OW Amazon and Google in Wholesale Distribution

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AMAZON & GOOGLE INWHOLESALE DISTRIBUTIONOVERBLOWN HYPE OR GAMECHANGERS?

Distribution & Wholesale


2/12

2Copyright 2013 Oliver Wyman

Over the past fifteen years or so, the emergence of online

players like Amazon and Expedia has transformed many

B2C sectors, from books and music, to electronics and

travel. With US e-commerce sales of goods at some $210

BN+ in 2012 and Amazon alone accounting for $35 BN

sales in the US and over $60 BN worldwide, it is hard to

argue that Amazon does not now represent a formidable

competitor in those areas where it chooses to focus.

What then to make of Amazons entry into B2B Distribution

with AmazonSupply in April 2012, or Googles beta-test ofGoogle Shopping for Suppliers launched in January 2013?

To what extent do these represent early moves of

disruptive game-changers, or will they turn out to be

limited incursions in a set of complex sectors where local

presence, technical knowledge, and personal customer

relationships will always win?

By the time customers call you today,

they have now already done the majority

of the research.They want the easiest way to accomplish the

task Thats where the market is going.

We are trying to get ahead and create the

customer experience of the future. CEO, $BN DISTRIBUTION COMPANY


3/12

Copyright 2013 Oliver Wyman

In our discussions with more than 25 CEOs of Billion Dollar distributionbusinesses in recent months we have heard a broad range of views.

Around a third are skeptical that e-commerce will have a major impact on

their business: often because their product is too difficult for a new entrant

like Amazon to warehouse and ship, and sometimes because of value

added services that they feel cannot be provided except through a direct

local relationship. This view is reinforced in some cases by work their

businesses have done to provide online ordering platforms that have seen

limited uptake.

Other CEOs take a different view. In some cases they are already competing

head-to-head with AmazonSupply in certain categories. Many are keenly

aware of how customer behavior is changing in influencing sales. To quoteone: By the time customers call you today, they have now already done the

majority of the research. They want the easiest way to accomplish the task

thats where the market is going. We are trying to get ahead and create the

customer experience of the future. Within this group, of those CEOs

intending to build greater barriers to online competitors, about half feel

they are on the right path, while half are struggling.

Such concerns are underpinned by some interesting facts:

In B2C, in 2012, US sales that were influenced by online research, at

$1,200 BN, already account for around 6x the sales transacted online

In B2B, 45% of professional buyers have already purchased fromAmazonSupply. Additionally, 85% of buyers state they will always buy

a lower cost option online, despite loyalty to their current supplier

90% of younger procurement buyers (aged 1835) make B2B purchases

online, compared to only 29% of older procurement buyers (age 60

and over)

(See Exhibit 1)

It is also worth bearing in mind that Amazon in particular has a track record

of taking a long view in establishing a competitive position. In 1997 Jeff

Bezos stated, Its all about the long term We may make decisions and weigh

tradeoffs differently than some companies.More recently he was quoted assaying, Percentage margins are not one of the things we are seeking to

optimizeAmazons history of always seeking to have the most competitive

price in the market by applying advanced trading algorithms to real time

competitor price data is well known.

EXHIBIT 1: YOUNGERPROCUREMENT BUYERS THEFUTURE OF THE B2B CUSTOMERBASE ARE FAR MORE LIKELY TOUSE ONLINE PLATFORMS THANTHEIR OLDER COUNTERPARTS

WHAT WE HEAR AND SEE

Respondents by age making B2B

purchases online1

NOTES 1. 2013 State of B2B Procurement, Acquity Group

29%

45%

68%

90%

AGE 60+

AGE 4660

AGE 3645

AGE 1835


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EXHIBIT 2: SOME CATEGORIES ARE MORE IMMEDIATELY PRONE THAN OTHERS TO A NEW ONLINE ENTRANT

HYPE OR THREAT?

If you cut through the hype, we believe that there is a steady andinevitable online and multi-channel transformation underway. As with

most things in business, its pretty simple: it starts with customers and

their needs. Customers increasingly value quick, simple, effective ways

of interacting to get the products and services they need, as well as new

value-added services that were not possible previously. As one CEO put it,

Our customers have already been trained by Amazon [in B2C] on what good

looks like. Thats what we have to compete with.

