Hot Topic: Creative disruption

It’s difficult to have a conversation in the office products industry without the subject of Amazon and/or Amazon Business cropping up. OPI takes a look at some of the main talking points...

The growth of Amazon Business in the past three and a half years has been impressive by anyone’s standards, including Amazon’s. Official figures are not released often, but the most recent numbers published in mid-2018 point to an annual sales run rate of more than $10 billion. That’s a tenfold increase in just two years, although since then, of course, Amazon Business has expanded out of the US and into seven more markets, including Germany, the UK and France.

The Amazon Business ethos is built on the same customer-centric and ‘Day One’ approach that is a common trait across all parts of the Amazon ecosystem. The decision to pull the plug on Amazon Supply in 2015 and launch Amazon Business instead also demonstrated another company trait: to try out new ideas, but to then move on swiftly when things aren’t meeting expectations. It’s something that, by CEO Jeff Bezos’ own admission, has resulted in “billions of dollars of failures along the way”.

Healthy dialogue

One thing that sets Amazon Business apart from the regular Amazon platform is the presence of a sales force. Or, more accurately, two sales teams – one targeting end-user organisations and the other focused on adding third-party sellers to the Amazon Business marketplace.

Until recently Head of Seller Marketing, but now in the expanded role of Head of Awareness Marketing, is Colin Puckett. One of Puckett’s responsibilities is to drive third-party (3P) seller participation on Amazon Business and he has been actively involved in industry conferences and events – including OPI’s own Global Forum in Chicago, US, in November 2018 – as he looks to increase Amazon’s visibility within the trade.

Puckett says it is “interesting” for him to learn from others what Amazon intends to do next, but on a more serious note, he is aware of the scepticism that exists in many industries about the role of Amazon Business. “We are eager to engage potential sellers in a healthy dialogue about our ability to bring incremental business to them, and I would be open to suggestions about how to do that,” he adds.

3P is a big deal for Amazon Business, with over 50% of its $10 billion in sales coming from marketplace sellers. Eamon Kelly, Partner and Senior Research Analyst at Edgewater Research, expects this percentage to grow over time due to a number of factors, including: higher margin levels of 3P versus commoditised first-party (1P) sales; Amazon’s increased focus on private label which might leave some products locked out of 1P sales channels; and the online player increasingly looking to drive revenue and profits through 3P advertising.

Selling on the Amazon marketplace is a controversial subject for office products dealers. According to Dani Attard, co-founder of UK-based e-commerce platform provider Comgem, the resistance shown by these resellers to sell on Amazon is higher than in other industries. However, she recommends that dealers at least look at the possibility of selling on Amazon – “because that’s where their customers are” – as part of a balanced e-commerce approach.

Two independent dealers in the US – coincidentally both from El Paso, Texas – have been in the public eye over their decisions not to partner with Amazon Business. Both Sandy Grodin of El Paso Office Products and Teresa Gandara of Pencil Cup Office Products had been courted by Amazon Business to become 3P sellers. Grodin went so far as to open up his company’s books to his local schools district to demonstrate the impact working with Amazon in this way would have on his bottom line. He faced the prospect of servicing an existing contract, but losing a significant chunk of margin to Amazon – margin he could not afford.

Meanwhile, Gandara has recently appeared on local television to speak out against the city offering the Amazon Business platform as a purchasing vehicle. El Paso purchasing officials argue that Amazon Business is an optional purchasing tool and that businesses which are members of a local initiative called Hire El Paso First will get priority rankings in search results.

On another Amazon Business contract – at Johns Hopkins University in Baltimore, Maryland – a local independent dealer has been designated as the “preferred” supplier of office products on the e-commerce platform. This ties in with Amazon’s claims that it is empowering small businesses around the globe. For example, in its 2018 Small Business Impact Report, Amazon said that more than 20,000 SMBs worldwide surpassed $1 million in sales in 2017 while – as mentioned before – more than 50% of Amazon Business’ sales come from 3P sellers, many of whom are SMBs.

Jay Mutschler, Partner at consultancy firm ESG and an industry veteran whose roles have included President of Corporate Express North America and Managing Director of Staples Australia, notes that there are instances of dealers partnering with Amazon Business to fulfil contract business.

“It’s essentially a ‘last mile’ service, but a bit more complex than that,” he explains. “In cases where Amazon is awarded a contract that requires dealer-type services, it is partnering with independent dealers to supply those services – for example desktop delivery, cost-centre reporting, etc. Amazon then pays dealers a percentage of revenues for these services.”

However, Mutschler warns that this is “not a good long-term strategy” for dealers. “It’s only a matter of time before Amazon perfects these service skills itself.”

But what is the alternative? Mutschler believes that dealers need to focus on their skills and continue to provide customers with the personal, high level of touch and service that can’t be found at Amazon and other large competitors.

