B2B Distribution

The Threat

Amazon Business launched in 2015 and it’s already eclipsed $1 billion in first-year revenue. Additionally, this B2B product marketplace is growing at over 20% month over month, meaning that in 2017, Amazon Business’s revenue could exceed $9 billion.

What’s more, it’s not just revenue that is growing for Amazon Business. Product offerings and the customer base are growing quickly, too. By last tally, Amazon Business has over 300,000 customers and is approaching 10 million product listings.

amazon-product-count

Looking at its track record, Amazon made short work of the likes of CompUSA, Circuit City, Borders, Tower Records, Finish Line, and many others.

From our case study on Circuit City’s defeat by Amazon, we saw that the average longevity of a B2C business after Amazon decided to enter that market was about eight years. There is no reason to believe that B2B distributors will fare any better. In reality, Amazon is in a much better position than it was in 1999 when it entered the consumer electronics market, and, accordingly, the eight-year estimate (Amazon Business Launched in 2015) is highly conservative.

The common reaction to the Amazon threat has been to list the reasons why Amazon can’t operate in your space.

From the apparel industry:

“People can’t buy clothes online! How will they know if it fits?”

From electronics:

“People want to see the TV’s picture before they buy it. They want to hold the item.”

The problem facing most B2B distributors is size. It’s easy to pack and ship a pair of shoes or even a 60-inch TV. But how simple is it to pack and ship components of a commercial kitchen or a industrial machinery?

Countless unknown senior B2B executives have said over and over:

“Amazon can’t deliver large items.”

To hurt their competitors, Amazon doesn’t need to move those bigger products. Instead, the e-commerce giant can chew into their EBITDA by offering everything else in their product catalogs at better prices. B2B supply customers will be easily lured away from their suppliers in favor of cost savings and, ultimately, better margins.

Applico recently modeled this for a multi-billion dollar B2B client. The result bore out that the business still operated but didn’t turn a profit.

The Opportunity

At Applico, we believe that the best defense is a strong offense. For large, multi-billion dollar companies, the natural instinct is to play defense and protect their positions at the top of the mountain, typically by not innovating and instead pursuing mergers and acquisitions, which is costly and typically ineffective.

When facing competition from a serious platform business, this will always be a losing strategy in the long run.

Aside from the hopelessness of deploying defensive strategies, the opportunity presented by taking the offensive is enormous. Large B2B distributors have a significant number of competitive advantages over Amazon Business and potential startups in building a platform. They have decades’ worth of very nuanced industry knowledge, established relationships with the original manufacturers, a large and loyal customer base, significant distribution logistics already in place, and a very sufficient amount of capital and resources to design and execute a platform business strategy.

This is true of most incumbent B2B distributors. Where Amazon is trying to be everything to everyone (and will eventually succeed if unchallenged), a B2B distributor has the opportunity to be the best solution for that specific industry vertical.

As such, the B2B distributor should take its natural advantage to carve out complete market dominance in its industry while preventing disruption and defeat at the hands of an online retailer like Amazon.

The Endpoint

The modern monopoly for B2B distribution would be one that sells all of the products relevant to its vertical in aggregate, by aggregating supply from a myriad of existing distributors and suppliers in the industry. The customer would visit the marketplace site or app and add all of the desired items to a cart, ordered according to quality, quantity, and price, and then place the order, all at once.

The goods would be delivered through typical channels and the customer would be none the wiser as to who the actual supplier is because, quite simply, it wouldn’t matter. As long as the purchasing process is easy and streamlined, the experience will be all that matters.

The platform’s owner would eventually welcome its traditional competitors into the marketplace and then control all of the transactions. This is how the company that creates a B2B supply platform becomes a modern monopoly.

B2B Distribution

Suggested Reading:

The Threat

The Opportunity

The Endpoint

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