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.

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