amazon & google in wholesale · pdf file1/2013 amazon & google in wholesale...

1/20131/20131/20131/2013

AMAZON & GOOGLE IN WHOLESALE DISTRIBUTIONOVERBLOWN HYPE OR GAME-CHANGERS?

Distribution & Wholesale

2Copyright © 2013 Oliver Wyman

Over the past fifteen years or so, the emergence of online players like Amazon and Expedia has transformed many B2C sectors, from books and music, to electronics and travel. With US e-commerce sales of goods at some $210 BN+ in 2012 and Amazon alone accounting for $35 BN sales in the US and over $60 BN worldwide, it is hard to argue that Amazon does not now represent a formidable competitor in those areas where it chooses to focus.

What then to make of Amazon’s entry into B2B Distribution with AmazonSupply in April 2012, or Google’s beta-test of Google Shopping for Suppliers launched in January 2013?

To what extent do these represent early moves of disruptive game-changers, or will they turn out to be limited incursions in a set of complex sectors where local presence, technical knowledge, and personal customer relationships will always win?

“By the time customers call you today, they have now already done the majority of the research.

They want the easiest way to accomplish the task – That’s where the market is going.

We are trying to get ahead and create the customer experience of the future.”

– CEO, $BN DISTRIBUTION COMPANY


In our discussions with more than 25 CEOs of Billion Dollar distribution businesses in recent months we have heard a broad range of views. Around a third are skeptical that e-commerce will have a major impact on their business: often because their product is too difficult for a new entrant like Amazon to warehouse and ship, and sometimes because of value added services that they feel cannot be provided except through a direct local relationship. This view is reinforced in some cases by work their businesses have done to provide online ordering platforms that have seen limited uptake.

Other CEOs take a different view. In some cases they are already competing head-to-head with AmazonSupply in certain categories. Many are keenly aware of how customer behavior is changing in influencing sales. To quote one: “By the time customers call you today, they have now already done the majority of the research. They want the easiest way to accomplish the task – that’s where the market is going. We are trying to get ahead and create the customer experience of the future.” Within this group, of those CEOs intending to build greater barriers to online competitors, about half feel they are on the right path, while half are struggling.

Such concerns are underpinned by some interesting facts:

• In B2C, in 2012, US sales that were influenced by online research, at $1,200 BN, already account for around 6x the sales transacted online

• In B2B, 45% of professional buyers have already purchased from AmazonSupply. Additionally, 85% of buyers state they will always buy a lower cost option online, despite loyalty to their current supplier

• 90% of younger procurement buyers (aged 18–35) make B2B purchases online, compared to only 29% of older procurement buyers (age 60 and over)

(See Exhibit 1)

It is also worth bearing in mind that Amazon in particular has a track record of taking a long view in establishing a competitive position. In 1997 Jeff Bezos stated, “It’s all about the long term… We may make decisions and weigh tradeoffs differently than some companies”. More recently he was quoted as saying, “Percentage margins are not one of the things we are seeking to optimize…” Amazon’s history of always seeking to have the most competitive price in the market by applying advanced trading algorithms to ‘real time’ competitor price data is well known.

EXHIBIT 1: YOUNGER PROCUREMENT BUYERS – THE FUTURE OF THE B2B CUSTOMER BASE – ARE FAR MORE LIKELY TO USE ONLINE PLATFORMS THAN THEIR OLDER COUNTERPARTS

WHAT WE HEAR AND SEE

Respondents by age making B2B purchases online1

NOTES 1. 2013 State of B2B Procurement, Acquity Group

29%

45%

68%

90%

AGE 60+

AGE 46–60

AGE 36–45

AGE 18–35


EXHIBIT 2: SOME CATEGORIES ARE MORE IMMEDIATELY PRONE THAN OTHERS TO A NEW ONLINE ENTRANT

HYPE OR THREAT?

If you cut through the hype, we believe that there is a steady and inevitable online and multi-channel transformation underway. As with most things in business, it’s pretty simple: it starts with customers and their needs. Customers increasingly value quick, simple, effective ways of interacting to get the products and services they need, as well as new value-added services that were not possible previously. As one CEO put it, “Our customers have already been trained by Amazon [in B2C] on what good looks like. That’s what we have to compete with.”

