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‘If I Ran Amazon Business…’

By Jim Williams

Timing is everything. The headlines this morning tell the story…

Google and Walmart are joining forces to take on Amazon – The Business Insider

Google and Walmart Partner with Eye on Google – The New York Times

Google and Walmart's Partnership Will Be a Real Test for Amazon – Wired

Amazon is making headlines of its own as the e-commerce giant received the go-ahead yesterday from Whole Foods shareholders on the nearly $14 billion offer to buy the grocery chain.

tED magazine wanted to talk to a marketplace expert to pose the question “If you were running Amazon Business, what would you do?” We talked with Alex Moazed, founder & CEO of Applico, this week to bring this topic close to home and look at it from the view of an electrical distributor.

tED magazine: What would you do if you were running Amazon Business?

Moazed: It's a multibillion-dollar business, that has generated about $5 billion in GMV (Gross Merchandise Value), and Amazon Business is growing 20 percent month-over-month. By comparison, Amazon's core marketplace, the consumer marketplace, grows at about 30 percent each year.

So the growth is very big for Amazon Business, and  it's doing a lot of things correctly. The Whole Foods acquisition does a lot of good within B2B distribution. It gives Amazon the ability to compete with grocery industry retailers, and in the world of B2B distribution, it can now compete with B2B food distributors as well, which is a massive industry in and of itself.

Amazon Business is doing quite well within industrial supplies and the office supply market and you're seeing Staples chop itself up and you're seeing Grainger and its other competitors, like Fastenal and MSC Industrial Direct, come under a lot of fire.

The only other thing would be the heavy industries,  verticals like building materials, metal, chemicals, some of these other heavier industries – maybe that makes sense for Amazon to investigate an acquisition of an existing distributor. The valuations are very, very low for those businesses – their multiples are extremely low. But again, each of those industries is at least $100 billion in size in the US alone and there is a lot of potential there for Amazon.

I think it could roll out certain programs a little bit faster as far as providing financing and helping out with cash flow to distributors that are crossing the chasm and selling on Amazon's marketplace. But for the most part, I think it's on the right track.

tED magazine: As Amazon Business, what would you do to keep electrical distributors at bay?

Moazed: They could try to get some key mid-sized electrical distributors on board. If you were to look more specifically in electrical distributors and their product catalogs, there are two product categories that I think are particularly vulnerable and particularly attractive to Amazon. One of those is MRO (maintenance, repair and operations), which you are seeing heavily with Grainger. But every large national, multibillion-dollar, even large billion-dollar regional electrical distributors, has a decent amount of their revenue coming from MROs.

The other area would be lighting and lighting supplies. Those areas both have massive industries. Both have a lot of cross-sections across the revenue distribution of large electrical distributors – and smaller ones, too. Both are highly commoditized product catalog. Both have products that are created by a lot of manufacturers that can be easily packed and shipped. Anyone can centrally distribute the majority of those products.

tED magazine: What are electrical distributors' weak points?

Moazed: I would break it down like this: first, are you a large, billion-dollar-plus distributor or are you a small- to mid-sized distributor?

If you are large and you are a multibillion-dollar distributor, you have weak points just about everywhere. No matter how you slice this pie, you are going to have a big chunk of it clawed out from your business over the next five to ten years. It doesn't matter what kind of digitization work you do.

If you are going into more high value-added services (HVAS), more premium exclusive product offerings, your own white-label brands – whatever you do to give yourself better margins – those things could help improve revenue and your margins. But it will not prevent a large disruption – and I mean at least 30% of your relatively short-term revenue being opened for the taking by Amazon over the next three years, not just the next five to ten years.

There's nothing you can do to make up for that loss. You can diversify, you can do all of these things, but you need to reimagine your business in a very different way.

What they need to do, ultimately, is build or buy their own marketplace; build their own version of Amazon. And they could win. The large distributors have the capital, they have the brand. They have the trust of customers and small distributors. They have relationships with manufacturers. They have a lot of the characteristics, a lot of the things a marketplace needs to be successful.

They just don't have the business model – which they need to build or buy – and they don't have the technology – which you can also build or buy. But it doesn't mean they can't do it and they can't win. Just look Walmart's acquisition of Jet.com. If Jet.com is just the number two e-commerce marketplace, that's huge. Just like we have iOS and Android, or Uber and Lyft. There's a winner-take-all dynamic, wherein there are one or two winners that dominate a given market. It's still fine to be number two. Second place will have still created a tremendous amount of value and  any organization would be worth a lot more with a marketplace approach than without it. 

