture demand, process transactions and more. In this scenario, distributors surrender much of their value-add and openly share data that Amazon could use to replace them. This is an especially significant risk if the marketplace is also a merchant. In other words, it carries its own assortment, employs product managers and has its own distribution capabilities.
Manufacturers selling through marketplaces. Increasingly, manufacturers are selling through marketplaces and they’re often handling their own fulfillment. Many manufacturers are prepared for this because distributors have demanded more drop-shipping over the years.
Manufacturers selling direct. Many manufacturers are selling directly through their own websites. This is partially due to frustration with their distributors’ lack of ecommerce capabilities.
Fulfillment by Amazon. With Fulfillment by Amazon, you ship your inventory to Amazon distribution center, and they fulfill the orders. You’re providing the working capital, and Amazon takes over the customer service, transaction processing, demand generation and bulk breaking. In this scenario, it would easy for Amazon to go directly to your supplier and cut you out entirely.
The hard reality is that when distributors stop adding value, they stop earning their margins. By outsourcing distribution functions to marketplaces, distributors are heading down a slippery slope toward extinction.
We recommend that distributors:
- Take control of performing key distributor functions well and capitalizing on those differentiators.
- Consider how they can improve your value-added services, which we discussed in a recent episode of Wholesale Change.
- Choose marketplaces that are not merchants – in other words, they are not competitors. Examples include Alibaba, Google Shopping and eBay Business & Industrial.
Every distributor needs a marketplace strategy, but if you prioritize short-term benefits, you’ll suffer from long-term consequences. Every business must add value or it becomes vulnerable to competitors. And sometimes those competitors come disguised as friends. Don’t be fooled.