We believe this multi-channel shift will eventually affect nearly every type

of product in B2B distribution. Some sectors though are likely to feel the

competitive impact much more quickly and acutely than others. Sectors

characterized by small, high value, low weight, easy to handle and shipSKUs that are readily specified and do not require specific physical services

to deliver, are much more amenable to an Amazon entry. Unsurprising then

that AmazonSupply has launched with an industrial parts offer a category

which meets all of the above criteria rather than, say, industrial chemicals,

which fails most of the above tests (see Exhibit 2).

Chemical Industrial parts

Intrinsic Shipability

Handling Requirements

Technical Guidance

Product Selection

Value-Added Services

Much lower value, heavy, bulky product Requiring local supply chain density

Often requires specialist equipment /handling / certification

Numerous products require technicalguidance and support

Typical customer buys a small numberof predictable products enabling local

SKU counts of 100s 1000s only

Diluting, blending, cleaning, etc. arewidespread and require physical presence

Not an obvious place to start

+ Typically high value, light, smaller product Easy to ship via common carrier

+ Straightforward

+ Many products easily bought tospecification

+ Customers can buy across many 1000sof SKUs

+ Real time availabi lity, tracking,inventory management, etc. can often

be executed remotely

Online platform & remote DCs well-

suited to meet many customer needs

Product-

driven

Customer

driven


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It would be a mistake, though, to think that the threat from AmazonSupplyor others is binary in nature. The question is not whether AmazonSupply

will be a threat, rather it is which customers, purchase occasions, and

categories will be attacked first. Consider the lesson from the mass merchant

retail clubs. In a number of categories Amazon already has a comparable or

broader range than the established club stores such as Costco. In addition,

Amazons Subscribe & Save service that delivers frequently purchased high

value items such as razor blades and diapers automatically every month or

so (unless the customer pro-actively updates or skips the order) is already

hollowing out shoppers baskets at the clubs and reducing trip frequency.

There is a ready read-across to non-core categories such as personal

protective equipment in industrial gas distribution or non-food items infood-service. While the core business may not be at threat, such adjacent

categories can often drive around 2030% of dollar gross margin. Thats a

lot to have to make up in other core and often lower margin categories.

Such customer unbundling also acts to undermine full service customer

relationships.

The key battle is one of consideration rate, i.e. for what percentage of

customers are you the first place they will go (whether physically or online)

when the customer thinks about purchasing a product in a specific category?

In B2C of course, Amazon has already comprehensively won the consideration

rate battle in many categories through its aggressively low prices, huge range,

consistent meeting of fulfillment promises and no quibble returns. So muchso that many customers now never check prices or range anywhere else.

As one looks ahead, compared to most traditional off-line distributors,

AmazonSupply by our reckoning starts with an SG&A cost advantage of some

20% or more to its scale and lack of local operations and field sales; as well as a

business model built on operating margins (currently


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Similarly, while AmazonSupply is still at an early stage of growth, one

can already see the beginning of a compelling range in those categories

where it has started to focus (see Exhibit 3). Finally, one needs to take into

account Amazons substantial investment in building ~10 distribution

centers per year since 2010 close to major cities. Our estimate is that by

2015 Amazon will be able to reach more than 50% of the US population

with same day delivery.

As one looks ahead, our view is that AmazonSupply, for one, will represent

a new predator in the competitive ecosystem for the majority of wholesaleand distribution product verticals, and that a new competitive equilibrium

will therefore evolve.

EXHIBIT 3: BUILDING A COMPELLING RANGE AMAZONSUPPLY HAS BEEN AGGRESSIVELY GROWING ITS PRODUCTSELECTION, DOUBLING ITS BREADTH IN JUST OVER A YEAR

NOTE: Product selection compared on September 12, 2013 for office products, September 24, 2013 for industrial parts

June 2 012 January 2013 July 2013 September 2013

Product selection for a few representative categories

Amazon MSC Grainger WB Mason

Abrasives 15K+ products 31K + products 9K+ products

Fasteners 39K+ products 55K + products 55K+ products

Hand tools 50K+ products 17K + products 38K+ products

Paper 9K+ products 1K+ products

Office furniture 5K+ products 3K+ products


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We have of course already roughly characterized two business models:the traditional distributor with local presence and fulfillment, field sales,

expert knowledge, and established relationships; and the online distributor

(e.g. AmazonSupply) with more centralized operations and fulfillment, and

no pretense to technical knowledge or field sales. A natural third model is

the omni-channel distributor: A model defined by enabling customers

to get the information they need and place orders across the web, phone,

mobile devices, and in person in a seamless and integrated way.

