May
26 -- Forget the delivery drones and TV deals. Jeff Bezos’ stealthy foray into
the unsexy world of B2B distribution is likely his most disruptive move yet —
and it has an $8 trillion swath of the economy running scared.
In
recent months global Internet retail behemoth Amazon.com has green-lit six new
original TV shows, announced an online streaming deal with HBO and tested
same-day grocery delivery on the West Coast.
Up
next? Possibly a smartphone. And, if billionaire CEO Jeff Bezos has his way,
packages dropped off by unmanned drone.
But
there’s one thing Bezos hasn’t been talking about: AmazonSupply, an e-commerce
site targeting the unsexy but hugely lucrative wholesale and distribution
market. His silence is especially surprising as the site has the potential to
turn into the most important development in the company’s history since it
started selling books. Yet Bezos has uttered only 28 words in public–ever–about
AmazonSupply, describing it in passing as “an incredible category” during the
company’s 2012 annual meeting.
“You
can get industrial motors, flanges, valves, fasteners, materials, janitorial
supplies,” he said. And that was it, before moving on to proudly tell
shareholders that the world’s largest gummy bear, a 72-ounce sugary beast, was
for sale on Amazon.com. Whether the lack of hype is a deliberate part of a
stealthy rollout or Bezos just thinks selling rubber gloves to dentists lacks
p.r. value, wholesalers are taking the threat seriously, and it’s easy to see
why.
While
U.S. retailers took in more than $4 trillion in revenues according to the most
recent U.S. Census, wholesalers brought in $7.2 trillion selling everything
from Bunsen burners to toner cartridges. Even better for Amazon: Of America’s
35,000 distributors, almost all are regional, family-run companies pulling in
annual revenues of $50 million or less, and only 160 have more than $1 billion
in sales annually. “The industry is largely ignored,” says Dirk Van Dongen,
president of the National Association of Wholesaler-Distributors. “You can go
your whole life without having a single thought about it.”
Amazon,
meanwhile, booked more than $74 billion in revenues last year, selling
everything from beds to server time with a virus-like strategy that values
opportunity and disruption above short-term profitability. Almost identical to
the company’s flagship website, albeit without ads for its ubiquitous Kindle
e-readers, AmazonSupply.com launched quietly in April 2012 with 500,000 items
for sale.
Two
years later, with the site still officially in beta, that list of products has
grown to more than 2.2 million–covering 17 product categories from tools and
home improvement to janitorial supplies, stocking everything from 12-packs of
Hawaiian Punch to schedule-40 stainless steel pipe. If 2.2 million products
doesn’t sound like a staggering figure on its own, consider that the average
wholesaler sells closer to 50,000 products online.
“The
question is not whether AmazonSupply will be a threat,” says Richard Balaban,
who has studied the site for management consulting firm Oliver Wyman. “Rather
it is which customers, purchase occasions and categories will be attacked
first.”
***
AmazonSupply’s
genesis was in 2005, with Amazon’s acquisition of SmallParts.com, an online
emporium that billed itself as “the hardware store for research &
development.” The purchase price was never disclosed. “It was an opportunity
for us to learn more about our business customers,” says Vice President of B2B
and AmazonSupply Prentis Wilson. “As we evolved our selection, we launched
AmazonSupply.”
He
won’t say what Amazon is spending–and likely losing–on the venture, but overall
the company, despite all those billions in revenue, estimates an operating loss
of up to $455 million next quarter. This aversion to profits may be starting to
turn off investors (the stock is down 9% since the announcement in April,
though the market capitalization remains a staggering $142 billion), but it’s
helped build a 125,000-employee logistics and data powerhouse that was able to
process orders on 36.8 million items during peak Cyber Monday shopping last
Christmas season–a staggering 426 items per second to 185 countries.
As
impressive: The company earned the top score among 230 of America’s biggest
companies in the University of Michigan’s annual customer service satisfaction
index and has placed in the top ten for years. “We are comfortable planting
seeds and waiting for them to grow into trees,” Bezos told FORBES for a 2012
cover story. “We don’t focus on the optics of the next quarter; we focus on
what is going to be good for customers.”
The
development of Amazon Web Services, which Bezos launched in 2006, says a lot
about Amazon’s likely ambitions for AmazonSupply. Having developed the computer
infrastructure needed to run Amazon.com, Bezos set up a B2B division that
allowed other companies to use Amazon’s excess computing power. Web Services
now dominates the cloud computing industry, hosting customers from NASA to
Pfizer and ringing up an estimated $3.2 billion in revenue last year, thanks to
an even faster growth rate than Amazon’s main storefront.
