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For the past couple of years, B2B distributors have dealt with a new 800-pound gorilla in the room: Amazon Business. For many verticals in B2B, from electronics to medical supplies to industrial equipment, Amazon Business has competitors worried.
However, given Amazon’s focus on tail spend to get initial traction, the full impact of Amazon’s growth hasn’t yet been felt by traditional competitors. As Amazon Business eventually grows beyond the long tail, it will begin to claw off market share and take a bite from incumbents’ revenue in earnest. Even for those verticals not yet affected, the specter of how to respond to Amazon Business looms large.
If what’s happened in retail is any indication, B2B distributors looking to compete need to move beyond proprietary online stores. At scale, single-company web shops can’t compete with the breadth and price competitiveness of Amazon’s marketplace approach. For small and midsize distributors, the best answer is likely to join Amazon’s B2B marketplace. But large distributors should be worried.
Long term, the only real answer for large distributors is to build or buy true marketplaces that are open to third-party sellers. In retail, Walmart learned this lesson the hard way, as I’ll review below. With its acquisition of Jet.com, Walmart finally kickstarted its e-commerce success by going all in on the marketplace approach. It has since emerged as a strong #2 to Amazon in retail e-commerce.
Learning from Walmart’s Mistakes
Walmart launched the Walmart Marketplace in 2009 in an attempt to combat Amazon’s quickly accelerating growth. However, Walmart’s core business was very concerned that third-party sellers might erode the quality of its customer service and delivery. To mitigate those concerns, Walmart created stringent application criteria that made it onerous for new sellers to join the marketplace. Most sellers couldn’t meet Walmart’s standard, and many of those who might have didn’t bother. As a result, five years later Walmart’s Marketplace only had a few thousand sellers at a time when Amazon’s Marketplace had millions. Walmart was a couple of orders of magnitude off where it needed to be.
This failure to truly embrace the marketplace approach handicapped Walmart’s ability to expand its catalog and offer competitive prices. However, Walmart’s monopolistic power in brick-and-mortar stores gave it ample wiggle room to stumble and course-correct, as well as the financial muscle to make big acquisitions. Today, it’s growing at an impressive pace, posting 40% growth in online sales in Q2 2018. It’s on its way to joining Amazon in an e-commerce marketplace duopoly. And with its $16 billion acquisition of Flipkart, the leading marketplace in India, where Amazon is a strong number two, Walmart is taking its marketplace success international.
B2B distributors looking at how to respond to Amazon would do well to emulate Walmart’s success. However, Jet.com’s don’t grow on trees, and most distributors would have a hard time stomaching acquisitions on that scale. So how should B2B distributors try to compete with Amazon Business?
There’s no Walmart of B2B
Distributors don’t have long to figure out an answer. Just three years after its 2015 launch, Amazon Business’s B2B annualized sales surpassed $10 billion. Over the last two years, it has had a compound annual growth rate north of 200%. To put that in perspective, if Amazon keeps up that rate of growth, it will reach $100 million in sales in just two years’ time.
While this may be a tall order, the company has ample market share left to gain, and it’s growth shows no signs of slowing down. Whether or not its sales reach the century mark within two years, it’s all but certain that Amazon Business will be a top-five distributor within that time frame.
Any traditional B2B distributor aiming to beat Amazon at its own game through a marketplace must first honestly appraise its ability to scale quickly across multiple B2B verticals. To do so, a company would need to have a lion’s share of the market across several products, and have a wide distribution network already in place. Put differently, it must be the Walmart of B2B. Unfortunately, the B2B industry looks quite different than retail, without a clear Walmart-sized titan capable of taking on Amazon by itself. However, there are a handful of medium-to-large incumbents who do dominate specific verticals. If several of these incumbents banded together, their collective platform could pose a real threat to Amazon, and provide an alternative marketplace for smaller distributors to sell their products. These large brands would bring their existing business to the marketplace, and they would provide customers with a broader catalog by connecting them to a platform with multiple sellers, large and small, who could meet every need across multiple verticals.
The good news is that such a cooperative model is by no means unprecedented. In Part 2 of this series we’ll take a look at some instances in which fragmented players banded together to meet the threat of a major new entrant to their industry.
Alex Moazed is the founder and CEO of Applico. Visit https://www.applicoinc.com/ for more information.
MDM’s Forum, “How Distributors Should Respond to Amazon Business”, is being held in Denver on December 4-6. Visit https://www.mdm-forum.com/ for more information or to book your spot.