When technology replaces the middleman

One of Andy Kessler’s examples of his “eat people” rule is the travel agent, replaced by online booking (Black Enterprise, May 2011). In his book Eat People (Portfolio/Penguin, 2011), the people at most risk are those who stand between a maker and a buyer and add cost without adding much else. For traders and dealers in India, the obvious question is: will apps do to distributors and wholesalers what websites did to travel agents? (See ideas 7 and 12 on our Eat People page.)

The honest answer is: tech removes the parts of the job that only pass information along, and keeps, or even raises the value of, the parts that carry stock, credit and delivery. This article works through it. The numbers are hypothetical.

What a middleman actually does

On this site, a distributor buys from a company, holds stock, and sells and delivers to shops in an area, often on credit; a wholesaler buys in bulk and sells in smaller lots to shops; and a no-stock seller sells goods it never holds (see plain words and the trader sub-levels). Those definitions don’t change. What changes is which of their jobs a phone can do:

Job	Can an app do it?
Passing on prices and taking orders	Yes, easily
Billing and payment collection	Mostly
Holding stock near the shops	No, someone must
Breaking bulk into small lots	No
Delivering to many small shops	No, but routing can be cheaper
Giving credit to known shops	Partly; needs data and trust

A travel agent mostly did the first two jobs, which is why the web replaced them. An Indian distributor does all six.

Who gains when a step is cut

The margin didn’t vanish; delivery still costs money. What vanished is the part that paid for passing orders along.

What the app can’t easily replace: credit

Many small shops buy on credit from a distributor who knows them. If the app wants payment up front, the shop loses that credit, and credit has a price.

In this example the app’s 3.75% saving is bigger than the 1.05% value of credit, so a well-run shop would switch, unless the distributor offers something more. That is the real test for every middleman: what do you give that is worth more than your margin? (See credit days, interest and channel finance.)

How a middleman stays useful

1. Go digital yourself. Use the same tools the app uses to cut your own costs, so you can live on a smaller margin.

2. Own the pipe. Kessler’s “virtual pipe” is the link to customers that a business controls (Black Enterprise). A distributor whose shops order through its app, not the brand’s, owns that link, and can carry several brands through it (see idea 12).

3. Do one step better than anyone. Kessler’s “get horizontal” rule (idea 3) suggests becoming the best at one job, such as last-mile delivery to small shops, cold storage or C&F work (1.4), and selling it to many brands.

4. Add service. 3S dealers (2.3) earn from service and spares, which an app can’t deliver. Installation, repairs, returns and local advice are hard to put online.

Who is most exposed on the ladder

• No-stock sellers (1.1) who only pass on orders are closest to the travel agent, unless they own the customer relationship. Platform-based ones depend on the platform’s pipe (see new platform micro-businesses).
• Sub-dealers (2.1) and second-layer wholesalers (1.3) between a distributor and shops are at risk where the main distributor can reach shops directly.
• Distributors (1.3), super stockists (1.4) and authorised dealers (2.2) that carry stock, credit and delivery are less exposed, but their margins will be squeezed towards the cost of what they actually do.

A fair word on India

Kessler would say cutting out a middleman makes the economy more productive, and often it does: the shop pays less and the brand earns more. But India’s trade runs through millions of small traders, many of them family businesses, and in many places they also provide credit, trust and reach that no app has yet matched. The likely future is not “no middlemen” but fewer layers, thinner margins and middlemen who use technology themselves.

In short

• List what you do for your customers: pass on orders, bill, stock, break bulk, deliver, give credit, service.
• Work out what each is worth to the customer. The parts that only pass on information are the ones at risk.
• Cut your own costs with the same tools, and build the link to customers that you control.

Related: Eat tasks, not people, Markets that get cheaper with scale and turnover and credit cycles.

The ideas are Andy Kessler's, from Eat People (Portfolio/Penguin, 2011), as he explained them to Black Enterprise (May 2011). The table, the explanation, the India notes and the examples are ours.