What is the trading company model? A business system that generates profits through the “power to connect”

【summary】

The trading company model is a business model that does not create products on its own, but rather uses information, networks, and trustworthiness to connect sellers and buyers, and earns profits from the difference in price and fees.

The important thing for beginners is not to think of a trading company as just an intermediary. Modern general trading companies also have the aspect of business investment companies that invest in resources, food, infrastructure, electricity, finance, consumption-related areas, etc.

In this article, we will summarize the basic structure of the trading company model, sources of profits, strengths and weaknesses, and the investors' perspective when looking at general trading companies.

What is the trading company model?

Many people tend to think that they need to own a factory or make products in order to make a profit.

However, trading companies are a little different.

The essence of a trading company is

Connecting the necessary people and the necessary things

is.

Even if you don't create a product, you can earn profits by completing transactions.

For example, it connects overseas producers, Japanese retailers, logistics companies, banks, insurance companies, local governments, and customer companies. Rather than simply "flowing from right to left," we play a role that transcends language, contracts, logistics, payment, credit, and information barriers.

This is where the value of the trading company model lies.

Basic structure of the trading company model

Simply expressed, the flow is as follows.

メーカー・生産者
      ↓
    商社
      ↓
    顧客

Trading companies step in and mainly provide the following functions:

*Product procurement *Transportation arrangements

• Inventory management
• Quality control
• Financial support
• Contract management
• Providing market information
• Developing sales destinations

In return, we receive trading profits, commissions, financial income, investment income, etc.

In other words, a trading company is a company that not only provides the goods themselves, but also provides the mechanisms for completing transactions.

Specific example: When importing coffee beans from overseas

For example, consider the case of delivering coffee beans from a farm in Brazil to a cafe in Japan.

ブラジルの農園
      ↓
輸送・品質管理・契約管理
      ↓
日本のカフェ

In theory, it is also possible for farms and cafes to do business directly.

However, in reality, there are some obstacles:

• Language
• Law *Payment *Logistics
• Exchange
• Quality control
• Contract trouble
• Confirm the creditworthiness of the other party

The trading company processes this wall in bulk.

From the cafe's perspective, the involvement of a trading company stabilizes procurement and makes it easier to check quality. From the producer's perspective, it becomes easier to secure sales outlets.

Profits are generated for this "value that reduces transaction friction."

Profit sources of the trading company model

1. Trading profit

It is the most basic benefit.

This difference is the trading company's gross profit.

However, in reality, there are also transportation costs, insurance, warehousing costs, labor costs, currency fluctuations, inventory risks, etc. 20 yen does not simply become a profit.

2. Fee income

In some cases, trading companies do not own the products and instead serve as intermediaries.

In a familiar example,

• Real estate brokerage
• Recruitment
• M&A brokerage
• Travel agency
• Advertising agency

In a broad sense, this is a model that ``earns revenue by connecting.''

In this case, while it is easier to reduce inventory risk, commission rates tend to fall if competition is intense.

3. Financial function

Trading companies sometimes use their financing power and creditworthiness to support transactions.

for example,

• Advance payment
• Import/export finance
• Project financing
• Currency risk management
• Credit enhancement to business partners

And so on.

For business partners, the involvement of a trading company reduces concerns about financing and payments. This is also where the value of a trading company lies.

4. Investment return

Modern general trading companies are more than just intermediaries.

for example,

• Resource development
• Power generation business
• Food business
• Infrastructure business
• Logistics business *Consumption-related business
• Digital/communication related business

We have invested in such companies and have earned equity profits, dividends, and profits from business sales.

For this reason, general trading companies

Trading company + Operating company + Investment company

It has a structure similar to.

When investors look at a general trading company, they need to look not just at its sales volume, but also at which businesses it allocates capital to, and from which businesses it collects profits and cash.

Strengths of the trading company model

You can move large trades with few fixed assets

Trading companies do not necessarily need to have their own factories.

