The market for industrial distributors is very big, very old and heavily fragmented, says a new report from consulting and market research company McKinsey & Co.

It’s also a market that’s ripe for a lot more deployment of B2B ecommerce and overall digital technology; the distributors that embrace such change the fastest stand to gain more sales—and fare better against looming new competitors such as Amazon Business, McKinsey says.

Industrial distributors generate combined annual sales of about $2.5 trillion annually and account for about 11.4% of the estimated 2019 U.S. gross domestic product of $21.90 trillion, McKinsey says. It includes in the figures sales by distributors of industrial products in such categories as motor vehicles, electrical, electronics, information technology, metals and heating, ventilation and air-conditioning (HVAC) systems.

Transition to digital commerce—now

But, depending upon the vertical segment, industrial distributors are heavily fragmented with no one company accounting for more than 15% in total market sales, McKinsey says. As B2B buyers switch more of how they purchase from paper, fax and phone to ecommerce, the distributors that make the quickest transition to selling online stand to gain more sales and generate more market share, McKinsey says.

“A few distributors are moving quickly to create more value by building scale, making dramatic advances in commercial and operational excellence, and digitizing to create the seamless, omnichannel experiences that customers now demand,” the report says. “But we expect slower-moving distributors to struggle—and some to go the way of Blockbuster and Borders.”

Industrial distributors need to think long and hard about embracing—or accelerating—ecommerce because the traditional ways B2B buyers are purchasing products is changing, McKinsey says. More manufacturers in some markets also are looking to potentially bypass more middlemen such as distributors and sell directly online.

Dow Corning and Kohler stand out

Among the manufacturers going direct and online to busi ness buyers are Dow Corning, which is a unit of Dow Inc., and Kohler Co. “Dow Corning recaptured cost-sensitive customers by establishing Xiameter, a low-cost, web-based brand and within ten years of launch, online sales accounted for 40% of Dow Corning’s revenues,” McKinsey says. “Kohler, a major manufacturer of plumbing products, has invested in direct-to consumer and builders’ channels with a state-of-the art ecommerce platform and supporting organization structure despite an extensive network of distributors and retailers who sell its products.”

Industrial distributors that don’t embrace ecommerce—or don’t embrace it fast enough—also may lose sales to new and more digitally nimble competitors such as Amazon Business, McKinsey says. In particular, industrial distributors that sell auto parts, electronics and general industrial products may be most at risk of losing potential sales to Amazon and others, according to the report.

“Digital leaders with top-shelf talent and deep pockets, including Amazon and eBay, pose the greatest threat,” McKinsey says. “By entering the B2B space, Amazon Business, previously known as Amazon Supply, threatens to cut many distribution players out of the supply chain.”

Those most at risk

Other report findings include:

• The distributors at the greatest risk losing digital sales to Amazon and eBay are sellers operating in large segments with high margins, limited technical expertise, low value-added services, low customer purchasing power, and easy-to-ship products, McKinsey says.
• The metal and building products segments may face somewhat lower risk because their products tend to be hard to ship, but Amazon also is now partnering with third-party vendors to ship large, bulky products, such as refrigerators and lumber, the report says.
• Competitive threats are not confined to digital entrants. Big-box retailers are also challenging traditional distributors, using their analytical prowess and customer insights to create tailored value propositions for contractors, for example, and using their large footprints to offer in-store convenience and extended hours.

“The race is on—we expect distribution as a whole to follow a version of the Amazon model, with just two or three winning platforms per segment,” McKinsey says. “The laggards—perhaps the majority of distributors—will struggle. Many will become commodity distributors, low-margin logistics providers on someone else’s platform.”

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