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AmazonSupply or Traditional Distributors: Where will he buy his electrical products in the future?

AmazonSupply: Threat or Partner?

Oct. 8, 2014
"We think AmazonSupply could represent a very real growth opportunity for progressive distributors who plan to be in business over the next five-to-ten years. The key is determining whether or not you are willing to make an honest assessment of your company’s ability to compete with AmazonSupply and if you are willing to make any necessary investments to up your game to do it more effectively."

AmazonSupply. Mention the company to electrical distributors and they see it as a harbinger of the future and a threat; an opportunity to sell to an entity that resells products to others; or as an entity to be dismissed. To manufacturers, it represents an unknown that they feel they need to engage with out of concern that if they don’t, their competitors will.

But AmazonSupply may also offer a growth opportunity for distributors. Launched in 2012, AmazonSupply has gained visibility through public relations and word of mouth. While Amazon is recognized as an innovator with its consumer initiatives and hardware platforms (Kindle and Fire) its e-distributor efforts are in the early stages and are quite small, considering the company’s size.

AmazonSupply will eventually take a percentage of electrical industry sales. It’s just a question of how much and when. But not all customers will flock to AmazonSupply just because it exists. In the end, it may very well depend on what type of products they want to buy and what type of service they expect from a supplier of electrical products, whether it be a traditional electrical distributor or an online vendor like AmazonSupply. Some products are a better “fit” for AmazonSupply than others. The company has had lots of success with books, downloadable music or other consumer-oriented products, but selling them online is not the same as selling a fuse or selecting a circuit breaker online. And as we all know, there’s more to distributing electrical products than just the logistics of moving products.

We’ve conducted research regarding AmazonSupply’s foray into the “Industrial Electrical” market and we think AmazonSupply offers opportunities for distributors. In fact, we think AmazonSupply could represent a very real growth opportunity for progressive distributors who plan to be in business over the next five-to-ten years. The key is determining whether or not you are willing to make an honest assessment of your company’s ability to compete with AmazonSupply and if you are willing to make any necessary investments to up your game to do it more effectively.

Before we get into our discussion of how distributors can compete or partner with AmazonSupply, let’s first take a look at some of the key facts and figures:

  • AmazonSupply now provides 2.25 million SKUs (stock-keeping units) for 17 product categories.
  • In the electrical space, they offer 109,118 SKUs in 11 product categories (you offer more!).
  • Electrically, their stated end-user audience is industrial purchasers (but anyone can go online and buy at the same price).
  • Amazon Prime customers benefit greatly as they typically do not pay shipping costs. If a purchaser (not necessarily the company), isn’t Prime, shipping costs can be expensive.
  • According to a recent Forbes article on innovation, since 2010 Amazon increased its research and development budget 5X while sales increased 3X.
  • The Kindle e-reader family and the Fire phone, if adopted by corporations, can become ordering platforms.
  • Amazon benefits from being able to invest in its offerings, and platforms, without much concern for profitability.

AmazonSupply’s strengths include:

  • An online ordering process that millions of consumers are familiar with that can be leveraged by these same people in their work environment.
  • A perception that they are cost-effective, if not inexpensive.
  • For Amazon Prime customers, near 100% order fill-rate and 100% guaranteed delivery in two days or less.
  • Extensive data analytics capabilities.

Some challenges that AmazonSupply faces include:

  • Its reliance on electrical distributors to be its source for materials.
  • When ordering electrical products, the purchaser needs to know what the item is and type it in, correctly. Today’s system isn’t intuitive.
  • Product categorization and depth of selection could be improved.
  • Searching and finding multiple items takes much more time than calling a distributor salesperson or sending an email.
  • Achieving mass adoption requires interacting with customer billing systems and procurement processes which generates questions about ease of usage for a corporation without customization, which Amazon could do.

Accessing Product

While some manufacturers, typically “Tier 2 and Tier 3” suppliers, sell direct to AmazonSupply, more typically it’s an electrical distributor furnishing products to AmazonSupply. The company contacts several distributors within a 100-mile or so radius of its distribution centers and asks them to bid on a bill of material. They then selectively determine which SKUs they will purchase from a distributor. This may be how AmazonSupply can circumvent manufacturer authorization policies. The distributor has the authorization and the product is sold within the territory. Consider, given that Schneider Electric and Eaton authorize distributors by geographic area, how does AmazonSupply offer both of these lines nationally? The answer is a network of distributors or relationships with key national chains. This then brings up the issue of point of sale/transfer reporting and rep compensation, but that’s outside the scope of this study.

Price Competitive?

Amazon has a reputation for low prices, or at least being price competitive. We conducted a price analysis on 12 items (see sidebar  on the previous page,“Comparing AmazonSupply Prices With Prices Now Available in the Electrical Market) and as can be seen AmazonSupply’s pricing is comparable, if not equal, to the “list prices” available in electrical market industry pricing services. For comparison sake, “real” prices with electrical distributors are typically at least 30% to 50% less than “list” prices. AmazonSupply believes industrial MRO buyers are interested in price consistency and ease of ordering rather than being price conscious (unless Amazon offers different pricing to large end-users.)

So who are they selling to and who are their distribution targets? They seem to be going after the customers of Grainger, MSC, Staples, IDG (now Sonepar), WESCO and other larger companies that call on Fortune 500 companies. AmazonSupply wants big end user accounts who have significant MRO, transactional, and purchasing capabilities, and can put multiple product categories on the same order. Obviously, they will sell to others, but the company appears to have targeted its sales force (yes, they have one) on large industrial and institutional accounts.

