The preeminence of Amazon Business is now a fact of life. It has taken a commanding lead in the $6-8 trillion American B2B industry and will leave incumbent distributors in the dust unless they figure out how to compete.
RBC Capital Markets projects that Amazon business will reach $31 billion in sales, with the GMV quintupling to $51 billion, by 2023. This will make it the largest industrial distributor several times over. These numbers aren’t surprising, given our correct prediction that Amazon Business would hit a GMV of $10 billion within 2018. The projected figure for 2023 might even be a bit low, as we can easily imagine Amazon’s B2B marketplace pushing $100 billion in GMV by that time.
With Amazon as a Top 20 B2B distributor, already holding the #4 position in the U.S., the window of opportunity for large incumbent B2B distributors to stand up dominant, vertical-specific eCommerce marketplaces are narrowing fast. Amazon Business is already a go-to for industrial consumers who have relatively simple needs and don’t require deep technical assistance.
W.W. Grainger, Inc., the leading industrial supply and MRO (maintenance, repair, and operations) distributor, has made a number of forays into eCommerce. Its outlet Zoro.com, which targets smaller businesses than their more-traditional enterprise clientele, is its latest attempt at getting the model right.
But can Grainger’s eCommerce strategies mount a successful challenge to what Amazon Business is doing in industrial supplies and MRO? It remains to be seen, but a closer look at Zoro and past marketplace missteps show Grainger might have missed the boat.
On its Q3 2019 earnings call, Grainger’s executive staff discussed some ways the company intends to expand its eCommerce offerings and embrace marketplace dynamics. One key takeaway is its hope of adding 10 million SKUs of products over the next 3-5 years to Zoro’s U.S. site.
The only problem is that, in the current eCommerce landscape, 3-5 years is way too slow. By way of comparison, Walmart Marketplace added 10 million products to its catalog — 9.5 million of which are from third-party sellers — within just about 9 months in 2019, with Walmart CEO Doug McMillon wanting to see an even steeper upward trajectory.
Grainger is still apparently not addressing its major eCom weaknesses. One of the biggest issues can be spotted right away with a simple visit to Zoro.com. As of December 2019, there is no prominent “Sell on Zoro” button or link. This might seem like a subtle omission, but it strongly suggests Zoro isn’t open to third-party sellers on the level needed to get high throughput and jumpstart its marketplace platform growth.
Another problematic sign for Grainger, and perhaps a more damning one, is that it’s making the P&L on Zoro public, with the promise that Zoro will only continue to grow in profitability. That means shareholders and analysts will now scrutinize Zoro’s performance purely on the numbers. Putting a P&L on Zoro hamstrings Grainger’s ability to take transformative steps, such as revamping Zoro’s business model to make it a more viable marketplace. GE made the same mistake with GE Digital and paid a big price.
Grainger seems to be counting on other factors such as cost control, maintaining a consumer-friendly pricing scheme, and “investments in technology” to keep the profit trendline going up and to the right. But as it is now, the chances of Zoro being able to recapture dominance in MRO from Amazon Business are approaching zero.
Without the ability for sign up small sellers, Grainger and Zoro are likely to rely on select partners to expand its product catalog. Many large incumbents who want to make serious plays in eCommerce end up taking this top-down approach. For example, they might seek out partnerships with a handful of big third-party suppliers, or put new suppliers through an arduous application process, in order to protect the core brand.
The end result is a faux marketplace that’s limited in size and scope. The value for customers is limited because the product catalog remains small and stagnant. And with limited demand, you won’t be able to organically attract more and bigger suppliers over time.
A prominent example of a curated marketplace in the big-box retail arena is Target+. According to Marketplace Pulse, Target has only added about 115,000 products in 2019, which pales in comparison to Walmart’s Marketplace, which added about 10 million in the same time frame.
A similar, sometimes overlapping approach is a complimentary marketplace, which offers customers adjacent-industry products besides the typical merchandise. But this approach is also a loser. Complimentary marketplaces hurt your ability to command a good take rate, and can’t generate the demand and throughput needed to attract suppliers and build real leverage.
If you’re a B2B distributor who still wants to earn a position of strength in eCommerce, you will have to do the hard stuff early on. That means abandoning top-down thinking in favor of bottom-up platform design.
It involves tapping into fragmented supply to bring smaller, “mom-and-pop” producers into the fold, allowing them to compete with each other in ways that create immediate value for consumers. It even means being willing to self-disrupt by letting third parties sell the same products you already list online, effectively allowing them to compete with you.
The bottom-up approach lets distributors create favorable economic terms for themselves from the start (such as a healthy take rate), rapidly test and prove the business model long before pursuing big expansions and partnerships, and build platforms with potential.
The now-defunct Gamut.com was Grainger’s experiment with new search functionalities, product recommendations, and a cleaner UX for buyers. Those were noble intentions, but it was an “incremental innovation” at best.
Why was Gamut a flop? Aside from numerous foibles — including de-branded, commoditized merchandise, and product recommendation tech that fell short — the biggest problem was that it merely duplicated Grainger’s linear operational model. Products were bought wholesale, listed on the balance sheet, and resold to customers.
However, it would have been the perfect place to test out marketplace platform strategies.
Given its separation from the core brand, Gamut could have been Grainger’s vehicle to take a stab at self-disruption. This would have allowed Grainger to generate some good initial demand and throughput, and to realize some of the value of a true marketplace.
While Grainger promised to incorporate the learnings from Gamut into the flagship Grainger.com experience (and by implication, Zoro), it still has not opened up the core of their business in a way that sparks platform growth. And it’s only gotten harder, if not impossible, for Grainger to create a viable marketplace experiment now, given Amazon’s foothold in its niche.
There’s no getting around what it takes to beat Amazon Business at its own game. There’s still enough fragmentation in B2B distribution to build out vertical-specific marketplaces that recapture eCommerce market share from Amazon, but the doors are closing.
Despite some key incumbent advantages — such as high-touch services for their enterprise customers, valuable information services for more complex customer needs, and deep finesse in freight and logistics, just to name a few — Grainger has missed the mark in eCom again, by shackling Zoro to a P&L. It has lost a lot of flexibility to do the kind of digital transformation that matters.
Given such critical loss of ground in B2B eCom, nothing short of a tectonic shift in thinking, or maybe some very fortuitous investments and acquisitions around platform opportunities, can turn things around.
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