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The Amazon Effect: Future of Electronics Distribution is Marketplace Model

While many distributors are still struggling to move their businesses online, a new player has arrived and is making a lot of noise. Amazon’s business to business (B2B) marketplace, Amazon Business, already is making significant progress in multiple verticals, armed with low prices, an extensive international logistics network, and a universally recognized brand. 

While some electronics distributors may not see Amazon as a real threat –  believing that what worked in business to consumer (B2C) won’t work in B2B – they would do well to take a closer look.

As I’ve previously outlined, passive products and similarly commoditized product categories offer an incredibly vulnerable gateway for Amazon to penetrate the industry. Given the thin margins of most electronics distributors, they can’t afford to let Amazon Business take over even a small portion of their industry. 

If Amazon is successful, the cost structures of large distributors will become untenable as they face increasing margin pressure. The only way for large distributors to prevent this scenario is to go on the offensive.

Waiting won’t win the war

Distributors may be inclined to take the wait-and-see approach with Amazon Business, but as Walmart has learned, the waiting game can be quite costly whenever Amazon targets new markets.

Last year, Walmart spent $3.3 billion to acquire Jet.com, an online marketplace for consumer goods, and has been grappling with integrating its startup culture while also trying to catch up with Amazon. 

Similarly, many in the food distribution and grocery industry brushed off the Amazon threat. That is, until they collectively lost more than $20 billion in market cap overnight when Amazon announced its acquisition of Whole Foods.

In industrial supply, existing distributors are already feeling the impact of Amazon Business. Grainger notoriously missed its earnings expectations back in April and cost its investors over $2 billion over the following month. HD Supply also missed earnings recently, with its margins under continued pressure in its facilities maintenance unit.

Medical supply is also feeling some Amazon-related pains. The massive medical supply distributor Owens & Minor has suffered from declining revenues and margins, both down 5.2% in the first quarter this year compared to the same period from 2016. The company noted “ongoing margin pressure” on its distribution business in the U.S. A notable difference between Owens & Minor and many other distributors: it lists many of its products on Amazon Business.

It’s time to act

Before long, Amazon Business will turn its full attention to electronics distribution. The smaller firms will be enticed to sell on the marketplace with heavy subsidies for joining and they’ll find a low-cost channel for new sales growth.

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.

2 comments on “The Amazon Effect: Future of Electronics Distribution is Marketplace Model

  1. haladf
    July 25, 2017

    Amazon has tended to target the end customer, where margins are high, when it moves to the other end of the supply chain, it will find things are different.

    As a consumer, I call up and say I want goods, as a manufacturer, I call up and say the consumer might want goods at a holiday period or special event or just because, so I might want to order or I might not, so you need to hold stock, manage quality, supply documentary evidence of all events, comply with all regulations, take back inventory I don't want, hunt your supply chain for product, confirm it is genuine and not conterfeit, complies with all local and international regulations.

    Amazon say what?????

     

    I know companies that buy form Amazon and none can supply even the outlines of the information required.  Unlike the author, I have worked in electronics and can assure him that price is not the thing, it is quality, verification of source, all things Amazon can't do. 

    Some small players might use Amazon for unimportant things but the industry is not just about buying products, as anyone who works in it will tell him.  Good luck Amazon, if you try electronics like you do everything else, you will fail, your record on profits and quality show you to be a sham

  2. jaxongibbs
    July 26, 2017

    Amazon has become the mostly used brand for online shopping and it now doesn't require any sort of promotion to get business. Amazon always coming up with more offers to attract customers. I think other brands do good competition with Amazon and it is also appreciable as well. Obviously, the history of Amazon is interesting. I recommend you custom history writing experts to get more history and how Amazon became the universal brand.

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