Despite a trend towards direct sourcing and vertical integration to improve margins by cutting out the middle man in the retail supply chain, new classes of middle men are emerging.
These new mediators come in a number of different guises:
- credit providers;
- marketplaces; and
They offer a consumer centric business model which aims to deliver convenience to consumers, however this can be a double-edged sword for retailers.
For example, the implementation and acceptance of point of sales credit services, such as Afterpay and zipMoney, enables customers to buy now and pay later at no extra cost. While the concept is not dissimilar to credit cards or interest free offers, these middle men maintain profitability by charging retailers a direct merchant fee when a purchase is made through their platform.
Similarly, marketplace and other platform operators (from Amazon and Ebay through to RedBalloon and Deliveroo) charge retailers a mix of fees and commissions in order to be listed on their platforms. This cost is a characteristic of middle men that directly reduces a retailer’s margin at the convenience of customers. This can alternatively be seen as retailers becoming middle men themselves and acting more as wholesalers.
These new classes of middle men continue to expand their presence throughout the retail industry due to the indirect benefits they offer.
Apart from the guaranteed up-front payment to retailers and zero credit risk, Afterpay and zipMoney both promise to increase basket sizes, repeat purchase rates and conversion rates as their register of customers grows. Major fashion retailer Cue reported that Afterpay had already been adopted by 16% of online customers, with their average order value increasing 20% on such sales.
In a similar light, marketplaces and platform operators provide retailers with access to new markets and a wider group of consumers through their pre-established sales channels, with many success stories for both established and emerging businesses well documented.
Despite the cost pressure that middle men will put on margins, can retailers afford to ignore these middle men and go at it alone given the market share being capture by these operators?