Digital natives and online e-commerce platforms have raised standards in retail service and convenience, gaining ground across industries. The disruption will continue. Many of the biggest digital online players are eyeing expansions into B2B realms. Chief among them is Amazon Business. Launched in 2015, it averaged annual growth of 115 percent in its first three years. Its revenues rose from $10 billion in 2018 to $25 billion in 2021,1 and are expected to top $31 billion by 2023, with $11 billion in gross margin, making Amazon one of the largest distributors in the United States.
To continue growing, Amazon Business and many other large digital players, such as eBay, Alibaba, and Mercato, are building best-in-class distribution networks and go-to-market sales forces and offering products they used to avoid due to technical or supply chain challenges. Many are also venturing beyond their core geographies, such as Europe, where most incumbent distributors are smaller and have been slow to innovate and invest in digital capabilities.
According to our 2021 survey of close to 3,500 B2B decision makers in a dozen countries, around 25 percent fewer distributors in Europe expect to increase investments in e-commerce technologies compared with those in the United States2—even though European B2B customers say they are excited about the faster, cheaper, and more seamless buying experiences that digital players can offer. In fact, 95 percent of B2B buyers said they were willing to make purchases without interacting with salespeople.
All is not lost, however. Distributors who have not yet been disrupted can learn from early adopters on the front line. Indeed, we believe they should endeavor to learn new strategies quickly to keep pace with digital players that significantly invest in digital and customer experience, supply chain, and talent. We recommend that distributors around the world consider actions across four categories:
- Build a unique ecosystem to address customer pain points. This will help distributors provide technical expertise and value-added services that only they can offer, strengthening customer loyalty.
- Build a distinctive supply chain to keep pace with digital leaders. Traditional distributors aiming to offer a true omnichannel experience might need to forge innovative new partnerships and alliances.
- Focus on tomorrow’s essentials and sales interactions. Nearly every distributor will need up-to-date digital tools, including advanced analytics and the cloud, to personalize the customer experience and align with new “hybrid” ways of doing business.
- Bring privileged insights to decision making by tapping treasure troves of data.
Amazon Business: Digital native and leader of the pack
Amazon recognized the B2B opportunity early by acquiring Small Parts, an online and catalog specialty and materials player, in 2005. It quickly built differentiated B2C-like offerings with analytical and digital capabilities such as an integrated procurement system, flexible payment options, enhanced invoicing capability, dynamic competitive pricing, and ease of use.
With its brand name and logistics built on Amazon’s consumer infrastructure—including the ability to reach 93 percent of US customers in one day—Amazon Business is now the sixth-largest distributor in the United States, disrupting sectors from auto parts to food and janitorial supplies.3 For example, after it acquired Whole Foods in June 2017, the value of shares in publicly traded food-service distributors dropped by up to 5 percent. After Amazon purchased PillPack in June 2018, shares in publicly traded pharmaceutical distributors dropped by as much as 8 percent.
Amazon Business is expected to continue its momentum. It’s playing in a highly fragmented global B2B market worth about $70 trillion that lacks sophistication where online penetration may be less than 15 percent.
The threat is on the horizon
Digital players eyeing the highly fragmented B2B market are making major investments to build distribution-center networks and expand their B2B fulfillment footprints and capabilities. Experts tell us that leading digital players are building dedicated sales organizations that mirror those of traditional distributors, hiring key account managers to serve a large swath of Fortune 100 companies and forming field sales teams to acquire small and medium-sized customers.
Perhaps most worrisome to traditional distributors is digital players’ growing technical expertise across sectors. Leaders are now using advanced algorithms to identify which parts customers need based on the specific machines they use, breaching a moat of technical knowledge that has protected many distributors for years.
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Moreover, many digital players are also building scale by expanding beyond their core geographical markets. Consider a few examples:
- Alibaba, with about a 60 percent share of the Chinese market,4 expanded into Russia in 2016 and partnered with the French food retailer Auchan in 2017, opening offices across Europe.
