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January 1, 2015

Is Amazon Your Next Competitor?

Critical lessons from the e-commerce frontier

Visit AmazonSupply.com and the first thing you’ll see is the number 2,250,000 plastered like a banner headline across the giant online retailer’s industrial goods portal. It’s the number of products on offer—up from a measly 500,000 two years ago—and it practically dares the business buyer to find something AmazonSupply doesn’t carry. There are paper clips and packing tape, but also centrifuges, snack foods, cutting tools—a world of janitorial, scientific, food service and maintenance supplies. And under the “materials” category, metal: from aluminum sheets to stainless steel bars to copper tubing. With a click you can get product specs, a line of credit and, this being Amazon, free two-day shipping on orders over $50.

As for prices, Boston Consulting Group says they’re significantly lower than, and automatically adjusted to beat, competitors’. Is $600 for a 24×36-inch, quarter-inch-thick sheet of polished aluminum a good deal (prices range widely based on size and specs)? That depends on how many sheets you need and who’s buying. Traditional industrial distributors, with their branch offices full of salespeople and high margins on low-volume items, are said to be vulnerable to Amazon’s encroachment into this space.

Should metal service centers be worried, too? Only if they offer the wrong products, higher prices and slower delivery, say wholesale market experts who have been watching AmazonSupply since its launch in early 2012. At the same time, they point to AmazonSupply as yet another indicator that the business-to-business (B2B) world is following the consumer market online, with more and more buyers expecting the same perks and conveniences they’ve grown accustomed to when doing personal shopping on eBay, Amazon, Google and other sites.

“Buyers are younger,” says Helgi Thor Leja, a senior account executive with Fortna, which designs distribution centers and e-commerce processes for big companies, including wholesalers. “They expect things faster. They expect the company to have that portal. If you don’t have an e-commerce presence, you’re dying—you just don’t know it yet.”

       “Amazon’s approach in B2C is about offering great selection, convenience and value, and businesses absolutely want
these same things.” 

The Answer Is Adding Value

Maybe. But there’s good news for metals distributors: Those that are thriving already provide the kind of added services for customers—processing raw metal into custom shapes, performing some fabrication and helping clients manage their supply chains with just-in-time deliveries—that typically require close business relationships and that AmazonSupply would be hard-pressed to replicate.

“[The executives at AmazonSupply] have not spent a lot of time getting to know the customers. They have not spent a lot of time understanding individual markets,” says Richard Balaban, senior partner at the consulting firm Oliver Wyman, which has done work on behalf of traditional distributors. “They’ve just been loading up capacity and building a system that works. The current data we have … suggests Amazon is not getting dramatic traction in the B2B space.”

Indeed, Amazon has barely mentioned its B2B portal since a terse news release announcing its launch in April 2012. It shows up nowhere in the company’s annual reports to the SEC, and company executives appear to have given few interviews on the topic. In an emailed response to Forward’s questions, Prentis Wilson, vice president of industrial and scientific supplies at Amazon and head of the company’s B2B business, wrote, “Some of the feedback we have received from business customers is that they love the convenience of shopping online, and they want an experience that is similar to how they shop in their personal lives. Amazon’s approach in B2C is about offering great selection, convenience and value, and businesses absolutely want these same things.”

Hear that? The bad news is that still too few in the service center business appear to have fully functional e-commerce portals where customers can not only see selection and prices but also submit orders. To be sure, more and more service centers are putting product specifications and inventory on the Web. And as more companies go online, competition will intensify—not just from Amazon, but from more-diversified industrial distributors or from the service center across town.

 

A Large and Shifting Market

“Amazon’s entry is big news. You better make sure your game is as good as theirs,” says Dirk Van Dongen, president of the National Association of Wholesaler-Distributors (NAW). “The lesson for distributors, as perhaps is always the lesson: You don’t own your customers. You have to earn your customers’ loyalty every single day.”

The appeal of industrial supplies for Amazon is a huge market fragmented by both clientele and geography, though one that is already well acquainted with e-commerce. Overall sales by U.S. wholesalers totaled $5.3 trillion in the 12 months ending in August 2014, according to the U.S. Census. That’s almost a third of 2013’s gross domestic product and up almost 6% year-over-year. E-commerce accounted for more than 20% of wholesalers’ business in 2012 (the latest figures available), compared to just 5% of the nation’s retail sales (but more than 6% in the first three quarters of 2014), Census data shows.

Business buyers are increasingly comfortable online. Around 60% of corporate buyers have made purchases online, and more than a third plan to increase online business spending, according to a 2013 survey by Acquity Group, a unit of consultancy Accenture. Of younger buyers, aged 35 and under, 63% had already tried AmazonSupply.