We believe this multi-channel shift will eventually affect nearly every type of product in B2B distribution. Some sectors though are likely to feel the competitive impact much more quickly and acutely than others. Sectors characterized by small, high value, low weight, easy to handle and ship SKUs that are readily specified and do not require specific physical services to deliver, are much more amenable to an Amazon entry. Unsurprising then that AmazonSupply has launched with an industrial parts offer – a category which meets all of the above criteria – rather than, say, industrial chemicals, which fails most of the above tests (see Exhibit 2).

Chemical Industrial parts

Intrinsic ‘Shipability’

Handling Requirements

Technical Guidance

Product Selection

Value-Added Services

– Much lower value, heavy, bulky product – Requiring local supply chain density

– Often requires specialist equipment / handling / certification

– Numerous products require technical guidance and support

– Typical customer buys a small number of predictable products – enabling local SKU counts of 100s – 1000s only

– Diluting, blending, cleaning, etc. are widespread and require physical presence

Not an obvious place to start

+ Typically high value, light, smaller product – Easy to ship via common carrier

+ Straightforward

+ Many products easily ‘bought to specification’

+ Customers can buy across many 1000s of SKUs

+ Real time availability, tracking, inventory management, etc. can often be executed remotely

Online platform & remote DCs well- suited to meet many customer needs

Product- driven

Customer driven


It would be a mistake, though, to think that the threat from AmazonSupply or others is ‘binary’ in nature. The question is not whether AmazonSupply will be a threat, rather it is which customers, purchase occasions, and categories will be attacked first. Consider the lesson from the mass merchant retail clubs. In a number of categories Amazon already has a comparable or broader range than the established club stores such as Costco. In addition, Amazon’s Subscribe & Save service that delivers frequently purchased high value items such as razor blades and diapers automatically every month or so (unless the customer pro-actively updates or skips the order) is already ‘hollowing out’ shoppers baskets at the clubs and reducing trip frequency.

There is a ready read-across to ‘non-core’ categories such as personal protective equipment in industrial gas distribution or non-food items in food-service. While the core business may not be at threat, such adjacent categories can often drive around 20–30% of dollar gross margin. That’s a lot to have to make up in other ‘core’ and often lower margin categories. Such customer unbundling also acts to undermine ‘full service’ customer relationships.

The key battle is one of consideration rate, i.e. for what percentage of customers are you the first place they will go (whether physically or online) when the customer thinks about purchasing a product in a specific category? In B2C of course, Amazon has already comprehensively won the consideration rate battle in many categories through its aggressively low prices, huge range, consistent meeting of fulfillment promises and ‘no quibble’ returns. So much so that many customers now never check prices or range anywhere else.

As one looks ahead, compared to most traditional ‘off-line’ distributors, AmazonSupply by our reckoning starts with an SG&A cost advantage of some 20% or more to its scale and lack of local operations and field sales; as well as a business model built on operating margins (currently <2%) that are a fraction of those in more established competitors. It is then no surprise that one can already see more aggressive pricing on many items at AmazonSupply.

The question is not whether AmazonSupply will be a threat, rather it is which customers, purchase occasions, and categories will be attacked first.


Similarly, while AmazonSupply is still at an early stage of growth, one can already see the beginning of a compelling range in those categories where it has started to focus (see Exhibit 3). Finally, one needs to take into account Amazon’s substantial investment in building ~10 distribution centers per year since 2010 close to major cities. Our estimate is that by 2015 Amazon will be able to reach more than 50% of the US population with same day delivery.

As one looks ahead, our view is that AmazonSupply, for one, will represent a new predator in the competitive ecosystem for the majority of wholesale and distribution product verticals, and that a new competitive equilibrium will therefore evolve.

EXHIBIT 3: BUILDING A COMPELLING RANGE – AMAZONSUPPLY HAS BEEN AGGRESSIVELY GROWING ITS PRODUCT SELECTION, DOUBLING ITS BREADTH IN JUST OVER A YEAR

NOTE: Product selection compared on September 12, 2013 for office products, September 24, 2013 for industrial parts

June 2012 January 2013 July 2013 September 2013

Product selection for a few representative categories

Amazon MSC Grainger WB Mason

Abrasives 15K+ products 31K + products 9K+ products –

Fasteners 39K+ products 55K + products 55K+ products –

Hand tools 50K+ products 17K + products 38K+ products –

Paper 9K+ products – 1K+ products

Office furniture 5K+ products – 3K+ products


We have of course already roughly characterized two business models: the traditional distributor with local presence and fulfillment, field sales, expert knowledge, and established relationships; and the online distributor (e.g. AmazonSupply) with more centralized operations and fulfillment, and no pretense to technical knowledge or field sales. A natural third model is the omni-channel distributor: A model defined by enabling customers to get the information they need and place orders across the web, phone, mobile devices, and in person in a seamless and integrated way.

