Amazon Business head Prentis Wilson has openly identified Industrial Supply as a target for Amazon’s growing B2B marketplace. But one industry segment in particular stands out as ripe for disruption: the $160 billion electrical distribution industry.
While other industry segments like electronics distribution typically involve a lot of custom orders and closer cooperation between distributors and manufacturers, many of the goods sold in electrical distribution are essentially commoditized.
This commoditization is particularly true in the MRO (maintenance, repair and operations) segment of electrical distribution. Many of these commoditized items also fall within the typical small, pack-and-ship type of goods that Amazon has long excelled at delivering.
The biggest challenge for Amazon will be getting enough inventory onto its platform to allow it to compete with top linear distributors like Sonepar, Wesco, and Rexel.
Amazon’s ability to achieve this level of parity will in large part be dependent on how fragmented the supply is in the electrical distribution industry.
The more small players there are in the industry, the easier time Amazon will have in attracting these smaller shops to sell on its marketplace. Larger competitors will typically resist joining Amazon until they have no other choice, but smaller distributors will likely jump at the chance to access Amazon’s scale and logistics services.
So just how fragmented is the electrical distribution industry? Let’s take a look.
There are about 15,000 companies in the United States in the electrical products wholesalers industry according to industry reports from Hoovers for 2016.
Of these companies, the vast majority are smaller shops. All but about 600 of these companies have fewer than 50 employees, and about 14,000 of them earn under $10 million a year in revenue.
Collectively, these smaller distributors also make up the majority of the industry’s revenue. The top 20 companies in the industry only earned about 42% of the revenue according to the most recent census.
With the high level of fragmentation in electrical distribution, Amazon Business represents a serious threat to the existing large distribution companies in the industry.
A company like Amazon has the resources and logistical services to attract a large number of small sellers very quickly. Once Amazon has the breadth and depth of inventory that these small suppliers can offer, the marketplace can begin to compete with the major distributors on price and quality.
Indeed, our own research has shown that on many key items Amazon Business is already beginning to match – or even beat – top electrical distributors on price on identical items, especially once you factor in fulfillment costs.
However, it’s not yet a foregone conclusion that Amazon Business will dominate this industry. While Amazon’s marketplace is rapidly growing and gaining marketshare, the top distributors still represent a sizable segent of the electrical distribution market.
If one of these companies (or multiple working together) made its own marketplace, it would be able to jumpstart its platform with its existing customer base, industry-specific services, and infrastructure.
Existing industry players should view the threat of a marketplace with as much alarm as they would the rollup of several of their major competitors. Once a marketplace has reached scale, it impacts competing businesses much the same way that traditional competitors consolidating would.
However, unlike traditional consolidation, which can be slow moving and capital intensive, the marketplace approach is a much more rapid and capital-light method of consolidation. And given the right industry conditions, the marketplace approach is often far more effective
over the long term.
A marketplace is capable of capturing a much greater share of the industry than typical consolidation strategies can, and a dominant marketplace will capture marketshare and exert market power as effectively as a traditional industry player would following a series of acquisitions.
Who will own this opportunity in electrical distribution is not yet certain. But with industry demographics pointing toward a strong marketplace opportunity, the current structure of the industry will likely not last for long.