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Fragmentation in Industrial Supply Industry Creates Opening for Modern Monopoly

Platforms are making there way into many industries that have long been dominated by linear companies. And the industrial supply industry is likely next. One of the key traits of an industry ripe for platform disruption is fragmentation, as Applico CEO Alex Moazed and Head of Platform Nick Johnson note in our book, Modern Monopolies.

Large, fragmented supply allows a platform to come in provide for both consumers and producers by consolidating supply in a marketplace. At $75 billion a year, the industrial supply industry certainly has the scale to justify building a platform.

industrial supply market size revenue

So what makes the industrial supply industry a good target for a platform? Let’s take a look.

  • The industrial supply industry is very fragmented, with 30% of companies earning less than $10M
  • The 50 largest companies generate only 50% of annual industry revenue.
  • There are approximately 1,600 companies that are earning less than $10M

As you can see, the industry is quite fragmented, mostly in the middle revenue ranges. While total annual revenue for the industry is $75B, most companies are in the low and high ranges, forming a U-shaped distribution. Approximately 1,600 (or 30%) of the industry consists of small companies that earn less than $10M per year in revenue.

METHODOLOGY

We first reviewed the Industrial Distribution Big 50 List. Then, we utilized data from the same organization as the Big 50 List, and other sources to identify the revenue segment percentages. The sources included research reports, survey data, and Census industry reports for NAICS 423840.

INDUSTRY SIZE

For the industrial supply industry, the Census Bureau reports there are approximately 5,300 firms and 8,000 establishments. FirstResearch, based on the same number of establishments, states that annual revenue is $75B.

REVENUE SEGMENTATION

FirstResearch reports that the “50 largest companies generate about 50% of the revenue,” but the large majority have revenues under $5M. These figures are somewhat similar to those reported earlier this year by the Industrial Distribution’s 69th Annual Survey of Distributor Operations. Based on their findings (of approximately 130 companies), here is the industry breakdown based on 2015 sales:

industrial supply market fragmentation

The industry is fairly segmented, with most companies pooling at either end of the spectrum, and multiple smaller segments in between. The companies in the Big 50 List fall within the last 3 segments, or the top 34% in revenue.

 

CONCLUSION

The scale and fragmentation of the industrial supply industry makes it an excellent target for a platform business. The concentration of small suppliers gives a platform an easy route to building a modern monopoly.

A platform would start by targeting smaller suppliers and offering them greater access to consumers. Once it consolidated the 30% of the market made up of small businesses, it would have the scale on the consumer to attract some of the larger regional players in the industry.

Once a platform achieves this level of scale, it will be able to squeeze the margins of larger suppliers since it can compete at scale with these incumbents, but with a more asset-light and capital-efficient business model.

Many of these large incumbents won’t see the platform as a direct threat until it’s too late to fight back. That’s why the best strategy would be for one of these incumbents to go on the offensive and build its own platform. This platform would enable it to attack its competitors while building a highly defensible moat around its core business.

If an incumbent doesn’t take this route, then the size and margins of the industrial supply industry makes it an almost certain target for either a startup or a large tech company like Amazon.

For those incumbents, the clock is ticking.

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