The Bleak Future of Middlemen
Just fifty years ago, products were made available for sale by a shopkeeper who had acquired these goods for himself from an intermediary. Tracing a product from origin to point of sale was far from easy, as the route could involve multiple intermediaries. The intermediary between a manufacturer and a consumer- the middleman- was the vital link between the maker and the consumer of any particular good. With progress in technology, it became possible for the shopkeeper to negotiate with the manufacturer and bypass an intermediary or two, allowing the maker to charge less while still maintaining his profit margin. At the point of sale to the customer, the ethical shopkeeper could charge less, while also retaining his profit margin. The role of the intermediary thus started to lose its sheen and today, the middleman is on the verge of extinction. Diehards that they are, the middlemen are fighting back, as, in their case, it is a matter of survival.
Keywords: product, intermediary, middleman, manufacturer, shopkeeper, profit margin, point of sale, extinction.
The Bleak Future of Middlemen
People have long been suspicious of “middlemen,” e.g., traders, lawyers, bankers, salesman, marketers, managers, and politicians. For millennia, most people have suspected such middlemen of being mostly social parasites, and many “Utopian” reforms have planned to eliminate them. Economists have faced an uphill battle arguing that middlemen usually serve important functions. Among intellectuals, engineers and physical scientists find it especially hard to appreciate roles other than designing, building, maintaining, fueling, and distributing physical goods. Robin Hanson, April 4, 2010; (www.overcomingbias.com)
Right up to the 1970s, Marketing was the preserve of the retailer, or shopkeeper. You went up to him and asked for a product. If it was available, fine. If it wasn’t, he just said, “Sorry, try after a few days.” In those days, the recommended maximum retail price (MRP) was not always printed on the package, just a price. It was made mandatory by law thereafter to print the MRP only in 1975 (Businessworld, Issue 8-14 July 2008). The consumer had no idea what the profit margin was. Prices of a product varied from locality to locality, with uptown markets charging more than the local dime store. Even the manufacturer had no clue about final prices.
Let’s try and trace the cost of a jacket in a hypothetical upper end and famous apparel company, John & Jane (J&J) forty years ago. The retail price on a prominently displayed label was, say, £ 64.99. The fastidious and moneyed bought it, because, after all, it was J&J. But the story begins in a small town in India, where the fabric was produced from high quality yarn, dyed to get a specific and consistent colour, tested by a prospective buyer and if the sample passed, accepted. At this point, the fabric supplier had his profit margin fixed in his selling price of £ 5.00 per metre. He would then sell the ordered amount of fabric to that buyer, whose job was to ensure that the right amount of fabric reached a specific garment factory by a somewhat flexible time. His price at the factory would be £ 10.00 per metre. Using block cutting, the fabric wasted would be kept down to the minimum. Simultaneously, another agent would be busy procuring buttons and other embellishments, which he would sell to this factory with his own profit built in. Post assembly, the factory would have their jackets inspected by yet another agency, who would pay a pre-decided price per piece, say £ 27. After adding the cost of transportation, customs duty-90% of which would be refunded once delivery was confirmed-the agent would sell it to the supplier to J&J at say £ 40. The supplier would deliver the order to J&J at £ 48 per piece. J&J’s floor price would be £ 64.99. An item whose intrinsic value was less than £ 20 would be sold at three times that price. Naturally so, considering the number of middlemen involved, each hanging on to his profit.
What if J&J decided to put its own man into the loop, starting at the fabric stage? He would get his fabric at £ 4, the product at the factory would be close to £ 15 and worth £ 19 at the J&J warehouse. J&J could make a killing at £ 29.99! The customer would probably buy two jackets at this price. This latter scenario is no longer hypothetical-it is close to the extant situation post globalization. The market no longer belongs to the Seller; it is now a Buyer’s market, with a wide array of products and their prices available online. The Internet has changed global rules totally. With fierce competition in a buyer-driven market, the retailer has to keep prices in check. Brand loyalty has been displaced by value for money. The retailer has to pare costs to the bone. When he first studied his market dynamics, he was shell-shocked at the price differential between the point of origin and the point of sale. He was compelled to set up a new office, called the ‘Buyer’s Office’, close to his manufacturer and delegate to this office the task of ordering, testing, packing and shipping almost finished goods to the bonded warehouse in the destination country. I say almost finished goods, because there was a peculiar law that said that the deemed place of origin of the product would be that country where the last major finishing action was done on the product.