“If
you think about where they’re making their money right now, it’s not in
shipping you and me Crest toothpaste,” says Bruce Cohen, a senior partner at
management consultancy Kurt Salmon. “It’s in cloud computing. It’s these vast
servers. They’re not making money on the sexy part of the business–streaming
video or delivering us boxes of cool stuff.”
Wilson
is Bezos’ wholesale czar. The chiseled, dark-haired 43-year-old joined Amazon
in 2011 from Cisco Systems, where he was responsible for sourcing materials and
overseeing suppliers at the networking and data center powerhouse. Now based in
Seattle, Wilson oversees industrial and scientific supplies across the whole of
Amazon, as well as this new business. He wouldn’t disclose how many Amazon employees
are currently working solely for AmazonSupply, but scan the division’s
recruiting website and you’ll see how lofty the e-tailer’s ambitions are for
its wholesale business. Under the heading “Our goal is to supply everything
needed to rebuild civilization,” some 40 jobs are listed, including
software-development engineers and “brand specialists” who’ll be expected to
become experts on the tools of the trade for one particular manufacturer, be it
a maker of plumbing or office supplies.
It’s
definitely on its way. Most of the scientific and industrial equipment
AmazonSupply lists for sale, for instance–items like centrifuges, micrometers
and air cylinders–would otherwise be available only from specialist
distributors. But few can compete with its vast inventory, not to mention the
easy-to-navigate website and 24-hour delivery, all longstanding hallmarks of
Amazon’s appeal. “If you have a lab scientist, someone with a Ph.D., trying to
find the next cancer drug in a capital-intensive lab, any time they spend
trying to find a new product is expensive,” Wilson says.
Nor
can small fry compete with AmazonSupply’s infrastructure and deep cache of
consumer data. The company won’t disclose any details, saying only that
AmazonSupply “utilizes all of Amazon’s fulfillment and logistics capabilities.”
In the U.S. that’s a network of 40 U.S. fulfillment centers–and growing. And
while retailers like Home Depot and Lowes (and Amazon in its earlier days) are
loath to stock products that don’t sell quickly, to gain competitive advantage
AmazonSupply, with its vast financial resources, has been more likely to take
on inventory that won’t necessarily fly out the door. Industry experts estimate
the company stocks more than 50% of what it offers on the site at any given
time. “I encourage my clients to become third-party fulfillers to
AmazonSupply,” says Dick Friedman, a consultant who helps traditional
distributors develop strategies to compete with AmazonSupply. “Why not? The
only trouble is if it sells well enough, AmazonSupply will stock it and cut the
little guy out of the picture.”
“The
challenge of distribution is to have orders big enough to make money,” says
Scott Benfield, a B2B consultant who’s been following the wholesale and
distribution game for 20 years. “It’s a very thin-margin business: 2% to 4% for
traditional businesses in this sector.” Amazon’s scale is ideally suited to
compete in this kind of high-volume, low-margin operation. A Boston Consulting
Group study found AmazonSupply’s prices to be about 25% lower than the rest of
the industry on common items.
To
woo manufacturers the company has also built in the ability to show off
products in Web videos, post downloadable CAD drawings and draw from user
reviews. Buyers, from 3-D printing specialists to auto mechanics, avoid the
human interactions–which can either be pesky or irreplaceable, depending on the
rep–that remain a feature of most wholesale and distribution deals.
“It’s
a very consistent message, versus 500 different sales reps,” says Wilson. He
added that manufacturers have reported an uptick in sales of products that were
not quite as popular before. “Just getting the product available on Amazon,
people know it exists,” he says. “We aren’t afraid to put inventory on an item.
That has a lot of value. It builds confidence.”
***
If
there’s one company standing in Amazon’s way, it’s Chicago-based industrial
supplies giant W.W. Grainger. With $9.4 billion in revenues it’s definitely the
business to beat, controlling an estimated 6% of the entire B2B market. With a
robust e-commerce operation dating back to 1995, its site is slick and
user-friendly; it offers 24-hour delivery on most items, user reviews and
suggestions based on your previous purchases and searches.
