In this article, the last in this series, we’ll look at some growth options for master distributors, including how they might work with certain marketplaces.
The Evolution of Endless Assortment and Marketplaces
In part one of this series, How Endless Assortment Moved from Behind the Scenes to in Front of the Customer, we explained the traditional role of master distributors and how the rise of marketplaces largely displaced them as the providers of broad assortment.
Distributors are no longer the gatekeepers of “endless assortment.” So many companies sell on marketplaces that, with few exceptions, customers can find any product without relying on a distributor to locate it. Marketplace Pulse claims more than 6 million third-party sellers are on the Amazon marketplace providing an assortment that RepricerExpress estimates is about 350 million SKUs.
In part two, Berkshire eSupply is an “Upside Down” Marketplace, we reviewed how marketplaces scale with little or no variable costs by holding on to the digital components of ecommerce (e.g., online marketing, merchandising, transaction information) while offloading the physical activities (inventory holding, picking, packing, shipping, etc.) to third-party sellers.
We contrasted this with Berkshire eSupply, which holds onto the physical activities while building websites for mostly small distributors, turning each of them into “mini marketplaces” from an economic perspective.
We also explored various research that demonstrated that business buyers are rapidly consolidating purchases among a small number of large websites while eSupply is betting on a large number of small websites. We showed that smaller distributors generated a very small percentage of their sales from ecommerce and questioned the potential for this to change much in the short run.
After the second article, a long-time distribution executive for whom I have great respect emailed me to say, “I couldn’t agree more,” and then suggested I may be losing whatever friends I had at Berkshire eSupply. Perhaps this article will alleviate that a bit as I believe eSupply has some excellent growth prospects, including one potential home run. So, let’s explore those alternatives now.
4 Growth Ideas for Berkshire eSupply
1. For distributors, broaden the company’s focus from ecommerce to more complex needs.
While Berkshire eSupply already provides products for distributors to sell through all channels – not just on their websites – the company focuses too much on ecommerce. In a 2020 interview with Industrial Distribution, CEO John Beaudoin said, “Technology is the equalizer, and the people at eSupply really create the moat.”
We disagree. First, it’s not credible that providing digital technology to independent distributors will make them competitive in ecommerce with Amazon, Grainger, MSC and other behemoths who have developed formidable skills and momentum over the past 25 years. Second, that’s not where independent distributors should build moats, in our opinion.
We have written extensively about how distributors need to specialize and add complex solutions to their value propositions. Simple products and simple needs are increasingly migrating to marketplaces and competing against them via ecommerce is getting more difficult all the time.1 However, marketplaces like to avoid variable costs, and that means they rarely provide value-added activities that require people to perform.
That is a lot of white space where distributors can differentiate, and companies like Berkshire eSupply can help. The company already provides some of these – such as industrial vending services. Why not work with its distributors to find out if there are other services they can develop together, such as rentals, equipment repair, design, customer parts fabrication, technical training, certifications and more?
Some industrial distributors do a fantastic job adding value in ways marketplaces do not – and likely never will. Berkshire eSupply could help its distributor partners offer customers even more products and services they cannot get from marketplaces. Differentiation is key and adding value with more complex solutions is how you build a great moat against companies that thrive on scale and standardization.
2. Sell on marketplaces.
In part 2 in this series, we quoted Digital Commerce 360, which claims that “online marketplaces accounted for nearly two-thirds — 62.5% — of global ecommerce in 2020, up from 60.1% the year before” and that “nearly 40% of business buyers make at least 26% of all corporate purchases on Amazon Business.”
If, like eSupply, your current value proposition is to provide a wide array of SKUs for fast fulfillment, you are set up to be a great third-party seller on a variety of marketplaces, ranging from Amazon Business to Zoro.
Berkshire eSupply may be reluctant to sell on marketplaces because its entire history and value proposition have been focused on supporting independent distributors. The problem is that business buyers are flocking to marketplaces when they just need to place orders for a wide variety of basic needs.
Business buyers are not flocking to local distributors to make these purchases. So, while we recognize that the company would have to manage this channel conflict carefully, we believe eSupply should sell on marketplaces for the same reason Willie Sutton robbed banks: “That’s where the money is.”
3. Build its own marketplace
Many large distributors are considering building their own marketplaces. With its resources, Berkshire eSupply should carefully evaluate this alternative if it has not. Two million SKUs is a great head start at reaching a critical mass of assortment if the company sticks to its current product niches. Simply by adding the entire range of SKUs offered by its existing suppliers (and having those suppliers do the fulfillment), eSupply could probably double or triple its assortment in short order.
