Christa Hart

Everyone is aware of the power of Amazon. The Seattle-based ecommerce powerhouse is a force in both the consumer space and in web services with sales across all business segments totaling US$233 billion in 2018. A small fraction of that massive figure is attributable to a recent venture that is poised to upend established B2B suppliers.

Amazon Business is the company’s slumbering giant. Launched in 2015, the B2B platform enables companies to purchase almost anything—computers, office supplies, medical supplies, industrial tools, auto parts, you name it. With a reported 100 million products in its marketplace—more than on the consumer site—Amazon Business zoomed from $1 billion in annual sales one year after launch to an astounding $10 billion just three years later.

Theophila Lee

Amazon management views Amazon Business as an under-appreciated opportunity for investors—but it likely won’t stay that way for long. Some analysts predict the platform will surpass the company’s consumer site in sales in the future.

One Million Customers and Counting

What’s driving Amazon Business’s phenomenal growth? Start with the fact that it offers features similar to those that make Amazon’s business-to-consumer site so wildly popular: reviews, product specifications, endless aisles and two-day shipping. Amazon Business Prime (priced from $179 – $10K annually) adds to the appeal. The business platform stands out with 5% back or 90-day terms (with Amazon Business Prime American Express), multi-user accounts, guided buying, approval workflow, payment solutions, tax exemptions, dedicated customer service and spend visibility.

Already established in eight countries— the U.S., U.K., Germany, France, Italy, Spain, India and Japan—with plans to expand, global success for this venture seems inevitable. In addition to Amazon-stocked products—including Amazon Basics, including computer accessories and other electronics products—hundreds of thousands of third-party sellers reside on the platform, ranging from mom-and-pop shops to large companies. Indeed, half of Amazon Business’s annual sales come from these sellers, which gives its reported one million customers the opportunity to find new sources for goods they might not otherwise have discovered, such as local suppliers and minority- and women-owned businesses.

Just how powerful has Amazon Business become in four years? The size and scale of some of its customers in the U.S. alone give an indication:

• 80% of the 100 largest enrollment education organizations
• 55 of the Fortune 100 companies
• More than half of the 100 biggest hospital systems
• More than 40% of the 100 most populous local governments

Distributors under Threat

Just as with the consumer site, the rise of Amazon Business threatens to disrupt a variety of established industries, with three types of distributors particularly vulnerable: industrial, medical and auto supply chain. Here’s what they can expect:

Industrial Supply: Amazon’s biggest play is in the maintenance, repair and operations (MRO) segment, where customers purchase goods on a per-piece basis online, and do not need technical support or expertise. Amazon’s greater catalogue depth and lower prices, compared to top distributors in items such as switches, conduits and wiring connectors, give it an advantage. (Impacted competitors include: MSC Industrial Supply and W.W. Grainger.)

Medical Supply: Medical and dental supply is another likely area of disruption. Medical professionals have indicated that they find Amazon especially compelling for commodity products such as surgical supplies, catheters, syringes, needles, clinical swabs and cotton balls, and basic equipment like stethoscopes and forceps. In fact, a Reaction Data survey of 151 hospital CEOs and executives showed that 62% indicate they support Amazon’s arrival, given its track record of lower costs and fast delivery. (Impacted competitors include: Cardinal Health and Henry Schein.)

Auto Supply Chain: Amazon recently accelerated efforts to sell car tires, batteries and accessories and is cutting into the DIY and “do-it-for-me” markets with basic auto parts, wiper blades, cleaning kits and accessories. A partnership with Sears allows customers to purchase tires from Amazon and have them shipped to a local Sears Auto Center for installation. Similar ship-to-store partnerships exist with auto parts and services chains operated by Pep Boys and by Monro Inc.. Such direct relationships with auto parts suppliers and installers  are likely to cut out middlemen. (Impacted competitors include: Advance Auto Parts, Auto Zone, and O’Reilly Auto Parts.)

Other Suppliers: Additional industries vulnerable to disruption include office suppliers such as Office Depot and Staples; office, snack and pantry goods distributors such as Snack Nation and Nature Box; and small-scale home construction, which includes Home Depot and Ferguson.

How Distributors Can Compete

In a 2018 survey of 244 manufacturers, distributors and wholesalers conducted by Unilog, Amazon Business was named as the top threat to their existence. Yet more than half (52%) of the respondents admitted they do not have a strategy to compete. At the same time, 43% said they sell direct on Amazon Business, often bypassing their traditional distributors.

As dire as the situation may seem, existing distributors can compete by playing to their strengths in two areas where Amazon Business is lacking: (1) same-day delivery, and (2) personal touch and value-added capabilities.

Industrial Supply: Value-added distribution services and technical expertise give suppliers in this segment a major advantage. Examples include knowledgeable customer service, tailored relationships and executive attention when an issue arises. The focus should be on large contracts, as opposed to small- and medium-sized.

Medical Supply: Having industry knowledge is a big plus here, with awareness of complex purchasing procedures in hospitals and managing difficult and/or recurring delivery deadlines that cannot be missed. Amazon will be hard-pressed to honor existing general purchasing organization (GPO) contracts that dominate healthcare. Dealing with the red tape so characteristic to the industry will also be a challenge.

Auto Supply: Existing players such as Advance Auto Parts (AAP) have extensive logistics and supply chain networks that can deliver parts to mechanics and car owners faster than Amazon. Within this scope, supplying bulky, complex parts such as engines, crankshafts and flywheels for professional installation give AAP an advantage.

Other Suppliers: Higher-margin value-added business services such as copying, IT support, business advice/coaching, marketing support and staffing are all areas where office supply companies are competing. Snack and pantry goods distributors must also find areas of differentiation, such as snack packages, dietary and allergy options and subscriptions where they can deliver incremental value.

From Tremors to an Earthquake

Amazon Business represents only a fraction of Amazon’s overall revenue and, therefore does not receive as much attention from the company itself in its financial reporting. Indeed, Amazon Business is not broken out or even listed in the company’s year-end 10K report among its three reportable segments: North America, Amazon Web Services (cloud services) and International.

Or, perhaps Amazon Business is only causing tremors in the B2B environment at this point. That’s bound to change in the next few years; it’s very likely that a proliferation of distressed distributors will cite the company as a key culprit in their first-day motions during Chapter 11 bankruptcy proceedings.

Amazon Business is the giant hidden inside a much bigger giant. Its breakout moment is at hand.

Christa Hart is a senior managing director and Theophila Lee a consultant, each specializing in retail and consumer products within the Business Transformation practice at FTI Consulting, a global business advisory firm. They are also contributors to the FTI Journal.