E-commerce in wholesale distribution is changing the industry including the way business is done and the competitors of tomorrow. In this final installment of our three-part series, we discuss Fourth and Fifth Stage distributor e-commerce firms and their lead in the online space.
Fourth Stage e-commerce firms are those who have between 25 percent and 50 percent of total revenues online. Across the distribution landscape, they account for less than 6 percent of all firms. Typically, these firms favor larger distribution entities including those with revenues of $250 million and above, however, there are often specialty firms within this group who are newer “E” firms starting within the last decade or so.
Fourth Stage firms have a competitive technology suite that allows them to compete with the best in class online competitors. Their technology includes:
Customers can interact, online, for the majority of their business needs hence a high preponderance of online sales. Fourth Stage firms exhibit organic growth in their online sales as their technology gives a competitive, reliable and consistent shopping experience. Many distribution firms, at earlier stages of online growth, don’t have a full technology suite for e-commerce and their online sales are in slow decline. The upshot of our research for distribution firms is that if the firm does not have a full and current technology platform, they will likely lose online sales to firms with up-to-date software.
Fourth Stage firms also have begun their cultural transformation to a digital firm. These firms have developed a marketing presence of reasonable sophistication that has, among others, product managers, digital asset manager(s), digital analytics specialists, social media marketers, etc. They have often restructured their sales forces to recognize the use of online technology and are developing new models of sales that recognize the need to move beyond the route or branch-based sellers of yesteryear.
Fourth Stage firms also have begun the painful, yet necessary rework of the branch footprint. Branches are decreased to favor larger, regional, warehouses that can match the current logistics demands of the customer; often 24-hour next day at 95 percent or higher fill-rates.
The cultural changes within the Fourth Stage firm can often become barriers to growth. The heavily populated positions of yesteryear stature including branch managers and branch-based sellers are difficult for many distributor executives to remove. The overriding logic, however, is that the online customer is self-serve, they have limited need of traditional branch based, commodity compensated, personnel. Instead, they value the latest in technology that makes their interaction easier, less costly, and less error prone. The personal sale influence, of value, is often related to a specialization in product or process.
Many Fourth Stage firms don’t sustain their e-commerce growth, largely because of an inability to transform, culturally, to a new understanding of their business. They view e-commerce as a transaction engine and not a comprehensive change in the way business is consummated. We call this inability to change the culture a Digital Washout and it is the cause of some two-thirds of all e-commerce failures.
Fifth Stage and platforms
Fifth-Stage e-commerce firms, typically, have more than 50 percent of their annual sales online and make up 2 percent of all distribution entities. These firms can be both existing distributors who have passed through the Fourth Stage, but also include start-ups unique to the distribution space. Grainger is the online distribution firm most well known in this stage with more than half of its sales online and projections for 80 percent of its revenues online in a few years. A Fifth Stage start up is Sustainable Supply. The Colorado headquarters firm (SustainableSupply.com), is known for its “green” philosophy along with excellent product content, concentration on parts, and quick delivery using manufacturer drop ships as much as possible.
One of the distinguishing traits of Fifth Stage firms is their use of platforms. A platform is an online segment based business that differs from the full-service platform of the main business. Grainger, at last count, has a handful of “platforms” including Gamut and Zoro Tool. For instance, Zoro Tool appeals to the smaller buyer of industrial/MRO supplies with limited budgets and limited need of supply chain services. Platforms are not necessarily totally new business entities in that they use existing e-commerce technology and logistics for their business. However, they appeal to different customer needs (segments) in the way their online experience and supporting business policies are pinpointed. The use of platform strategies will grow in the online space and they will come at the expense of the full-service distribution firm. A parallel example of platform success can be found in the supermarket space where full-service generalist firms have to compete with new platforms such as Whole Foods, Aldi, PeaPod LLC and others.
The use of platforms will expand in unique ways, some predictable and some yet to be discovered. We believe there will be significant growth in low-cost (transactional) platforms that strip out the redundant service costs and flow low-price/acceptable quality commodities through the channel. There will also be room for high-value platforms that offer a custom/high-touch experience excepting that the “touch” is largely digital. To develop platforms, the entity must have well-thought out and developed segment based logic of the existing industry; the overriding rationale is to find gaps where existing businesses are under-served and often over-charged for their loyalty. Most platform businesses offer reduced pricing over full-service brick and mortar models. Where there is no price advantage, the level of service for a particular B2B demographic takes significant hassle out of existing supply relationships. We typically find where platform businesses have a history and backing of successful strategic marketing over more traditional wholesale functions of sales or operations. Platform businesses also have deep pockets to fund the need for online technology differentiation and spending in online media to attract new customers. They are typically financed from existing operations of a large firm, venture capital, or Private Equity with experience in a specific vertical market.
Stages and industry future
E-commerce in B2B markets is a growth model with a predicted CAGR of 7 to 8 percent. This is some three to four times the existing growth rate of most distribution verticals. For durable goods products through distribution, we estimate that overall 15 percent are sold online; global demand of all B2B goods online is currently at 11 percent of all goods sold. We forecast that the conversion rate of goods sold online will accelerate in coming years as millennials show a strong preference to purchase online. Recent surveys have millennial industrial buyers moving 30 percent of their purchases online compared to 16 percent of baby-boomers. The forecast, if the research trend plays out, is that traditional distributors will decrease their share of the overall channel by some 32 percent in coming years (55 percent to 37 percent). The implication for existing full-service distributors who are first, second, and third stage is clear; they must engage technology and change their firms post-haste if they want to participate in the move of the supply chain toward digitalization.