To understand how vulnerable a distribution vertical is to disruption, look at the relationship between the product category’s complexity and the ability for the distributor to deliver that product using common small-package carriers.
Knowing this, distributors can focus on adding value that cannot easily be hijacked by traditionally B2C companies.
It’s no secret that Amazon Business busted onto the B2B scene in a big way. But outside entrants from other traditionally B2C companies like Walmart, eBay, Alibaba and even Google Shopping have crept onto the industrial distribution landscape. Together, these well-capitalized and sophisticated companies seem to be severely threatening some distributors’ markets – while leaving others untouched.
Why? What makes some distribution verticals more at risk of disruption than others?
In a recent episode of our weekly live show, Wholesale Change, we discussed a list of factors that affect distributors’ exposure to disruption.
What Makes Distributors More Exposed?
The strengths of disruptors like Amazon or Walmart lie in their ability to quickly ship and fulfill orders using ecommerce platforms that are accessible and familiar to customers. Here are other factors that increase vulnerability:
How easily a small package carrier can deliver the product
Imagine shipping a case of Post-It Notes vs. shipping drywall and insulation. The more easily the product is picked, packed and shipped, the more vulnerable that category is to disruption. After all, it’s more difficult for outside players to disrupt large orders that require flatbed trucks or jobsite forklifts.
Complexity of product application
Picture a technical part like a condenser fan motor: Most end-users aren’t going to be able to select, let alone install such a complex product themselves. They’ll call a contractor who may need technical support to determine which motor to buy. The more complex the product or application, the stronger the distributor’s position.
Situations in which this is more likely include:
- Intermediaries such as contractors with sophisticated skills, who are less likely to use disruptors
- When a product is part of an end product
- Whether the product is specified on a blueprint
- A buyer who may need service from an expert distributor
The Strongest and Weakest Distribution Verticals
Picture a distributor servicing a vending machine in a customer’s plant. It’s a complex application of a service, not to mention, it’s expensive, considering the equipment and the stock. Compare this with the simplicity of picking, packing and shipping office supplies to deliver using a common carrier.
Disruptors would have to expend many more resources to compete with distributors servicing vending machines than the distributor shipping office supplies. Here, we sort through the relationships between complexity and shipping to brainstorm the most and least vulnerable verticals.
Small packaging and low complexity
Simple small verticals are the most vulnerable to disruptors.
Recall that office supply companies like Staples were soaring before Amazon swooped in. Even though most suppliers had their own delivery fleets as part of their value proposition, there just isn’t much complexity with paper and pens and well-capitalized disruptors can just as easily use small package carriers to destabilize those distributors.
Variable packaging and mid complexity
Pay attention to verticals that vary in shipping and complexity as these leave room to be easily disrupted – or fiercely protected depending on the distributor.
Verticals like fasteners are a great example of shifting complexity and shipping. Fasteners can be used in both construction or industrial contexts though the product itself is simple. Few end-users are confident in their ability to shop for fasteners on their own. And although fasteners are small enough to be shipped by common carriers, they’re the type of product that often require scheduled deliveries to job sites. It’s a vulnerable vertical with a lot of potential to build a more protective moat with consulting services and specialized shipping.
Small packaging and high complexity
Compact but complex verticals can protect themselves from disruptors with expert service.
Consider electrical components for design.
An entire industry of electrical engineers works to choose the right electrical components for prototyping. Highly sophisticated buyers like this are usually seeking an equally sophisticated salesperson who understands their needs. So even if the component parts buyers are looking for product that is available from online disruptors, distributors can protect their business by ensuring they have a highly-specialized team integrated with and adding value to their customers’ work.
Large packaging and low complexity
If the size or scale of a vertical cannot be delivered using small package carriers, a distributor with its own delivery fleet for heavy or large orders won’t be easily disrupted.
For example, lumber is often ordered separately from other building materials. While it may not present much complexity in the market, the cost of equipment to transport hefty lumber shipments are a strong barrier to entry for disruptors.
Large packaging and high complexity
A vertical with size and scale that requires complex application is at least risk of disruption.
For instance, fulfilling large specialty construction orders for concrete, chemicals, drywall and insulation is a complex operation. The expertise required on the part of the distributor to execute these kinds of orders is the most challenging for generic disruptors to emulate.
No One is Immune to Disruption
If you’re wondering whether a well-funded major player like Amazon could really break into even your bulkiest and most complex vertical, the answer is probably yes – if they wanted to. The truth is, many of your customers are likely already making some purchases with disruptors like Amazon or Walmart. That’s why it’s critical for distributors to not only invest in excellent operations, but also in innovation.
The reality is, by moving toward complexity in technology and service, innovators can not only protect their business from disruption, but strengthen it as things continue to change.
If you sell office supplies, can you offer a printer replenishment service? If your customers are electrical engineers, can you provide a professional consulting service? How can your sales reps play a consulting role that complements strong digital services? The further distributors move away from a commoditization mindset and toward specialization, the stronger and more protected they will be.
Watch our episode on the vulnerability of distribution verticals: