Amazon Business: Understanding the Threat to B2B Distributors

Amazon Business is a major threat to B2B distributors.

Looking at the numbers, Amazon Business’s rapid growth over the last year belies any assertions that it can’t get traction in B2B industries.

Our research looks at the business model behind Amazon Business and its progress in key B2B industries. We also provide the blueprint for how traditional distributors can fight back.

In 2016, Amazon Business’s marketplace surpassed $1 billion in sales, and its marketplace has been growing at 20% month over month. It also has more than 9 million product listings, up from less than 4 million a year ago.

If the business unit keeps up its pace, it could surpass $8 billion in sales and 15 million listings in 2017.

Our research looks at the business model behind Amazon Business and its progress in key B2B industries. It includes proprietary data on Amazon’s progress in B2B, available through Applico’s Marketplace Tracker tool.

While the threat of Amazon Business in B2B is significant, large distributors still have time to take action and come out ahead once the dust settles. We’ve outlined what steps traditional distributors need to take to stave off this threat.

To succeed, distributors must embrace the new marketplace platform business model that Amazon also employs.

Amazon Business’s Progress in B2B

In our white paper, “Disruption at the Gates: Monitoring The Threat of Amazon Business,” we examined Amazon’s pricing and product availability compared to top electrical distributors.

We found that Amazon already had much greater catalog depth as well as cheaper prices compared to top electrical distributors.

Amazon Business Catalog Depth in B2B

As you can see in the graphic above, Amazon Business’s product catalog depth is far beyond that of its top competitors in the industry. In wiring connectors, Amazon Business has 77,764 listings compared to a Big-4 distributor’s 2,855. The disparity in other categories is even wider.

The common response to this disparity from distributors is that Amazon lacks top quality items.

Yet when comparing a Big-4 electrical distributor to Amazon, Amazon had products listed from 106 of the 120 manufacturers offered by a Big- 4 distributor.

Even worse for distributors, 96 of these 120 distributors, or 80%, already sell directly on Amazon.

Amazon Business :Manufacturers selling direct

In addition to extensive product listings, a number of these distributors also have extensive branding on their Amazon Business storefronts, including intro videos and links to their social media accounts, all of which indicate that they are very active on Amazon’s marketplace.

Finally, we looked at price competitiveness by comparing top-selling products from a Big-4 Distributor with Amazon Business’s listings. In each instance, we were able to and the exact same product offered by the Big-4 distributor on Amazon Business’s marketplace.

For the full breakdown, check out our white paper, but we’ve included one such example below.

Amazon Business Product Comparison

Download White Paper Now – Disruption at the Gates: Monitoring the Threat of Amazon Business

The Financial Impact of Amazon Business on B2B Distributors

While we first looked at electrical distribution, this price disparity is already true in many B2B distribution industries. Earlier in March 2017, Grainger CFO Ron Jadin admitted that the company was not competitively priced during his presentation at this year’s annual Raymond James Institutional Investor’s Conference.

While Grainger remains competitive on large contracts, where it offers significant discounts from list pricing, it has fallen behind on small and mid-sized contracts and spot buys. This latter segment makes up some 42% of Grainger’s $10.1 billion in revenue.

Amazon Business Threat to Grainger and Other B2B Distributors

2016 Revenue for Grainger – At Risk (Not Competitively Priced) vs. “Big Contract” Revenue

This lack of price competitiveness has already started to hurt Grainger’s business, as 2017 revenue growth was negative in North America, its largest market.

During his presentation, Jadin announced that to correct this price gap Grainger would cut web prices on most of its listings by 15-25% over the next 18 months.

In our recent webinar, we showed financial projections resulting from this price cut, and the results were dire.

This analysis demonstrated that even if Amazon Business only commoditizes a handful of small, high-margin items, it can severely impact distributors’ net profit margins even as their overall revenues stay high. We’ve found similar results with top distributors in other B2B industries.

Grainger’s recent quarterly earnings miss confirmed our analysis, as they fell well short of projections due to increased pricing pressure.

