Welcome to the final installment of our Amazon in Australia series! This series of articles explores e-commerce in Australia, and how Amazon will affect Australian wholesalers and distributors. In our third article, we discuss what intermediaries like wholesalers and distributors can expect from this retailing juggernaut.
Amazon is finally up and running in Australia. The Commonwealth Bank’s latest Retail Insight research suggests that while shoppers are ready for Amazon, at least 70% of retailers don’t have a strategy in place to combat the retail giant.
Intermediary business such as wholesalers and distributors are increasingly vulnerable to Amazon. The main concern is that these middlemen will start losing volume because sales are going to the online channel and because it’s increasingly difficult to be competitive on pricing.
Amazon Business has already begun affecting industrial distributors who sell screws, pumps, fasteners, and other parts for the industrial business in America. Most recently, Goldman Sachs claims that the value proposition of the industrial distributor isn’t keeping pace as new entrants like Amazon are disrupting traditional models. As a result, $130 billion of industrial distributor total addressable market is on the line.
Threat to Margins
The rapid growth of Amazon Business has increased competition for wholesalers and distributors. This competition will significantly affect prices and margins. For example, Goldman Sachs sampled 100 products from Amazon and Grainger, an industrial supplier. They found that Amazon carried 98 of 100 products that Goldman sampled. Of that, Grainger’s prices were 55% higher than Amazon’s. This strong price competition pressures other distributors and wholesalers to lower their prices in order to compete at a price level. However, this competitive pricing also erodes their gross margins.
Another aspect of competitive pricing is with shipping costs. Amazon operates its shipping services at a loss of more than US$7 billion. This shows just how aggressive Amazon is when it comes to building scale and encouraging customer transactions. Given Amazon’s competitive shipping, there is mounting pressure for competing businesses to subsidise shipping for their online channels, cutting into their operating margins.
Changing Buyer Behaviour
As discussed in the previous article in the Amazon in Australia series, B2B buyers are changing their approach to online buying.
Consumers have increased trust in online purchases and are making more frequent purchases and higher value purchases. Business buyers want to have the Amazon shopping when they are buying for work. Business buyers are less reluctant to buy supplies online. Sites like Amazon Business are easy to use, fast, have a broad selection, limited login requirements and built-in trust are more likely to attract B2B buyers.
What Can Intermediaries Do?
Ultimately, it is up to the business to decide whether to treat Amazon as a friend or a foe. Rob Green, who leads marketing, sales, selection expansion and account management across a diverse portfolio of B2B merchants, suggests that one way to compete with Amazon is to sell on Amazon.
This tactic does pay off, as in the case of a US department store, Sears. Sears had closed almost half of its stores across the US in five years; some of the decline was driven by Amazon’s online presence. However, Sears had a popular line of home electronics. When the US department store announced it was selling its electronics through Amazon, its shares jumped 20%. Despite Sears giving people another reason not to visit its physical stores, the potential for increasing earnings from Amazon distribution proves far more valuable.
However, this tactic is a double-edge sword. In the case of Sears, selling through Amazon has boosted one of their sales channel, while crippling another. This highlights Amazon’s unpredictable impact on retailers. For businesses that can partner effectively with Amazon, there is a great deal of opportunity.
The Future of Intermediaries
Does Amazon’s aggressive push spell Doomsday for wholesalers and distributors? Despite the pessimism surrounding intermediaries, business experts doubt that Amazon will fully replace intermediaries.
Small companies might tend to use Amazon because the price of products is the most important factor for them. In contrast, big companies will want to foster relationships with their suppliers as they place greater importance on the invaluable expertise and customer service.
Until Amazon has the ability to replicate the same level of business knowledge and customer relationship, larger businesses seem out of its reach for now.