“Quite frankly, dealers can’t replicate the Amazon product and service model,” he argues. “Trying to ‘out-Amazon Amazon’ is a losing proposition. That being said, it’s critical to invest in improved technology to more effectively interact with customers. Independent dealers need to redeploy their capital resources from traditional sales expenses to a balanced sales and technology approach.”

He continues: “However, I believe that most small independents won’t have the necessary resources and must depend on their wholesaler partner to provide these. If I were advising wholesalers, I would suggest bringing a technology solution to their dealer customers, giving them state-of-the-art mobile ordering platforms, high-resolution product imaging, easy-to-understand product descriptions, track-and-trace shipping technology, and an easy-to-use 3P sourcing solution. Stop focusing on product price and give dealers tools that will allow them to grow and retain clients.”

Small business focus

Which segments of the office supplies channel have been hardest hit by Amazon Business? Edgewater’s Kelly has been closely studying the impact of the platform in the US. “Amazon Business growth appears to remain confined to gains at the SMB level, with limited progress in large enterprise,” he notes. Kelly puts this success down to factors such as the low-touch/self-serve model – which more closely resembles the B2C buying experience – favoured by these types of customers and which makes Amazon a convenient purchasing destination.

For other customer profiles, results would appear to be mixed. “We do not expect the impact on sales in the delivery/contract segment for Office Depot or Staples to be overly significant, with Amazon Business showing little willingness to work at cost (or lower) on high-volume items, which is often necessary to acquire new contracts,” states Kelly. “Amazon lacks a credible service component which is a limiting factor relative to its office/industrial counterparts.”

The company also seems to have little appetite for writing (p)rebate cheques, which would further limit its ability to compete in the contract space. However, that doesn’t mean the company is ignoring enterprise customers. Far from it. It says in the US it’s doing business with more than half of the Fortune 100 organisations; it’s a similar ratio with FTSE 100 companies in the UK.

Rather than being the contract holder of choice, Amazon is scooping up long-tail/non-contract spend. Indeed, it has been said that Amazon Business is pitching itself as “everybody’s number two supplier”, picking up the lower-turn, higher-margin off-contract items where contract holders have traditionally offset the very low margin or loss-making core basket of products.

This type of arrangement can be found, for example, in the state of Washington via its Amazon Business programme. State purchasers are reminded to use Amazon Business only to purchase items that aren’t currently on state master contracts, and that these master contracts must be used before purchasing from Amazon Business. How this is monitored is not clear – state buyers are required to “check” master contracts first, but there is no indication that they are blocked from buying duplicate products that are listed on Amazon.

Mutschler predicts that this type of arrangement “will definitely disrupt the traditional supplier/dealer model”. As he explains: “The first part of market share to fall is the non-contract items, which is similar to what happened when the superstores came onto the scene in the 1990s.

But he also believes that it is “just a matter of time” before Amazon Business develops the abilities to serve the contract customer. “If dealers continue to use old pricing strategies and models, they’ll see dramatic declines in their margins. To protect these, they will need incentives and loyalty programmes to reduce leakage. Wholesalers also need to step up and provide innovative strategies.”

All that said, it’s not just a question of all take and no give. Resellers have long been taking advantage of Amazon’s breadth of product to service their own customers. One prominent US dealer, for example, told OPI that it spends in the region of $100,000 a year sourcing hard-to-find products on Amazon, and Edgewater’s Kelly notes that some of Amazon Business’ largest customers are other resellers that use the online player to fill inventory gaps, although this is a by-product of Amazon’s breadth of product as opposed to a deliberate move by Amazon to fulfil a wholesaling role.

Battleground

The local and federal government space is likely to be another key battleground for market share. The US General Services Administration (GSA) is pushing ahead with its e-marketplace and Multiple Award Schedule reforms, with an important Federal Marketplace Industry Day due to take place shortly after this issue of OPI has gone to press.

Mike Tucker, CEO of US trade association NOPA, believes that Amazon could still run into compliance issues related to federal acquisition requirements and it appears that the GSA still doesn’t have all the answers. With local government, Tucker says that dealers “are fighting back” against Amazon and its US Communities contract that is open to municipalities, educational districts, non-profits, etc.

“Amazon’s dynamic pricing versus dealer fixed prices, better standard delivery terms from dealers and the message about keeping tax dollars in local communities are all areas where we have seen independents make progress,” he states. “However, it is important for dealers to get in front of these purchasing managers who are often ‘starstruck’ by the Amazon name.”

Predicting what Amazon Business will do next is always something of a guessing game. One thing is certain though – sitting back and waiting for things to happen is not an option. As Mutschler puts it: “If independent dealers don’t start defining their unique value proposition, it will be difficult to survive this new threat to their businesses. I’m confident they can, but I wouldn’t advise waiting too long: the competitive landscape clock is ticking.”