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A look at why the e-tailing giant is actively claiming market share in the electrical distribution space with its Amazon Business division.
Over the last two years, tED magazine has been reporting on how Amazon Business is widening its footprint within the electrical distribution space. In Is the “Amazon Business” Pillar Setting Sights on Electrical Distribution and Disintermediation and Amazon Business—Two Reasons for Distributors to Lose Sleep, for example, we explored the trend, discussed the current and potential impacts on electrical distributors, and gave NAED members some tips on how to overcome this new threat.
“If distribution can’t provide significant and measurable value, it doesn’t belong in the sales equation,” wrote Chris Brown, CEO Wiedenbach-Brown, in tED magazine. “A simple answer to the question is to become invaluable to the manufacturer, the end user, or to both. And that answer is also a partial solution to the Amazon Business challenge, which is more dangerous to at least the commodity product aspect of distribution.”
Well, we’re halfway through 2017 and it looks like Amazon Business’ foray into electrical supply has gotten even more serious since Brown penned his article in 2015. The question is, what is this e-tailing behemoth’s obsession with the industry and why is it putting time, effort, and money into conquering it?
Alex Moazed thinks he has the answer. As CEO of Applico, a New York-based advisory firm that helps enterprise companies understand threats posed by platform companies like Amazon and Google and “seize the opportunities available to compete with disruptive forces and emerge the winners in the market,” Moazed says the fact that the distribution sector has fallen short on the e-commerce front makes it a prime target for a company like Amazon Business.
“Companies like Grainger and HD Supply are supposed to be leading the charge with e-commerce, but they’re coming up short,” says Moazed, who has helped launch over 350 apps for Disney, DirecTV, Google, and various startups. He points to the grocery industry—and namely, the recent acquisition of Whole Foods by Amazon—as an example of how the latter can seamlessly expand into an area that one wouldn’t normally associate with a company that started as an online bookseller.
“Companies can talk about their evolution into value-added services and how they’re ‘moving up the value chain,'” Moazed states, “but at the end of the day, there’s a lot of transactional, spot business involved in grocery, electrical supply, or metal distribution—you name it.” And that, he says, opens the doors for a large e-tailer that does have its e-commerce act together to steal market share.
An Enticing Mix
In assessing the typical SG&A costs (selling, general, and administrative expenses) for a larger electrical distribution firm, Moazed says most firms shell out about 15% for sales costs and 15% for warehousing, administration, and fulfillment, for a total of 30%. “That’s a lot,” says Moazed, who notes that building material and metal distribution firms have SG&A costs that are “an order of magnitude lower” than that of an electrical distributor.
“From a margin standpoint, you can make an argument that there’s actually more meat on the bone in industrial and electrical supply than there is in some of the heavier distribution industries,” Moazed explains. “If you’re Amazon and you’re looking at that, it looks interesting because its business model centers on hacking down margins and then giving the benefit to the customer. That’s why customers come back to Amazon.”
The Door is Still Open, But Not for Long
For now, Moazed says that “door” into the e-commerce world remains open, and that it’s waiting for a distributor to start its own marketplace initiative that goes head-to-head with Amazon. But that opportunity is slowly closing, he notes, and 10 years from now the selling landscape will be different than it is today. “I guarantee you that there will be at least one dominant, marketplace-type of business model—be it Amazon, Jet.com, or a large distributor,” says Moazed. “Put simply, it’s inevitable that the marketplace business model evangelized and exemplified by Amazon will gain traction in the [electrical distribution] industry.”
And while other industry segments like electronics distribution typically involve a lot of custom orders and closer cooperation between distributors and manufacturers, many of the goods sold in electrical distribution are essentially commoditized. “This commoditization is particularly relevant in the MRO space,” writes Applico’s Nicholas L. Johnson in Electrical Distributors a Prime Target for Amazon Business, “where many commoditized items fall within the typical small, pack-and-ship type of goods that Amazon has long excelled at delivering.”
Moazed says the fragmented state of electrical distribution is definitely a key attractor for Amazon Business. “There are thousands of small, three or four location distributors in the U.S., all of which are selling commodity-type products such as lighting and MRO,” says Moazed. “When you’re dealing with these types of standardized products, that’s usually where a marketplace takes hold and evolves.”
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