The 2022 financial performance of many industrial distribution companies have been very strong. Third-quarter earnings reports for publicly traded distributors consistently showed double-digit revenue growth and strong earnings. And while the news headlines focus on a likely recession in the U.S., there is another story that is receiving less attention: the massive impact that digital technology is having on the industrial distribution sector.
Digital technology is impacting every business, of course, but in the industrial distribution sector it is resulting in two specific disruptive forces:
- Increasing channel displacement as new digital competitors offer end customers great value, and
- Increasing channel disintermediation as manufacturers go direct to end customers
Amazon Business, the part of Amazon that caters to businesses, is the most disruptive example of a new digital competitor. Gross merchandise revenues are estimated to have reached $28B in 2021, which represents an astonishing 70+% annual growth rate since 2015 when Amazon reached $1B in revenues after re-branding its earlier B2B business. The company has expanded into numerous product categories for business customers, including maintenance, repair & other; janitorial and sanitation; tools and hardware; and many others. Analysts estimate its gross revenues could reach $80B by 2025. The company’s ability to take market share seems to have no limits.
Digital marketplaces are another new market entrant that are also growing rapidly. Digital Commerce 360, a market research firm, estimates that total B2B revenues on digital marketplaces will reach $130B in 2022, up from $25B in 2020. The firm was following 75-100 marketplaces in 2020; they now are tracking over 400 marketplaces spread across 18 industries. Mirakl, a marketplace technology provider, estimates digital marketplace revenues grew ~7X faster than B2B e-commerce in 2021, and are expected to grow ~2X faster than e-commerce, non-marketplace revenues over the next few years. No matter the statistic, these digital marketplaces are here to stay and represent another source of displacement risk for incumbent distributors.
Big box retailers – Home Depot, Lowe’s, and Walmart – are not sitting idly by. Each has made huge investments in their e-commerce and supply chain capabilities, while leveraging their national footprints to offer more value to contractor professionals. In 2017, Home Depot announced a strategic change to pursue contractor professionals and their “planned purchases” with an aggressive revenue goal of $100B from the Pro segment in near future. Home Depot has made numerous improvements to its customer experience and how it adds value to the professional contractor. The payoff is showing as its Pro customer segment, which is 5% of total customers, reached 45% of HD’s $150B total revenues in 2021 and is growing faster than its DIY consumer segment. Lowe’s story is similar as it began its strategic change in 2018 with its “Total Home Strategy”. Its Pro customer segment reached $24B in revenues in 2021 (25% of total) and is growing faster than its DIY consumer business. Walmart, while slower to make a strategic change than the others, launched “Walmart for Business” and in 2020, it launched Walmart Marketplace with Shopify to pull in third party sellers.
Manufacturers are increasingly going direct to their end customers with e-commerce, often as part of an omni-channel strategy. Digital Commerce 360 estimates that total U.S. manufacturer B2B e-commerce sales reached $543B in 2021, which represents a 16% annual growth rate since 2016. E-commerce continues to grow faster than overall manufacturer sales (~1.45x faster), and as a share of total U.S. manufacturer sales it reached 9% in 2021. While the shift began well before Covid, the pandemic accelerated it. Beyond e-commerce, many industrial manufacturers have been busy digitally connecting their products with the aim of getting closer to end customers and growing revenues.
End customers are demanding better experiences and greater value. Regardless of which companies they buy from, customers have a high expectation that their experience is like that of buying as a consumer on Amazon. They want an easy way to transact that fits their organization, competitive prices, product availability, fast delivery, and integration to help them with spending controls. With a changing demographic where younger buyers are taking over procurement roles, this trend is here to stay too.
Strategic Positioning – Implications for Distributors
The war for the customer has reached a new level of intensity in the industrial distribution sector. These digital technology-driven trends have critical implications for how incumbent distributors position themselves to compete better and realize profitable growth.
- Digital will continue to drive changes, which in many areas, are accelerating
- Traditional ways of serving customers are still important, but are being commoditized and will lead to lower profitability and returns on invested capital
- Strategic choices of problems to solve, customers to target and products / services to offer matter greatly
- Customer experience – a strong, omni-channel approach is a must have
- Capabilities typically need to be developed or strengthened in commercial, technology and operational areas, which need to explicitly link to strategic choices
- Scale is good, specialization is good, but scale + specialization is even better
- No choice but to adapt, and many need to move forward faster and more boldly
For many, changing will be hard, but what better options are there?
In the weeks ahead, we will be sharing additional points of view on these disruptive changes to the industrial distribution sector, and what incumbent distributors can do to grow profitably. We welcome your feedback and would be delighted to have an in-depth discussion on these topics. Send us a note at info@groovesg.com.