Removing the middleman

I spent the last ten years growing a $10MM packaging manufacturing company, which I sold in October 2024. It didn’t actually manufacture anything in a traditional sense of producing finished goods from raw materials using some type of equipment or skilled labor…but it did deliver exceptional value, remove the risks, and make it easy to buy low-cost, made-in-China, premium custom packaging. For 13 years prior to starting my company, I did the same thing for licensed toys and promotional consumer electronics. The products were different, but the formula was the same - create systems and processes that allowed for the capture of relevant warm leads and profitable resale of goods and services produced by someone else without dealing with the headaches and overhead of CapEx, OSHA, and seasonal production staff. Not that there's anything wrong with that, but my temperament better aligns with the seller than with the maker. Gotta know who you are, right?

This seller/maker equation is nothing new. It existed forever. Remember the spice trade? Someone harvested the crops, then someone converted the crops into spices, then someone else transported it across the word and sold in bulk to local merchants, and finally the merchant sold it at the local market to the end consumer. That’s your modern day supply chain; raw materials, manufacturing, distribution, and retail. The only thing that got added at some point was the brand. In the old days, it was almost impossible for the street merchant to bypass distribution and buy straight from the manufacturer. Today, it’s common practice, especially on the brand side.  

Most people don’t think about these things, but your typical modern B2C chain looks like this. You want need new eyeliner. You go to a physical Sephora store at your local mall, or perhaps online to Sephora.com. You find a brand you like. It might be something you’ve seen advertised on Instagram by your favorite influencer, like Urban Decay. Or maybe you go for the Sephora house brand when you get there because their salesperson tells you they’re better quality. Neither Sephora nor Urban Decay are in the business of manufacturing eyeliners. They likely work with a formulation company that makes white label eyeliner and other product lines, for hundreds of different brands. As a consumer, you can’t go to that formulator and purchase one eyeliner for personal use. That neither makes sense for you nor the formulator. You, as the consumer, need a reasonable price, immediate checkout, and a flexible return policy. The average formulator doesn’t offer any of that. Instead they have technically-inclined sales people, good engineering, tight manufacturing tolerances, high yield production, and low volume pricing. This is not the type of marketing that drives consumer demand. It solves different problems, the ones consumers don’t have, but Urban Decay, Sephora, and other brands do. And so you go to the store, buy your eyeliner, and the transaction is over (it’s not really over, but that’s a different post). 

Enter B2B supply chain. As far as that formulator goes, in the above equation they’re the manufacturer and the raw materials are the ingredients used to create the eyeliner, the primary packaging plastic eyeliner containers they fill with the product, and maybe the secondary packaging paper boxes printed with the brand name that house the plastic containers with the product on the retail shelf. The formulator is in the business of developing cosmetics. They don’t produce primary plastic packaging or secondary paper packaging. Those have to be sourced from somewhere else. That task either falls on the brand, Urban Decay and Sephora, or on the formulator. If it’s the formulator doing the sourcing, chances are they already have vetted factories they work with for all of those items. In the case of primary and secondary packaging, they purchase factory-direct at low prices, add their markup and resell the complete package with additional markup built-in for every touch (product formulation + filling + primary packaging + secondary packaging + fully assembled, barcoded, packed into case packs, and ready for retail distribution) to the brand. There’s value to the brand for this kind of white glove service. Yes, they pay more, but they don’t have to deal with each of those components of the supply chain separately. As the formulator grows and creates operational efficiencies through automation and process to be able to offer competitive pricing, they typically start limiting options, increasing minimum order quantities, and eliminating non-revenue-generating services. In fact, more often than not, and for a variety of reasons (creative control, too small for a formulator, products that don’t require formulation, …), the brand ends up with the responsibility of managing their own supply chain. And so a designated employee (owner, buyer, assistant) goes to a trade show, Alibaba, or google, finds 3-5 suitable vendors, vets them, orders samples, gets pricing, and on and on and on until they land on the final variation of what it is they’re buying and from whom. Remember those primary and secondary packaging factories that supplied the formulator with plastic eyeliner containers and paper boxes to resell? They’re now the ones the brand is looking to buy from directly. In this equation, they’re the manufacturer of the containers and boxes and their raw materials are paper and plastic out of which they’ll produce finished goods for the brand.

This is the space I’ve occupied for the majority of my post-university career which started in 2004. And this is exactly what I built my company around. We’ve exhibited at trade shows, advertised on google, and sold custom packaging to brands handling their own supply chain sourcing. Having done this for 20 years, and having spoken to many customers across different industries, I can tell you this, brands have a problem (I mean, who doesn’t). The traditional brick and mortar keystone model of retail distribution takes 50% of the brand’s profits, assuming you can even get into retail (limited shelf space for many competing brands in every category). Internet retailers and marketplaces like Etsy and Amazon take 20-40%. This leaves DTC (direct-to-consumer), which most brands now do. DTC, however, is not free. The CAC, customer acquisition cost, is about the same or even higher than that of retailer wholesale margins. On top of that, brands bear all the costs of product development, inventory, marketing, and distribution, all while trying to stay relevant on the bleeding edge of their oversaturated category. As I told my friends in the CPG space, “I don’t envy you.” All these market dynamics have forced the brands to squeeze everywhere they could, some of which naturally falls on the supply chain. Long story short, because of consumer preferences, hyper personalization, limited production runs, the number of smaller brands trying to break into already-saturated categories, the only viable way to produce these “raw materials” (necessary add-ons to the core product, like packaging, accessories, gifts with purchase, promos, …), has become China-based (depending on the item, you can substitute China with another emerging nation like Vietnam, Indonesia, …) production. 

In an ideal world, brands want to buy directly from offshore factories to get the best price, but due to the nature of seller/maker dynamics, they are either afraid, have no trust, or find it too difficult (language barriers, culture shock, …). And so they pay more to trading companies and resellers to bridge the gap and reduce the risk. These risks are real and actual. If you’ve never done business in China, it doesn’t seem all that difficult on the surface. You go to Alibaba, search for the product you need, and get pages of results of qualified and verified factory-direct suppliers who are ready to deliver your product on time, at low cost, and with high quality. It’s a nice story, but it almost never plays out like that. You can easily find the same factories I’ve worked with on Alibaba, but they won’t deliver the same products or level of service to you as they did to me…even though they really want your business. In fact, these factories have a similar problem the brands have. They want to sell directly to American brands, but don’t have the knowledge, systems, and resources to do it effectively. So they rely on trading companies, and give up profits they should be keeping.

I spent the last 20 years sourcing, doing factory audits, observing and analyzing production processes and workflows, deep diving into material compliance and testing, creating QC standards, engineering systems, evaluating sustainability metrics, and most importantly translating all of that into a packaged, sellable product/service that instilled trust and confidence. Just as I saw an opportunity when I started the Paper Tube Co., I see one here as well. I feel the market is moving away from the middleman. It’s already happened on the US manufacturing side where many large-enough brands are buying direct from American manufacturers. But it hasn’t happened quite yet for smaller brands, and first-time sellers, and short-run limited production items that simply can’t economically be made in the US. Those who can’t commit to a 10 or 50 thousand piece minimum quantity and have it made in America. Those who aren’t willing to pay $50-100K for injection tooling. I believe there is a way to connect the Chinese factory with an American brand and have them build a long-term, mutually beneficial, profitable partnership. It’ll just take a bit of education on both sides. But once you make it less scary, it’s nothing but benefits. Come on it, the water is warm.