Can This Leading Industrial Distributor Stop the B2B E-Commerce Juggernaut?

Will industrial distributors end up with the same fate as bookstore operators, following Amazon's aggressive push into B2B e-commerce? W.W. Grainger is likely to be among the survivors.

Jun 11, 2014 at 3:09PM

The May issue of Forbes put the spotlight on Amazon.com (NASDAQ:AMZN) in an article titled "Amazon's Wholesale Slaughter: Jeff Bezos' $8 Trillion B2B Bet", focusing on AmazonSupply's threat to industrial distributors such as W.W. Grainger (NYSE:GWW). Launched in April 2012, AmazonSupply, a B2B e-commerce site, has grown rapidly over the past two years.

According to Acquity's "State of B2B Procurement Study" published in June 2013, 45% of respondents had shopped at AmazonSupply in the past year, while 25% of respondents were frequent purchasers. In particular, the shift in buying behavior was concentrated with the younger generation, with 63% of respondents aged between 18 and 35 having bought from AmazonSupply at least once.

Furthermore, AmazonSupply has increased the number of products it carries from 500,000 at inception to 2.2 million currently. This trumps the 1.2 million products available at Grainger companywide.  

However, the race to dominate the B2B distribution market isn't over. Grainger, a leading maintenance, repair, and operating (MRO) distributor, with 6% of the U.S. MRO market estimated at $145 billion, is more than capable of maintaining its market leadership.  

Customer type
Although both Grainger and Amazon are competing in the B2B industrial distribution space, they aren't exactly focusing on the same group of customers, at least not in the same proportion.

In the case of Grainger, it generates about three-quarters of its revenues from the large customer segment, where it claims to have about 15% market share of this $37 billion market. In contrast, small customers only make up about 4% of its sales.

While AmazonSupply doesn't disclose its customer profile breakdown, it's worth noting from the Acquity study that larger companies have engaged in online purchasing to a lesser extent than their smaller peers. Only 13% of buyers with a budget of $500 million and above purchased directly from a supplier's website. That's simply because larger companies have more complex sourcing needs and prefer multi-channel distributors that deliver high levels of customer service and wide distribution, like Grainger does.

Source: Grainger

Customer service and convenience
Notwithstanding the fact that Boston Consulting Group estimates that AmazonSupply tends to offer cheaper prices on common items than its peers by about 25%, it isn't all about price. Acquity's 2013 study indicated that 32% of respondents placed a stronger emphasis on customer service and convenience over price, when it comes to factors influencing the purchasing decisions.

Moreover, the study showed that 37% of respondents were more likely to make a significant online purchase (in excess of $5,000), if they had access to customer service representatives available via phone.

Grainger has an edge over AmazonSupply, when it comes to customer service and convenience.

One aspect of Grainger's superior customer service is the additional value-added services it provides. For example, Grainger's inventory management solution KeepStock helps its customers reduce working capital needs to shorten the cash conversion cycle and improve inventory availability to keep customers happy. This is especially valued by larger companies where conventional inventory management tools such as bin labeling and scanning devices are insufficient.

Another area of differentiation for Grainger is the customized advice that its 3,000-plus knowledgeable sales representatives provide.

With respect to convenience, while AmazonSupply has 40 U.S. fulfillment centers to serve its customers, it doesn't beat Grainger's extensive branch network. Grainger boasts a domestic footprint of close to 400 stores. When local companies urgently need certain parts to fix a machinery failure, they don't simply having the luxury of navigating to a e-commerce website to place orders. That's where Grainger's nationwide store footprint provides extreme convenience and utility for its customers.

E-commerce
The battle between AmazonSupply and Grainger isn't purely about clicks versus bricks. In fact, Grainger's U.S. business' website, Grainger.com, is the 15th largest eCommerce site in North America, based on Internet Retailer research.

Back to the point about targeting smaller customers with less complex needs, Grainger offers e-commerce as a low-touch, single-price offering for this group of customers. While e-commerce accounted for only 15% of Grainger's sales in 2009, it currently represents about one-third of Grainger's top line.

Grainger.com boasts full-fledged e-commerce capabilities including automated purchasing, approval and invoice processing, which are targeted at its large customers. With small customers in mind, Grainger also launched Zoro Tools as a stand-alone, single channel online offering.

Unlike Grainger.com, Zoro Tools operates on a no-frills basis with lower prices but limited technical support. The results speak for themselves, with Zoro Tools registering positive operating earnings and $80 million of revenues in 2013.

Looking ahead, Grainger expects e-commerce revenues to eventually account for 40%-50% of its sales in the future.

Foolish final thoughts
I don't doubt that Amazon will be able to disrupt B2B industrial distribution in the same way it shook up the bookstore market. However, not every company will be affected in the same way. Grainger has an edge over AmazonSupply with respect to large customers, where customer service and convenience are top priorities. For the small customer market, Grainger's Zoro Tools will give AmazonSupply a run for its money.

Grainger's resilience is validated by its recent first-quarter 2014 financial results, where it delivered record revenues of $2.4 billion on the back of continued market share gain with its large customers.

Will this stock be your next multi-bagger?
Give us five minutes and we'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers