At the ProSales Dealer Breakfast at the International Builders Show in Las Vegas in January, attendees were treated to an eye-opening presentation by Robert Rourke, head of L.E.K. Consulting’s Chicago office. While the majority of his talk was an overview of the trends affecting the LBM industry, he brought up some salient points about a new competitor to the independent dealer: Amazon Supply, a new service from amazon.com that sells a variety of industrial and office goods, including a fairly large selection of building supplies. We dug deeper into this subject with Rourke following the show to find out not if, but how this will affect the independent dealer.
Why should independent dealers be worried about the advent of Amazon Supply?
Rourke: Amazon Supply is a relatively new focus for Amazon Corporate and it is focused on the B2B market. Amazon has proven to be a formidable competitor in most of the markets it has pursued. Amazon CEO Jeff Bezos has repeatedly referred to his view on market entry and competitive disruption as “your profit is my opportunity.” Independent dealers will likely have a hard time matching the supply chain efficiency, purchasing power, inventory turns—and ultimately pricing—of the categories that overlap between Amazon Supply and the products sold by independent dealers.
Additionally, as many know, Amazon has invested heavily in local distributions centers in many states across the U.S. These DCs have, in many cases, forced Amazon to pay state sales tax (which in essence reduces their historical competitive tax-advantaged position). We believe they would not make this move lightly. In fact, these DCs can reach nearly 70% of the US GDP with same-day shipping. Amazon has not deployed same-day shipping broadly yet, but independent dealers need to keep a careful eye on this future possibility as it could reduce the advantage LBMs realize on the dimension of immediacy of supply.
What items are Amazon Supply’s stock in trade that could directly impact independent LBM dealers?
Rourke: Amazon is relentless in improving the customer service experience. When you look at Amazon’s scores on customer satisfaction, as measured by things like Net Promoter Score (NPS), it is as strong and formidable as any consumer-facing company in just about any category. It performs at levels similar to Apple. That level of performance has been honed in the consumer world. Replicating it in B2B will not be the same—nor will it be easy. However, it is a core competency and one which is vigorously pursued by the company. We have to expect it will become a focus area—and eventually a core competency—in Amazon Supply
What types of items will Amazon Supply likely NEVER sell?
Rourke: The fundamental business model of Amazon favors products with a high gross-margin-to-weight ratio. In their consumer business, they sell products that deviate from this rule—so one cannot be certain they will not sell products of this type over time in the B2B business. However, if you look at products that they currently sell on Amazon Supply, they would appear to be consistent with the gross margin/weight rule: Lighting, plumbing fixtures, tools, etc., are prominently and deeply merchandised. There are some categories, therefore, which would appear unlikely to transact through Amazon Supply. For example, it’s unlikely they will sell building materials, (lumber, brick, wall board, concrete) as well as other categories which are handicapped by weight/shipping limitations (siding, roofing, paint, composites, etc.).
What is the biggest advantage that independent dealers have over Amazon Supply?
Rourke: Independent dealers have several advantages. First, is the immediacy of supply. When the contractor needs the product, the cost of not having it readily available is far greater than the potential savings from price-shopping. Second, the sales support. Most LBMs are in many ways one part distributor and one part project advisor. The advice in problem solving, product selection, installation techniques, etc., is not likely to be easily replicated by Amazon Supply. Service/returns are another area where LBMs are likely to continue to be advantaged. Finally, let’s not forget job-site delivery. The flow and timing to the job site is critical. As good as Amazon is at transportation and logistics, the ability to deliver to a site—that in many cases doesn't even have an address yet—within a narrow window specified by the contractor/builder should impede their value proposition to many jobs.
Is there any way a dealer can compete with Amazon Supply?
Rourke: Service, selection, breadth, competitive pricing have always been the hallmarks of LBMs and will continue to be relevant going forward. However, Amazon Supply is a new and formidable competitor. They will no doubt take share in some categories (like those mentioned above) and it will be difficult for the LBMs to compete for the business in these categories when the purchase is pre-planned and transactional.
To counter these situations, we have two recommendations. First, make sure to have an online offering. When your contractor customer is online and shopping across potential sources of supply, you do not want to miss the opportunity to sell to them. You don’t need to replicate Amazon Supply’s sophistication in merchandising and category management. But you cannot afford to not be available during this potential purchase moment. Secondly, develop customer-share-of-wallet/loyalty programs. By designing thoughtful programs which bundle your discounts to your customers as a function of total annual spend volume (or some other metrics), you reduce the incentive for the contractor to price-shop you on the expanding set of items which Amazon is offering.