By leveraging information, trust, contract power, logistics network, and sales network, we can move large transactions.

Network becomes valuable

A trading company's strength lies in the number and quality of its business partners.

The deeper your relationships with buyers, sellers, financial institutions, logistics companies, local partners, and government agencies, the easier it will be to find business opportunities.

Easy to deploy worldwide

Trading companies have strengths in cross-border transactions.

In fields where there is an international gap in supply and demand, such as resources, food, metals, energy, machinery, and infrastructure, a trading company's ability to adjust is valuable.

Easy to gather information

Because trading companies have contact with many business partners, they are in a position to quickly grasp market trends, price changes, and changes in demand.

Even in the investment world, companies that gather information quickly are strong. This is also where the value of the trading company model lies.

Weaknesses of the trading company model

Simple intermediary services tend to have low profit margins

Competition is fierce in transactions where anyone can broker the same thing.

The more competition there is, the lower the commission rate and profit margins will be.

As a result, trading companies have expanded their role from mere intermediary to include finance, logistics, inventory management, investment, and business operations.

Affected by economic and market conditions

Trading companies are affected by resource prices, exchange rates, interest rates, the economy, and logistics market conditions.

For general trading companies in particular, there are times when profits increase in the resource field, and times when profits are squeezed due to falling resource prices.

If you just look at trading companies as stable because they have high dividends, it's easy to overlook this point.

Trust is important

Trading companies do business on trust.

If you lose the trust of your business partners, your business will collapse in areas such as contracts, payments, logistics, and financial support.

That's why financial strength, risk management, governance, and compliance are so important.

What is different about modern general trading companies?

Japanese general trading companies are quite unique in the world.

As a representative example,

• Mitsubishi Corporation
• Mitsui & Co.
• ITOCHU Corporation
• Sumitomo Corporation
• Marubeni

and so on.

These companies are more than just intermediaries.

The business area is

• Energy
• Metal *Food
• Chemicals
• Daily consumption
• Infrastructure
• Machinery
• Finance
• Digital

and so on.

From an investor's perspective, general trading companies are difficult to understand just by looking at what they sell.

Rather,

Where are you allocating capital and recovering cash?

Must see.

In this respect, general trading companies are similar to investment companies with business portfolios.

Points that investors should learn

The important ideas that can be learned from the trading company model are:

Control the flow, not the object

That's the idea.

For example, in investment

*Companies that make products

• Companies that transport goods *Companies making payments *Companies providing information
• Companies that provide finance
• Companies that manage inventory and logistics

Now, the profit structure is completely different.

Companies that support market trends have profit opportunities even if they do not manufacture the products themselves.

This is also a useful perspective when looking at platform companies, payment companies, logistics companies, M&A intermediaries, and recruitment companies.

You can broaden the scope of your company analysis by looking at not just "what you're making," but also "which flow you're supporting."

Check points when looking at trading companies

When considering a general trading company as an investment target, you should check the following points.

A general trading company is an attractive business, but it is not a panacea.

When resource prices are at a tailwind, profits tend to appear large, but when market conditions worsen, profits can suddenly become heavier. Investors need to look not just at the dividend yield, but also at the content of profits and cash sustainability.

summary

The trading company model is a system that connects sellers and buyers and creates value through information, trust, and networks.

There are three points that beginners should understand:

*Profits can be made even if you don't make things

• Information and networks become assets
• Modern general trading companies also have aspects of investment companies.

As an investor, you can greatly expand the scope of your company analysis by considering not only ``what does a company produce?'' but also ``does a company support market trends?''

When we look at trading companies, we see that the value of business goes beyond manufacturing. The power to close deals, the power to supplement credit, and the power to allocate capital. This is also an important source of profits for companies.

source

• Mitsubishi Corporation “Business introduction”
• Mitsui & Co. “Business introduction”
• ITOCHU Corporation “Business introduction”
• Sumitomo Corporation “Business introduction”
• Marubeni “Business introduction”