The larger distributors will find their margins declining in the more commoditized segments of their business, most notably in passive products. Soon afterward, they’ll find struggle to meet earnings projections and the stock market will respond accordingly.
So if the threat is very real and very serious, how should large electronics distributors respond? The best response is digital transformation with a marketplace platform, one tailored to the electronics business and built on the knowledge and relationships of incumbent distributors.
The first step is to build a freshly branded business unit with a sophisticated e-commerce site. However, the platform owner should be careful not replicate the mistakes of Grainger’s new site Gamut. Don’t simply slap a different website on top of your existing linear business. A linear e-commerce strategy, no matter how sophisticated, won’t best Amazon, much less hold it back from dominating.
It should be noted that Arrow Electronics is offering something fresh in the industry: free overnight shipping on any order over $20. While this may attract more orders over the short term, it will be an expensive initiative to maintain and likely be a drain on the company’s margins.
Amazon can offer free two-day shipping sustainably because its receives orders at an unparalleled scale. Replicating something like free shipping without the customer volume will only add to the margin pressure that electronics distributors will face.
Take the platform approach
Rather than trying to combat Amazon’s rapidly growing marketplace with an online store, large distributors should fight fire with fire. The only upward trajectory for these companies is to go on the offensive and pursue a marketplace that enables transactions between customers and third-party sellers.
In electronics, that means the platform creator should establish partnerships with local and regional distributors, as well as manufacturers, to provide customers with the high-quality electronics products they’ve come to expect from the market.
The best starting point for this marketplace is with passive products, like capacitors and resistors. Offering competitive pricing on these items shouldn’t be too difficult, nor should finding reliable suppliers. As its network grows, the marketplace can slowly expand its offerings upstream to more and more complex products.
This marketplace, in combination with digitizing the distributor’s existing business, will provide a defensive moat against Amazon that straightforward e-commerce alone cannot.
Additionally, investors will reward the distributor that builds a successful marketplace with much higher multiples than what traditional distribution businesses typically achieve. While marketplace digital transformation is never easy, the rewards for success are considerable and worth evaluating.
However, in order to capitalize on this marketplace opportunity, incumbent distributors will need to act quickly. They have the advantage in launching their own marketplace for now. Yet, if they wait much longer, it will be too late.
Once Amazon Business establishes itself within electronics distribution, it will be nearly impossible to launch a competitive marketplace in the a market with a dominant platform with overwhelmingly strong network effects. Instead, incumbent distributors will be receiving their marching orders from Seattle.
There is a rich opportunity to move electronics distribution into the future and to deliver authentically better outcomes for the customers, suppliers, and investors. The real question at this point is whether the industry will move the needle itself or let Amazon take the reins and do it for them.