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Top 20 Stories of 2017: #12 Amazon Business Vs. Large Distributors—What’s the Threat?

Top 20 Stories of 2017: #12 Amazon Business Vs. Large Distributors—What’s the Threat?

EVERY WEEKDAY IN DECEMBER, TED MAGAZINE IS COUNTING DOWN THE TOP 20 STORIES OF 2016. BELOW, THE #12 MOST-VIEWED STORY OF THE YEAR, ORIGINALLY PUBLISHED ON JULY 6, 2017.


 

By Bridget McCrea

Amazon Business hasn’t conquered the electrical supply business yet, but it may be there soon if large distributors don’t step up to the plate now.

It’s not just the small to midsized electrical distributor that Amazon Business has shaking in its boots; it’s the big guys too. In fact, Alex Moazed thinks larger distributors may face a bigger threat from competitors like Amazon, which have wide logistics networks and reputations for negotiating deep discounts with their suppliers.

Large distributors should also keep an eye on consolidation and mergers and acquisition (M&A) activity. For example, Moazed believes Amazon Business can “scoop up” various smaller distributors, thus creating a “super team” that will be able to go head-to-head with the industry big boys. That super team will distribute products (and in particular, commoditized goods) anywhere in the world via the Amazon Business network.

According to Moazed, CEO of New York-based advisory firm Applico, the large distributor that’s not part of this equation should either be “figuring out how to exit the business and sell their shares, or buckling down for a war unlike anything they’ve ever seen.”

“Amazon’s coming,” says Moazed. “And while it can [afford] to buy the largest electrical distributor if it wanted to, Amazon doesn’t need to buy it. It’s not like the Whole Foods deal, where the acquired entity had a logistics infrastructure in place for perishable goods.” Electrical distribution is also different from, say, the building material, metal, or chemicals sectors—all of which rely heavily on complex distribution and fulfillment infrastructures.

“In the case of these three industries, it could make sense to buy a larger player in the space,” says Moazed. “However, in the electrical supply space, Amazon Business can enter the market without acquiring anyone. In fact, it’s already making progress with the thousands of different sellers that are presently using its platform to sell their products.”

Knocking on Your Door
Equipped with a dedicated team that’s focused solely on acquiring both customers and distributors, according to Moazed, Amazon Business is currently growing at a rate of 20 percent (month over month). “This is one of the fastest-growing initiatives that Amazon has,” says Moazed, “and it’s probably the reason why Jeff Bezos doesn’t talk about it. In fact, he’s said about five words about [Amazon Business] in the past two years—and it’s not because he isn’t excited about it.”

Pointing to the fact that Amazon is using vehicles like the National Association of Wholesaler-Distributors’ (NAW) newsletter to “come and sign up and use our site,” Moazed says the e-tailer is doing what it can to accumulate market share across various categories. “They’re not at your front gate anymore; they’re in your backyard,” Moazed warns. “They’ve jumped over your fence and they’re in your space.”

Amazon’s Hit List
In reviewing Amazon’s current “hit list,” Moazed says food remains “front and center” for the e-tailer on the consumer side, while the top five on the business-to-business (B2B) front include industrial, food, electrical, auto parts, and medical supplies.

So, how can a large electrical distributor ward off this threat and continue growing and thriving? Moazed sees e-commerce as the ticket. “The only way to beat them—and it took Walmart 22 years to figure this out—is to have your own marketplace,” says Moazed. “Just doing more e-commerce, or doing it better, isn’t going to work. We’ve already seen this with Grainger and other industrial supply [companies].”

And while Walmart found the answer to its conundrum in the 2016 acquisition of Jet.com, Moazed says there really are no Jet.coms available for purchase in the industrial/electrical space. “Jet.coms don’t grow on trees,” he says, “so large distributors are really going to have to build their e-commerce marketplaces from scratch.”

There’s Still Time to Act  
For a company in any industry to compete effectively with the likes of Amazon, Moazed says adopting a top-down approach to the initiative is a great starting point. “It has to begin with the company CEO, and particularly one who sees himself or herself ‘being there’ for at least the next few years to see the initiative through,” he says. “That person has to be willing to take risks—the kind of risks that could literally cannibalize a part of their existing business.”

It also requires a long-term view, says Moazed, and a commitment to gaining market share and making your company more valuable over time (versus racking up short-term gains). “Getting there will require some pain,” he says.

On a positive note, Moazed says large distributors need to realize that Amazon is part-platform, part-marketplace, and part-reseller (he estimates that the e-tailer currently sells one-third via digital e-commerce sales, one-third via reselling/white labeling, and one-third via third-party resellers. This mix plays in the favor of the large distributor, says Moazed. “This is good for the company that wants to launch its own marketplace, and that already has the brand and the trust in place,” he explains. “Small distributors, for example, are more likely to trust you faster and more than they’re going to trust Amazon.”

The same goes for customers, according to Moazed, who singles out the most difficult aspect of building an online marketplace as getting initial traction and building out the network of customers. “Large distributors already have a bunch of customers, which means going to a smaller outfit and asking them to sell on your site is probably going to be a pretty attractive proposition for the latter,” says Moazed. “If you already understand the industry dynamics (e.g., cash flow management), the regulatory environment, the human element, and the customer pain points, then you probably already have a much better read on things than a general e-tailer like Amazon does.”

The key is to put all of those strengths together and then leverage them into a successful marketplace that addresses the points that large e-tailers are overlooking. “A large electrical distributor could do this; it can beat Amazon—or least be #2 to Amazon,” says Moazed. “The company that’s #2 in the electrical supply marketplace will be [worth] at least 3-5 times its current valuation. And while there’s going to be risk at the outset, the distributor that pulls it off will find a nice payoff at the end.”

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