Among the prescriptions for traditional distributors to stay competitive: Let customers buy however they want to buy, whether by phone, fax, online or in person—a strategy called omni-channel or multi-channel selling.

“The buyer of today is far savvier from a technology perspective, and this empowers them to buy what they want, when they want it and how they want it,” Cody Phipps, CEO of office supply distributor United Stationers Inc., told the NAW in a 2013 book-length report on the topic.

But selling through multiple channels presents its own set of challenges, including reorganizing and retraining sales forces, analyzing customer profitability and streamlining everything from packing to offering credit. Upgrading to new software and other enabling technology may actually be the easy part, now that much of it is offered via the Web and plugs directly into popular business software packages from Microsoft or SAP, says Paul St. Germain, wholesale distribution industry leader at IBM and a researcher on the NAW report.

“You need a lot of the business processes and back-end systems to support [e-commerce],” he says. “The technology part is more plug and play. That’s not usually where you’re going to have the trouble. The challenge tends to come around the people.”

 

E-commerce Isn’t Just About Technology

One challenge is understanding how valuable, say, 24-hour delivery is to a customer and thus what to charge for it. St. Germain points to the special pricing model for large customers of oil field equipment distributor Wilson International Inc., now part of National Oilwell Varco Inc., in which parts might be listed at cost, but with extra charges for urgent delivery, holding just-in-case inventory, frequent replenishment and other services. Putting a price on those, St. Germain says, helped Wilson communicate the value it provided to customers while encouraging them to be more efficient with their orders. Efficiency, a key client metric for all distributors, is of special importance in e-commerce.

Other processes that may need re-examining are returns, low-volume orders and extending credit quickly, he says. “If a customer just ordered something online and is at their credit limit, how does the business process handle that? If there are returns, does it matter which way it went out and which way it’s returned?”

Fortna’s Leja, who has worked with brands like Milwaukee Tool and Moen, and distributors like W.W. Grainger and MSC Industrial Direct Co., agrees. He recently helped an apparel company shrink its order fulfillment (the time it takes to get an order approved, picked and shipped) from 48 hours to three—not by installing robots but by speeding up human activities such as the company’s agonizing credit review. “It should be a one-minute process,” he says, noting that such bottlenecks are typical and a result of building on past procedures. Selling seamlessly through multiple channels, including online, means streamlining them.

Perhaps the best defense against Amazon or any other insurgent, says Oliver Wyman’s Balaban, is to focus on doing what others can’t.

“The B2B business seems easy. But someone running a business has a more complicated need than a consumer,” Balaban says. Those needs often, but not always, transcend price. “Distributors who reinforce their ability to help their customers be successful are dramatically less vulnerable than distributors who just deliver product at a competitive price.”

 

The Amazon Edge

What Amazon can do, says Balaban, is raise customers’ expectations for service, price and availability, and cut deals with suppliers to fill gaps. “I don’t think Amazon is going to laser-cut steel, but what if Amazon does a fulfillment deal with local distributors?” Balaban asks.

Amazon’s Wilson declined to say whether AmazonSupply will provide the kinds of processing services that MSCI members typically perform. But he did say that AmazonSupply offers items stocked by third parties, as it does with books and other consumer items it sells (the company declined to make any of its suppliers available).

Then there’s Amazon’s sheer size and long track record of picking fights in complacent markets, sometimes unsuccessfully but rarely without landing some punches. After all, Amazon is now a behemoth with $85 billion in annual revenues, with a stock market value at press time more than triple that of Target’s. The company is seemingly willing to earn almost no profits while building market share, if not markets themselves.

Since expanding into apparel, jewelry, home goods and other product categories, the company has also built entirely new businesses selling everything from cloud computing to e-readers to groceries to, most recently, smartphones. It has also scooped up promising competitors such as Zappos and, according to the 2013 book The Everything Store, written by Brad Stone, coerced uncooperative ones into joining forces. The portrait that emerges is of a technology company obsessed with efficiency and of Amazon founder Jeff Bezos as an uncompromising, if gifted, leader enamored of Walmart’s relentless drive to lower prices.

     “Distributors who reinforce
    their ability to help their customers be successful are dramatically less vulnerable  
    than distributors who just deliver
    product at a competitive price.” 