Grainger
has been selling tools for maintenance and repair since 1927; since then
business has grown to more than 700 regional sales branches and 33 distribution
centers. It still makes much of its money offline. In 2013 its e-commerce sales
surpassed $3 billion, representing 33% of the company’s total revenues.
Grainger
and some of its specialty competitors – Cardinal Health, for example, in the
area of medical supply–are well-established in the back offices of corporations
and hospitals, where the business is deeply rooted in their processes. At the
Nebraska Medical Center, for example, Cardinal picked up the initial tab for
$4.5 million in inventory, freeing up financial resources for the hospital.
Then it took over the center’s entire supply chain, from loading-dock workers
and the accounts-payable department to administering all contracts with
suppliers and tracking distribution from the truck to the bedside. Cardinal
bills the hospital based on usage. “Companies have written over processes to
them,” says Cohen. “Just as some organizations outsource their entire IT
departments.”
But
just a couple years into the game, AmazonSupply has already beaten Grainger in
sheer volume of online inventory, with its 2.2 million products for sale
dwarfing the latter’s 1.2 million. AmazonSupply may cut into Grainger’s
high-volume, low-margin business if it hasn’t already. It’ll sell truckloads of
beakers, for example, or copy paper. These are what the industry calls
“replenishment items,” and they’re the lowest hanging fruit for Amazon. A pound
of Gorilla Glue high-strength superglue costs $159 on AmazonSupply. On
Grainger’s site the same bottle is priced at $173.25.
Grainger’s
take on AmazonSupply? CEO Jim Ryan
declined requests for an interview, but a spokesperson says: “While we don’t
comment specifically on other companies, it’s important to note that Grainger’s
multichannel business model and our target customers differ significantly from
how online-only retailers serve the market.”
Not
everyone buys Grainger’s nonchalance. “They’re planning, and they don’t want
Amazon to know what they’re thinking,” says Barry Lawrence, program director of
industrial distribution at Texas A&M University. He expects the company to
make it easier to do business with Grainger through technology like mobile apps
for purchasing managers and stronger loyalty programs–just like United Airlines
uses frequent-flier programs to discourage you from using Expedia. “Grainger’s
going to build some firewalls up against Amazon,” he says.
***
But
that’s Grainger. For the rest of the 34,000-plus wholesalers and distributors
with revenues and infrastructures who deal in millions, not billions of dollars
in sales each year, the future competing with a fast-growing AmazonSupply could
be bleak. Providing high-touch, value-added services to customers–the kinds of
things humans attuned to their field excel at–is one defense.
And
industry insiders seem to take some hope from the idea that Amazon can’t–and
indeed won’t want to–tackle every customer’s needs in a complex, highly
segmented part of the economy. Last year management consultancy firm Oliver
Wyman studied Amazon’s encroachment into wholesale. Interviewing 25 CEOs of
billion-dollar distribution businesses over the course of a few months, Wyman’s
Balaban found that a third were skeptical that e-commerce competition will hurt
their business in part “because their product is too difficult for a new
entrant like Amazon to warehouse and ship.”
For
instance, will Amazon want to handle industrial gases like carbon dioxide for
pubs and bars and McDonald’s soda pumps? Amazon can sell gloves and goggles,
but it’s much more expensive to deliver big, ugly tanks of acetylene or
55-gallon drums of acetate.
“Businesses
with products that are dangerous, exotic or require specialist handling will be
slower to be vulnerable to Amazon,” says Balaban, who co-wrote the Oliver Wyman
report. “Amazon won’t take business away for drills or dentists’ chairs. But
dentists also have drawers full of mouthwash, dental floss, paper towels, latex
gloves and those bibs that go around your neck.”
To
fight back some companies are adding services they hope AmazonSupply can’t–or
won’t–duplicate. Take Valin Corp., a 40-year-old San Jose, Calif. distributor
that once specialized in selling computer chips. Since 2010 the company has
focused on the fast-growing oil and gas sector, handling and measuring output
at surface oil wells among other relatively new assembly and manufacturing
revenue streams. “Amazon is never going to get into servicing oilfields,” says
Benfield, the B2B consultant. “They’re not sending out engineers.”
So
are they right? Like everything else about AmazonSupply, Wilson is cagey about
what services it’ll leave to the competition and which ones it may attempt to
provide. Would it start selling tanks of oxygen? Or transport lumber to
construction sites? “We would explore any item to ensure that we’re able to
fulfill it,” is all Wilson will say.
Claire O’Connor www.forbes.com
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