Two weeks ago, Amazon announced that they were launching a B2B service called Amazon Business Prime Shipping but more easily known and Amazon Prime Business. Naturally, everyone overreacted and Industrial Suppliers across various verticals sank on the news. This included W.W. Grainger, which dropped over 5% when the announcement dropped. In this brief article, we will look at what the service entails, why it may be a threat to the current industrial electrical market, and why it may not matter at all.
Amazon Prime Business Overview
The highlights of the program include the following:
- Free, two-day shipping benefits to all users with an Amazon Business account
- It was only launched in the US and Germany, for now
- Exclusive pricing and bulk discounts on over 5M SKUs
The pricing for the service is based on users. This is similar to a SaaS (software as a service) model where software licenses are sold by the number of people using the service. Here are the pricing tiers from Amazon’s website:
In short, Amazon is copying the B2C Prime model and bringing it into the B2B market. Their idea, clearly, is that the market dynamics are the same. Therefore, Amazon Prime Business should have incredible success, right?
Why Amazon Prime Business Will Be a Hit
There’s a few reason that businesses overreact when Amazon encroaches on their turf.
- First, they have dominated a remarkable number of industries since their humble beginnings in books.
- Second, they have scale which allows them to consolidate purchasing power/shipping costs and enter into industries as a loss leader (willing to lose money to gain market share).
- Third, and most importantly for the industrial electrical market, they are able to consolidate pricing and supply.
In our opinion, #1 and #2 are less of a concern to the large electrical incumbents such as Grainger or Fastenal. However, those could become a challenge to mid-sized distributors who are already racing to keep up with the traditional distribution channel changes that are starting to occur. As stated, the biggest reason that Amazon Business Prime could take over the industry will be because they are able to allow users to compare pricing across suppliers. In technology, this is called a “meta platform” (think TripAdvisor or Expedia aggregating hotel pricing). If they are able to get rich supply and great pricing from all of their suppliers, the current kings may not be on the throne much longer.
Why Amazon Prime Business Will Be a Flop
Remember what we just said? The key to Amazon Prime Business becoming big will be “rich supply and great pricing”. Do we think they will get great pricing from any vendor that chooses to join? Simply, yes. They will force their suppliers to give them the best pricing because they are Amazon. However, they cannot force top tier suppliers to join. In areas of the industrial electrical world such as Pin and Sleeve wiring devices or motor disconnects, that means companies such as Hubbell, Legrand, Mennekes, Eaton, Square D, Meltric, etc. It is inevitable that second tier suppliers will choose to participate and they will gain some incremental sales. But if the tier one manufacturers don’t join, then Amazon won’t have a top tier offering and their customers won’t get a great experience.
Everywhere you look, articles are being written about E-Commerce, the Internet of Things, and digitization. So, it may be logical to follow that B2B consumers are ready to make their industrial electrical purchases online. However, if you think about the MRO market (which is what Amazon Prime Business is attacking), it’s just not that simple. We are fortunate enough to know a lot of the people in the industry responsible for MRO purchasing. These people are extremely smart in many different ways but technology is not the driving force behind their buying process. Sometimes, it’s the relationship they have with their local distributor that they value. Sometimes, they prefer to order over the phone. We could go on and on, but the point is that a local of MRO transactions simply aren’t occurring online or Grainger would be much bigger than they already are. Sure, as millennials move into more Maintenance, Engineering, and Purchasing roles this may change but that remains to be seen.
Summing It Up
In conclusion, we understand the fear that runs deep in the industrial electrical market as Amazon Prime Business lines up to disrupt it. However, until a world-class, top-tier supplier such as Hubbell joins we aren’t going to be able to forecast whether it can be a success. If that happens and others follow suit, be warned: Amazon’s dominance will be swift and painful for everyone involved.