April 8, 2013
transportation report | 3PL Report

Amazon: Just can't wait to be king

Amazon rules the B2C online domain. Now, it has set its sights on the larger B2B space. The plain may never look the same.

By Mark B. Solomon

In 25 years of working with manufacturers and distributors, Linda Taddonio, co-founder, CFO, and e-commerce guru at Minneapolis-based business-to-business software developer Insite Software, has heard enough corporate boasts to know when a company's claims are legitimate and when its pants are on fire.

So it was a revealing moment in mid-January when, as Taddonio was breezing through a webinar on Amazon.com's then nine-month-old B2B offering, Amazon Supply, she hesitated after showing a slide describing the unit's mission to offer the world's largest parts selection to the industrial maintenance, repair, and operations (MRO) buyer.

"This is the first time in my career where a business has set the earth as a defined territory," Taddonio said, with a slight chuckle in her voice that sent a message that Amazon's vow, as audacious as it sounded, should not be taken lightly.

In less than 20 words, Taddonio summed up what could become commerce's next signature moment. Already with a dominant position in the $186 billion-a-year domestic online business-to consumer (B2C) segment, Seattle-based Amazon has now turned its attention to the U.S. business-to-business (B2B) market, which in 2013 will generate $559 billion in sales, double that of three years ago, according to a mid-March forecast from research and advisory firm Forrester. How Amazon plays it and the changes wrought as a result could reshape the industrial distribution landscape for decades to come.

It would also, if things break his way, cement Amazon founder Jeff Bezos' reputation as a supply chain practitioner extraordinaire. Like Wal-Mart Stores Inc. founder Sam Walton before him, Bezos hit the ground knowing that the power rests not with the products themselves, but with the knack of getting them to the right place, at the right time, and at the lowest price.

Launched in April 2012 with inventory covering 14 industrial "categories" from abrasives to material handling, Amazon Supply is still too new to be a disruptive influence. Unlike the business-to-consumer e-commerce segment it helped invent, Amazon enters a field populated by seasoned intermediaries, or distributors. These firms add value through a deep knowledge of their customer base and its product needs, and by offering industrial inventory management and transportation service options Amazon isn't accustomed to providing.

The leader of the pack is arguably Grainger Industrial Supply, the Chicago-based colossus with 86 years of experience, more than 1 million parts and repair parts online, and 400,000 more in its catalogue (Amazon currently has about 600,000 online stock-keeping units, or SKUs). Grainger also has 711 local branches—more than 400 in the U.S.—where customers can pick up their orders on the same day or have them shipped.

Online transactions accounted for about one-quarter of Grainger's $9 billion in annual 2012 sales, according to Raleigh, N.C.-based consulting firm Tompkins International. That percentage is expected to rise to as high as 50 percent by 2015, the firm says.

BUILDING ON CONSUMER SUCCESS
Yet Amazon is Amazon. And it brings to the B2B game many of the unique characteristics that powered it to B2C online dominance. Amazon has 233 million products on its core website, and Tompkins estimates it is the launching pad for between 30 and 35 percent of all online shopping queries. A number of the SKUs available on Amazon's site for B2C transactions are applicable to B2B purchases as well.

Amazon has a base of 173 million users, many of which visit its site multiple times a week. This "familiarity footprint," as Taddonio calls it, could give Amazon Supply a leg up over its rivals, especially among younger procurement executives whose use of Amazon in their personal lives could be a marker in driving their business decisions.

Amazon will continue to beef up its DC density as the inexorable shortening of product cycles compresses delivery times to hours instead of days. It will add 47 million square feet of domestic DC capacity through 2016, bringing its U.S. network to more than 80 facilities, according to Tompkins International. Amazon plans to use separate centers to fulfill consumer and industrial orders, according to Jim Tompkins, the consultancy's CEO.

