As it currently stands, the market for industrial supply is incredibly fragmented. There exists a plethora of companies operating in this space, supplying and distributing everything from hoses and pipes to screws and motors, serving customers big and small. This industry-wide fragmentation leaves this age-old sector extremely vulnerable to disruption.
Applico‘s analysis of industrial supply reveals that while there are some large players, no company has a dominant share of the market. The Census Bureau reports some 5,000 firms operating in this sector, all vying for their slice of $75 billion in revenue per year. In fact, sales figures from 2015 show that the top 50 companies in the industry generate only half of that revenue. There also exist a large number of small suppliers, with nearly a third of businesses in the industry generating annual revenues below $10 million.
Such conditions make the market incredibly ripe for platform disruption in the form of a digital marketplace that facilitates the transactions between all of these industrial suppliers and the buyers of their goods.
Unfortunately for these companies that have stuck around for decades, if they wait much longer, it may be too late to react to this threat thanks to Amazon Business, the B2B (business-to-business) – facing segment of global ecommerce giant, Amazon. Amazon Business was born from the repurposed carcass of AmazonSupply, and the division is helmed by Prentis Wilson, who led the way to $1 billion in revenue in the first year of operation and presses forward with continuous month-over-month growth.
There are a litany of reasons why Amazon Business should keep industrial supply executives awake at night. Originally, Amazon Business targeted small and medium-sized companies, but it was met with unexpected enthusiasm by its large customers. The unit offers custom pricing as a differentiator from large industrial supply companies like Grainger, who use an older, much more opaque process. Amazon Business currently has more than 80 new features on the docket to ease buying and selling friction. On top of that, Amazon is actively recruiting for this project. It even named industrial supplier Grainger as its top competitor.
Enter Grainger CEO James Ryan, who shockingly espoused that Amazon is “not relevant” in industrial distribution today. In fact, he asserts he isn’t worried about the market, which actually had a downturn last year. Comparing that to outside analysis does not reflect well on Ryan’s judgment.
“Anybody who isn’t aware of the power of Amazon is either not aware of anything or sleeping,”
says Jim Tompkins, chief executive of Tompkins International, a supply-chain consultancy in Raleigh, N.C.
Ryan believes his 5,000-strong sales force is key to Grainger’s success, and Amazon won’t be able to replicate that advantage anytime soon. However, while the service offerings Grainger supplies with product orders set it apart, there’s little to stop Amazon Business from developing these services alongside its product business. Or, more simply, they could run their margins thin enough to draw off Grainger’s customers, who would only return to Grainger for the consultations they offer on energy efficiency, workplace safety, and the like. Given the sentiments of his competitors, Ryan’s comments should be taken with a grain of salt.
“Overall, the sense that the industrial economy may have been stabilizing has given way to more belt-tightening and less optimism among our customers,”
mourned MSC chief executive Erik Gershwind in an earnings call with analysts earlier this year. Either Grainger has its head in the sand or it has a few secret strategies it’s not revealing quite yet. Smart bets, however, are on the former.
Just as with food distribution, Amazon can bring transformative disruption to an industry that has not significantly innovated in more than a generation. In the process, it would turn many established firms into commoditized merchants relying on Amazon for order fulfillment. No matter the value-add provided with a purchase, a screw is a screw and a drill press is a drill press. As long as the product quality doesn’t suffer, industrial supply customers will gladly click a different button if it means cost reduction and convenience.
The right play for an incumbent is not to double down through acquisitions or increasing its salesforce. Instead, incumbents should be looking to go on the offensive by creating an industry-wide marketplace in which competitors participate and become subordinate to the platform owner. Scooping up the small players first would be ideal, developing expertise in their specific verticals and rapport with their customer networks. The platform would empower the owner to beat the big companies in margins and force them to join the network. Otherwise, they’ll never be able to tap the customer base.
Regardless of the sales team’s quality, it will not save Grainger or their competitors from the tidal wave of disruption Amazon Business is bringing. A platform play, executed immediately, is the only high ground for industrial supply. Will Grainger’s established presence in the industry or Amazon’s new approach win out? Only time will tell, but my money’s on the e-commerce giants.