Amazon has had a huge impact on many industries. Starting with books they changed the way people found and purchased books and other media. They were so successful at this that their largest competitor, Borders, could not adjust fast enough and paid the ultimate price. Amazon’s ideas and way of doing things was so unique by the time traditional book sellers knew what was happening it was too late. They are also applying this same, out of the box, thinking to other areas of their business to great success.
Amazon also figured out that if they needed a massive, scalable, resilient, distributed, fast and cost effective IT infrastructure then other people probably did too. Or maybe other people just needed a small bit of that infrastructure for a short period of time but in aggregate it would be a huge demand. So they built an automated system to handle their needs and, to the delight of their customers, made it available to anyone, anytime, any size for any period of time and you just pay for what you use when you use it. Amazon Web Services (AWS) helped to change the way companies and individuals build and buy technology.
While Amazon was selling millions and millions of books, DVDs and other products that they bought and resold they also realized that the infrastructure they built and dedication to service would be valuable to others as well. They came to the realization that they could help their competitors sell the same products they were selling and both parties would be happy. Amazon launched two services: Amazon Market Place and Fulfilment By Amazon (FBA).
With Amazon marketplace anyone could sell their own product on Amazon.com even if Amazon sold it themselves. The Seller would get the order and ship the product directly to the consumers and Amazon would collect the money, take a fee and give the rest to the seller. The competitor would sell more product and would need no logistic infrastructure to support it and Amazon got a piece of the action on every sale.
With FBA, the seller would send their products to one(or more) of Amazon’s warehouses and Amazon would hold the inventory but the seller would maintain ownership. Once the product sold on Amazon would pick, pack, and ship the item to the consumer, usually the same day. The shipping method was chosen by the consumer but the item was shipped using Amazon’s shipping rates and packaging. For this service Amazon would take a commission and a small charge for pick and pack (still cheaper than most could do it themselves). As an added bonus, these FBA products in stock in Amazon’s warehouse would qualify for prime shipping. This means that the consumer, with an Amazon Prime membership, could choose to have the product delivered in two days for free! No minimum purchase, almost no limits on size or weight. Amazon does this all at no extra cost to the seller. Even a 100lbs generator will ship two days free if it is an FBA product.
Like everything else Amazon does they take inventory management very seriously and they have built a very sophisticated and efficient system. They are so confident in this system that they guarantee the product in their warehouse. If they lose it or damage it they will buy it. So inventory shrinkage is no longer an issue for sellers.
So how does this all affect the structured cabling industry? Well, Amazon already sells many different structured cabling products. Just search for Corning, Belden, Commscope, Ortronics, Panduit and you will see thousands of results. So it is not a matter of whether structured cabling product will be available on Amazon but it is more a question of when will the pricing sort itself out?
Most prices on Amazon for these products are close to “List Price”, if you believe that such a thing actually exists. My point is that the price is generally higher than what these products are typically being sold for through traditional channels. At this point in time this is to be expected. Currently it is mostly resellers reselling again on Amazon. These resellers are purchasing at a discount from the manufacturers with the expectation of being able to sell with a reasonable margin to make a profit when selling directly to the consumer.
To get into the online e-commerce market these resellers are listing the products on Amazon and are seeing some success. The success however comes in small bits. The consumers that are purchasing these products are not the typical customer for structured cabling products. They are usually end users that need a couple of pieces and parts to finish a job or to do a small MAC. They are unaware of better pricing and they just want it quickly at a reasonable price from someone they trust….Amazon fits the bill. They pay with a credit card and they get it two days later (free shipping) and they finish their small job.
The traditional customers for these product, cabling installers typically go to their local distributor such as Anixter, Graybar, CSC and Accu-Tech. They know the people there, they can ask questions, they can get a “project” price on top of their everyday discount that is probably already cheaper than the Amazon price. They can order with a purchase order, and pay thirty days later. If need be they can drive to the warehouse and pick it up the same day.
So it would appear that the manufacturers choose to use a distribution channel strategy. This allows them to get the products close to the consumer, it transfers the financial burden of carrying inventory to the distributors, it means they do not have to set up, and run locations around the country (or world) and it means that there is someone out there selling their products for them…or does it?
Most manufacturers in this industry that I know of all have an outside sales force in local major markets to call on local customers. These reps call on the distributors, the installers, the consultants/engineers, and the end users of large accounts. They are in the business of demand creation. They have to be doing their own demand creation because the distributor has too many manufacturers to support. So many in fact they typically choose only a few brands to “lead” with and usually only one per category of product. So, if the manufacturer relies on the distributor to sell their products they leave their fate in someone elses hands. A strategy I am sure no shareholder would be happy with.
Even if you, as a manufacturer, have worked for years and built the relationships with the distributor to be the “lead” brand your success makes you a target to be aimed at by your big competitors. What is even worse is that the small competitors may just decide to aim at a completely different target. This is where Amazon comes in.
