Reintermediation consists of the process of introducing again an intermediary that had previously been cut out from the supply chain. Or perhaps by creating a new intermediary that once didn’t exist. Usually, as a market is redefined, old players get cut out, and new players within the supply chain are born as a result.
Reintermediation as a business strategy
Almost any company that wants to sell direct-to-consumer (D2C) can now do so thanks to the near-total prevalence of the internet.
Direct-to-consumer (D2C) is a business model where companies sell their products directly to the consumer without the assistance of a third-party wholesaler or retailer. In this way, the company can cut through intermediaries and increase its margins. However, to be successful the direct-to-consumers company needs to build its own distribution, which in the short term can be more expensive. Yet in the long-term creates a competitive advantage.
The D2C model is attractive to many companies since removing the intermediary increases profits and provides greater consumer data access.
However, this scenario does not always play out in practice.
Cutting out the middleman is often associated with a whole new set of problems for the business.
Some find the fulfillment of minimal orders problematic, while others must take on customer service duties that were once the purview of the retailer.
Reintermediation describes the reintroduction of a supply chain intermediary between producers and consumers.
It is mainly used by companies that, for whatever reason, decide that the D2C approach is not for them.
Other businesses use reintermediation to reassemble buyers, sellers, and intermediaries in new and profitable ways.
The rest of this article will be devoted to discussing some specific reintermediation examples.
Case study: Amazon’s last-mile delivery
Last-mile delivery consists of the set of activities in a supply chain that will bring the service and product to the final customer. The name “last mile” derives from the fact that this usually refers to the final part of the supply chain journey, yet this is extremely important, as it’s the most exposed, consumer-facing part.
As Amazon tried to figure out last-mile delivery, the company might also, over time, disintermediate the old delivery industry, which suddenly might be cut out from the supply chain.
Disintermediation is the process in which intermediaries are removed from the supply chain, so that the middlemen who get cut out, make the market overall more accessible and transparent to the final customers. Therefore, in theory, the supply chain gets more efficient and, all in all can produce products that customers want.
As this process happens and Amazon defines the new market, new intermediaries that have learned to play according to Amazon rules will form.
Creating a whole new intermediary
For instance, as Amazon has been figuring out the last-mile problem, it also approached it with a new program, launched in 2018, called Delivery Service Partner.
Or simply put, a startup that gets helped by Amazon to become an independent contractor (under the rules of Amazon) that delivers packages for the company.
Thus, Amazon disintermediates the old carriers and builds up a new system, which is comprised of new intermediaries.
Yet those will follow Amazon’s rules and policies.
The tension between intermediation and disintermediation
The evolution of the Internet moves from phases of disintermediation, which is extremely helpful to remove old logic that does not work anymore in current market conditions, to establish new systems.
As those new systems are established, reintermediation might occur for several reasons.
First, it might be the critical player, once disintermediating, now incentivizing reintermediation, to gain more control over the market.
Second, as the market adjusts to this new reality, new intermediaries learn the logic of this new market and try to capture some value within the supply chain.
Deliveroo is a British online food delivery company founded by Greg Orlowski and Will Shu in 2013. Shu developed the platform in response to a lack of high-quality food delivery in London.
Deliveroo makes money by collecting 25-45% of every order it facilitates. It also charges delivery fees and onboarding fees for restaurants that wish to be featured on the platform.
Deliveroo for Business is a service designed for corporate clients needing to order food in bulk. The company also charges a higher commission to businesses that utilize a network of digital kitchens to process orders.
Online food delivery company Deliveroo partners with restaurants across thousands of cities around the world.
In so doing, it manages the entire process from pickup at the restaurant to delivery at the customer’s door.
Deliveroo created a more efficient supply chain for restaurants that were previously handling their own food deliveries.
Reintermediation has created a new market for eateries that found the cost of delivering food themselves prohibitive.
Without Deliveroo, in other words, the restaurant would be required to invest in vehicles, drivers, insurance, and logistics planning, among many other things.
Deliveroo and many similar companies have made the supply chain more efficient through intermediation.
From the point of view of the restaurant, food delivery is now no different to a customer picking up an order from their premises.
Autobytel.com
Some intermediaries provide general information about various product categories and how they meet different consumer needs.
Web-based car sales intermediary Autobytel started with searchable information about vehicles based on several criteria and also allowed consumers to locate dealerships that sold the car they wanted.
The company has now transitioned into selling ancillary services such as servicing, insurance, and finance to build long-term relationships with customers.
In the D2C model, these are services once exclusively offered by the dealership or car manufacturer.
