Wholesale Distribution Has Destroyed Direct Exchange

The rise of the middleman economy and wholesale distribution has led to long supply chains and multiple parties between the producer and consumer. These distributors have grown so large that they now control many of our supply chains and have removed direct exchange from our daily lives. It’s time to develop creative ways around this model to bring the consumer closer to the producer.

Happy Tuesday Friends,

When you buy fruits/vegetables directly from a farmer at your local farmers market it creates a meaningful connection between you, the farmer, and the product you are consuming. This type of direct exchange is very powerful. It is not something you can measure on a spreadsheet, but it is a critical piece to living a connected, meaningful life. This feeling is completely different than picking up your greens or shiny produce at the supermarket where there is no connection to the person making the product you are consuming. The challenge is our modern day economy is based on long supply chains and multiple parties operating between the producer and consumer. There is little direct exchange in most of our lives. Much of this piece was inspired by Kathryn Judge’s book, The Rise of the Middleman Economy and Power of Going to the Source where she talks about many of these concepts and the power of going direct to the source.

The Middleman Economy 🛠️ 🚚 🛃 💰️ 

If you step back and think about it. the giants that dominate our modern day economy are all middlemen. They do not make anything. Walmart, Amazon, Home Depot, banks, mortgage companies, the list goes on and on. But, it’s not that middlemen are necessarily bad - they provide a ton of convenience and help overcome many informational and logistical hurdles between suppliers and buyers. The problem is that we have turned into an entire middleman economy where in exchange for cheaper goods, we have developed extremely long and fragile supply chains, no accountability, and we are completely disconnected from the things we buy. There is something very important missing with how we consume in today’s modern day world and it has a dramatic effect on our happiness as well as human and planetary health.

In the retail industry, the thing that all of these large middlemen have in common is they require suppliers to work with specific wholesale distributors if they want to get on their shelves or e-commerce storefronts. Examples include:

• Supermarkets: working with UNFI or Kehe

• Amazon: using Amazon’s Fulfillment by Amazon (FBA) service.

Any supplier that works with these retailers can tell you about the joys of working with wholesale distributors 😥 😠 . Below is a simple digram of the value chain in the traditional retail industry.

Now, let’s look at how wholesale distribution has evolved.

What is Wholesale Distribution? 🚚 🛩️ 🚢 

In simple terms - it’s the process of buying goods in large quantities from manufacturers or suppliers and selling them in smaller quantities to retailers, businesses, or other intermediaries. These distributors typically offer services that include storage, logistics, inventory management, and in some cases marketing. Wholesale distribution has been around since forever and date as far back as Mesopotamia (3000 BCE) where merchants distributed things like textiles, grains, and metals to merchants in other regions. But, it has evolved into something much more powerful into today’s modern day economy.

The Rising Power of Wholesale Distributors 👑 💪 

As the result of the Industrial Revolution and advent of large, centralized systems of production, wholesalers have grown so big and powerful they now control many of our supply chains.

• 18th and 19th centuries - the rise of mass production of the Industrial Revolution significantly increased the volume of goods requiring distribution. This enhanced the role of wholesalers managing large quantities of products. Airplanes and the automobiles allowed them to expand their reach and distribute efficiently over long distances.

• 20th century - the expansion of global trade networks created an opportunity for wholesalers to operate on a global scale. This combined with digital transformation and the rise of e-commerce has created the opportunity to develop real-time inventory management and global distribution networks.

All of this technological advancement has led to horizontal and vertical integration in nearly every industry. This has created extremely large entities with significant market power who control our supply chains either directly or indirectly.

Standing in the Middle 👨‍🦰 👩‍🦱 👱‍♀️ 

We are not going to name specific companies or insert names into this piece as we will be getting much deeper into this as we move forward. The point of this piece to simply explain how the game currently works in big box retail:

1. Retailers use their buying power to negotiate the lowest prices possible from suppliers.

2. The retailers require suppliers to sell their products through preferred wholesale distributors to get on their shelves. These distributors stand as a layer between the suppliers and retailers.

3. The distributors often do not provide transparency to suppliers on the final price they charge the retailers. They also offer a variety of rebates and other incentive programs to the retailers that the suppliers have no control over.

4. The distributors charge a myriad of fees to suppliers. These include chargebacks for unsold inventory, freight allowances, and other stocking fees.

5. Distributors pay suppliers between 30-120 days after receiving the product.

If you add this all up, it makes it very difficult for any small business to compete. In other words, the game is rigged. This entire game of wholesale distribution and lack of transparency is how they control supply chains and markets. They stand between the supplier and their customer so there is no direct relationship. It’s that simple.

Finding a Way Around It ⭕️ 

We have seen glimpses of consumers wanting more true direct exchange in their lives despite the middleman economy and wholesale distributors who dominate today’s modern day economy. Some examples include:

• The growth in the number of farmers markets over the last 20 years.

• Increasing number of creators selling their own goods direct through their websites.

• Popular digital platforms that enable direct exchange - ex:// Etsy and Kickstarter.

• Early DTC brands like Warby Parker and Glossier that sell direct to their customers at scale.

Enter the Creators 🦸‍♂️ 🦸‍♀️ 

This is where the creator economy comes in. It represents the biggest distribution channel that has ever existed (yes, we will keep repeating ourselves). If the right infrastructure and systems are built, the creator economy has the opportunity to create an alternative to the traditional wholesale distribution model in many industries. A model that is rooted in more transparency and enables consumers and businesses to procure direct from the source. Creators can help us all lead richer lives and contribute to a more resilient, connected, and just economy by increasing the amount of direct exchange. Shorter supply chains are better, direct is the best, and the creator economy is the lynchpin to making this a reality.

Now, on to a quick summary of the Kickstarter story.

Kickstarter is Now a Verb

Kickstarter launched in 2009. Over the last 15 years, it has enabled hundreds of thousands of entrepreneurs to raise over $8 billion to get their creative projects off the ground.

🍿 Synopsis: Perry Chen, Yancey Strickler, and Charles Adler founded Kickstarter in 2009 to help artists, creatives, and entrepeneurs get their projects off the ground through crowdfunding. It works like this: someone with an idea can post their concept and related marketing materials on the website. Others who endorse the project or want to have the product made can invest small amounts of money to help the concept owner develop it further. To date, the platform has successfully funded nearly 260,000 projects, totaling over $8B in dollars pledged. The pledges have come from more than 23 million individuals.

📚 Insights: Kickstarter has changed the way many artists, creatives, and entrepreneurs fund early product development. In the past, small entrepreneurs didn’t have access to the necessary finances to get their products off the ground. Kickstarter has enabled them to tap into other individuals who are interested in the specific product and want to help them develop early versions of it. The platform has created a unique way for hundreds of thousands of entrepreneurs to test demand and get direct feedback in an iterative way. Products used to be conceptualized and produced without really knowing if there was real customer demand. This led to many product launches that were simply disasters. Kickstarter connects creators/makers directly with an audience to help them avoid this fate. If a project is not successfully funded, it shows the entrepreneur there might not be enough demand, which saves him/her time and money. If a minimum threshold is not met then the backers receive their funds back. The fact that 23 million people have contributed to Kickstarters over the years show the desire of consumers to be directly connected with the producers of the products they consume. Kickstarter created an entirely new category around crowdfunding. Fast forward 15 years and how there are endless numbers of crowdfunding sites across different industries and themes that follow a similar model.

👀 Read More: check out more about Kickstarter’s incredible statistics on how much capital has been invested on the platform, the number of contributors, and much more:

Have a great week and remember to Go Direct!

Build with love,

Jordan & Scott