This omni-channel model is where a number of CEOs are already working hard to take their businesses in the next two to three years. Our sense though is that AmazonSupply is not the only new business model many will face.

Google Shopping for Suppliers is, currently in beta test form, essentially an online catalog in three test categories, with detailed structured technical data comparable across SKUs and vendors. The only current revenue model is that vendors pay $1,000 to be verified and those that are verified appear higher on the search rankings (although the fee is currently waived). The customer concept is of course appealing: A truly comprehensive, fully up to date product catalog that is as easy to search as Google.

Yet consider Google’s core revenue stream: AdWords that suppliers bid for to appear in paid rankings alongside their ‘natural’ search results. How long might it be until you can bid – in more or less real time – for such customer searches? What would you pay for a potential $10,000 equipment sale

‘click’ vs. a ~$100 sundry consumable sale? We expect that this would soon lead to greater and more transparent competition for new sales, as well as additional new commercial complexity for distributors to manage.

One might also expect, in some categories, the advent of a meta-search business model offering price comparison searches similar to those in B2C sectors such as travel (e.g. Kayak) or insurance (e.g. insurance.com). We are also seeing attempts to establish online marketplaces for specific customer types (e.g. “The Supply Place, Powered By Ace”).

Lastly one can also anticipate the disruption to traditional supply chains. Some manufacturers are already using the web to go direct to customers and reduce reliance on channel partners. In other instances one sees potentially powerful new partnerships evolving (e.g. Grainger partnering with Lowes to fulfill MRO supplies for its B2B customers).

It might be interesting to consider how you would react if your main competitor tomorrow announced a major fulfillment partnership with AmazonSupply.

SO HOW MIGHT YOUR COMPETITIVE ECOSYSTEM EVOLVE?

It might be interesting to consider how you would react if your main competitor tomorrow announced a major fulfillment partnership with AmazonSupply.

Copyright © 2013 Oliver Wyman


We have seen a few versions of this movie before. To highlight one: In grocery retail much of the story of the last 20 years or so has been how the progressive roll-out of Walmart Supercenters across North America has challenged one regional chain after another. The arrival of a disruptive scale competitor with a low cost base, compelling range advantage and SKU prices often some 15–20% below those of the existing players has driven a dramatic shake up in most markets.

The most typical pattern is a polarization of incumbents. Those grocers with relatively undifferentiated offers, many of whom cut prices or increased promotional activity in order to try to compete, typically did not make it. (Although long run price elasticity is high, in the short run it is lower. So those that invested only in price did not see enough volume increase fast enough to compensate for the short-term margin loss due to lower prices – exacerbating their financial bind.)

Those who instead invested thoughtfully in quality, freshness, alternative formats and who critically stayed sufficiently in touch with Walmart on price (within ~10% or less) have generally grown sales. Today in many markets there are only one or two strong conventional grocers left alongside Walmart, but they have thrived at the expense of the players that have left these markets (see Exhibit 4).

POSITIONING YOUR BUSINESS TO SURVIVE (& HOPEFULLY THRIVE)

EXHIBIT 4: THE KEY TO SURVIVING WALMART’S ENTRY INTO A LOCAL GROCERY MARKET HAS BEEN A STRONG OFFER PERCEPTION COMBINED WITH ‘GOOD ENOUGH’ OR BETTER VALUE PERCEPTION

CUSTOMER FAVORITESVery well placed to win share from all local competitors, including the value leader(s). Typically only 1 in 10 retailers are in this position.

“THE PACK”Around 4 in 10 retailers are typically viewed by customers as ‘average’ - a weak starting point. A few break out to become customer favorites or offer leaders, while others slip into the laggard zone.

VALUE LEADERSPrice leadership is highly effective against established rivals. A customer perception positioning often defined by Walmart. Today around 2 in 10 retailers are in this position.

OFFER LEADERSStrong assortment, great

product quality and/or high levels of service put these

retailers in a strong position to defend against the

Walmart threat. Typically around 2 in 10 retailers fall

into this category.

LAGGARDSRetailers in this region

are poorly regarded by customers, and are in

trouble even without a new competitor. Only around

1 in 10 retailers are in this position at any given time –

in part because they don’t tend to survive long.

