Amazon Business is growing rapidly, and many B2B distributors and retailers should be feeling the heat.
However, many of them still don’t view Amazon as the true threat that it is. The common assumption is that B2B is a much different game than B2C, which Amazon has come to dominate. They claim Amazon can only handle relatively small, shippable items and, in B2B, many items are larger or require more complex shipping practices.
Many companies also assume that Amazon lacks the industry-specific knowledge to sell in B2B markets where relationships tend to matter more than they do in B2C.
However, these complaints echo the sentiments given by several B2C retailers a decade ago.
For example, in electronics, many execs didn’t view online retailers as a threat. As one C-suite executive recently put it, “People want to see the TV’s picture before they buy it. They want to hold the item.”
Similarly, in apparel, many didn’t take online retail as a serious threat. The common refrain from these C-suite types at these traditional retailers went something like this: “People can’t buy clothes online. How will they know if it fits?”
Obviously, in hindsight, both of these notions proved incorrect. More and more, electronics and apparel retail has been moving online to e-commerce platforms like Amazon.
In light of this unparalleled competition, a veritable graveyard of retailers who have gone bankrupt has emerged and grown dramatically. In fact, we charted the average time it took from Amazon entering an industry against how long it took for the major retailers in that sector to go bankrupt. On average, we determined it took only seven years for Amazon to run out the competition.
Nowhere was this shift more pronounced than in the fate of retailer Circuit City.
Circuit City was once the #2 electronics retailer in the nation and was in business for over 60 years. It had $12 billion in sales and tens of thousands of employees. However, just two years after having its best year and attaining a record high share price of $30, Circuit City shockingly filed for bankruptcy. Before it stopped trading, its share price declined to just $0.10.
What happened? In 2000, Amazon launched its Marketplace initiative and started selling consumer electronics at scale. Circuit City didn’t take online retail seriously at the time. In fact, it even agreed to let Amazon stock Circuit City inventory on its marketplace in 2001.
By 2004, Amazon had reached $1 billion in annual electronics revenue. To hurt Circuit City’s business, Amazon didn’t need to take the large items like TV’s and computers away from the traditional retailer (though it did that too, eventually).
It turned out that if Amazon captured enough of the smaller items that consumers typically bought at Circuit City – MP3 players, computer accessories, headphones, computer parts and the like – which eroded Circuit City’s margins so much that many of its locations would become unprofitable.
Why does this story matter?
The situation of many B2B distributors today very closely mirrors that of Circuit City from a decade and a half ago.
Today, Amazon is aggressively entering the sphere of B2B supply. It’s Amazon Business marketplace has already surpassed $1 billion in annual sales and is growing at an estimated 20% month over month. It already lists nine million B2B products on its site and is on track to surpass $25 billion in annual revenue by the end of 2018.
Retailers and distributors in the sectors Amazon Business is targeting would do well to heed the lessons from Circuit City’s demise and the many other B2C retailers who have also fallen to Amazon’s domination. This is especially true for B2B companies in verticals like Industrial Supply, which Amazon has mentioned as an explicit target for 2017.
Amazon doesn’t need to capture the large, complex orders from B2B distributors to be successful and or to have a large impact on their business.
If Amazon dominates only the smaller items, what would that do to their margins? We’ve built financial models for clients of ours in these sectors that show, conservatively, that they could lose 80% of their margins in this scenario. Is anyone’s industry truly different? Will it be the first to really escape Amazon’s grasp?
In all likelihood, within the next seven years, a marketplace will become a dominant player in B2B distribution. The only question is who will own that marketplace. It could be a dominant tech giant like Amazon or a tech startup nobody’s heard of yet. Or it could be an established B2B company with the know-how, the connections, and the capital.
The opportunity is ripe in many of these industries to build a platform, such as metals, chemicals, industrial supply, electrical distribution, and shipping and logistics.
Alas, the clock is ticking. The longer the industry waits, the less likely it is those companies will be able to build a successful platform. Only one or two platforms get to dominate a given industry and it always pays to be first one to the party.
Filed under: Platform Innovation | Topics: b2b, enterprise, platform innovation