ACHRNEWS

Amazon.com: Implications for wholesalers

May 16, 2000
If you haven’t been to Ama zon.com, please go and do a search on your number-one business topic, hobby, sport, or kid’s passion or problem. While you are there, reflect on the following observations.

1. Wouldn’t you and your customers want to shop the entire universe of products, not just the lines one supplier happens to stock or represent?

How long will it be before any given channel offers the shopping equivalent of what Sabre system (or travelocity.com on the Web) has done for travelers?

2. Isn’t Amazon giving customers the total shopping process at one site?

What will Web-enabled self-service shopping scenarios for 2001 involve for the quality, quantity, and skill sets for both inside and outside sales forces? Who will continuously create and manage the information on the selling site?

Our guess is that there will be a need for a smaller staff that will be able to answer mostly higher-level questions and continually add content to the website. Automation will elevate both the quality of the customers’ questions and the talent needed to respond.

3. Amazon is skimming the cream of U.S. book buyers, the 10% of the customers that buy 50% of the products.

If the heavy buyers leave the retail bookstores, and the browsers stay to read books for free and put them back, what does this do for bookstores, which have high fixed costs?

Wholesale-distributors may have more adaptable variable cost structures than retailers, but most have huge cross-subsidies between customer groups, products, branches, and valuable employees that support “coasters.” E-commerce will exploit all of these cross-subsidies, causing old business models that have bundled the good with the bad to fall apart.

4. Now that Amazon has enough traffic and purchasing information, it is changing the new book development and distribution process.

Publishers now pay Amazon a fee to assess the odds of a prospective book selling enough copies. This is similar to A.C. Nielsen’s creation of an information service business from grocery store scanning data. Every would-be centralized database for channel activity will have this new infomediary opportunity.

Interactive web commerce applications will allow for the rebirth of many information-rich, higher value-per-pound niche products that heretofore couldn’t get pushed through traditional channels.

Who will provide these new physical distribution and selling solutions for the appropriate niche items? And who will become enough of a channel activity database to become the A.C. Nielsen service for the manufacturers?

5. Amazon has compiled an incredible sales growth curve, but it’s losing 20 cents on every dollar of sales. A lot of wholesale-distributors could grow quickly too, if they sold goods for 80 cents that cost a dollar!

The question is whether Amazon will make money over the long haul. Amazon has also had to spend enormous amounts of money to acquire new customers, but these costs will collapse.

Although analysts don’t expect Amazon to make a profit before 2001, we have seen projections for enormous profits to begin then.

One big problem for Amazon and any channel product database initiative is to reach a margin level that exceeds potentially enormous up-front database development and maintenance costs. If the breakeven point can be reached, then websites can handle millions more transactions for little incremental cost, allowing for huge flow-through of incremental margin to the bottom line.

Amazon seems to have that possibility by 2001.

6. What does this mean to wholesale-distribution channels?

Some giant distributors have spent millions of dollars on their web initiatives and have little in recorded sales to show so far. Do their products have the same potential as books, which are 100% information, easy to ship, and not necessarily needed today or tomorrow? Usually not, by a long shot.

If a traditional wholesale-distributor or a new infomediary were to create a channel-wide, comparative product database, could the company generate enough new margin from this service to get a return on both its large set-up and maintenance costs?

How does this apply, for example, to Grainger’s current web initiatives for parametric searching of electric motors and industrial lamps? Grainger could eventually create a database of all products it stocks and doesn’t stock in order to make 100% of its manufacturers’ products available to end-users on a drop-ship basis.

The company could also try to pursue master-DC consignment initiatives as Amazon has done. But will the incremental margins provide a positive return on web investments?

7. After spending well in excess of $10 million, Ingram Micro, the $24 billion-plus PC and network components distributor, gave up on doing its database alone and partnered with pcOrder.com’s industry-wide product database.

If infomediary businesses like Amazon and pcOrder.com are struggling to breakeven in the biggest, most web-promising channels like books and PCs, then will most other channels have to eventually move to a shared-industry, information utility model to serve the end-users?

This could parallel the cooperative pattern we’re seeing with the development of industry data warehouses in the oil, drug, electrical, paper, and consumer goods channels, to make continuous replenishment and automated receiving possible.

The bottom line

One way or the other, customers want the ability to compare, so they may use their own software “agents” to get the data they want from many sites and build their own customized, comparative desktop catalog.

Or, one or more wholesale-distributors will use agents to do the same, offering instant availability and price comparisons on their own sites to generate traffic and usage data to their advantage.

This article is an excerpt from “Electronic Commerce for Distribution Channels,” a report published by the Distribution Research & Education Foundation; copyright 1999 by DREF, Washington, DC. The report can be ordered by phone at 202-872-0885, or online at a 5% discount at www.nawpubs.org (Web site).