This omni-channel model is where a number of CEOs are already working

hard to take their businesses in the next two to three years. Our sense though

is that AmazonSupply is not the only new business model many will face.

Google Shopping for Suppliers is, currently in beta test form, essentially

an online catalog in three test categories, with detailed structured technical

data comparable across SKUs and vendors. The only current revenue model

is that vendors pay $1,000 to be verified and those that are verified appear

higher on the search rankings (although the fee is currently waived). The

customer concept is of course appealing: A truly comprehensive, fully up

to date product catalog that is as easy to search as Google.

Yet consider Googles core revenue stream: AdWords that suppliers bid for

to appear in paid rankings alongside their natural search results. How long

might it be until you can bid in more or less real time for such customer

searches? What would you pay for a potential $10,000 equipment sale

click vs. a ~$100 sundry consumable sale? We expect that this would soon

lead to greater and more transparent competition for new sales, as well as

additional new commercial complexity for distributors to manage.

One might also expect, in some categories, the advent of a meta-search

business model offering price comparison searches similar to those in

B2C sectors such as travel (e.g. Kayak) or insurance (e.g. insurance.com).

We are also seeing attempts to establish online marketplaces for specific

customer types (e.g. The Supply Place, Powered By Ace).

Lastly one can also anticipate the disruption to traditional supply chains.Some manufacturers are already using the web to go direct to customers

and reduce reliance on channel partners. In other instances one sees

potentially powerful new partnerships evolving (e.g. Grainger partnering

with Lowes to fulfill MRO supplies for its B2B customers).

It might be interesting to consider how you would react if your main

competitor tomorrow announced a major fulfillment partnership with

AmazonSupply.

SO HOW MIGHT YOUR COMPETITIVE ECOSYSTEM EVOLVE?

It might beinteresting to

consider how you

would react if your

main competitor

tomorrow

announced a

major fulfillment

partnership with

AmazonSupply.



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We have seen a few versions of this movie before. To highlight one:In grocery retail much of the story of the last 20 years or so has been how

the progressive roll-out of Walmart Supercenters across North America

has challenged one regional chain after another. The arrival of a disruptive

scale competitor with a low cost base, compelling range advantage and

SKU prices often some 1520% below those of the existing players has

driven a dramatic shake up in most markets.

The most typical pattern is a polarization of incumbents. Those grocers

with relatively undifferentiated offers, many of whom cut prices or

increased promotional activity in order to try to compete, typically did

not make it. (Although long run price elasticity is high, in the short run it

is lower. So those that invested only in price did not see enough volumeincrease fast enough to compensate for the short-term margin loss due to

lower prices exacerbating their financial bind.)

Those who instead invested thoughtfully in quality, freshness, alternative

formats and who critically stayed sufficiently in touch with Walmart on

price (within ~10% or less) have generally grown sales. Today in many

markets there are only one or two strong conventional grocers left

alongside Walmart, but they have thrived at the expense of the players

that have left these markets (see Exhibit 4).

POSITIONING YOUR BUSINESS TO SURVIVE & HOPEFULLY THRIVE

EXHIBIT 4: THE KEY TO SURVIVING WALMARTS ENTRY INTO A LOCAL GROCERY MARKET HAS BEEN A STRONGOFFER PERCEPTION COMBINED WITH GOOD ENOUGH OR BETTER VALUE PERCEPTION

CUSTOMER FAVORITESVery well placed to win sharefrom all local competitors,including the value leader(s).Typically only 1 in 10retailersare in this position.

THE PACKAround 4 in 10retailers aretypically viewed by customersas average - a weak startingpoint. A few break out tobecome customer favoritesor offer leaders, while othersslip into the laggard zone.

VALUE LEADERSPrice leadership is highlyeffective against establishedrivals. A customer perceptionpositioning often definedby Walmart. Today around2 in 10retailers are inthis position.

OFFER LEADERSStrong assortment, great

product quality and/or highlevels of service put these

retailers in a strong positionto defend against the

Walmart threat. Typicallyaround 2 in 10retailers fall

into this category.

LAGGARDSRetailers in this region

are poorly regarded bycustomers, and are in

trouble even without a newcompetitor. Only around

1 in 10retailers are in thisposition at any given time

in part because they donttend to survive long.

VALUE

OFFER

Weak Strong

Weak

Strong

NOTE: The above exhibit is an illustrative example of Oliver Wyman's Customer Perception Map - A powerful tool for understanding customer perception,predicting share growth / decline, and informing customer f acing strategy.

