Peer to Peer

The digitization of the global/local supply chain using a peer-to-peer model, removing the middleman from the process, is proving itself to be a successful business model. Alibaba, the giant Chinese e-commerce 22 billion USD flotation, which was the world's largest flotation of its kind, underscores how successful a business model can be when it brings makers in direct contact with buyers on a global scale.

But the major story for investors might not be about another internet company and a massive Initial Public Offering (IPO) grabbing the business headlines. There might be something more to it than simply that, namely the way the peer-to-peer digitization of the supply chain might be posing a major threat to the existing business model used by the current dominant players.

Let's take a look at the current business model used by the worlds big retailers, like Wal-Mart.

For manufacturers and suppliers it’s a hard-nosed affair doing business with the dominant players who up until now have controlled exposure and major market access. When suppliers want to sell their items through, for example, the Wal-mart route, the retailer tends to monopolizes access to the market giving the supplier few other options. The process involves the supplier being squeezed until they are left virtually gasping for air. For the supplier to realize a worthwhile profit, the only option might then be to increase output and reduce costs with bulk buying of raw materials/reducing production costs. For the titan retailers it’s a win win situation. They’re able to monopolize access to the market and squeeze the suppliers to an inch of their life then buy in bulk. With all roads leading to these modern day “temples of consumption”; the out of town stores, the titan retailers are then able to market their merchandise to the masses. Economies of scale gives the big retailers a heads up over their smaller rivals. So the titan retailers are then able to undercut their small rivals, drive them out of business and carve up the market between themselves. The end result is a few big players supplying the entire market. It is defined as an oligopolistic market where the business can extract abnormal profits by forming cozy agreements on prices with its other big rivals.

This type of supply chain business model enabled retails like Wal-Mart to prosper for decades during the era of low gasoline costs and cheap available credit. Buying shares in the company was viewed as safe defensive play for investors, providing regular dividends. But lately this has not been the case. Do a google search on Wal-Mart under performance and a raft of information comes up. The company continues to undercut competitors and it is trying to diversify its money streams from in-store money-transferring services to organic groceries and now auto insurance. In a desperate attempt to return to the path of profitability the company has even closed down its unprofitable stores. But despite these strategies Wal-Mart stores are still struggling to gain traction. Year on year, Wal-Mart Stores have seen net income shrink by a massive one billion USD to 16 Billion USD.

Perhaps there is more behind Wal-Mart's flagging revenue than just the reconfiguration of the economy that took place following the 2008 financial crisis. Indeed maybe the new disruptive technology of the peer-to-peer systems over digital platforms, enabling makers, suppliers and buyers to link up supply and demand in real time, is also having an adverse impact on Wal-Mart's net income and profitability.

Assuming a local electrician wants to order 150 domestic 10 amp fuses because a recent electrical storm, followed by a power-outage, had caused damage to many household fuses in his area. Instead of driving out of town to a large electrical stockist he is able to place his bid online through the giant online business procurer Alibaba. The electricians bid is now visible in real-time to universal manufactures of fuses or stockists who might have an oversupply of fuses. Within five minutes an offer is made, its 40 percent cheaper than the brick and mortar local supplier. What’s more, delivery is guaranteed within three working days. In this hypothetical example, the manufacturer or stockist is able to undercut the titan retailer. The digital supply chain has efficiently brought the supplier and the buyer together and cut out the middleman. This is what is meant by the digitalisation of peer to peer business and it’s now rattling the traditional big players. 

It is changing the level playing field, the manufacturer is now able to compete or completely cut-out the titan retailer from the transaction. The digital overhead costs of the transaction are considerably lower compared with the superstore model, managing the logistical supply chain is also less costly. So by comparison, there is very little overhead compared to the vast hierarchy of corporate controls and management of the superstore model. The obvious gainers are the consumers and the manufacturers, but at the cost of the traditional super-stores, whose previous economies of scale are no longer giving them an edge. In other words, the profits that were creamed off by the super-stores can now be split between the buyer and the manufacturer. 

In actual fact when buyers start seeing the advantage of not having to drive out of town, the benefit of not running up fuel costs, wear and tear on a their privately owned cars and being able to deal directly with a small workshop, whose survival depends on providing quality to the customer, this business model is likely to grow more profitable as time goes by. However, that may well be to the detriment of the super-stores and perhaps this also explains why they are experiencing a turnaround in their fortunes.