To keep from losing ground to Amazon Business, large distributors need to think about launching their own vertical industry-specific marketplaces, a new report from Applico says.

To compete with Amazon Business, large distributors should focus on becoming the dominant marketplace within a vertical-specific market, rather than competing head-to-head with Amazon Business as a multi-category marketplace, says a report from business consultancy Applico Inc.

There is room for one to two specialized marketplaces in each vertical market to become the dominant or second-largest player.

Amazon Business has an advantage in competing against multi-category marketplaces because it serves as an aggregator for large but fragmented markets with commodity products that are easy to pack and ship, such as industrial and maintenance, repair and operations (MRO) supplies, Applico says in the report, “Amazon Business: Threat and opportunity in B2B Distribution.”

NickJohnson-Applico

Nick Johnson, principal, Applico Inc.

This strategy allows Amazon Business to quickly scale its catalog through third-party sellers, putting competing marketplaces at a disadvantage when it comes to matching its selection. Amazon Business lists more than 56 million products, or about 10 times as many products as listed by traditional distributors that it competes against, the report says.

Specialized vertical marketplaces give B2B distributors a fighting chance to compete with Amazon Business, as they can offer a wide selection of products within an industry vertical, pricing transparency, lower prices, and a centralized trading portal. Those are all attributes B2B buyers find attractive, says Nick Johnson, a principal for Applico and co-author of the report.

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“There is room for one to two specialized marketplaces in each vertical market to become the dominant or second-largest player by servicing buyers in ways Amazon Business can’t,” Johnson says.

Using customer data to grow sales

In addition, distributors can grow marketplace sales by leveraging existing customer data and arming sales representatives with digital sales tools to service buyers that typically purchase offline.

“Vertical marketplaces can provide users more customized experiences, whereas Amazon Business uses an aggregator model that relies on scale and commoditization,” says Johnson. “It’s a different way of competing with Amazon Business.”

While specialized marketplaces can be potent competitors to Amazon Business, they need to act fast because their window of opportunity is closing fast, the report says.

Indeed, Amazon Business is making rapid in-roads to several B2B market segments, including food service and equipment, medical and dental, and lab and scientific supplies. Since 2017, when Applico launched its Marketplace Tracker to follow the number of sellers and products in Amazon Business’s catalog, food service equipment has grown to 20,000 sellers and more than 3 million products; the medical supplies category has 19,500 sellers and 2.9 million products; dental supplies has 11,700 sellers and 1.2 million listed products; and lab and scientific has 12,400 sellers and 730,000 listed products. The Marketplace Tracker does not record sales through Amazon Business.

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In the MRO and industrial supply categories, Amazon Business’s two largest, the ecommerce giant lists 31.3 million products. In comparison, the leading traditional or “incumbent” distributor’s ecommerce site has about 3 million products in those categories, the report says, without naming that distributor.

While that distributor plans to add 10 million products to its ecommerce site in the next three-to-five years, most likely by embracing a marketplace model and allowing third-party sellers on its site, it would not be enough to gain a competitive advantage on Amazon Business, the report says. Instead, the distributor would need to add millions of products in the next few months to stay competitive with Amazon Business, the report says.

Expanding into new product categories

“There is a noticeable difference when it comes to product selection on Amazon Business and competitors have to address it, especially with Amazon Business rapidly expanding into new product categories,” Johnson says.

Becoming a leading B2B vertical marketplace, he contends, starts with recognizing that building a vertical marketplace from scratch to match or exceed Amazon Business’s product selection in that category will take too long. “It can take five to seven years to achieve the necessary scale when building a marketplace from scratch,”  Johnson says.

A faster path to achieving the scale needed to dominate a vertical market is through acquisition or partnering with start-ups. “The goal is to find start-ups that have splintered from generalist marketplaces, do well at what they do, and bring scale to achieve critical mass,” he says.

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Achieving critical mass will also help marketplaces fend off competition by the likes of other large B2B platforms, such as Alibaba.com, eBay.com and Walmart.com, the report says.

A better buyer experience for small customers

Another advantage of digital marketplaces is that they allow distributors to improve the buyer experience for smaller, irregular customers they typically do not serve well through traditional sales channels. Distributors offering an online marketplace not only have a chance to retain these customers, but attract competitors’ customers they were previously unable to serve, the report says.

Other sources of value that marketplaces can leverage include supplier relationships, the distributor’s brand, consumer data and insights, ample inventory, and such value-added services as logistics, technical support, credit offerings, and underwriting and collections, the report says.

“Distributors shouldn’t forget that Amazon Business is adding services many thought they couldn’t, such as financing, negotiated and custom-pricing, in order to add value to its platform,” Johnson says. “If vertical-specific marketplaces want to compete with the big guys, they have to find ways to add value that enables them to become sole owner of the customer.”

Peter Lucas is a Highland Park, Illinois-based freelance journalist covering business and technology.  

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