Caught in the Middle Dwindling wholesalers try to adapt as more strapped retailers buy direct

July 11, 1993|By Michael Dresser | Michael Dresser,Staff Writer

It's tough being a middleman when everyone wants to cut you out.

Wal-Mart doesn't want to deal with you, Home Depot is stealing your customers, and the warehouse clubs are selling what you sell at wholesale to anyone who walks in off the street.

Turn on your TV for escape and what do you see? Some talking head on a shopping network pitching merchandise you represent at a price lower than you paid for it.

Wholesale sales, once a low-risk business, is becoming a "vicious, vicious industry," says Jeff Striegel, chief operating officer of Elias Wilf Corp., an Owings Mills-based distributor of carpets and flooring.

"In years past, there was enough business to cover the mistakes. There was enough profit to cover the sins. Today the margins are so small you can't afford any mistakes."

Since 1985, between 15 percent and 20 percent of the nation's wholesalers have sold out or closed up, according to Alfred L. Whiteman of Walpert Smulliam & Blumenthal, a Towson-based accounting firm that has built up a specialty in helping wholesalers survive.

The trend is expected to accelerate. Between now and 2000, some 100,000 of the nation's 300,000 wholesale distributors are expected to go out of business, Mr. Whiteman said.

"This business is changing faster than it ever has," said Brooke Tucker, another wholesale industry specialist at Walpert Smulliam. "It's very difficult to keep up."

Innovative wholesalers, however, are doing what it takes to compete in a Darwinian environment where the old rules have changed:

* Carpet wholesaler Elias Wilf, anticipating that carpet retailers will evolve into outlets for all types of flooring, acquires a ceramic and vinyl tile distributor so it will be ready for the change.

* Commerce Distributors, a lawn and garden equipment distributor in Linthicum, makes sure its retail customers are a captive market by always having a huge inventory of traps when the Japanese beetles come out.

* Apparel Associates, a Woodlawn distributor of women's clothing, opens its doors to the public and replaces the business lost as mom-and-pop clothing stores give way to big chains that buy direct from the manufacturer.

But for every success story in the wholesale business, there are many failures you never read about. When wholesale companies die, they tend to go quietly, tucked away in remote warehouse districts and industrial parks. Only in rare cases does their passing rate media attention. Because the majority of wholesalers are private companies, financial markets barely notice.

Cumulatively, the impact of this wholesale attrition on the American economy is enormous. According to the National Association of Wholesalers, the merchant wholesale distribution business accounts for 6.5 percent of U.S. economic activity. As of 1991 it employed an estimated 4.6 million people, with a total compensation of $165 billion.

The reasons for the shakeout in wholesaling are many. According to Mr. Tucker and Mr. Whiteman, wholesale companies have been slow to adopt new inventory-control technologies, slow to recognize the changing needs of vendors and retailers and slow to react to alternative distribution channels. In addition, many chief executives of family-run businesses have failed to provide for an orderly succession or build a professional management team.

But the most important factor is one the companies can't control. It's a powerful trend that can be summed up in a seven-syllable buzz word that few people outside the think tanks understand: disintermediation. It's a fancy word for cutting out the middleman, and it's happening all over.

When Ross Perot shuns reporters' questions and takes his case directly to the electorate through "infomercials," he's disintermediating the media. When people cash in 3 percent certificates of deposit and invest directly in a mutual fund that buys Treasury bills, they're disintermediating the bank. When someone uses a computer program to write his will, he's disintermediating a lawyer.

But nowhere is the effect of disintermediation more clear than in the distribution of goods. Every wholesaler who passes goods on to a retailer is an intermediary, and thus a potential road kill on the highway of commerce.

"Every intermediation adds costs that are passed on to the consumer," Stanley M. Davis wrote in "Future Perfect," an influential book published in 1982. "In some industries, such as food, clothing and cosmetics, intermediary activities are the largest component in the final cost of the product. Eliminating intermediation is one of the key ways to being the low-cost producer."

That's the reasoning behind Wal-Mart's requirement that almost all its vendors deal with it directly rather than through brokers or wholesalers. And it's why many category-dominant chains buy everything they can directly from the manufacturer.

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