This multipart series will explore the convergence of trends that is both drawing and enabling these new competitors and others into the distribution market.
Long spared the intrusions of outside entrants armed with enormous capital and cutting-edge technology, the $6-trillion distribution industry in the U.S. has benefited from limited competition, mostly between long-time incumbents. To those who’ve spent years or decades in distribution, that sort of competition seemed difficult enough to overcome.
After all, firms like Sonepar, Grainger, Arrow Electronics, McKesson Pharmaceuticals, Ferguson Enterprises and other large distributors earn billions of dollars in revenues each year and invest fortunes in technologies. Competing with companies like this is no small task and so the industry has always favored tough-minded operators who can provide great service, build an effective sales force and manage working capital smartly.
Besides, disruption hit specific segments of the distribution industry long ago: Retailers grabbed share from auto parts and office products wholesalers. And, of course, The Home Depot took a large chunk out of many established sectors, including building products, hardware co-ops, electrical and plumbing distributors and STAFDA houses.
The New Disruptors
Even so, most distributors haven’t seen a “wholesale revolution” in their competitive environments. If you sold fasteners, cutting tools or MRO supplies, for example, you woke up every day to fight with Fastenal, MSC Industrial and HD Supply Facilities Maintenance. Amazon sold books. Walmart sold household retail. Berkshire Hathaway seemed like a grab bag of unrelated and non-threatening companies. Google was merely a search engine.
Today, all of these firms compete with distributors; many of them collaborate as well:
Amazon Business: In four years, this division of Amazon is now one of the largest distributors in the world.
Walmart.com: Carrying countless products from distributors, the retail behemoth now boasts a “Walmart for Business” section on its website. We know of industrial manufacturers that used to rely exclusively on distribution that are now selling through Walmart.com. Grainger’s Zoro division sells through Walmart.com as do other distributors.
Berkshire Hathaway: Having acquired TTI — an electronic components distributor — back in 2007, the company subsequently bought Production Tool Supply in 2017 and renamed it Berkshire eSupply. Currently organized as a sort of sourcing marketplace and a provider of “white label” websites for distributors who need e-commerce capabilities, Berkshire eSupply offers more than a million products online.
Google: Unlike the players above, Google is not a merchant. But the company began piloting Google Express, an Amazon-like marketplace, in 2013 and now features products from major retailers (Target, Home Depot, Best Buy, etc.) as well as tens of thousands of products from distributors like Grainger’s Zoro and Standard Electric Supply.
It won’t end there. China’s Alibaba and JD.com operate marketplaces and eBay for Business has offered distributors access to many B2B buyers as well.
Emboldened and threatened by the success of Amazon Business, marketplace operators see a growing opportunity to take B2B share. And they have to – as both consumers and business customers begin to rely on AI as a means of making their buying easier, more accurate and productive, large retailers, tech companies and other players view the B2B market as too big to ignore and consider it poorly defended by incumbents versus the firms they crushed in retail.
Macro Trends in Technology and Demographics
It’s essential for distributors to understand not only the capabilities these players will use to compete with them, but also the macro environment that is rapidly changing and tilting the playing field to favor tech-enabled marketplaces:
Rise of the Millennials: According to IPUMS USA (ipums.org), the University of Minnesota’s census data center, by 2025, 73% of the U.S. workforce will be made up of millennials, Gen Z and younger people. These are the first generations of “digital natives” to become a majority of your customers and they have different expectations around technology, put less value in sales relationships and will often purchase from the company with the best e-commerce capabilities, which is rarely a distributor.
If your schtick is to bash millennials, you should stop. No matter your stereotypes of people you think spend too much time on their phones, use text instead of voicemail, wear “man buns,” bring their dogs to work, drink fancy lattes or spend a lot of time worrying about the environment, these are your customers. You should treat them accordingly — instead of with dismissive statements about an entire generation, which just makes you look like a grouchy old person anyway. You should study them, understand their preferences and figure out how to delight them when they do business with you.
Rise of Artificial Intelligence: If you think “artificial intelligence” is just another term for “advanced technology,” then you are every bit as wrong as the people who pessimistically thought the internet was just the next stage of computer networking. The AI revolution will be just as disruptive, transformative and jarring as the internet revolution. Perhaps even more so. AI will fundamentally change nearly everything in our lives — including how your customers interact with and buy from you.
Google and Amazon have among the best artificial intelligence capabilities of any companies in the world. Tools like item recognition with cameras, voice ordering through smartphones and smart speakers and autonomous land and air vehicles are already in the marketplace. The next 10 years will see enormous leaps forward in the development and adoption of tools like these, which will play strongly to the advantages of new entrants to the distribution industry.
Rise of Marketplaces: Way back in 1990, I was a branch manager for Grainger in Billings, Montana. I designed my own ads for the local business journal. One of them showed a photo of the inside of our warehouse with the caption, “At Grainger, we believe in the power of those three little words: ‘It’s in Stock.’”
Earning a reputation for a broad, quickly available assortment has long been a highly compelling part of the value proposition for many distributors. Some, like Grainger, accumulated a couple of million SKUs and won the reputation of being the supplier most likely to have a product on-hand when you needed it. Customers prefer this because it’s time-consuming and inefficient to shop around, so many of them simply shopped at Grainger first. This explains why so many distributors are shocked to see some of their best customers buy products from Grainger at relatively higher prices.
Marketplaces take this principle of a wide variety of quickly available inventory to vastly greater heights. Not only does this win them customers, market share and loyalty, but it also gives the marketplace owners the alternative of managing their profitability via sales growth or gross margin improvement. By changing the mix of third-party for direct sourcing, marketplaces can manage their earnings in ways traditional retailers and distributors cannot. Of course, this is enabled by their third-party partners, who hand over data that can lead to their own demise.
The Whole of the Trends is Greater than the Sum of the Parts
Taken individually, any of these trends would be difficult for distributors to overcome. In combination, it’s a potentially lethal set of changes in the marketplace for many incumbent firms — particularly those who don’t understand the challenges or how they can respond.
In this series, MDM will dig into each of these trends and offer not only a clear view of how they will affect you, but also what you can do about it. Distributors will need to respond by transforming their own value propositions as the market is transformed around them. That’s a necessary but inefficient condition for success. Amazon attacks industries, not companies. That means only an industry-wide solution will have the scale to hold back Amazon as it overflows its retail banks and spills into distribution.
Along the way, we hope you’ll share your thoughts on MDM.com, on LinkedIn or by sending emails to us. MDM has been the thought leader in defining and interpreting this disruption as well as developing recommendations for how distributors can thrive in a more difficult competitive environment. With your help, we can refine our views, sharpen our recommendations and assist the industry in continuing to flourish.
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