VALUE

OFFER

Weak Strong

Weak

Strong

NOTE: The above exhibit is an illustrative example of Oliver Wyman's Customer Perception Map - A powerful tool for understanding customer perception, predicting share growth / decline, and informing customer facing strategy.

The customer perception map: a typical pattern for a retail sector

Copyright © 2013 Oliver Wyman 9

SO WHAT SHOULD YOU DO?

Responding to the changing environment is not only about digital capabilities. It is about robustly understanding what customers want and need, and then delivering it better and faster than your competitors. As the grocery story illustrates, the good news is that you don’t need to outrun the low cost ‘bear’. But you will need to outrun your ‘friends’ in the industry.

If Amazon (or other new entrants) start to take significant share, the remaining available market will shrink. Growing your business will require you to take an ever greater share of what is left, and potentially to expand your perimeter. If this is striking an immediate chord, and even if it’s not, there are six elements that we suggest need to be part of a credible plan.

1. PLAY THE MOVIE FORWARD, BOLDLYWhat could Amazon do to your sector if they got serious? Work this through at the level of customers, purchase occasions, and categories. Which will be the early battlegrounds? Which customers and occasions are core and must be held at all costs? What will cause your key vendors to partner with you, vs. your competitor, vs. Amazon vs. sell direct? What could be the new competitive equilibrium? (Hint: If your scenarios don’t involve you or a competitor exiting the market or merging, you are not being bold enough.)

Example: One distributor is ‘inventing’ how their customers will behave going forward. By mapping customers’ economics and anticipating online innovation, they are predicting new service and solutions offers, and working hard to stay ahead of this curve.

2. GET CRYSTAL CLEAR ON WHAT YOU NEED TO DO TO WIN THE CONSIDERATION BATTLEIf your prices are more than 10% above Amazon, it’s time to review your pricing policy – but carefully, reflecting on the grocery lesson about short vs. long term price sensitivity above. If you can’t fulfill next day delivery on 90%+ of your SKUs, it's time to review your supply chain. How might you leverage your technical knowledge and local service to defend the first ‘battleground’ categories? Own brand products and exclusive brand supply relationships may have an important role to play here too.

Example: Several distributors are explicitly focusing on: achieving 90–100% same or next day product availability, up-skilling the sales force to provide more customer advisory support, and consolidating vendors to minimize delivery disruptions to important customers.

3. STAY VERY CLOSE TO BOTH YOUR CUSTOMERS AND COMPETITORS Do you collect monthly customer feedback on your local service performance? Do you know how customers rate you vs. competitors on key

The good news is that you don’t need to outrun the low cost ‘bear’. But you will need to outrun your ‘friends’ in the industry.


dimensions such as value, product quality, service, technical support, and can you translate that into a ‘customer perception map’ vs. AmazonSupply? Are you tracking competitor pricing in the field and online? Do you have tools to help you spot missed orders or customers at risk?

Example: One distributor tracks customer satisfaction every month in every branch, has a scale mystery shopping program, and tracks fill rates and customer service issues to create a monthly customer dashboard.

4. GET SERIOUS ABOUT CUSTOMER STICKINESSWhat information, services, and apps could you deliver in a better way to core customers in a multi-channel world in order to save them time or make them more productive? What service activities can you ‘automate’ online, cutting costs and driving up sales? Can you create new pricing constructs that defend against SKU by SKU cherry-picking?

Examples: Several distributors are delivering services to keep the customer on the shop floor, not in the back office (e.g. back office apps, CRM, sales/inventory reporting). One is hosting dozens of customer websites using their infrastructure. Another has innovated a ‘whole basket’ pricing construct that is delivering 20%+ customer sales growth in an otherwise flat market.

5. GO ON OFFENSEOnce you have a robust online catalog and transaction engine, why not

‘re-skin’ it for B2C? Once you have the fulfillment model, why not start adding more adjacent product categories? Then why not get serious about customer acquisition through pay-per-click engineering, affiliates, targeted e-mail promotions, etc.? Should you consider acting as the fulfillment partner for AmazonSupply or a large B2C player?

Example: Several distributors are driving e-commerce across wholesale and retail, and managing the challenge of competing with their customers.

6. START THINKING ‘MOBILE FIRST’We are right now living in the first year when there are more ‘smart’ mobile devices connected to the internet than PCs. Mobile commerce is forecasted to quadruple in the next five years. In distribution businesses most customers are, by nature, already mobile – whether on a building site, a shop floor, in a commercial kitchen, etc. Delivering simple, relevant, highly personalized information, services and ordering capability to customers while they are about their business will be a competitive game changer.