The relationships that the major manufacturers have with the major distributors is, for the most part, very strong. These relationships are long and from the top down. This gives some of the smaller, or second tier manufacturers incentive to find an alternative.
If you take a second tier manufacturer (in structured cabling anyway) such as a Hubbell or HellermannTyton they have the clout behind them and a fairly complete product line both copper and fiber. They do not get the same attention from the major distributors as Corning/Commscope/Panduit/Belden get. They are very rarely the “lead” brand for any major tier one distributor’s sales people. As a result, all the demand creation at the end user or consultant level needs to be done by the Hubbell sales team.
So, what could Hubbell do? If they are not getting mind share at the distributor and the distributor has relatively little stock compared to the Corning/Commscopes of the industry and all virtually all demand creation needs to be done by direct Hubbell employees, what is the advantage of using a distributor? Well, they would take the accounts receivable risk and they would provide local access to their products so that consumers, that Hubbell finds, can buy it locally but this comes at a cost. The cost of doing business with distribution. The marketing fees, the inventory turns/returns policies, not to mention the markup that the distributor adds on to their product for all the work that Hubbell did.
What if Hubbell decided to sell direct? After all, it appears that they are doing most of the work anyways to have the relationship with the consumer. Why not take the order too? The answer of course is where will the product come from? Right from Hubbell? Like most manufacturers, I think they just want to manufacture, they do not want to inventory and ship small orders. Its all about scale and volume so shipping individual orders is not very attractive. They are a large company though, perhaps they could afford to keep an inventory of the popular products. And why not send it to Amazon? They have warehouses around the world. They don’t even have to ask Amazon. They just sign up and pay the $40 a month to be an FBA customer and ship to the warehouses Amazon tells them to. In fact, because there are already Hubbell products selling on Amazon, Amazon will tell them how many of each item to send to which warehouse to get it as close to the demand as possible.
Hubbell can sell these products on Amazon at a much higher price than they were selling to distribution at and they now have stock around the country. So, when Hubbell’s sales force sells products now they can take the order direct and have Amazon ship it for them today. Hubbell pays a shipping fee and a small handling fee but no commission. This is more than made up for the extra margin they get by eliminating the distributor.
Now, with Hubbell making more margin on the same products with the same workforce (or less considering they no longer have to call on the distributor) they can invest the extra earnings into more, or better trained, sales force. Generate more sales, keep more stock, sell more.. and so it goes. And, Amazon may very well not even have noticed other than seeing increased sales.
Now of course there are some challenges. The largest of which is mindset. A manufacturer like Hubbell needs to have the willingness to take the risk of doing something this bold. It is even more difficult for tier one manufacturers. Take for instance Corning and Anixter. This relationship is very, very strong. It is hard to imagine Corning deciding to add a new distribution channel let alone selling direct through Amazon. But they may not have a choice some day. Once one of the players has success then others will follow. The biggest barrier to entry is mostly mental and the ability to fund the stock for a period of time.
Payment terms may also be an issue but Amazon seems to looking after that too. Most of distributors largest customers have 30 day payment terms, allowing the installer to get the product and get the job done before having to pay for the products (ideally anyway). Amazon now offers a line of credit for it’s Amazon Industrial customers.
So where does this leave the manufacturers and distributors? In the end, for the most part I think the manufacturers will end up making some decisions and changes that will disrupt decades of relationships and business models. However, in the end the manufacturers do something that Amazon can not, or at least does not seem interested in doing.
The distributors on the other hand may not be so lucky. The first place North American distributors should look is to their operations or competitors in the rest of the world. It seems to me that just about everything in Europe is more expensive that in North America…..except cabling products. Brand seems to be much less important and the relationship that the distributor has with the installer or end user seems to be much less important. Price is the true deciding factor.
Perhaps the distributors in NA can hold on to this advantage and continue to provide better service and demand a higher price. But what if that small second tier manufacturer breaks through on Amazon and starts taking market share from the tier one player? How long will the tier one players be able to support this less efficient channel?
The one advantage that the distributors has over Amazon is cutting cable. Amazon is not setup to cut cable to customer specific lengths. However, at one time they were also not setup to design and manufacture an electronic book either. If this business shows them enough potential they will make it happen and they will do it in the Amazon fashion and it will be remarkable. Here is where I think that a distributor who is willing to look ahead and see what is coming and who is willing to rebuild their business model (or some completely new player) has an opportunity.
What if someone like Anixter approached Amazon now and offered to handle that side of the business for them? To be their cable inventory/cutting partner? Be ahead of all the other distributors and instead of fighting Amazon became a trusted friend? Maybe they offer to put all the “box” products that are simply sitting on a shelf waiting to be picked and shipped into the Amazon warehouses because they can pick and ship better than anyone and they take all the cable and other products that need special handling? The Anixter sales force could still provide the relationship and sell either specific products or perhaps they can get an affiliate fee for selling any Amazon product.
Who knows? It might work.
Geoff Laycock
1-29-2013
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