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repair, and operation equipment (MRO) serves as a withering warning sign of what happens when Amazon challenges outdated market standards and the incumbents fail to respond appropriately.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.
An attempt at a marketplace
To that end, Arrow Electronics purchased Verical, a self-dubbed electronic components marketplace, in 2010.
However, the acquisition wasn’t meant to transform the industry, but merely to supplement Arrow’s e-commerce efforts. Verical focuses on supporting buyers who need end-of-life (EOL) products – items that are no longer in production or close to it – and provides verification of the parts’ authenticity.
On its face, Verical is a platform, connecting Arrow’s typical customers with manufacturers of the electronic components to EOL parts and spot buys. This marginal focus means Verical hasn’t been able to fully capitalize on the opportunity for a marketplace in electronics
When compared to other e-commerce sites, Verical doesn’t look like one on the face, which hurts its chances to immediately convert new page visitors. The site owners should investigate simplifying the user journey to making a purchase.
Verical should have pursued the smaller electronics distributors and provided them access to a larger customer base, one that didn’t require huge acquisition costs from those firms. It would have driven new revenue for those companies at near-zero marginal cost, while Verical could have collected a cut of each transaction. That’s the model that working well for Amazon Business, first in MRO and soon to come in more B2B verticals.
A costly second place
To add more color to the costs of not properly deploying a marketplace strategy against Amazon, one needs look no further than Walmart, the world’s largest retail company.
In 2009, the big-box retailer launched Walmart Marketplace, its branded attempt at an online marketplace that was meant to compete with Amazon directly. To protect the Walmart brand, the site had very strict rules for its third-party sellers. However, these restrictions ultimately turned off most sellers and cost the effort any chance at traction it may have had.
Not only were the rules too onerous for onboarding and stickiness, Walmart Marketplace launched 15 years after Amazon and 11 years after the e-commerce giant expanded its offerings beyond books. Consumer e-commerce was already gripped firmly enough by Amazon that Walmart’s half-hearted effort didn’t stand a chance.
In another campaign to compete with Amazon and hedge against its established (and expensive) linear business of brick-and-mortar stores, Walmart purchased Jet in August 2016 for $3.3 billion and placed Jet founder Marc Lore in charge of the retailer’s entire domestic e-commerce division.
Even with Walmart’s deep pockets, Jet can never hope to overtake Amazon, but it can secure second place in e-commerce for Walmart, albeit with an incredibly hefty price tag.
Walmart’s stumbles should serve as an example of how not to compete with Amazon – for electronics distributors and all B2B firms. History has shown that Amazon is almost always willing to win any price war and that it can find willing collaborators in practically any vertical it wants.
The right move for electronics distributors is to embrace the marketplace model in a practical and sensible way now, lest their margins get demolished by Amazon and they end up like Walmart or, even worse, Circuit City.