The news will likely only get worse for distributors as Amazon wades deeper into the B2B sector. Per leaked court documents, Amazon has identified custom pricing as a key factor in the success of Amazon Business.

So while distributors’ custom pricing on large contracts may be defensible today, it likely won’t be an inimitable advantage for long. Amazon Business will ultimately put margin and price pressure on those large contracts, just as it does with smaller orders and spot buys today.

If Amazon Business only commoditizes a handful of small, high-margin items, it can severely impact distributors’ net profit margins even as their overall revenues stay high.

While Amazon has specifically and publicly set its sights on industrial supply distributors like Grainger, distributors in related industries like building materials, metals, chemicals, electrical supply, electronics, auto parts, and medical supply should all be worried.

B2B distributors need to learn from those who have fallen to Amazon before.

Consumer retailers only played defense, launching e-commerce sites and not creating a network of third-party sellers. Circuit City went bankrupt. Best Buy lost 40% of its market capitalization from ten years ago. B2B distributors can’t afford to repeat the same mistakes.

Better yet, they don’t have to: they can take action now and go on offense.

Watch Now – Webinar: The Financial Impact of Amazon Business on B2B Distributors

How B2B Distributors Can Beat Amazon Business with a Marketplace

Following our webinar, all of the B2B distributors and industry analysts we spoke to agreed that distributors are in trouble. But they all had the same question: what can these companies do to fight back?

The answer for these distributors is to take advantage of their own marketplace platform initiative.

Building platforms has been the secret recipe for success in Silicon Valley for the last 20 years. But now the secret is out, and the time is right for B2B distributors to embrace platform innovation.

With its scale and resources, Amazon Business will likely succeed as a generalist B2B marketplace. This would mean that Amazon will own a substantial portion of many B2B distribution industries.

However, given the size and significant fragmentation present in these industries, there also is tremendous opportunity for vertical-specific marketplaces to emerge before it’s too late.

Large, established distributors are well positioned to capitalize on this opportunity. Why? Think of this marketplace model as the modern version of the current distributor business model.

In our white paper, “The Best Defense is Offense: How B2B Distributors Can Dominate With a MarketplaceD,” we cover the advantages of this model compared to the traditional distribution model.

Additionally, we look at the considerable advantages that incumbents in these B2B industries have in making a marketplace successful compared to startups or outside tech companies.

Building platforms has been the secret recipe for success in Silicon Valley for the last 20 years. But now the secret is out, and the time is right for B2B distributors to embrace platform innovation.

With the blueprint we’ve provided in our bestselling book, Modern Monopolies, and with the work we do with our clients, we strongly believe that the next generation of successful, multi-billion dollar platforms won’t just be tech companies and startups.

It will be dominated by traditional businesses that have taken this recipe for industry disruption and turned it to their own advantage.

Want to see how Amazon Business is doing in your industry? Check out the Applico Marketplace Tracker below.

This white paper explains how traditional distributors can leverage their existing supply chain and industry knowledge to jumpstart a platform’s growth. Like Amazon, they can succeed by employing a hybrid model combining a marketplace with their traditional business models.

Additionally, we explain the pros and cons of the potential approaches for embracing platform innovation, which include building, buying, investing, and partnering.

While building a platform is a complex, multi-year endeavor, this white paper will get you on the right path to not just surviving the threat of Amazon Business, but also to thriving in spite of it by embracing platform innovation.

Download Now: How B2B Distributors Take On Amazon Business

Applico Marketplace Tracker

Applico’s Marketplace Tracker is a tool designed to track market trends in B2B distribution.

The tracker dynamically updates information on Amazon Business’s best-selling industrial products, prices, their 3rd party seller ecosystem and more.

Amazon Business Marketplace B2B Distributors Tracker tool by Applico

Check out the tracker at the link below for up-to-the-minute insights.

For now, the tracker will be focused on the maintenance, repair, and operations (MRO) segment, but more and more product categories will be added, such as electrical supply, chemicals and metals.

The tool is free to access, for a limited amount of sign-ups. Individuals interested in accessing this tool can sign up for access below.