Entrepreneur & Investor.
Entrepreneur & Investor.
distributors are the necessary middlemen

Issue #2: Distributors, The Necessary Middlemen

NOTE: this was a past issue of my weekly newsletter, Friday Gems. Join my free mailing list so you don’t miss out on future issues.

Today’s gem is this image that depicts a distributor’s value add.

My eCommerce business works with several different distributors. When I first came across distributors, I thought they were antiquated unnecessary middlemen that shouldn’t exist with the advent of eCommerce and direct-to-consumer. Why can’t eCommerce retailers just buy directly from manufacturers and cut out distributors to pass on the savings to end customers? But once I took time to understand the distributor business model, I did a full 180 – I now believe that distributors are a necessary middleman and provide significant value.

Each part of the supply chain specializes in something specific. Manufacturers are good at building stuff, retailers are good at merchandising and managing B2C relationships… and distributors are good at all the messy stuff in between: warehousing, shipping, managing inventory and B2B relationships. The more fragmented the manufacturers and retailers are, the higher the value-add of the distributor.

Distributors are the “API” of the physical world in that APIs digitally distribute fragmented back-end applications access (banking, telecom, insurance, etc) seamlessly to front-end interfaces (consumer apps, websites, etc). Just like physical distributors, API softwares (such as Plaid or Twilio) unlock immense value in their respective supply chains, as necessary middlemen.

A well-run distribution business can be very lucrative, with significant moats and high returns on invested capital. Just look Poolcorp’s stock (the largest pool supply distributor), it’s returned 400x since inception!