Having grown exponentially over the last century, the massive market for business goods is finally experiencing disruption.
Leading the way is Amazon’s e-commerce platform, but there is also a wave of marketplace startups making headway in transforming B2B distribution. The landscape is wide and there are many points of attack. Given the $8 market size for B2B distribution, these opportunities certainly look like the most lucrative space to build a startup.
A Growing Opportunity
Companies like Grainger and Reliance Steel have long fulfilled the market need for the distribution of business goods, such as industrial parts, medical supplies, metals, and tools. These distributors buy their inventory from the manufacturers and resell the merchandise to the end customers, along with some well-developed value-added services (VAS).
For years, established distributors operated their businesses, some rising to become multibillion-dollar market leaders with others continuing as mom-and-pop stores that serve their local geographies. All of this has left the majority of these verticals with high levels of fragmentation.
Also laying the groundwork for imminent disruption was the kind of products these companies sold – they’re mostly commoditized. A nail from from Peter is as good as a nail from Paul and the cheapest one is typically the one that gets bought, as long as the quality holds constant.
This commoditization and fragmentation of the distribution world has left it incredibly vulnerable to disruption, particularly due to the lack of serious innovation by the market leaders. The market was primed for a scalable entity that provided transparent, competitive pricing and increased convenience.
That’s where Amazon Business made its entry, as well as a heap of startups, all looking to carve out their own chunk of a massive market in need of modernizing and new efficiencies.
The international landscape for companies moving to change the way businesses buy their wares and services is jam-packed with startups innovating in a number of verticals.
In particular, India and China have a standout amount of innovators, topping the list across most of the verticals for number of digital business-facing marketplaces.
By contrast, the US market is more sparse, with only a few companies operating in each of the major verticals.
The largest players are Amazon and Alibaba, of course, which have operated in the B2B space for less than a decade. Decades-old incumbents are conspicuously absent because they all lack marketplace strategies, either due to ignorance of the sea change coming their way or a stubborn refusal to adapt to the shifting landscape.
These attitudes are already delivering poor outcomes for a number of top distributors. For example, Grainger. Since 2016, the company has lost some 25% of its spot purchase revenue, which is the segment of its sales that is most commoditized. As a result, it missed its quarterly expectations twice so far in 2017. Its stock has plummeted more than a quarter since that first bad report.
A Swell of Innovation
The question isn’t when or if B2B distribution will get disrupted. It’s happening and it’s happening right now.
The question is who will take the lead in the sweeping changes? Will it be the emergent startups, established market leaders, or massive tech companies moving into a vulnerable market?
European and Asian startups are outpacing American ones in the race to disrupt and define the future of B2B disruption. In the US, Amazon is increasingly the leader for introducing efficiency, convenience, and savings to business customers, which is driving more and more players to join its B2B marketplace.
If Amazon is left to dominate the market uncontested, numerous firms will experience heavy losses, forcing layoffs and shutdowns over the next five to ten years. New innovations typically borne out of a batch of startups competing for customers and market share won’t occur and take hold.
How did this situation come to pass?
Perhaps there’s some residual shell shock from the dotcom era, in which established distributors made investments in a number of B2B marketplaces that mostly went belly-up.
However, the circumstances are incredibly different today than they were 20 years ago. Internet speed and access has vastly improved, buying habits are increasingly shifting online, and purchasing managers demand more transparency and convenience when making purchases.
Many of these changes were driven by Amazon itself, who is now reaping what it sowed.
To anyone looking to make gains in a largely greenfield opportunity, building a marketplace for buying and selling business goods looks to be one of the ripest chances out there.