Amazon has a diversified business model. In 2021 Amazon posted over $469 billion in revenues and over $33 billion in net profits. Online stores contributed to over 47% of Amazon revenues, Third-party Seller Services, Amazon AWS, Subscription Services, Advertising revenues and Physical Stores.
Amazon is also a significant proponent of intermediation.
The Amazon.com homepage features an intuitive user interface that provides customized product recommendations.
This is paired with similarly tailored email marketing and proprietary product fulfillment systems.
Amazon understands that consumers purchase many of the products it sells directly from the manufacturer and in fewer steps.
To maximize its success as an intermediary, the intuitive user interface and personalized product recommendations shorten the time consumers spend finding the correct item.
In essence, Amazon is creating a cohort of users dependent on its product recommendations to streamline the purchase process and discover new products they may be interested in.
Traditional manufacturers in the D2C model have been slow to replicate this level of detail.
Amazon has a business model with many moving parts. The e-commerce platform generated over $222 billion in 2021, followed by third-party stores services which generated over $103 billion, Amazon AWS, which generated over $62 billion, Amazon advertising which generated over $31 billion and Amazon Prime, which also generated over $31 billion, and physical stores which generated over $17 billion.
Key takeaways
Reintermediation describes the reintroduction of a supply chain intermediary between producers and consumers.
Deliveroo created a more efficient supply chain for restaurants that were previously handling their own food deliveries. Reintermediation in the food delivery context has created a new market for eateries that found the cost of food delivery prohibitive.
Companies such as Autobytel started by providing general information about product categories and then moved into offering ancillary services that a manufacturer would normally handle. Amazon also uses tailored product recommendations to make the process of purchasing through an intermediary more attractive to consumers.
The idea of a market economy first came from classical economists, including David Ricardo, Jean-Baptiste Say, and Adam Smith. All three of these economists were advocates for a free market. They argued that the “invisible hand” of market incentives and profit motives were more efficient in guiding economic decisions to prosperity than strict government planning.
Positive economics is concerned with describing and explaining economic phenomena; it is based on facts and empirical evidence. Normative economics, on the other hand, is concerned with making judgments about what “should be” done. It contains value judgments and recommendations about how the economy should be.
When there is an increased price of goods and services over a long period, it is called inflation. In these times, currency shows less potential to buy products and services. Thus, general prices of goods and services increase. Consequently, decreases in the purchasing power of currency is called inflation.
Asymmetric information as a concept has probably existed for thousands of years, but it became mainstream in 2001 after Michael Spence, George Akerlof, and Joseph Stiglitz won the Nobel Prize in Economics for their work on information asymmetry in capital markets. Asymmetric information, otherwise known as information asymmetry, occurs when one party in a business transaction has access to more information than the other party.
Autarky comes from the Greek words autos (self)and arkein (to suffice) and in essence, describes a general state of self-sufficiency. However, the term is most commonly used to describe the economic system of a nation that can operate without support from the economic systems of other nations. Autarky, therefore, is an economic system characterized by self-sufficiency and limited trade with international partners.
Creative destruction was first described by Austrian economist Joseph Schumpeter in 1942, who suggested that capital was never stationary and constantly evolving. To describe this process, Schumpeter defined creative destruction as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Therefore, creative destruction is the replacing of long-standing practices or procedures with more innovative, disruptive practices in capitalist markets.
Happiness economics seeks to relate economic decisions to wider measures of individual welfare than traditional measures which focus on income and wealth. Happiness economics, therefore, is the formal study of the relationship between individual satisfaction, employment, and wealth.
An oligopsony is a market form characterized by the presence of only a small number of buyers. These buyers have market power and can lower the price of a good or service because of a lack of competition. In other words, the seller loses its bargaining power because it is unable to find a buyer outside of the oligopsony that is willing to pay a better price.
The term “animal spirits” is derived from the Latin spiritus animalis, loosely translated as “the breath that awakens the human mind”. As far back as 300 B.C., animal spirits were used to explain psychological phenomena such as hysterias and manias. Animal spirits also appeared in literature where they exemplified qualities such as exuberance, gaiety, and courage. Thus, the term “animal spirits” is used to describe how people arrive at financial decisions during periods of economic stress or uncertainty.
State capitalism is an economic system where business and commercial activity is controlled by the state through state-owned enterprises. In a state capitalist environment, the government is the principal actor. It takes an active role in the formation, regulation, and subsidization of businesses to divert capital to state-appointed bureaucrats. In effect, the government uses capital to further its political ambitions or strengthen its leverage on the international stage.
The boom and bust cycle describes the alternating periods of economic growth and decline common in many capitalist economies. The boom and bust cycle is a phrase used to describe the fluctuations in an economy in which there is persistent expansion and contraction. Expansion is associated with prosperity, while the contraction is associated with either a recession or a depression.