B2B’s Online Struggle

Still, as many point out, online B2B selling has been around as long as the Internet, with notably limited success. High-profile online metals businesses, for example, have not fared well. U.S. Steel’s Straightline Source closed in 2003 after two years, with more than $100 million in losses. ThyssenKrupp Steel and ArcelorMittal shut their jointly run STEEL 24-7 portal in 2007 after four years, calling the concept “obsolete” in the face of individualized customer needs. In 2007 ThyssenKrupp Materials North America, owned by the same parent as the steelmaker, bought OnlineMetals.com, which offers a wide range of metal products “all cut to size, no minimum orders” and boasts six shipping locations in the United States. Amazon, on the other hand, has more than 60 distribution centers in the United States, according to its website—and Oliver Wyman predicts that sometime in 2015, the online retailer will serve half the U.S. population with same-day delivery. (ThyssenKrupp didn’t return requests for comment.) Google tried its own version of AmazonSupply, called Google Shopping for Suppliers, but quietly shuttered it in June after just 18 months in operation. (Google didn’t respond to requests for comment.)

Of the 10 largest U.S. service centers, only two appear to have e-commerce sites that offer a full range of selling and shipping transactions, though many service centers offer product catalogs or portals where customers can log in and see buying history and quotes. Ryerson’s Ryerson Direct site, for example, offers a product catalog, specifications and even tutorial videos. One big difference from AmazonSupply: Before you can see prices, you must request access from Ryerson. (Ryerson declined to answer questions.) Registration is also required at O’Neal Steel’s e-commerce portal, which says it offers spot purchases on “designated” inventory, as well as regular replenishment for repeat clients.

Is that a failure to adapt, or smart business? After all, few service centers would jump at the chance to handle the order that Forward put through AmazonSupply recently: a package of 100 tiny chromium steel ball bearings, a square foot of cold-rolled steel and—a bean counter’s nightmare—six feet of straightened stainless steel wire weighing under three ounces but arriving in several pounds of packaging to keep it from bending. Those three items totaled just $17.07, arrived separately in their own packaging and qualified for free shipping under the Amazon Prime program.

If that sounds like a money loser, well, that may be the point. Says Amazon’s Wilson: “We’re focused on finding ways to offer customers the best possible shopping experience. We’re not focused on other companies. Competitive prices combined with the right selection, fast and free shipping options, robust product information, Amazon customer reviews and a dedicated customer service team help us reach our goal of offering the best possible shopping experience and value to customers.”

 

A Vulnerable Market:
Industrial Supplies

The low rate of e-commerce adoption in metals stands in marked contrast to the so-called MRO market (maintenance, repair and operations), a mainstay of traditional wholesale distribution dominated by large companies such as Grainger, Fastenal and MSC that sell a wide array of goods from hardware to janitorial to safety.

The MRO market and similar businesses such as laboratory suppliers that sell each customer small volumes of many products are most vulnerable to the Amazon threat, Balaban and others say. The markets may agree: Shares of Grainger, Fastenal and MSC have markedly underperformed the S&P 500 since AmazonSupply’s launch. Perhaps not surprisingly, the largest MRO companies have robust online shopping portals and speedy delivery. A 24×24-inch sheet of Kaiser aluminum on MSC’s website is just $15, though you have to spend twice as much as on Amazon to get free shipping.

Balaban says AmazonSupply is targeting the high margins on small things that are easy to ship, easy to stock and don’t require special handling or processing. A dentist may still need a medical supplier for drills and other equipment, but Amazon might pick off the latex gloves and bibs. The MRO sellers may have seen this coming: Their latest invention is to install vending machines for some items inside their customers’ locations or to take over their supply chains entirely for a fee.

Outwardly, traditional distributors maintain that they’re not threatened by AmazonSupply. “It’s hard for me to imagine that in the short term Amazon will have a significant impact,” MSC’s executive vice president of sales, Tom Cox, told the Financial Times in 2012. Jim Ryan, Grainger’s CEO, was equally dismissive: “Less than 1% of our customers buy only on the Web.”

The NAW’s Van Dongen is more measured but just as sanguine about his membership’s prospects. “Somebody has to take the product from where it’s made to where it’s needed, when it’s needed,” he says. “What is not immutable is who performs those functions. Distributors do a very good job in the aggregate of adopting and adapting to new tools, new techniques and new approaches, and e-commerce is no exception in that regard.”

But just in case they need a little help, Brad Stone, author of The Everything Store, is speaking at the NAW’s convention in January.


Peter C. Beller is a Los Angeles-based business journalist and editorial director at Ebyline.com. A former staff writer for Forbes and MarketWatch, Peter has been published in The New York Times, New York magazine, the Jerusalem Post and elsewhere.