Sorting out by colour and size, inserting a cardboard collar-shaped stiffener into the folded collar, attaching clips to the folds, inserting tissue paper between the jacket front and rear, wrapping them in plastic bags were considered major finishing jobs when combined. J&J would then attach a tab, ‘Made in England’ to the inside of the collar.
Today, with broadband freely available, colour matching can be carried out online, reducing approval time from 6-10 days to just 60 minutes. CAD-CAM reduces pre-production time to less than a day. Eton bundling systems gets all machines on stream the next day and shipment of the order can start on D+7, as against D+120 in the middleman era. Their ERP integrates all loose ends of his supply chain and cuts out unwanted bodies from the process. Ergo, exit the middleman. New styles on display every 40-60 days, at relatively low prices. Traditional Spring-summer and Autumn-winter fashion seasons dead and buried.
The slow demise of the middleman started the day an individual could put his items up for sale with pictures thereof, advertise promos for multiple buys, etc. Canny individuals climbed onto the bandwagon while there was adequate space. We know the success stories of Amazon,
Ryanair/Spicejet, Expedia and other net-based low-cost high-volume sellers. Mullaney (2004) has listed the three services where middlemen have more or less been eliminated, i.e., books, music, and travel. He predicts that the next six to fall will be jewelry, bill payments, telecom, hotels, real estate, and software. I believe he is being conservative, but then his article was printed six years, more than a full cyber-generation, ago. The all-pervasive Internet will strike down almost all businesses that have middlemen, bar a few whose expert advice and experience cannot be substituted by online forces. The nurse, anesthetist, child minder, jockeys, Montessori teacher, CAD-CAM operators, Test Pilots, mail delivery systems for physical goods like the courier, and many other specialists will remain. For how long? Perhaps only for a couple of generations, who knows?
An interesting case would be that of a pharmacist/druggist. He stocks medical goods, some of which he cannot sell to a customer unless he sees a legitimate prescription slip. Can he be
dispensed with? All that is needed is that the Doctor fill in a customized prescription slip, of which one copy goes online to the patient’s supplier(s) of that drug/those drugs. But how many drugs is a diabetic coronary disease patient with atherosclerosis consuming? Two separate drugs for diabetes, three for coronary disease and two for atherosclerosis. So will the pills come by routine mail or by courier? Given the attendant risk factor, some will come by courier. So the chemist/druggist stays, while becoming much more efficient. He gets an alert over the web when the good old doctor is filling in the prescription of Patient X, Personal Number (PN) ABQCM7850NAM; he checks his stocks and is all set to deliver. PN could be any unique number on the database, for non-financial transactions. Financial transactions would need multiple security, with at least one layer more than is extant. That would imply yet another PN, the Financial PN or FPN. The number of banks the customer could use would be restricted to three, at the outside, which would make the IRS/Income Tax authorities happy.
What about your grocer and other essential services providers? Somebody has to deliver your foodstuff, your wine and other liquor, household requirements, etc. Is there enough data to substantiate a statement that an errand boy for household goods is necessary? Yes, there is, even if you need to make a trip to the supermarket to select your goods and hand over your shopping cart to an agent who will deliver your stuff at home and collect your payment there. But a time will come when even this system will be automated; the supermarket’s wide array of supplies will be made visible online for you to pick and choose.
The educated middleman like the stock broker and the financial investment consultant is doomed to perdition. The share depository will be subsumed by the company and all transactions will be online and one-on-one. Every single interaction involving a middleman will be put through the wringer and an answer found on a case by case basis as to how to get rid of the middleman. Peter Drucker used to point out that the classical professional firm consisted of two partners and a clerk. Today, the partners ARE clerks, doing data entry, numbers crunching, and most other computer related activities (EzineArticles.com). The poor clerk has been hacked. Do we really care about what he will do to survive? No. That’s his problem. And he is not alone, if that is any consolation.