Their target is the MRO sale — those orders for small quantities of products not needed immediately that can be shipped to a physical address and paid for via a credit card. They would welcome the OEM opportunity but would probably be challenged with the JIT (just-in-time) aspect from a service viewpoint and will eventually partake in some project business that needs minimal negotiation and off-the-shelf products.

Amazon succeeds where distributors are challenged. While distributors try to be responsive to their customers, Amazon, and by extension AmazonSupply, is known for:

  • Offering an easy, self-serve ordering system that buyers know from prior experience
  • Representing a wide product array
  • Providing perfect order fulfillment and delivery, especially for Amazon Prime customers
  • Timely delivery tracking information
  • The ability to remarket to buyers through data analytics.

Three ways to compete against AmazonSupply

Part of the key is delivering on what AmazonSupply does well. Be easy to do business with and provide the services your customer wants to. Offer a “wide” selection as defined by your customers’ needs. Deliver what they need, when they need it. And track it and your overall performance.

These attributes are the essence of quality as defined by Philip Crosby, who said quality is “conformance to customer requirements” and “zero defects.” As a distributor, you can more fully deliver on your customer needs and supplier needs by providing a broader product range; customized purchasing and billing solutions; a wide array of services (some tailored to an individual customer where that makes sense); and personal relationships for customers who want that, or at least a person to complain to. So, how do you start? Here are three tips:

Deliver on these service basics. Carry the inventory that meet customer needs and provide timely, complete, delivery. To help you do this, master the capabilities of your ERP system and populate it with good data — both product and price. Why data? Because it drives operational efficiencies and accuracy. It ensures a well-managed inventory, reduces picking errors which enables high fill rates, facilitates accurate pricing, and enables search capabilities for e-stores. Another element of accurate data and utilization of your ERP system is the ability to optimize system reporting and customer analytics. This impacts inventory management, pricing strategies, re-marketing to customers and the measurement of performance.

Evaluate your business. Be honest with yourself. Is it easy for customers to place orders with you? How easy is it for them to pay you? How could it be easier? Consider mobility options, payment options, ordering centers, etc., and how could you optimize your delivery system.

Focus on customer intimacy. You know your marketplace and your customers. Utilize this information to your advantage to tailor inventory and services. Several elements of driving customer demand that enable you to out-market AmazonSupply include:

  • When analyzing your business, ask yourself if your company is reaching enough customers or only selected customers? Surprisingly, many of our clients’ businesses do not have 80% of sales coming from 20% of customers. Their business is closer to 90/10 … or worse.
  • Think back to the lessons you learned from the early days of competing against the Big Box stores like Home Depot and Lowe’s, and how you countered any perceived advantages in price, inventory and “convenience.” Is AmazonSupply much different?
  • Refine your value proposition, and consistently communicating it.
  • Make sure your customer database has the necessary contact data for all pertinent buyers and influencers so you can market your company to them.
  • Utilize your marketplace and supplier insights to tailor vertical marketing and application offerings.
  • Be your local market’s “knowledge” resource. While customers will go online for information, how can you easily provide that information to them? Content marketing could help differentiate you.

Electrical Manufacturers & AmazonSupply

There has been much discussion about the role of manufacturers with AmazonSupply — from providing product data to selling direct. We’ve heard, and validated, both, but in many cases the manufacturers are providing some data while Amazon buys through a distributor (after all, why should they want to carry inventory?)

AmazonSupply currently purchases through distributors for lines they cannot get, then plans to aggregate data and persuade manufacturers to sell them direct. The questions for manufacturers then become, “Is your warehouse optimized for small orders if you are not stocked in Amazon warehouses?” and “If you sell to distributors at $x/unit, why would you want to sell direct to Amazon for $y/unit?”

There’s marketing value for a manufacturer to be on AmazonSupply because it can enhance SEO (search engine optimization) and could provide product information for customers who purchase through other sources. But manufacturers should remember the disclaimer from financial advisors: “Past performance is not an indicator of future performance.” Just because a company can aggregate disparate transactional information doesn’t mean it can replicate performance if they are not actively marketing your products.

Conclusion. AmazonSupply is, and will, take some share from electrical distributors. Consider the 80% to 90% of your customers who represent 10% to 15% of your business. Are they suspect? Definitely. Does AmazonSupply desire your MRO business? Yes.

But you can compete if you are easy to do business with; deliver to your customers on time, every time; utilize the historical customer-specific insights you have; and market your difference. AmazonSupply can do the first two of these. Can you?

For manufacturers without brand awareness or who have nominal market share, AmazonSupply is an outlet to gain visibility and some business. For brand lines and those with vast distribution outlets, the advantage of AmazonSupply appears nebulous and correlates with the confidence you have that your other channels can compete. AmazonSupply’s endgame is to initially be a product data aggregator, then procure material from an electrical manufacturer’s distributors and then leverage that electrical manufacturer with customer purchase information to obtain better pricing, ultimately purchasing direct for less.

Amazon has become an important retailer for consumer goods but are they a viable e-distribution electrical play or a niche player with a big name? Tomorrow’s distributors need to re-evaluate their business and redesign to meet changing customer needs while taking advantage of their marketplace insights. Are you ready?