Wholesalers face a valley of death — unless they change quickly

Faced with potential disruption, wholesalers have a difficult journey in front of them

The wholesale industry in Europe and the US has been slow to adopt new technology. While other sectors have been going through rapid — and accelerating — change, companies in the wholesale and business-to-business (B2B) distribution sector have generally held firm to traditional ways of doing business.

Wholesale companies can decide they don’t want to become yesterday’s businesses

The lack of awareness, or conscious choice to ignore, the risks of disruption means wholesalers are now in dangerous territory. Many are effectively sitting ducks, waiting to be blown out of the water by Alibaba, Amazon, and other disruptive tech companies. If this doesn’t change, some of these wholesalers’ days may be numbered.

But, it doesn’t have to be this way. The CEOs, boards, and shareholders of wholesale companies can decide they don’t want to become yesterday’s businesses. They can act before tech giants do. They can lead an offensive themselves, acquire tech companies, and steal a march on their competitors. This is what they should do.

The early warning signs are there if you look hard enough

The wholesale market is a fragmented, but huge, industry. Some estimates put the size of the sector at a massive $5 trillion. Though largely unknown to the public, these companies are some of the world’s largest. They include wholesalers of food, furniture, medical supplies, and countless other everyday products. The industry is so big, wide, and hidden that it’s sometimes difficult to pick out trends. But there are a few we can identify.

The Aquaa Partners Wholesale Index has consistently lagged the S&P average by between 1 and 3 percentage points

First, these companies have been very slow to adopt new technology. In fact, in some cases, they have actively shunned it. According to Frost & Sullivan, only around 10 per cent of business-to-business wholesaler transactions are conducted online. This has, of course, been shaped by the buyer side too, but it hasn’t been helped by some wholesalers’ own lack of appetite for innovation. The proportion of wholesalers engaged with truly bleeding-edge technology, like big data, AI, and smart warehouses is likely to be much smaller. There is a lot of ground to catch up.

Over the last 3 months, the Aquaa Partners Wholesale Index has consistently lagged behind the S&P 500

Secondly, share prices are on the decline, relative to the market. At Aquaa Partners, we recently created a wholesale index to track the share price movements of the world’s biggest public wholesale and B2B distribution companies. The results show that over the last three months, the Aquaa Partners Wholesale Index has consistently lagged the S&P average by between 1 and 3 percentage points, with some individual companies falling behind as much as 30 points.

Interpreting declines in share price

In my view, these share price declines are the market taking a negative view on wholesalers’ future earnings prospects, even if current Earnings Per Share (EPS) and Dividends Per Share (DPS) are generally holding up. In fact, many wholesalers might be focusing on paying dividends instead of reinvesting that same capital into fighting off potential tech competition. In my view, this is exactly the wrong thing to do.

Investors know technology is a powerful force for disintermediation

Investors have seen what technology has done to established business-to-consumer markets, and they recognise that the B2B wholesale market is at risk of the same thing. They have seen Amazon, and many other online retailers like Taobao, Chewy and SnapDeal, successfully challenge traditional, bricks-and-mortar consumer retailers, who have found it difficult to catch up without the technology to match these tech giants’ customer experience and delivery times.

Investors know technology is a powerful force for disintermediation, or stripping out the middleman — and now they’re starting to wonder what’s going to happen in the wholesale industry. This uncertainty leaves wholesalers vulnerable.

How disruption in wholesale will play out

Wholesalers can’t take any comfort from the fact that the big tech companies haven’t managed to disrupt their market yet.

Amazon has already dipped its toes into the water of the B2B office supplies market with AmazonSupply, which was quietly shelved. But its relaunch in April this year under the brand Amazon Business shows the company is keen to succeed. Amazon Business might be an experimental playground for the company to learn the ropes, and better understand the market before it rolls out a comprehensive wholesaler proposition in the near future.

Amazon has already built out an effective international distribution network (credit: GeekWire)

Amazon is certainly committed. In 2015, the company was granted licenses by both the Chinese and US governments to act as a freight forwarder for ocean container shipping. It also signed a deal to lease 20 Boeing 767 aircraft to tackle shipping costs and transport goods quickly across the US. Amazon thinks big, it has enormous pockets and it is determined to crack the wholesale market, however long that takes.

What can traditional B2B wholesalers do to compete?

But established wholesalers can fight back: they know the wholesale business, its challenges, and its unique needs better than these technology companies, including Amazon. They just need deploy that expertise and experience to fight back.

Rather than take purely defensive decisions to protect your business, the smart move is to buy up technology through acquisitions

In my experience, when disruption starts to take hold in a market, companies broadly react is one of three ways: they either hide from the reality, which does absolutely no good in the long term; they recognise the threat, and resign themselves to defeat — or, they see the opportunity, grab it with both hands and start to fight back.

When faced with disruption, many CEOs, CFOs, and other senior executives may not fully realise the third option exists — but it does, and it’s often the best approach. For example, once the technology that runs and supports your industry starts changing, rather than take purely defensive decisions to protect your business, the smart move is to buy up this technology through acquisitions. This puts you in the driving seat; it allows you to power growth and steal a march on your competitors, who end up dependent on your technology infrastructure in the future.

A number of wholesale and distribution companies are already starting to show the leadership that is required. Food distributor US Foods recently acquired data analytics company Food Genius, giving them access to new technology to gather, track, and monitor granular foodservice data; something that could not only help them drive efficiencies in their own business, but could potentially become the analytical backbone of the food distribution business in the future. The Wine & Spirits Wholesalers of America recently acquired a minority stake in an e-commerce alcohol platform; and medical device distributor MSD acquired digital health startup VerbalCare in 2015.

Abigail Johnson, CEO of Fidelity Investment, is demonstrating to other CEOs how to tackle disruption (credit: Quartz)

But, perhaps, the best demonstration of the leadership required comes from outside the wholesale sector — from finance, automotive, and retail. For example, faced with disruption, investment giant Fidelity has proactively and positively embraced new technology. Abigail Johnson, Fidelity’s CEO, was recently lauded by The Wall Street Journal as “bitcoin’s unlikely evangelist” — a bold stance for a company whose very essence could be said to be under threat from the emergence of new norms in finance, like bitcoin and blockchain.

In fact, Fidelity has tried to take the opportunity with both hands, investing in disruptive startups, like peer-to-peer loan provider Prosper, and — perhaps as a result — has seen its share price rise nearly a third from the start of this year. Fidelity is turning the threat of tech disruption to its advantage.

The wholesale market will be disrupted — that much is certain. Its impact on specific businesses, though, remains unclear. If executives react slowly or in fear, share prices could continue to fall. However, if companies see the emergence of tech as an opportunity, and seize upon it, then it could drive a new generation of growth.

Paul Cuatrecasas is CEO and Founder of Aquaa Partners, a London-based investment bank that works with growth-focused corporates to help them find and acquire the right technology company.

Find out more about how Aquaa Partners can help you at: http://aquaapartners.com