The paradox of thrift was popularised by British economist John Maynard Keynes and is a central component of Keynesian economics. Proponents of Keynesian economics believe the proper response to a recession is more spending, more risk-taking, and less saving. They also believe that spending, otherwise known as consumption, drives economic growth. The paradox of thrift, therefore, is an economic theory arguing that personal savings are a net drag on the economy during a recession.
In simplistic terms, the circular flow model describes the mutually beneficial exchange of money between the two most vital parts of an economy: households, firms and how money moves between them. The circular flow model describes money as it moves through various aspects of society in a cyclical process.
Trade deficits occur when a country’s imports outweigh its exports over a specific period. Experts also refer to this as a negative balance of trade. Most of the time, trade balances are calculated based on a variety of different categories.
A market type is a way a given group of consumers and producers interact, based on the context determined by the readiness of consumers to understand the product, the complexity of the product; how big is the existing market and how much it can potentially expand in the future.
Rational choice theory states that an individual uses rational calculations to make rational choices that are most in line with their personal preferences. Rational choice theory refers to a set of guidelines that explain economic and social behavior. The theory has two underlying assumptions, which are completeness (individuals have access to a set of alternatives among they can equally choose) and transitivity.
The peer-to-peer (P2P) economy is one where buyers and sellers interact directly without the need for an intermediary third party or other business. The peer-to-peer economy is a business model where two individuals buy and sell products and services directly. In a peer-to-peer company, the seller has the ability to create the product or offer the service themselves.
The term “knowledge economy” was first coined in the 1960s by Peter Drucker. The management consultant used the term to describe a shift from traditional economies, where there was a reliance on unskilled labor and primary production, to economies reliant on service industries and jobs requiring more thinking and data analysis. The knowledge economy is a system of consumption and production based on knowledge-intensive activities that contribute to scientific and technical innovation.
In a command economy, the government controls the economy through various commands, laws, and national goals which are used to coordinate complex social and economic systems. In other words, a social or political hierarchy determines what is produced, how it is produced, and how it is distributed. Therefore, the command economy is one in which the government controls all major aspects of the economy and economic production.
How do you protect your rights as a worker? Who is there to help defend you against unfair and unjust work conditions? Both of these questions have an answer, and it’s a solution that many are familiar with. The answer is a labor union. From construction to teaching, there are labor unions out there for just about any field of work.
The bottom of the pyramid is a term describing the largest and poorest global socio-economic group. Franklin D. Roosevelt first used the bottom of the pyramid (BOP) in a 1932 public address during the Great Depression. Roosevelt noted that – when talking about the ‘forgotten man:’ “these unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power.. that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.”
Glocalization is a portmanteau of the words “globalization” and “localization.” It is a concept that describes a globally developed and distributed product or service that is also adjusted to be suitable for sale in the local market. With the rise of the digital economy, brands now can go global by building a local footprint.
Market fragmentation is most commonly seen in growing markets, which fragment and break away from the parent market to become self-sustaining markets with different products and services. Market fragmentation is a concept suggesting that all markets are diverse and fragment into distinct customer groups over time.
The L-shaped recovery refers to an economy that declines steeply and then flatlines with weak or no growth. On a graph plotting GDP against time, this precipitous fall combined with a long period of stagnation looks like the letter “L”. The L-shaped recovery is sometimes called an L-shaped recession because the economy does not return to trend line growth. The L-shaped recovery, therefore, is a recession shape used by economists to describe different types of recessions and their subsequent recoveries. In an L-shaped recovery, the economy is characterized by a severe recession with high unemployment and near-zero economic growth.
Comparative advantage was first described by political economist David Ricardo in his book Principles of Political Economy and Taxation. Ricardo used his theory to argue against Great Britain’s protectionist laws which restricted the import of wheat from 1815 to 1846. Comparative advantage occurs when a country can produce a good or service for a lower opportunity cost than another country.
The Easterlin paradox was first described by then professor of economics at the University of Pennsylvania Richard Easterlin. In the 1970s, Easterlin found that despite the American economy experiencing growth over the previous few decades, the average level of happiness seen in American citizens remained the same. He called this the Easterlin paradox, where income and happiness correlate with each other until a certain point is reached after at least ten years or so. After this point, income and happiness levels are not significantly related. The Easterlin paradox states that happiness is positively correlated with income, but only to a certain extent.
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organizationscale further.
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.
An economy of scope means that the production of one good reduces the cost of producing some other related good. This means the unit cost to produce a product will decline as the variety of manufactured products increases. Importantly, the manufactured products must be related in some way.
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