- Mercateo, Europe’s leading e-procurement platform, averaged 29 percent annual growth from 2005 to 20175—without any physical warehouses—by acting as an intermediary between B2B trading partners.
- Amazon Business launched in Germany in 2016, in the United Kingdom, Japan, and India in 2017, in France, Italy, and Spain in 2018, and Canada in 2019, with strategies tailored to each country. In Europe, for example, Amazon made value-added-tax compliance easier for its vast number of sellers; in India, it focused on the needs of microenterprises; and in Japan, it gave buyers the ability to print orders, which could then be stamped with the approvals that many companies still require.
Not all sectors are equally at risk
Experts tell us that digital giants consider three dimensions when deciding whether to enter an industry or geography:
- market and sector attractiveness in terms of size and growth, where digitization can improve customer experience, and where competitors are mostly fragmented and lack sophistication
- product categories that are easy to ship, with high margins, low requirements for aftersales support, and limited or no technical expertise expected
- customer segments that are price-sensitive, low-touch or digital self-serve, or that can be served by an account management team because they require few value-added services
Distributors at the greatest risk may, therefore, be those operating in large segments with high margins, limited technical expertise, low value-added services, low customer purchasing power and easy-to-ship products, such as electronics and general industrial and auto parts. For instance, most electronics are small and easy to ship, and many transactions are made online. Similarly, the general industrial segment has high margins, relatively easy-to-ship products, and mostly smaller buyers with knowledge and expertise.
By contrast, traditional distributors in the metal and building products segments may face lower risk because their products tend to be hard to ship. That could change, however, as digital players are increasingly forming partnerships with third-party vendors to ship large, bulky products, such as refrigerators and lumber. Traditional distributors who can supply “whole jobs” may have advantages against digital players, which are built to fill small orders and can struggle to meet multicategory needs.
Regardless of which segment they are in, all distributors, even those whose customer relationships seem invulnerable today, should craft plans to compete with digital disruptors. A 2019 McKinsey survey of more than 1,000 senior OEM leaders revealed that 48 percent would collaborate with Amazon if it became the largest distributor. As one HVAC and plumbing manufacturer put it, “Amazon is the ideal partner. Cooperation will mean faster and more shipping opportunities and faster capital flow. It’s a win–win model.”
How to manage digital disruption
This is the moment to build competitive capabilities. Some leading distributors in North America are already strengthening their business models to outperform digital natives on many dimensions. We can learn from them and from companies in other industries that have survived severe disruptions.
Leading distributors are working hard to create tangible commercial differentiation, investing in technology to close gaps between their operations and those of digital natives, and reinvesting the savings to create omnichannel customer experiences, all while aggressively pursuing scale through consolidation.
Customer intimacy: Build a one-of-a-kind symbiotic ecosystem
Many digital players tend to excel in consumable-product categories that require limited technical expertise, where customers know exactly what they want and constantly replenish their supplies.
But customers tell us that traditional distributors have the upper hand in several top-selection criteria, including product availability, customer service and technical expertise, and a long tail of products that pure digital players can’t match without big investments in technical talent and physical assets.
The most successful traditional distributors are working hard to address customer pain points and build interconnected ecosystems. In the wake of the 2009 housing recession, for example, a leading building-product distributor quickly helped its technical team develop the capabilities to install windows and doors for the many custom home builders struggling to find qualified labor—a service no digital giant could match. A leading packaging distributor, recognizing that traditional product sales will always be at the cusp of disruption, began offering “Silicon Valley level” custom design services and global sourcing and supply chain excellence to help address customers’ packaging needs.
Supply chain optimization: Keep pace with digital leaders
A great supply chain is essential, but it won’t be enough to differentiate, especially since some digital players and retailers have started to promise one-day delivery. That said, certain traditional distributors have—or can build—service capabilities that may give them an advantage over pure-play digital organizations. Some leading metal and building distributors, for instance, use special carriers to deliver harder-to-ship large and bulky products. Some roofing distributors use specialized flatbed trucks with conveyers to deliver products to rooftops quickly and safely.
