Since launching in April 2015, Amazon’s new business-to-business (B2B) marketplace has been doing some tidy business. Inside a year, Amazon Business has topped $1 billion in sales and hit a month-over-month growth rate of 20%.
Amazon’s progress should be worrisome for electronics distributors everywhere.
By empowering third-party sellers to reach new markets at virtually zero marginal cost, Amazon Business is growing rapidly and could easily lead the market by the end of the decade.
As the unit grows, Amazon Business is casting a wide net for B2B product listings, rather than concentrating on a single vertical, which means electronics and electronic components are already on its radar.
In tandem with Amazon’s growth comes a wave of change in demand for B2B distribution at large. Customers increasingly want more price transparency and easier purchasing options, both of which Amazon excels at and which most established distributors have built their success on avoiding.
Many verticals within B2B distribution feature not only a lack of transparency, but a high degree of fragmentation and commoditization. Electrical, industrial, MRO, chemical, building materials, and metal distribution are all fragmented markets where many product offerings are standardized.
In other words, these industries are incredibly vulnerable to disruption.
Doomed to disruption
Since these more commoditized products can be produced and sold by virtually anyone, Amazon can leverage its considerable resources and have little trouble sourcing suppliers from these verticals of similar quality to what’s currently offered by established distributors. In several of these verticals, it already has begun.
As Amazon hones in on these markets, there’s little these large distributors can do to resist the change because none of them hold enough market share to choke off marketplace disruption.
In its current state, electronics distribution is led by a small group of companies: only the top ten collect more than $1 billion in annual revenue, led by Avnet and Arrow. Looking further down the rankings, the reported annual revenue steadily and steeply declines, with the 24th and 25th largest distributors not even approaching $100 million, pulling in less than 1% of either Avnet or Arrow.
The reason for this top-heavy concentration is that these leading firms fill orders for heavily customized products, often at levels that can’t be replicated, which prevents commoditization. In these less commoditized product areas, Arrow and Avnet have built themselves a defensive moat against their competitors, including Amazon.
However, these distributors don’t only sell custom electronic products. They also sell passive products, such as capacitors and transformers, and maintenance/repair/operations (MRO) and computing products, which are more standardized.
Much like what happened with Circuit City and other consumer electronics retailers, Amazon doesn’t have to sell the large, complicated items for it to affect a distributor’s business. It can start with smaller or more commoditized items, placing significant price pressure on distributors in these areas and eating into their margins.
In Circuit City’s case, it ignored this competitive threat for years, even letting Amazon run most of its e-commerce on the Amazon Marketplace. Just three years after reaching its peak revenue and stock price in 2006, a broken Circuit City filed for bankruptcy.
The same fate could befall a company like Arrow. While its downfall won’t likely be as severely as Circuit City’s, 19% of Arrow’s 2016 revenue did come from passive products, while another 14% came from more commoditized product segments like MRO and computing and memory. In an industry with very tight margins, a large distributor like Arrow can’t afford to lose a significant portion of its revenue. Its cost structure won’t support it.
So how does that happen?