Wednesday, September 03, 2003

Disintermediation and oligopolies In retailing and many other business activities, the tendency had been for middlemen to develop.. These act as intermediaries between manufacturers and retailers. For example, food brokers stand between food manufacturers and supermarkets, handling the warehousing and specific fulfillment needs of the markets, region by region. Similarly, distribution companies handle the delivery of videotapes and DVD from the studios to the rental shops; clothing brokers between (often offshore) manufacturers and clothing stores; beer distributors between brewery and retail outlets. The middlemen have made their money by handling the specialized logistics of delivering just enough product to the shelves, something a market with lots of small entities on either end does not have the resources to handle. They also are in the business of pushing new products, helping arrange shelving, working with the stores to run special promotions. In return they would rake off a few valuable percentage points from the price of the products they handle. As oligopolies and oligopsonies have taken shape, both on the manufacturing and on the retail ends, concentration has also started to happen among the middlemen. In the supermarket industry, dozens of local brokers have basically boiled down to three national groups. There has been  a shake out in the video distribution industry and there now there are only a few major companies standing. Even the number of trucking companies is dwindling through mergers. Likewise, travel agencies are consolidating from local to regional to national companies. This concentration is based on a response to the change from numbers of independent buyers and sellers to the growth of national and multi-category manufacturers and retailers. The intermediaries need to be able to negotiate with the big boys on an equal footing in order to not have onerous terms dictated to them. They also need major resources (warehousing, sales, transport) spread over the whole country to compete. Only the big eventually can service the big. But even these big distributors are also threatened by disintermediation, the desire to deal directly without any middlemen at all. This trend is growing gradually but certainly. These middlemen oligopolies are in turn threatened by competition from the companies they serve. Coke and Pepsi are buying in many of their local bottling plants (which acted as middlemen), and Anheuser Busch is controlling its dealers more closely all the time. The biggest food companies act as their own brokers, handling warehousing and delivery. Many companies are using the Internet to cut out the middleman, from computer companies to airlines and hotels. As a result, a host of intermediate businesses from computer dealers to travel agents are in increasing difficulty. Clear Channel offers radio advertising clients its own ad agencies, audio production, and market analysis divisions. For the biggest manufacturers, it's a matter of having more control and fast response to change in the business. For that reason, for example, major studios are either taking over video distribution through direct subsidiaries or hiring existing distributors to do the physical fulfillment only, at a much lower markup. In the music industry, for a while, several of the big five companies own their own distribution arms. For bigger companies, the tendency is to deliver direct to the store from centralized regional warehouses on demand. On the other end, national chains are finding it more profitable and easier to do their own warehousing, transport to retail, and inventory management. They'll take deliveries from the manufacturer directly, without middlemen, with the thought of managing it better and saving the fees. That's the Wal-Mart model, and it has spread to every other chain. Manufacturers who used to be screened out from the day to day logistical problems of keeping shelves stocked are now directly involved and suffer the consequnces of this screening. In industries where there are a few manufacturers and a few chain retailers, disintermediation is an inevitable result. Computer technology, especially the Internet, makes this easier, as orders can be routed to both warehouse and manufacturer in real time from the point of sale. The ideal of just-in-time delivery helps the retailers minimize their investment in inventory and warehousing while forcing the manufacturer to worry about whether the key items are on the shelves. 6:46:57 PM

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