Manufacturers cut out the middleman (part 1)
For years, manufacturers have depended on the middleman to distribute goods and get merchandise in front of customers. Manufacturers, wholesalers, distributors and retailers were allies. But today, a shift in consumer behavior and the adoption of new technology are transforming the traditional supply chain. This transformation has been driven by: consumer demand for faster delivery and customized products; the price squeeze caused by low-priced imports; and e-commerce. Some manufacturers are selling direct to customers and cutting out the middleman.
Manufacturers that ship their products directly to consumers without relying on the middleman are considered direct-to-consumer (D2C) retail companies. Typically, they can sell their products at lower costs while maintaining end-to-end control over manufacturing, sales and marketing, and distribution. Well-positioned, streamlined D2C startups are able to connect directly with customers, grow fast and compete with the big retail brands. Direct sales can be a powerful source for increased profits and greater control over brand, price and customer data. As the lines between industries in the supply chain become uncertain, are allies becoming competitors?
A recent study showed that 44 percent of manufacturers admitted to opening an e-commerce web store, while 24 percent intend to do so in the future. It is no wonder that 50 percent of the world’s wholesalers feel threatened by manufacturers selling direct. Traditional allies are becoming competitors, making the supply chain more volatile.
Moving from business-to-consumer distribution to D2C is a complex move some manufacturers are unwilling to make. Others are finding that a partial reduction in intermediaries is right for them, choosing one or more customer segments for D2C sales based on volume, profitability and cost. Challenges include new investment, and gaining new capabilities in fulfillment, logistics, marketing and advertising, to name a few functions performed by traditional intermediaries. If the offshore ex-works price is $X, the retail price is about $3X. The U.S. ex-works price averages $1.5X, so U.S. manufacturers can sell for less than the retail price of imports and still make a solid margin. U.S. manufacturers have a further advantage, since they have a presence from which to ship domestically. Foreign products generally need a domestic infrastructure to service the market.
Companies are reshoring to move closer to U.S. consumers and satisfy the shift in consumer expectations. Producing in close proximity to customers provides more efficient production, flexibility for customization, and faster delivery for today’s on-demand digital consumer.
In 2019, car manufacturer Tesla said it would close some stores and begin the shift to an online sales model in an effort to cut costs and lower the price of its long-awaited Model 3. The move enabled Tesla to lower vehicle prices on average by about 6 percent. Tesla’s strategy to sell D2C bucks a 100-year tradition of car manufacturers selling through a middleman—car dealerships. But according to a Deloitte study, 60 percent of car buyers would prefer to purchase a vehicle online direct from the factory. They disliked the large amounts of paperwork (57 percent), thought the process took too long (42 percent), and hated haggling over price (40 percent).
For manufacturers considering a shift to D2C sales, we suggest sourcing or manufacturing locally for faster delivery, quality assurance and customization. Use the Reshoring Initiative’s free Total Cost of Ownership Estimator to see if reshoring makes sense for your company. Placing a real value on shipping, time to market, travel, intellectual property risk, increased inventory, and struggles with communication and quality issues can tip the scales in favor of producing at home.