Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

The Amazonian nightmare is only just getting started for distributors of industrial odds and ends.

The mere presence of the e-commerce giant in the marketplace for business-to-business sales of office supplies and machinery parts has been enough to wreak havoc on the stock prices of traditional competitors, most notably W.W. Grainger Inc. Such freakouts tend to be commonplace when Amazon.com Inc. enters a new industry, and it can be hard at first to gauge how serious these forays are and how real the competitive threat is. While industrial distributors from Grainger to Fastenal Co. and MSC Industrial Direct Co. have fended off endless questions about competition from Amazon, the e-commerce company itself has said fairly little about its aspirations for Amazon Business. 

But it is talking now.

Corporate Takeover
The expansion of Amazon Business has been fast and furious since the company retooled its approach in 2015
Source: Bloomberg
Amazon says those 1 million business customers are in the U.S. Globally, the number may be higher. In April, Amazon noted it had enrolled 50,000 business customers in Germany.

On Tuesday, Amazon put out a little-covered press release on the progress of its business-to-business marketplace. More than 1 million U.S. customers are now turning to Amazon Business for their equipment and supply needs, up from more than 400,000 this time last year. In a decision that can't have been arbitrary, Amazon quotes an executive from the U.S. arm of Siemens AG (you know, that giant industrial company) who's "looking forward to expanding our procurement capabilities with Amazon Business." Nothing about that should be comforting for Grainger and its rivals. 

It means something when Amazon devotes an entire press release to one particular unit. The company launched AmazonSupply in 2012, which then got rolled into the introduction of Amazon Business in 2015. While there have been a few off-hand progress updates in quarterly reports since then, the most detail we have on the unit's plans actually came from a deposition last year in connection with Staples Inc.'s efforts to overturn a regulatory block on its Office Depot Inc. purchase. In that, the head of Amazon Business Prentis Wilson called business-to-business sales a "must-win" initiative and the testimony zeroed in on Grainger as a competitor.

Ouch
Grainger meaningfully lowered its EPS guidance in April as it announced big price cuts. Analysts are projecting 2017 EPS to be toward the low end of Grainger's $10 to $11.30 range.
Source: Bloomberg

Already, the price transparency that's characteristic of Amazon's consumer e-commerce platform has exposed major flaws in Grainger's model, forcing the company to roll out price cuts that have squeezed its margins and darkened its EPS outlook. In the face of Amazon's staggering customer growth, Grainger CEO DG Macpherson's admission earlier this year that the company hasn't been able to acquire a new customer under its namesake brand in years and has struggled to use digital marketing to draw business becomes even more worrisome.

The Elephant in the Room
Shares of major industrial distributors have been pressured amid Amazon fears
Source: Bloomberg

With this latest announcement, we now know that even after all that growth, Wilson says "it's still day one for us." There's no mention of service professionals or on-site inventory management, so it seems Fastenal's efforts to more deeply ingrain itself in customers' supply chains will continue to help insulate it -- for now. All the same, if I was a business contemplating where I purchase my parts and supplies, I might be swayed by Amazon's talk of cost savings, tracking services, automation of orders and "very short amount of time" for deliveries.

Perhaps the biggest appeal is the ability to view multiple offers on a single product page, as opposed to having to shop around for quotes at different distributors. To really compete, Grainger and its rivals are going to have to collaborate on something similar, says Alex Moazed and Jonathan Goodwin of innovation advisory firm Applico. But Grainger is instead spending its time on an e-commerce R&D experiment called Gamut. The navigation is clunky and pricing doesn't always match up with what's available elsewhere at the company, nor does it lend itself to easy peer comparisons, Moazed and Goodwin say.

That's just not going to cut it. It's hard to believe industrial distributors needed any more of a kick in the pants to start rethinking their business models, but they just got one.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net