Last updateWed, 25 Nov 2020 4pm

The Amazon Effect: Is Your Distribution Company at Risk?

In a VALVE Magazine article from January of 2018, we discussed the effect that digitization is expected to have on the distribution business. The necessity of adding and adapting to digital technology and warehouse execution systems to meet customer expectations is one challenge. It was the area most distributors recognized would require important investments this year and for the foreseeable future.

However, the biggest disruptor to industrial distribution is what is being called The Amazon Effect. But it isn’t just Amazon that is causing the disruption. There are many other internet competitors, like Alibaba, that are causing concern.

Some call Amazon Business a digital disruptor on steroids. Unlike traditional distributors who had to adapt to business in the 21st century by changing their business model from outside sales reps and faxed paper orders to online ordering, the entire Amazon platform was built in the digital space.

Built by and for the digital age, it offers many advantages including purchasing system integration and business-ready purchasing analytics. It also has hundreds of millions of products and purchasing approval workflow support. Amazon also has free two-day shipping and palette shipping for consolidated order delivery.

The industry will likely get a clearer picture of Amazon Business’s impact on distribution in 2018. But according to a survey by Modern Distribution Management, online competition includes larger competitors who can invest in technology, diving into the niche markets and disrupting pricing when they can’t meet their sales goals. This leads to price and margin erosion. This is in addition to competition from China, which is undercutting prices because government ownership creates a huge advantage.

But is distribution for the valve industry very different from most other industries? It doesn’t seem logical that oil and gas producers, utility operators, petrochemical processors and power producers, especially those in the nuclear industry, are going to entrust their operations with valves bought through Amazon. Where is the support? Who would help with specifications and design?

To consider the possibilities, we spoke with Frank Hurtte, founding partner of River Heights Consulting and a well-respected advisor to distributors through North America who said, “If you’re only a logistics distributor, Amazon could hurt you bad.”

Price and Service

According to Hurtte, distributors relying exclusively on their ability to move parts from their warehouse to the customer are at risk of an Amazon attack. Amazon has the capability to provide more selection and a nearly endless quantity of parts to the customer with similar delivery times. Further, thinking strictly from a logistics cost point of view, they have a more efficient warehouse operation than most distributors. This means certain threat to margins and possible implications on getting business.

And that has proven to be true. According to an article in The Wall Street Journal, the “largest industrial supplier in North America, W.W. Grainger Inc., with sales topping $10 billion annually, said it cut prices by up to 25% this summer [2017] after years of losing customers to cheaper online competitors.”

While there is virtually no way to compete with Amazon on price, the small distributors that still exist do so because they have special expertise. But the larger distributors can battle Amazon on price.

Distributors who provide extra value-adds are safer today. “Many distributors handle some of the inventory management for the customer,” said Hurtte. “They go in and count stuff and move stuff around. They can check valves, make sure they’re being properly stored, that sort of thing. Amazon can’t do that yet. They might be able to in the future, but they can’t do it now, not in the next 3 to 5 years.”

Another plus for distributors is that many of them will go into a facility and problem-solve. “Amazon is five to 10 years away from being able to do that,” said Hurtte. “Distributors who provide product selection advice, troubleshooting and other technical skills offer a package of values which exceed those of any automated online wholesaler, at least today.”

Another area in which local distributors now have an edge is in ordering. “All of these process companies use enterprise-wide systems or maintenance systems that order products as needed on a purchase order,” noted Hurtte. “They generally send that PO to the distributor who works around the customer’s paperwork. For the customer, it’s perfect. They don’t need to enter requirements into a system twice. Once it’s in theirs, it goes right to the partner distributor.” Currently Amazon can’t do that, but Hurtte predicts that, within a year they will have that capability and that one small barrier for Amazon will be broken down.

On the down side for distributors, Amazon has “Dash Buttons”. We use them all the time as consumers—a customer can order new razor blades, soap or anything else simply by pushing a button on an app. The supply arrives basically automatically from Amazon. Some larger industrial distributors have similar services, so the customer can automatically order new parts, but it is not something that smaller distributors offer. “That’s a service that they might suffer from,” said Hurtte.

Mergers & Acquisitions

According to Hurtte, many of the small- to medium-sized distribution companies, including those who sell valves, actuators and controls, have been absorbed by larger entities. Companies like Motion Industries and Applied Industrial Technologies and SunSource have been gobbling up smaller distributors for years.

These larger distributors are probably equipped to have the battle with Amazon on price and selection. However, all is not lost for the smaller distributor.

“They know more about the customers’ needs than the other people,” said Hurtte. “They provide much more than shipment—they provide knowledge and applications, acumen and advice. It will be a long time before Amazon can touch that.”

Hurtte stated that distributors who have integrated themselves into the customer’s process will continue to be safe from the Amazon Effect. “Those who help the customer solve bigger issues are safe for the long-term future. Amazon lacks the engineering and technical backups needed to make these things happen.”

In Conclusion

“You can quote me on this,” said Hurtte. “Amazon isn’t going to put anybody out of business in the next three years. Distributors who do not provide any extra values are at risk, but I don’t believe it will put anybody out of business. It may force some additional consolidation.”

Hurtte echoed the advice of economists from this report on VMA’s Leadership Forum; a recession is expected at the end of 2018 going into 2019. “But it’s not going to be a very bad one, so there won’t be enough turmoil in the marketplace to drive any change and Amazon can’t do much. I’m still betting on the distributor.”

This email address is being protected from spambots. You need JavaScript enabled to view it. is senior editor of VALVE Magazine.  

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