Shopping will be entirely through the net, even for those who like personal interaction. Each store, as we see it now, a collection of bricks and mortar, will change tack, as all of them will become part virtual stores or storefronts as well. The magic mirror (www.rfidupdate.com), 3-D viewing platforms (www.anark.com) and person-specific customization (atmae.org) will become the norm. Every buyer will be able to select color codes and patterns to suit his/her choice. Hardware, carpentry and other tools, DIY machinery, etc. will all fall into place.
When I bought my first Desktop PC in 1996, I had a 2 GB hard disc and the seller told me it would take me a lifetime to load 2GB! Today, net geeks have 360 GB hard disc drives, with a 2 TB attachable hard disc. Servers are talking of 1 Gbps standard transmission speed, but this will also jump like Bubka. Data transfer will shift into the nanosecond regime, perhaps calling for artificial slowing down to digestible levels. When you call a company-through the computer-that company will scan its database to check if you are on record. If yes, it will crosscheck your facial features and voice for identification and proceed. A credit viability check will decide if you can place an order on credit. If not on record, they will treat you deferentially, using the 7Ps of the extended Marketing Mix (marketingteacher.com), Macro-environmental factors with the new-fangled acronym PESTLE (www.renewal.eu.com) and similar stratagems to get you on their rolls as a customer. Data-sharing agreements between branch/affiliate concerns which the customer might have agreed to will be used laterally, to dialogue with the prospective customer, offering him value or promotional pricing (marketingteacher.com).
E-billing and E-payment are basics. Expensive paper checks are passé. Online bill payment has shed its mystical aura and is exploding: Gartner Inc. estimates that 65 million people paid at least one bill online last year, up 97% from the year before. "The Internet economy is in full swing again," says Mark M. Zandi, chief economist at Economy.com Inc. (Mullaney, 2004).
The Computer World will soon see a battle of prices. Over the past lustrum, Linux had steadily but surely eaten into Microsoft’s OS pie and was considered a better system than Windows for servers. Today, this open source system is considered superior to the confusingly complex Windows 7. According to Computer guru Michael Horowitz, who runs a full website dedicated to Linux vs Windows, most of the software preloaded on top-end Sony VAIOs is junk and should be removed. He says (online: 2008), “A new computer with Windows pre-installed normally comes with additional application software; exactly what to include is up to the PC vendor. Sony VAIOs come with a lot of software. However, there are problems with the pre-installed application software on Windows computers.
1. First, much of it is junk. So much, that a new term ‘crapware’ is being used to describe it. The PC vendors make money by installing this software that many people consider worse than useless. In fact, the first thing many techies do is un-install this software. I have never heard of anyone complaining about the software that comes pre-installed in the normal, popular versions of Linux.
2. Second, important software is often missing or old. For example, the Adobe Acrobat reader, may not be pre-installed by the PC vendor.
3. Windows is open to attack by viruses. Linux is not!
To be fair, the installation of applications under Windows, while not standardized, is generally consistent and pretty easy. Installing software under Linux varies with each distribution and has not been nearly as simple, easy or obvious as Windows. But the fact remains that Linux costs less than half of what MS charges for Windows. But the computer world has gone beyond Linux (Hamm 2004).
The open-source crowd, led by MySQL AB and JBoss Inc. are coming out with second generation open-source software: everything from databases and search engines to programming tools and desktop PC software. If this stuff follows the trajectory of Linux, it could cut into the sales and profits of incumbents, altering the financial landscape of the $200 billion business. None of this would be possible without the Web. The Net lets thousands of people worldwide contribute code, fixes, and ideas to the small tribes that put open-source programs together (ibid).
‘The Consumer is King’ is today’s tagline. And the market will do its utmost to hard or soft sell their products to more and more customers. The customer never had it easier. Imagine a marketing manager from Toyota calling from his factory and offering you a simulated test drive in their latest model on your 3-D monitor/TV. And comparing it with other cars in the market! You could test drive a competitor’s car and push hard for bargain prices. Everything must be on tap for the customer. The moment you enter an option into your PC, all relevant data must be made available to you on demand. All presentations must be audio-visual, with no time wasted on buffering. You could split your 100 cm screen into four, and shut down the audio as you
compare the physical goods, whatever they are. You read whatever you want on your Kindle/
I-pad/ I-phone/Treo-phone or whichever is most convenient to you.
Still, some diehards like Hotel chains are bent on fighting the digital evolution (Mullaney, 2004). InterContinental Hotels Group is slapping hotel owners with fines and threatening to pull their franchise licenses if they offer special discounts through Net partners. Real estate giant Cendant Corp. is pressing the National Association of Realtors to make it harder for Net upstarts to get home-sale listings. These tactics can, at best, work for a limited period. Hotel owners barred from giving online discounts may see travelers book rooms across the street at a rival hotel. Cendant's parry in real estate is on hold while the Justice Dept. conducts an antitrust probe (ibid). The end result is inevitable.
Cross channel solutions provider ATG noted a rise of 50-100% in traffic for its e-tailer clients (www.retailtouchpoints.com). Several mid-sized retail companies reported year-over-year e-commerce sales growth of more than 200%. ATG noted the impact of Cyber Monday alone, when the sales conversion rates for consumers who were presented with personalized recommendations were triple the rate for customers who did not interact with them, as they say. Nina McIntyre, SVP & CMO, ATG, summarizes (online: www.retailtouchpoints.com), “It’s clear retailers are seeing success this year by combining attractive, aggressive sales promotions with personalization techniques that enable them to target different segments of shoppers with offers they’re likely to be interested in.”
Convenience goods/services: Goods which are easily available to the consumer, without any extra effort are convenience goods (www.altiusdirectory.com). Further, convenience goods can be sub-categorized into:
· Staple Convenience Consumer Goods: Goods which come under the basic demands of human beings are called staple convenience goods, e.g. milk, bread, sugar, etc.
· Impulse Convenience Consumer Goods: Goods which are brought without any prior planning or which are brought impulsively are called impulse convenience goods. e.g. potato wafers, candies, ice creams, cold drinks, etc.
· Shopping Consumer Goods: In shopping consumer goods, consumers do a lot of selection and comparison based on various parameters such as cost, brand, style, comfort etc, before buying an item. They are costlier than convenience goods and are durable in nature. Consumer goods companies usually try to set up their shops and show rooms in active shopping areas to attract customer attention and their main focus is to do lots of advertising and marketing to become popular. Goods like clothing items, televisions, radio, foot wear, home furnishing, jewelry, etc. come under the category of shopping goods (ibid).
· Specialty Consumer Goods: Goods which are very unique, unusual, and luxurious in nature are called specialty goods. Specialty goods are mostly bought by the upper-class of society as they are expensive in nature. The goods don't come under the category of necessity; they are purchased on the basis of personal preference or desire. Brand name and unique and special features of an item are major attributes which attract customer attraction in buying them. Examples of specialty products are: antiques, jewelry, wedding dresses, cars etc.
· Sought Consumer Goods: Goods or Services like insurance which are available in the market and the customer is interested in buying them with an ulterior motive are called
sought goods (ibid).
The removal of middlemen will make no difference in Convenience goods/services. But they will no longer be present in the Shopping Consumer Goods category. Expensive items of clothing and jewelry will be the first to be affected. Stores will have to conform to a new global prototype that will emerge of itself. Sought Consumer Goods will see status quo.
Amanda Ferrante writes (online: www.retailtouchpoints.com) “Black Friday showed that sales and traffic were on par with last year. However, the wake-up call for retailers this year was the continued shift in preference toward e-commerce channels. The biggest traffic jams were occurring online. ComScore Inc. an Internet audience measurement and consulting service, reported that online shoppers rang up $595 million in sales on Black Friday, up 11% from last year. Web shopping also rose 10% on Thanksgiving day to $318 million. Web analytics firm Coremetrics reported that as of 1:00 p.m. Cyber Monday, Nov. 30, online sales for the day were up 19.6% over a year ago.”
