Is Amazon Business the End of Traditional Procurement?
It’s been 5 years since Amazon started their AmazonSupply in the US and now, after 1 re-brand (in 2015 changed from Amazon Supply to Amazon Business) and a couple of European launches (UK & Germany), Amazon has established itself as the biggest threat to traditional supply / procurement model as we know it.
Initially in 2012, they included 500,000 products intended to industrial contractors, PPH workers, office supplies, car repairs, plumbers and similar markets. Just two years later, Amazon Supply was offering 2.25 million products in 17 categories.
Although AmazonSupply was originally geared towards business and contractors, later anyone could order products on the site. Last year, the product offering reached 9 million items under the slogan: “Everything you love about Amazon. For Business”.
In 2016 Amazon total sales were $136 billion with more than 310 million active customer accounts worldwide. B2B takes only a small proportion with sales of around $1 billion and 400k business customers but according to Bloomberg, in 2017 Amazon have reached 1 million customers in the US alone with its B2B marketplace growth rate at 20% month on month. If the rate of growth continues at this pace, the sales could surpass $8 billion in 2017.
So, is Amazon a real threat to traditional procurement model and should the western B2B distributors and suppliers be worried?
The best is to first take a peak into B2C sector; Circuit City and Borders Books in the US for example, both closed their doors for the significant part, due to Amazon. The latest victim to join the list is Toys R Us. Although they blame debt for their downfall, it has to be said that they never adequately transformed itself digitally and left it to the competition to claim the online toys space. (The Journal reports that in 2009, e-commerce represented only a 4% of ToysRus’ sales). Just couple of weeks ago, the US bankruptcy judge approved a loan of more than $2 billion to rescue and help stabilise the failing chain. But what is most interesting is that ToysRus made a swift move in an attempt to fight back Amazon’s dominance and have announced to be launching their own marketplace in the toys sector.
B2B distribution industries have started reporting negative impact Amazon Business is having on them too. In March 2017, Grainger CFO Ron Jadin admitted that the company is not competitively priced and announced that Grainger would cut web prices on most of its listings by 15-25% over the next 18 months.
Although Grainger still holds strong position on large contracts, it is being affected on small and mid-sized contracts and spot buys which present 42% of Grainger’s $10.1 billion revenue.
Amazon’s strategy can be seen in the next graph below. In main part, it is to move to and dominate the SME / Spot purchase sector first. As an undisputed online merchant in many B2C markets, they rely on their proven strategy and infrastructure to make the relatively easy move into the B2B spot-purchasing market segment. While initially most strategic and large considered / industrial purchases seem to be unaffected, Amazon eyes are most certainly set on as much of the $7.2 trillion B2B pie as possible, moving ever so closer to the large enterprise sector too (represented in blue below)
Everything you are worried about Amazon. For Business.
The evidence for their long term strategy materialised recently when Amazon won a major public sector contract in the US, empowering buyers at public agencies and non-profit organisations to procure their supplies through Amazon Business. Reportedly, the 11 year contract could be worth as much as $5.5 billion. Similarly, one county council in the UK is setting up the trend by recently signing up to the service to buy books. Bill Burkland, the head of Amazon Business in the UK commentated that the council did not limit itself just to books, but “ended up buying everything from wheelbarrows to glitter”.
The sign of the Amazon’s progressive intentions can also be analysed in their hiring of sales staff like never before. Burkland confirmed that "Amazon Business is part of the 5,000-job commitment that Amazon has made to new jobs or new hires in the UK this year". Growing B2B sales teams, relatively new endeavour for Amazon, is to enable both business buyers and sellers to build out the marketplace ecosystem from both ends, enabling the long term objective to disrupt and dominate the B2B procurement / supplier model globally in years to come.