The customer perception map: a typical pattern for a retail sector


9/12


SO WHAT SHOULD YOU DO?

Responding to the changing environment is not only about digitalcapabilities. It is about robustly understanding what customers want and

need, and then delivering it better and faster than your competitors. As the

grocery story illustrates, the good news is that you dont need to outrun the

low cost bear. But you will need to outrun your friends in the industry.

If Amazon (or other new entrants) start to take significant share, the

remaining available market will shrink. Growing your business will require

you to take an ever greater share of what is left, and potentially to expand

your perimeter. If this is striking an immediate chord, and even if its not,

there are six elements that we suggest need to be part of a credible plan.

1. PLAY THE MOVIE FORWARD, BOLDLYWhat could Amazon do to your sector if they got serious? Work this through

at the level of customers, purchase occasions, and categories. Which will be

the early battlegrounds? Which customers and occasions are core and must

be held at all costs? What will cause your key vendors to partner with you,

vs. your competitor, vs. Amazon vs. sell direct? What could be the new

competitive equilibrium? (Hint: If your scenarios dont involve you or a

competitor exiting the market or merging, you are not being bold enough.)

Example: One distributor is inventing how their customers will behave

going forward. By mapping customers economics and anticipating online

innovation, they are predicting new service and solutions offers, and

working hard to stay ahead of this curve.

2. GET CRYSTAL CLEAR ON WHAT YOU NEED TO DO TO WIN THE

CONSIDERATION BATTLEIf your prices are more than 10% above Amazon, its time to review your

pricing policy but carefully, reflecting on the grocery lesson about short vs.

long term price sensitivity above. If you cant fulfill next day delivery on 90%+

of your SKUs, it's time to review your supply chain. How might you leverage

your technical knowledge and local service to defend the first battleground

categories? Own brand products and exclusive brand supply relationships

may have an important role to play here too.

Example:Several distributors are explicitly focusing on: achieving

90100% same or next day product availability, up-skilling the sales force

to provide more customer advisory support, and consolidating vendors

to minimize delivery disruptions to important customers.

3. STAY VERY CLOSE TO BOTH YOUR CUSTOMERS AND COMPETITORSDo you collect monthly customer feedback on your local service

performance? Do you know how customers rate you vs. competitors on key

The good news isthat you dont need

to outrun the low

cost bear. But you

will need to outrun

your friends in

the industry.


10/12


dimensions such as value, product quality, service, technical support, and

can you translate that into a customer perception map vs. AmazonSupply?

Are you tracking competitor pricing in the field and online? Do you have

tools to help you spot missed orders or customers at risk?

Example:One distributor tracks customer satisfaction every month in

every branch, has a scale mystery shopping program, and tracks fill ratesand customer service issues to create a monthly customer dashboard.

4. GET SERIOUS ABOUT CUSTOMER STICKINESSWhat information, services, and apps could you deliver in a better way to

core customers in a multi-channel world in order to save them time or make

them more productive? What service activities can you automate online,

cutting costs and driving up sales? Can you create new pricing constructs

that defend against SKU by SKU cherry-picking?

Examples:Several distributors are delivering services to keep the

customer on the shop floor, not in the back office (e.g. back office apps,CRM, sales/inventory reporting). One is hosting dozens of customer

websites using their infrastructure. Another has innovated a whole basket

pricing construct that is delivering 20%+ customer sales growth in an

otherwise flat market.

5. GO ON OFFENSEOnce you have a robust online catalog and transaction engine, why not

re-skin it for B2C? Once you have the fulfillment model, why not start

adding more adjacent product categories? Then why not get serious about

customer acquisition through pay-per-click engineering, affiliates, targeted

e-mail promotions, etc.? Should you consider acting as the fulfillment

partner for AmazonSupply or a large B2C player?

Example:Several distributors are driving e-commerce across wholesale

and retail, and managing the challenge of competing with their customers.

6. START THINKING MOBILE FIRSTWe are right now living in the first year when there are more smartmobile

devices connected to the internet than PCs. Mobile commerce is forecasted

to quadruple in the next five years. In distribution businesses most

customers are, by nature, already mobile whether on a building site, a

shop floor, in a commercial kitchen, etc. Delivering simple, relevant, highly

personalized information, services and ordering capability to customers

while they are about their business will be a competitive game changer.

