On April 18, W.W. Grainger management reported a 22% decrease in year-over-year earnings along with an acceleration in branch closings. WWG stock peaked at $258 around March 1 and closed on May 5 at $189.
Grainger is and has always been a well-run company. Its steady innovations have powered great numbers and increased dividends for 45 years in a row.
Grainger will survive. It has niches of customers and items that Amazon can’t currently dent. But, there are questions all distributors should be asking. For instance, which niches of customers and items has Amazon already been stealing? How net-profitable were these for Grainger? Who is likely to innovate more customer value by 2019, Grainger or Amazon?
Which customers are being skimmed?
Amazon Prime customers typically are 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, Grainger’s service edge is an unnecessary overhead cost. Amazon gives them what they want and then 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 Grainger’s once lush profits on delivery markups have evaporated. And when customers buy those hard-to-find SKUs Grainger has, they often add overpriced staples. But with the ease of online price shopping and split-order buying, Grainger 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%. It’s time for some honest, new lenses to look through and assess Amazon’s forward innovation effects. Here are some questions to get you thinking about your own business vs. Amazon.
How deep is your thinking? When you think about the items and services you can handle that Amazon cannot, does that eliminate 100% of all possibilities of what Amazon might cherry pick from you?
Where have you seen examples of super-profitable items cross-subsidizing losing items? Fast food? Fancy restaurants? Your own business? How does Amazon 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?
Why have legacy channel partners underrated Amazon for 20 years?
My favorite example of a channel player underestimating Amazon is Barnes and Noble, which unveiled a website in 1999 that was going to crush what it referred to as “Amazon dot bomb,” according to Barron’s. But by April 27, 2017, the company had announced its fourth CEO in four years and 645 stores were down 9% for 2016. Meanwhile, on May 8, 2017, Barron’s targeted Amazon shares to hit $1,100 (+20%) in a year.
So-called experts generally extrapolate forward in a linear, incremental fashion. For example, they will narrowly praise the details of Grainger’s 90-year-old highly-evolved moats that Amazon can’t imitate. But, Amazon isn’t imitating the traditional channels. It is inventing an entirely new customer-centric channel that starts with ordering online. Then, it invents whatever is needed backward to its factory sources in China. Amazon even bought cargo jets and semitrailers, for example, to have better, cheaper delivery at peak times, not to compete with FedEx and UPS.
Get customer-centric with metrics
Amazon’s 500 customer-centric metrics guide its nonstop innovation to create value for digital buyers. They are looking ahead to what’s new. It is inevitable that in a short two years:
1) Your 5G bandwidth phone will have merged with the evolving Alexa/Echo to instantly retrieve all your product-information needs, including price and delivery speed comparisons.
2) Amazon achieves breakthroughs for 30-minute delivery and cost, which could easily look like driverless vehicles to ZIP + 6 zones and drones for last-block delivery.
3) By 2019, more than 50% of all purchasing will be by millennials who see reps as time wasters. Are you reinventing your reps’ cost/benefit per-call proposition? Keep in mind Amazon wants your zero-attention-needing digital customers and orders. You can keep the unprofitable, high-service-cost, small-order customers.
What about selling direct?
Factories are selling Amazon direct. Manufacturers and distributors-to-retailers resisted selling Amazon direct for fear of channel retaliation. Now that all items are available through the Amazon Marketplace, direct selling of the most popular SKUs to Amazon is snowballing.
What to do?
Your best, most profitable customers want you to match Amazon’s web shopping and ordering experience with a range of delivery options and prices. How will you keep the 5% of your most net-profitable customers and get even more of their total spend?
Here are some things to think about and discuss in your organization.
1) If Amazon is inventing an all-digital, customer-centric shopping channel (factory to doorstep), wouldn’t it make sense they can’t or won’t take away most existing channels’ business? The question then is what cream will they skim? How big a profit loss will that be?
2) Can you think of any factories that sell your distribution firm that have started to sell Amazon direct? What’s the implication?
Next time: Answers to these questions: How will you keep the 5% of your most net-profitable customers and how will you get even more of their total spend?