Many leading distributors have embarked on providing an omnichannel experience by providing customers with seamless experiences across physical and online channels. Success requires first-rate demand forecasting to select the right product assortments for each channel, along with real-time inventory tracking (following the same method some retailers use to let customers search for and buy goods online and then pick them up in-store).
Creating strong digital B2B channels at industrial companies
Many distributors are partnering with other players to gain an edge. In 2020, American Tire Distributors (ATD) partnered with OneRail, a cloud-based platform for same-day and on-demand delivery, to expedite tire delivery. With OneRail’s more than 100 delivery companies and 4.5 million deliveries, ATD could offer customers instant access to inventory from regional distribution centers in 90 minutes or less—a significant improvement that delights customers.6
Even Walmart, despite its scale, has been partnering with Handy, a third-party logistics provider, since 2018 in its home services business. Handy’s in-home installation and assembly assistance are options for customers in more than 2,000 Walmart stores and online.7
Digital renaissance: Focus on tomorrow’s essentials
Shoppers of all kinds now expect easy-to-navigate e-commerce portals and advanced online capabilities. In our survey of B2B decision makers, eight in ten said they perceived the digital-led omnichannel model to be as or more effective than traditional methods,8 a sentiment that has grown sharply since the onset of the pandemic. And remote and self-service are not just for low-value purchases: more than 56 percent of B2B decision makers say they would spend more than $50,000 on a completely remote or self-serve interaction. Many leading brick-and-mortar retail players are defending their revenues by becoming more “experiential,” providing digital offerings that complement rather than replace physical infrastructure.
Best Buy, for instance, has countered the availability of electronics products online by redesigning some stores as fulfillment hubs. At a few select Minneapolis stores, for example, the company shrank shoppable square footage by nearly 50 percent, freeing space for staging products for in-store pickup and ship-from-store transactions. Combined with its price-matching strategy, these changes have helped Best Buy maintain its leadership in electronics retailing.9
To tailor experiences even more closely to customers’ needs, most distributors should collect and explore data from more touchpoints including inventory, mobile devices, third parties, desktops, and public sources. Getting close to customers is a strong competitive advantage, especially in e-commerce, where mobile use is projected to grow at 14 percent annually, more than double desktop growth of 6 percent.
Distributors unable to build these digital capabilities should consider the Walmart example. Walmart acquired Jet.com in 2016 and grew it quickly. But the acquisition did more than boost Walmart’s bottom line—it provided access to a new target market: urban millennials, a demographic that Walmart had found hard to reach.
Analytical revolution: Bring privileged insights to decision making
Traditional distributors share a strength with digital players: they offer tens of thousands or even millions of SKUs to thousands of customers every day, and therefore have the rich volumes of data they need to use advanced analytics and machine learning to uncover valuable, granular, real-time insights. With the right talent and tools, they can anticipate customers’ needs, make the right product recommendations, offer alternative solutions, and achieve profitable growth by dynamically aligning offerings, key buying criteria, and customers’ willingness to pay.
Distributors’ major challenge is not when to start; rather, it is where to start. They can choose from a broad range of proven digital and analytical use cases and launch in just a few weeks. A leading industrial distributor, for example, became a digitally enabled powerhouse by using advanced analytics to optimize pricing, cross-selling, routing, and so on. The traditional organization adopted a start-up mentality, using pilots to prove use cases and build credibility gradually with the sales team and customers.
Nearly every distributor is facing disruption as digital natives build upon their successes in B2C to expand into B2B. The question traditional distributors should be asking now is how they can “self-disrupt” to compete with such formidable opponents. No matter what strategy they pursue, we expect the winners to galvanize their organizations to create more innovative cultures with a relentless focus on customers.
It’s not easy, but it beats the alternative—declining market share, revenues, and profits—and the lessons are clear.