Examples:Distributors are already enabling access to product technical

information, real-time product availability, ordering, order status tracking,

etc. on mobile devices. Getting just the right information to the field sales

force can also be hugely powerful. One distributor has real time customer

order history, statistically predicted orders and customers at risk, next

product to sell recommendations, and next prospect to call on insights

available to their sales force on iPads.

We are alreadyseeing the early

stages of a wave

of innovation as

the most forward

thinking wholesale

and distribution

businesses invest

significant time

and resources into

becoming potent

omni-channel

competitors.


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In our view AmazonSupply, Google Shopping for Suppliers and quite

possibly one or two more new entrants will have a profound effect on

many wholesale and distribution sectors over the coming five years.

In many (but maybe not all) sectors, a new competitive equilibrium

will be established.

History suggests that those that act to strengthen a differentiated high

quality yet good value customer proposition and who adapt fastest to theopportunities created in a multi-channel world will see their businesses

flourish. Those that do not will see their businesses struggle.

We are already seeing the early stages of a wave of innovation as the most

forward thinking wholesale and distribution businesses invest significant

time and resources into becoming potent omni-channel competitors.

If your business does not yet have a credible plan to survive and thrive

in the new ecosystem, there may be less time than you think.

If the above is about the what, the final question we have discussed

with a number of CEOs is about the how. How to move with sufficient

imagination, pace, and flexibility; and how to recruit and inspire some

very different talent?

One recipe comes from the digital disruptors themselves. Both Amazon

and Google have set up wholly separate divisions with the explicit aim ofinventing the future, fast and allowing bold failures on the path to bold

successes. In Amazon's case the genesis was in 2006 when Jeff Bezos

picked up the Sony e-reader and saw a huge risk to Amazon's core business.

He rapidly established Lab 126 and 18 months later the first Kindle was

launched. Walmart is right now seeking to apply the same approach with

a wholly separate division based in Silicon Valley (a long way physically and

culturally from Bentonville, AR) focused on rapidly reinventing its online

business in the face of the AmazonFresh threat. Closer to home, Grainger

established its online division more than 15 years ago.

Great care is required in managing what follows. As the new organization

successfully challenges the status quo and builds momentum, should it be

left alone, should it be integrated into the old business (or maybe better,

vice versa), or should it become an ongoing source of innovation that

hands over lines of business when they hit critical mass? The experience

of those sectors that have gone online earliest and fastest (travel, consumer

electronics, etc.) is that customers who shop across channels have little

tolerance for price and offer inconsistencies. Moreover, while customers are

happy to benefit from offline services and advice, superior online pricing

and assortment nearly always wins in securing the final purchase.

CONCLUSION


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Copyright information goes here.

FOR MORE INFORMATION PLEASE CONTACT:

IAN BROWN

Partner

[email protected]

+1 917 741 5924

+ 44 20 7852 7451

KEITH CREEHAN

Partner

[email protected]

+1 412 355 8844

www.oliverwyman.com

RICHARD BALABAN

Partner

[email protected]

+1 212 345 9389

JAMES ADAMS

Associate Partner

[email protected]

+1 212 345 2061

AMY RENAssociate

[email protected]

+1 415 743 7827

ABOUT OLIVER WYMAN

Oliver Wyman is a global leader in management consulting that combines deep industry knowledge with specialized expertise in strategy,

operations, risk management, and organization transformation.

In the Distribution and Wholesale practice, we draw on unrivalled customer and strategic insight and state-of-the-art analytical techniques to

deliver better results for our clients. We understand what it takes to win in distribution and wholesale: an obsession with attracting, serving

and growing customers, constant dedication to operational excellence, and a relentless drive to improve capabilities. We have a track record

of helping clients win in this environment, creating real competitive advantage and driving significant growth. We believe our hands-on

approach to making change happen is truly unique and over the last 25 years, weve built our business by helping distributors and

wholesalers build theirs.


All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman and Oliver Wyman accepts

no liability whatsoever for the actions of third parties in this respect.

The information and opinions in this report were prepared by Oliver Wyman. This report is not investment advice and should not be relied on for such advice or

as a substitute for consultation with professional accountants, tax, legal or financial advisors. Oliver Wyman has made every effort to use reliable, up-to-date and

comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. Oliver Wyman disclaims any responsibility

to update the information or conclusions in this report. Oliver Wyman accepts no liability for any loss arising from any action taken or refrained from as a result of

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OW Amazon and Google in Wholesale Distribution