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Why Metals Distribution is Ripe for Platform Innovation

As we’ve written previously, many old-school B2B industries are becoming targets for platform businesses, with both startups and established platforms getting in on the action.

One of the industries most prone to disruption is the $220B metals distribution industry.

Like industrial supply, metals is an industry that hasn’t yet gotten a lot of attention from Silicon Valley, since it’s dominated mostly by linear businesses. But tech companies like Amazon have taken an interest.

So what makes metals ripe for platform disruption?

The metals distribution industry is extremely fragmented.

metals-chart

In the most recent financial statement submitted by the industry’s largest player Reliance Steel & Aluminum, they’ve referred to the market as “highly fragmented and competitive within localized areas or regions.”

The top 50 companies within the US metal distribution industry comprise just 24% of the sector. In the industry, 6,299 companies, or about 78% of the total number of companies, generate less than $10 million in annual revenues per year.

Meanwhile, only 15 companies generate more than $1 billion in annual revenue. And the impact of the smaller players is only growing. According to American Metal Market, the category of companies with less than $1 million in annual revenue appears to be the fastest growing segment in terms of sales with 3.37% combined revenue increase from 2007 to 2012.

Metals Distribution Fragmentation

As with the industrial supply industry, where Amazon is moving fast to attack traditional industry players, one of the key traits of an industry ripe for platform disruption is fragmentation, as Applico CEO Alex Moazed and I note in our book, Modern Monopolies.

Large, fragmented supply allows a platform to come in and provide value for both consumers and producers by consolidating supply in a marketplace. Consumers get price transparency and access to a wider variety of products while producers get access to scale, as well as potentially software tools provided by the marketplace that reduce costs.

At $220 billion a year, the metals distribution industry is a juicy target for a platform company.

Further, with the low-end segment of the market experiencing rapid growth, this creates an opening for a platform to come in and establish a dominant position by catering to those smaller suppliers.

Once a platform achieves this level of scale, it will start to squeeze the margins of larger suppliers, since its network will give it enough scale to compete with these large incumbents. Larger suppliers, like Reliance, likely won’t notice the shift in industry market power until it’s too late to fight back.

So if you’re in the metals industry, what should you do? The simple answer is you need to be thinking about platform innovation. A dominant platform attacking the industry is more or less inevitable. The only question you should be thinking about is where your company will fall in the new value chain.

There are two possible scenarios here. One is that you fail to see the threat coming and end up as just another commodity supplier on a large marketplace. The other is that you set out to build your own platform now. Using their existing logistics and supply infrastructure, an incumbent would have a significant advantage against new entrants. But time is of the essence.

Being first to hit critical mass is key for marketplaces. If a competitor gets their platform to critical mass before you do, usually the best your platform can hope for is to be number two. While that’s a better position to be in than being a commodity supplier, it’s often not an enviable or sustainable one.

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