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*Editor’s note: This is a fictional article about a fictional entity. We share this bit of creative writing to generate some interest in the distribution industry about a platform alternative to Amazon Business. However, it’s dated six months from now – perhaps it will come true by then.
By Ian Heller June 10th, 2019
The B2B purchasing world was rocked today when hundreds of leading US distributors, along with numerous technology companies, announced the formation of a new joint venture called Material LogicTM. This new B2B marketplace combines the assortments and capabilities of these distributors to provide buyers with an alternative to Amazon Business.
Industry experts were surprised to hear that leading suppliers like Grainger, MSC Industrial, Fastenal, Ferguson, HD Supply, Graybar and the entire network of more than 500 members of Affiliated Distributors had worked through legal obstacles and long-held competitive relationships to form a deal.
MDM’s source, who participated in many of the conversations, said, “Distribution’s major players realized that Amazon doesn’t attack companies, it attacks industries. That means no single company’s response to the emergence of Amazon Business would be sufficient. Only an industry-wide response would have a chance of succeeding.”
In our conversations with analysts, there was general agreement that while Material LogicTM faces big challenges thanks to the four-year head start of Amazon Business, the new company enjoys some major advantages, including:
- Lower costs vs. Amazon Business. The new marketplace does not need to generate much of a profit margin. Analysts believe that 2 percent of ongoing revenues may fund the new entity. By comparison, Morgan Stanley estimates that Amazon Business marketplace transactions produce about a 20 percent EBITDA for the company. Distributors participating in Material LogicTM, will retain most of the profits and can undercut Amazon Business on price if necessary.
- The new marketplace is owned by the distributors and so will never be a competitor to them. That removes one of the major reservations distributors have in selling on Amazon Business: giving a perceived competitor access to sensitive commercial data.
- All transactions are processed and delivered by its distribution partners. This is different than Amazon Business, which is a distributor and fulfills many orders on its own.
- Distributors on Material LogicTM don’t give up ownership of their customers. They can continue to manage these relationships as they do today, instead of handing them over to an intermediary.
- Customers buying on Material LogicTM still get the services of distributor sales and service employees. Since outside sales forces and knowledgeable employees are often a big differentiator for traditional distributors, preserving this value-add is significant.
While analysts foresee many obstacles facing Material LogicTM, they tend to agree that this is the first time the distribution industry has developed a potentially viable strategy to offset the advantages of Amazon Business. In addition, analysts say the new entity offers a differentiated value proposition vs. Amazon Business by incorporating important services like local delivery capabilities, vending, kitting, light fabrication and much more.
“The beauty of this arrangement for customers is that they can buy direct from the distributor or through the marketplace,” said our source. “Material LogicTM allows buyers to prioritize the fulfilling distributor by name, proximity, price, delivery speed and more.”
We asked our source how the distributors managed to overcome competitive concerns as the negotiations proceeded.
“It was fascinating to watch a group of traditional industry players join together to develop an effective response to a fast and aggressive company like Amazon,” he said. “But I think these CEOs realized that they were already competing with each other, so why not do it in a way that builds the capability to compete with Amazon Business, too?”
We contacted a CEO of one of the major distributors participating in the deal, who agreed to talk on background.
“Look,” he said, “All of us know that the marketplace model Amazon Business has built provides the only answer to e-procurement’s longstanding problem of not having enough assortment to satisfy end-users. And they’re in B2B to stay because it’s a $6-trillion industry in the U.S. alone. We saw what happened to the retail industry – they refused to respond when Amazon attacked, but distributors are tough and we’re competitors. We say, ‘Bring it on.’ We’re going to school Amazon on how to serve business customers.”
Another CEO said, “Personally, I was sick and tired of hearing how distributors aren’t innovative enough to fight back. After all, Jeff Bezos didn’t invent the idea of a marketplace in B2B distribution. Don Bielinski tried to do this at Grainger back in 2001. In fact, that’s where we got the name Material LogicTM– that’s what Don called the marketplace he tried to start.”
(Ed. Note: we fact-checked and verified this claim: Grainger Launches Material LogicTM )
Although MDM has not been able to confirm the list of technology partners supporting Material LogicTM, some sources claim that a long list of Amazon’s rivals are participating. One individual named Microsoft, Google, Oracle, SAP, all of the ERP providers in distribution, along with companies offering PIM, pricing, e-procurement and many other types of software as sources of capital and technology to support the new marketplace. Fedex, which is not Amazon’s primary common carrier, is allegedly in talks to provide delivery for Material LogicTM. Some analysts claim that UPS may join, too, particularly since Amazon is building its own delivery fleet.
Funding is coming from distributors, technology companies, other supporting businesses and Berkshire Hathaway. MDM has not been able to confirm rumors that Walmart is considering adding its marketplace assortment to Material LogicTM, but the retail giant is known to be interested in finding a way to compete with its retail archrival in the B2B market.
Keep reading MDM for new developments. Separately, Amazon’s stock (NASDAQ: AMZN) dropped 2.3 percent after the announcement.
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