This would also give the company the opportunity to take its upside-down marketplace model and turn it right side up. Instead of selling its products through the websites of many small distributors, it could encourage those distributors to sell their products through a new eSupply marketplace.
While there are many B2B marketplaces, very few specialize in the kinds of industrial products that eSupply carries. For example, Amazon Business carries millions of commercial MRO items for restaurants, office buildings, multifamily residences, etc., but a quick look at its industrial supplies assortment reveals it sells not one drill press or milling machine.
We believe that eSupply is well-positioned to develop and launch a more industrial-focused marketplace that would be differentiated from competitors while providing a selling platform for its current distributor customers. If eSupply executed this initiative effectively, those independent distributors would probably sell more through the Berkshire eSupply marketplace than through their websites.
4. Launch a joint venture with Varis
In September, we wrote about how Office Depot had split into two public companies. The retail stores retained the “Office Depot” brand, and the rest of the company is now known as The ODP Corporation. ODP includes its contract sales channel and a newly formed B2B digital platform technology business, which will be named Varis. Varis and ODP hired a dozen former Amazon Business executives, including Prentis Wilson and Terry Leeper. Wilson was the VP, GM who led the launch of Amazon Business and Leeper was the division’s CTO.
We applaud ODP’s vision and boldness in seeing where the future of B2B sales is going and in hiring so many Amazon Business executives. After all, any number of distributors could have pursued this team, but ODP pulled off quite a coup by bringing them on board to build its marketplace.
However, one of the most common and critical mistakes we see executives make when they switch companies is to believe that the keys to success in their previous jobs are the keys to success in their new jobs. In the case of Varis, we think it’s likely that when Prentis brings the band back together again, they’re going to fall back on their greatest hit and try to build a direct rival to Amazon Business.
That would be a mistake. Amazon Business is now a formidable B2B supplier, with annual revenues likely exceeding $30 billion. It’s not just a website for buying supplies; the company says, “Amazon Business is a purchasing solution…helping organizations like yours reshape buying and move their businesses forward.”
The company has some of the world’s most sophisticated procurement solutions:
Launched in the US in 2015 and now live in 9 countries, Amazon Business serves 55 Fortune 100 companies, 80% of the biggest U.S. healthcare and educational systems, 40% of the top 100 US local governments, 80% of all cities in India, 60K+ government and educational organizations in Europe, and 90% of Japanese universities (Source: Amazon Job Posting).
Amazon Business has incredible momentum. What it does not have is a focus or any real strengths in serving the industrial market. While we understand that ODP’s heritage is in commercial markets similar to those pursued by Amazon Business, we believe that trying to build a direct competitor at this point would be very difficult. Indeed, any “copycat” version of Amazon Business is very likely to be inferior to the genuine article.
However, a partnership between Varis and Berkshire eSupply would enable the fast launch of an industrial marketplace with millions of SKUs. Not only would the marketplace have eSupply’s industrial SKUs, but its manufacturing customers also consume the office, breakroom, printer and other supplies ODP already carries.
Great Alternatives, Tough Decisions
We believe Berkshire eSupply has some attractive growth alternatives it can pursue. However, all these choices will create conflict with its current customers to one degree or another. Fear of such consequences often causes companies to stick with existing strategies, no matter how limited and flawed.
It’s likely that some combination of these alternatives represents the right direction for eSupply. In decades of leading strategic planning exercises for distributors, we’ve learned that the best strategies are rarely clean and elegant. They’re usually a little messy – even if you are very focused, you need some degrees of freedom around your strategic initiatives to maximize the return on your investments and efforts.
By comparison, we believe Varis actually has fewer good strategic alternatives than eSupply. The temptation to build a new (and doomed to be inferior) version of Amazon Business must be overwhelming for the team that built the original. They may believe they can come up with advantages that will truly differentiate Varis even if they pursue the same product verticals and customer segments.
That’s extremely unlikely. Amazon is the most sophisticated, well-capitalized, large-scale marketplace operator in the world. If Varis goes head-to-head with Amazon Business, that will be an ego-driven decision. Better to differentiate on something fundamental, like pursuing a different market – industrial, instead of commercial.
Berkshire eSupply and Varis are very different companies facing very different problems. There is an intersection between their needs, however, that we believe calls for a solution that would allow the whole to be greater than the sum of the parts.
It will be interesting to see which tough choices these companies make – individually or together.
1 For an in-depth discussion of how to compete against marketplaces, see the webinar we produced with the NAW called, The NAW Handbook for Disruption: An Integrated Strategy for Distributors.