Amazon Expands Into Industrial Supplies
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the internet space, one of the most fearsome competitors has to be Amazon.com (NASDAQ: AMZN). Just ask book publishing companies. Even Apple has to be aware of the company. But now Amazon has its sights set on another sector which it hopes to dominate...the $160 billion market for industrial supplies in the United States.
Some of the leading companies in this sector include MSC Industrial Direct (NYSE: MSM), W.W. Grainger (NYSE: GWW) and Fastenal Company (NASDAQ: FAST). These firms provide everything from electronics to toilet paper to the likes of Caterpillar, Boeing and General Electric. So far, these companies seem unperturbed by the debut last month of Amazon Supply, a website with more than 50,000 products targeted at the industrial market.
However, the stockholders in these firms are clearly fearful of Amazon's entry into this sector. Since Amazon Supply launched on April 23, shares in these companies have fallen by roughly 15 percent. And they have every right to be wary of Amazon with its reputation as a retailer that disrupts traditional sales patterns by undercutting competitors on price.
So what does Amazon see in this market? It believes the $160 billion sector is ripe for a low-cost competitor like Amazon. Online sales of industrial supplies are the fastest growing segment of the industry, growing twice as fast as sales through traditional suppliers. Internet sales now account for 30 percent sales at both Grainger and MSC Industrial. This move toward online purchases comes as a result of years of industrial companies slashing their purchasing departments.
In addition, Amazon knows that gross margins in the sector are currently very fat, running at about 50 percent. So even with lower prices, Amazon believes there is a lot of profit to be made from the sector.
The incumbents in this sector state that Amazon does not understand how the sector works. MSC Industrial Direct say that their industrial customers still value relationships, particularly when it comes to technical support and product availability. That may be true. At Grainger, for example, only 1 percent of its customers purchase exclusively online. And MSC notes that Amazon's new-found competitors already offer big discounts for large orders.
Amazon's counterargument is that it is also offering a customer call center where people stand ready to answer questions about items sold on Amazon Supply. A question that industrial firms may have though is how many people has Amazon hired in this capacity and what is their level of expertise. Grainger, for instance, has hired 500 technical sales people annually for the past few years.
What should investors in Grainger, Fastenal and MSC think about Amazon Supply? They have already voiced their opinion by leaving in droves the past few weeks. But they may have left in haste...
Amazon has been selling industrial products on their website for years. The introduction of Amazon Supply is merely Amazon's attempt to appeal to industrial customers in a more targeted way with a bit of an upgrade in customer service added. In other words, a rebranding. Amazon Supply may grab a larger share of the market, but is unlikely to gain a major share and truly challenge the leading companies in the sector.
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