Buying marketplaces is expensive, though – Walmart paid $3B for Jet.com. Wyndham only paid $50 or $60 million, but it's still $60M against its bottom line. It's not cheap. You could build your own marketplace for much cheaper than a $60 million one-time acquisition, and there are pros and cons between building or buying. But the point is, a large distributor solely investing in its e-commerce efforts is a strategy that could bring incremental improvement to the business, but it'll be in a worse position in five years than it is now.

The question right now is, is it just Amazon, or is it Amazon and someone else? And, how do they split the market? Is it 50-50, 70-30, 60-40? We will see, but the point is, the marketplace is already here. Amazon just announced a few weeks ago it has a over million business customers and it has many dedicated teams focusing on each vertical. This is a real, serious multibillion-dollar business with high growth for them.

Amazon is not playing around and is not going anywhere.

If you are a small or mid-size distributor, and you're asking “What is our weak spot?” I think your weak spot is not selling on a marketplace – your weak spot is to ignore this new reality that a marketplace will dominate. There are certain things you could do with your business – high value-add services, develop stronger relationships with larger customers, maybe do some specialized e-commerce – but by not selling on a marketplace, you're ignoring a growing source of demand and you're not understanding what products will naturally sell on a marketplace.

A lot of private equity firms own the mid-sized distributors. If I were them, I would try to sell those electrical distributors as fast as I could. Again, the reality is Amazon is a continuously increasing and more visible threat, where less and less of the industry can disregard it. Essentially, that is what the CEOs of large distributors are doing – they are just sticking their heads in the sand and saying, “Well, hey, we'll be okay.”

Those people don't understand reality. If you can find a CEO of a large distributor to buy your mid-sized electrical distributor business, you should probably take that deal because the multiples in the industry are only going to be compressed as time goes on and the Amazon threat is more thoroughly understood by traditional players.

Eventually, more and more people will understand the platform threat, but there is an adoption curve for everything. Some large CEOs of distributors are genuinely spending money and taking the initiative to create a marketplace that can compete with Amazon.

It's not a huge ticket price to figure out how to do your own marketplace. It's just a very different way of thinking. We've had 20 years of precedent here to show everyone that this is really the only way to successfully combat the Amazon threat.

tED magazine: What about the adage, “If you can't beat 'em…Join 'em?”

Moazed: Sure. For small, mid-sized distributors – that's what I'm saying. They can't create their own marketplace. It's too big of a shift for a mid-sized company doing a few million in revenue. I would rather try and start becoming a big seller on Amazon, or sell out, or get very niche and try and do only one sliver of electrical distribution which is very HVAS-focused and which is very customer- and relationship-driven. Those things will last for a while.

Electrical distribution is huge, so the small to mid-size distributors have a lot of options. If you think about being an Uber driver in the past five years, you are like the special fruit – Uber wants you, Lyft wants you. Before that there was Gett, Juno, and Via – when there were five or six ride share companies, they used to give people $1,000 if they referred a driver to them. So, when there is a lot of competition, these small to mid-size distributors will actually benefit.

Now, if it's only Amazon, then they have no one to compete with to justify spending more money to attract, acquire and retain small distributors. However, we recently saw Amazon taking action to retain their resellers because Jet was successfully luring them to start selling on Jet.com.

You haven't seen Amazon take reactionary measures in a long, long time, but with the presence of a legitimate marketplace competitor in Jet.com, you are seeing Amazon – which has a 20-year head-start – take action to hold on to their ecosystem to keep distributors focused on selling on Amazon and hopefully nowhere else. So in the presence of marketplace competition, small and mid-sized distributors have more options and will be more heavily sought-after by the marketplaces.

If there's still only one market-place – and that marketplace is Amazon (which it is) – then you should seriously look at selling product on Amazon and really understanding how that marketplace works and how it doesn't. The large distributors can't take that kind of action, but someone should be proactive here and fight back rather than just rolling over and letting Amazon take over. You could fight back. You have a lot of advantages to beat them, but you have to just try. Right now, almost no one is trying.



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