Amazon has painted an enormous bullseye on the backs of B2B distributors across numerous verticals, from industrial supply to building materials. The e-commerce giant will eventually move deeper into more complex segments, including electronic components.
As previously written, the market for passive components, such as capacitors and resistors, is particularly vulnerable to Amazon’s B2B marketplace model. As with segments like electrical supply and chemicals, the Seattle-based company could bring a lot of pain to electronic distributors comfortable with the status quo, like Arrow and Future Electronics.
The market for maintenance, repair, and operation equipment (MRO) serves as a withering warning sign of what happens when Amazon challenges outdated market standards and the incumbents fail to respond appropriately.
Disruption is here
MRO distributor Grainger, long considered the impervious market leader for its e-commerce business unit, missed its Q1 earnings targets and has only been stumbling since, losing over $1 billion in market value and announcing a reduction in prices that still wouldn’t make it competitive with Amazon Business.
Based on our analysis of Grainger’s fundamentals and guidance, Applico projects that Grainger’s once rosy margins and EBITDA will continue to decline, as far as half their current levels. Grainger is merely the tip of the Amazon iceberg.
Before long, other MRO distributors will be feeling similar pressure. Already, competitors like Fastenal and MSC Direct have been seeing declining margins, even as cyclical trends would usually point to margin expansion. Next, Amazon will likely begin aggressively expanding into more B2B verticals, including electronics.
By the time that happens, incumbent firms will need a marketplace strategy already in action. Amazon will already have its playbook for B2B markets and have a more mature B2B logistics infrastructure in place when electronics distribution falls under its crosshairs.
During the dot-com era, leading distributors like Arrow and Avnet made investments in B2B marketplace startups that appeared to be ushering the industry into the new digital age. A handful of those investments were made for roughly $10 million each.
However, within a few years most of these marketplaces had failed, becoming another story of the dotcom bubble bursting, more companies overpromising without surveying the landscape. The timing simply wasn’t right – internet connections weren’t so widespread as they are today, online payments infrastructure wasn’t yet mature enough, and the user behaviors in B2B weren’t ready to fully embrace e-commerce like they were in the consumer market.
Ordering equipment and parts for a business online was simply too new and too difficult back then. Today, this is no longer the case. Buying habits and customer expectations are increasingly shifting toward online shopping and transparent pricing. The conditions have never been better for a business-facing marketplace.
Amazon itself has been largely responsible for these shifts in purchasing trends, which has enabled Amazon Business to thrive where its B2B marketplace predecessors have failed. This same shift also presents opportunities for distributors to attempt marketplaces once again.