62. Amazon Business Series: Grainger v. Amazon, Part 1

Watch for the next four essays posted here, entitled Grainger v. Amazon. This will be a four-part series devoted to examining the impact of Amazon on the distribution industry upon the often unshakable Grainger.

On April 18, 2017, W.W. Grainger (WWG) management reported a 22% decrease in year-over-year earnings, along with an acceleration in branch closings. WWG stock peaked at $258 around March 1st and closed on May 5th at $189. WWG is and has always been a well-run company; Its steady innovations have powered great numbers and increased dividends for 45 years straight. But, damage control requires executives to downplay being Amazoned (the impact of Amazon on the distribution industry), while cheering plans to build on their unique strengths. 

The media echoes this denial-by-downplay because of their economic conflicts. If they want to maintain access to WWG management and retain income from their advertising or financial services spends, then they must spin positively.  Most distributors also want to buy the spin and believe that their business models will hold up against Amazon (AMZ). This all adds to a compounded confirmation bias:  we all want to read, see, and hear only what fits our hopeful beliefs.

Asking the Tough Questions

WWG will survive. It has niches of customers and  items that AMZ can’t currently dent.  But, there are questions that all distributors should be asking. For instance, which niches of customers and items has AMZ already been stealing? How net-profitable where these for WWG? Who is likely to innovate more customer value by 2019, WWG or AMZ?         

Which Customers are Being Skimmed?

Amazon Prime customers are typically higher income big buyers, younger, busier, more ambitious, and digitally savvy. In other words, they know what they want to buy and how to get it fast and cheap.

Prime members are zero service cost types. As 24/7 buyers, they see outside and inside reps as a Monday-to-Friday, 9-5 inconvenience who only slow down ordering. For them, WWG’s service edge is an unnecessary overhead cost. AMZ gives them what they want and the turns the overhead savings into lower prices on commodity staples. Conversely, 50% of any distributor’s smallest, highest service cost customers remain loyal, but as net profit losers.

In addition, Prime members like free delivery for an annual fee, and WWG’s once lush profits on delivery markups have evaporated. And, when customers buy those hard-to-find SKUs that WWG has, they often add overpriced staples. But, with the ease of online price shopping and split-order buying, WWG has been forced to drop prices.

What to Do

A distributor can lose just 5% of its sales from its lowest-cost customers on its most profitable SKUs and see profits drop by 50%. (To see how this happens, check out blogs 15 and 45). It’s time for some honest, new lenses to look through and assess AMZ’s forward innovation effects. For new spectacles, catch Part 2 in this series. In the meantime, here are some questions to get you thinking about your own business v. the impact of Amazon on the distribution industry.

  1. How deep is your thinking? When you think about the items and services you can handle that AMZ cannot, does that eliminate 100% of all possibilities of what AMZ might cherry pick from you?
  2. Where have you seen examples of super-profitable items cross-subsidizing losing items? Fast food? Fancy restaurants? Your own business? How does AMZ underprice legacy distributors’ profitable items and then not get hung up on fixing small-dollar items with higher prices, bundling, and add-on only status?

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