What is of great interest and probably a harbinger of future strategy of brick and mortar
stores is the finding reported by Experian Hitwise, a leading Custom Data and Analytics concern (ibid). According to them, “One traditional brick and mortar retailer that has clearly embraced the shifting channel preferences into its sales strategy is Sears Holdings. The retailer was ranked third in overall Web traffic for a multichannel store retailer for the week ending Nov. 28, which included Black Friday. Imran Jooma, SVP at Sears Holdings corroborated that finding (ibid), “We’ve experienced a record number of people engaged with the Sears ShopYourWay multichannel platform this Black Friday and on Cyber Monday, which proves we provide customers with the tools needed to easily find whatever they need when they need it.”
Jooma added, “Use of mobile phone orders were also on the rise and further evidence that we’re offering an exceptional online experience that is clearly transforming the way our customers shop.”
Driving Cross Channel Traffic : In order to drive traffic to both their physical stores and Web site, retailers continued to ramp up their e-marketing efforts this season. Both Black Friday and Cyber Monday hit all-time highs in terms of email volume (www.retailtouchpoints.com). Cyber Sunday, the day before Cyber Monday, also saw record email volume (online: Smith-Harmon’s Retail Email Blog). This is in keeping with Cross channel solutions provider ATG’s findings and subsequent strategy.
On Black Friday, 69% of major online retailers sent at least one promotional email, up from 59% in 2008, as tracked by the Retail Email Blog. On Cyber Monday, 71% sent at least one promotional email, making it both the most popular retail email day of this year and also the most popular of all-time. Last year, 70% of retailers sent email on Cyber Monday. And on Cyber Sunday, 45% of retailers sent at least one promotional email, up from 36% last year. That made Nov. 29 the biggest Sunday ever for retail email marketing (www.retailtouchpoints.com).
While Black Friday is traditionally known for in-store sales, the Smith-Harmon report noted that more online sales were promoted in this year’s Black Friday email campaigns. At the same time, retailers used their email campaigns to actively promote their in-store sales. According to the report, plenty of retailers promoted their Friday store hours in their emails and Kohl’s, Office Depot, Sears and Toys “R” Us even promoted theirs in their subject lines (ibid). End-to-end e-commerce provider iCongo Inc., revealed that its retail clients indicated average gains on
sales this year versus the same period in 2008 for Black Friday and Cyber Monday to be 83% and 74% respectively. The average sales increase, year to year, for the Saturday and Sunday between Black Friday and Cyber Monday was 47% (ibid).
Trends in E-Commerce : Site search vendor SLI Systems found that most e-tailers were using multiple technology applications and approaches, though 75% were uncertain if they are utilizing all the data gleaned through these applications to successfully recruit customers. The
top technologies being used are Search (88%); Web analytics (87%) and Email marketing (81%)
(www.retailtouchpoints.com). Geoff Brash, VP Marketing, SLI Systems believes, “During 2010 we expect to see integration of various on-site technologies provide a major impact to retailers — whether it’s the integration of applications like video, site search, customer ratings and reviews or improved integration between analytics and other on-site components. Retailers have been investing heavily in technologies over the past few years and they now need to integrate these technologies to see the full ROI” (online: www.retailtouchpoints.com). He adds that niche players are strengthening online, because typically shoppers have to travel to get to a specific type of store they’re after, but online always comes to you. He also notes that SLI’s retail clients have been exploring new ways to optimize the visual appeal of E-commerce sites, like adding more imagery and color to grab shoppers’ attention, in addition to improved site search and navigation tools (www.retailtouchpoints.com).
Conclusion: The traditional marketing system involving the manufacturer, the sales agency and the customer is undergoing a sea change with the middleman being excluded from the deal. There is no place for him in most businesses and his future appears bleak. Middlemen in certain businesses will remain, though their longevity cannot be forecast. Moreover, the balance of power has changed irrevocably, with the customer becoming king. The market has become ethereal in the sense that the customer is now invited to purchase any item he fancies of the lot being displayed to him, as he lounges on his sofa and observes the audio-visual hard sell in progress. He no longer has to visit a bricks and mortar store; the store is brought to him. E-commerce practitioners are besieging him with package deals and he has hundreds of options to choose from. Research has shown that old habits die hard, and those who pander to him, interact with him and keep him happy are most likely to get his patronage.
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