Examples: Distributors are already enabling access to product technical information, real-time product availability, ordering, order status tracking, etc. on mobile devices. Getting just the right information to the field sales force can also be hugely powerful. One distributor has real time customer order history, statistically predicted orders and customers at risk, next product to sell recommendations, and next prospect to call on insights available to their sales force on iPads.

We are already seeing the early stages of a wave of innovation as the most forward thinking wholesale and distribution businesses invest significant time and resources into becoming potent omni-channel competitors.


In our view AmazonSupply, Google Shopping for Suppliers and quite possibly one or two more ‘new’ entrants will have a profound effect on many wholesale and distribution sectors over the coming five years. In many (but maybe not all) sectors, a new competitive equilibrium will be established.

History suggests that those that act to strengthen a differentiated high quality yet good value customer proposition and who adapt fastest to the opportunities created in a multi-channel world will see their businesses flourish. Those that do not will see their businesses struggle.

We are already seeing the early stages of a wave of innovation as the most forward thinking wholesale and distribution businesses invest significant time and resources into becoming potent omni-channel competitors. If your business does not yet have a credible plan to survive and thrive in the new ecosystem, there may be less time than you think.

If the above is about the what, the final question we have discussed with a number of CEOs is about the how. How to move with sufficient imagination, pace, and flexibility; and how to recruit and inspire some very different talent?

One recipe comes from the digital disruptors themselves. Both Amazon and Google have set up wholly separate divisions with the explicit aim of inventing the future, fast – and allowing bold failures on the path to bold successes. In Amazon's case the genesis was in 2006 when Jeff Bezos picked up the Sony e-reader and saw a huge risk to Amazon's core business. He rapidly established ‘Lab 126’ and 18 months later the first Kindle was launched. Walmart is right now seeking to apply the same approach with a wholly separate division based in Silicon Valley (a long way physically and culturally from Bentonville, AR) focused on rapidly reinventing its online business in the face of the AmazonFresh threat. Closer to home, Grainger established its online division more than 15 years ago.

Great care is required in managing what follows. As the new organization successfully challenges the status quo and builds momentum, should it be left alone, should it be integrated into the old business (or maybe better, vice versa), or should it become an ongoing source of innovation that

‘hands over’ lines of business when they hit critical mass? The experience of those sectors that have gone online earliest and fastest (travel, consumer electronics, etc.) is that customers who shop across channels have little tolerance for price and offer inconsistencies. Moreover, while customers are happy to benefit from ‘offline’ services and advice, superior online pricing and assortment nearly always wins in securing the final purchase.

CONCLUSION

Copyright information goes here.

FOR MORE INFORMATION PLEASE CONTACT:

IAN BROWN

Partner

[email protected]

+1 917 741 5924

+ 44 20 7852 7451

KEITH CREEHAN

Partner

[email protected]

+1 412 355 8844

www.oliverwyman.com

RICHARD BALABAN

Partner

[email protected]

+1 212 345 9389

JAMES ADAMS

Associate Partner

[email protected]

+1 212 345 2061

AMY REN

Associate

[email protected]

+1 415 743 7827

ABOUT OLIVER WYMAN

Oliver Wyman is a global leader in management consulting that combines deep industry knowledge with specialized expertise in strategy,

operations, risk management, and organization transformation.

In the Distribution and Wholesale practice, we draw on unrivalled customer and strategic insight and state-of-the-art analytical techniques to

deliver better results for our clients. We understand what it takes to win in distribution and wholesale: an obsession with attracting, serving

and growing customers, constant dedication to operational excellence, and a relentless drive to improve capabilities. We have a track record

of helping clients win in this environment, creating real competitive advantage and driving significant growth. We believe our hands-on

approach to making change happen is truly unique – and over the last 25 years, we’ve built our business by helping distributors and

wholesalers build theirs.

Copyright © 2013 Oliver Wyman

All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman and Oliver Wyman accepts no liability whatsoever for the actions of third parties in this respect.

The information and opinions in this report were prepared by Oliver Wyman. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisors. Oliver Wyman has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. Oliver Wyman disclaims any responsibility to update the information or conclusions in this report. Oliver Wyman accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of such damages.

The report is not an offer to buy or sell securities or a solicitation of an offer to buy or sell securities. This report may not be sold without the written consent of Oliver Wyman.

amazon & google in wholesale · pdf file1/2013 amazon & google in wholesale...

Documents