Amazon Supply offers free two-day deliveries to any customer as long as the order is more than $50 and bound for one address. Amazon's "Prime" service, where users pay a $79 annual fee for free two-day shipping regardless of the order's cost, has been made available to Amazon Supply customers. In addition, Amazon Supply offers free returns every day of the year.

Kiva Systems, acquired by Amazon last May for $775 million in cash, will become a key part of Amazon Supply's strategy. Procurement in the industrial distribution world is "a mile wide and an inch deep," meaning buyers have a wide variety of items to choose from but generally order in relatively low volumes. As a result, a typical MRO order involves small quantities of multiple SKUs.

Kiva's mobile robots, which scoot around warehouses and DCs bringing racks of goods to human pickers and packers, will enable Amazon Supply's efforts to provide an "endless aisle" of online buying choices while yielding substantial labor savings by eliminating the need for human workers to travel around the warehouse locating and picking items.

THE SHIPPING CHALLENGE
The biggest challenge for Amazon Supply will be keeping shipping costs under control. It's an issue the mother ship is all too familiar with. Amazon's 2012 shipping expenses rose to more than $5.1 billion, up from nearly $4 billion in 2011, according to the company's 2012 10-K filing with the Securities and Exchange Commission. Shipping costs last year outstripped shipping revenue by nearly $3 billion, according to the filing. Amazon generates much of its shipping revenue from third-party merchants who sell products through the company's site and use its fulfillment services for storing inventory, picking and packing, and shipping.

In the filing, Amazon said it expects its "net cost of shipping"—the ratio of shipping expenditures to revenue—to continue rising as parcel rates increase and more customers take advantage of the company's low-priced delivery offerings. Amazon mitigates some of the pain by using its massive volumes to leverage better pricing from its parcel carriers.

Bezos is doing what he can to fine-tune Amazon Supply's transport cost structure. Amazon has been running its own vehicle fleet in Seattle to support its "Amazon Fresh" online grocery business. The Amazon Fresh operations, which have never expanded beyond the Seattle metro area, are designed more to tinker with dynamic routing schedules than as a serious attempt to succeed in an area that has demonstrated more than its share of failures over the years, Tompkins says.

Tompkins says Amazon has several options, including the launch of its own transportation network or the creation of courier clusters in each market it serves. Or it could drop the bomb and announce the purchase of a major transportation company. Whatever direction Bezos & Co. take—and Tompkins says he has no idea what it will be—it will be based on optimizing margins per box and driver stops per block—the hallmarks of delivery success in the parcel world, he says.

Taddonio of Insite, who advises traditional industrial distributors on e-commerce strategies to counter the encroachment of e-providers like Amazon and Google Inc., says Amazon Supply will focus on providing the best product price and availability, and will not—at least for now—address the value-added solutions that have successfully embedded distributors in their partners' operations. Those solutions include a broader range of transportation options beyond parcel, the one shipping mode that Amazon is comfortable with, she says.

Taddonio adds, however, that too many traditional players "are not paying attention," either because they are unaware Amazon Supply exists or they feel it's not a threat. This kind of thinking puts old-line distributors at risk of a "death by a thousand digital cuts" should Amazon's low-cost model take hold, she warns.

The broader lesson, according to Tompkins, is that Amazon's model can be exported into any area where goods are ordered online. Asked to identify any impediment to Amazon's muscling into any field it wants, he replies, "Nothing."

The notoriously secretive Amazon would not respond to requests for comment. Thus, this story is left to quote from the proverbial "Book of Bezos," which preaches a commitment to low prices and the need to proceed with patience as well as an unbending strategic view, but with a willingness to change course if the winds suddenly change direction.

"There are two kinds of companies in the world," Bezos was once quoted as saying. "Those who sell things for more, and those who sell things for less. We're the second kind."

As for the mode of implementation, another Bezosian maxim should resonate with anyone who dreams of building a behemoth from scratch: "We're stubborn on vision, but we're flexible on tactics."

More articles by Mark B. Solomon

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