In recent months global Internet retail behemoth Amazon.com has green-lit six new original TV shows, announced an online streaming deal with HBO and tested same-day grocery delivery on the West Coast.
Up next? Possibly a smartphone. And, if billionaire CEO Jeff Bezos has his way, packages dropped off by unmanned drone.
But there’s one thing Bezos hasn’t been talking about
: AmazonSupply, an e-commerce site targeting the unsexy but hugely lucrative wholesale and distribution market. His silence is especially surprising as the site has the potential to turn into the most important development in the company’s history since it started selling books. Yet Bezos has uttered only 28 words in public–ever–about AmazonSupply, describing it in passing as “an incredible category” during the company’s 2012 annual meeting.
“You can get industrial motors, flanges, valves, fasteners, materials, janitorial supplies,” he said. And that was it, before moving on to proudly tell shareholders that the world’s largest gummy bear, a 72-ounce sugary beast, was for sale on Amazon.com. Whether the lack of hype is a deliberate part of a stealthy rollout or Bezos just thinks selling rubber gloves to dentists lacks p.r. value, wholesalers are taking the threat seriously, and it’s easy to see why.
While U.S. retailers took in more than $4 trillion in revenues according to the most recent U.S. Census, wholesalers brought in $7.2 trillion selling everything from Bunsen burners to toner cartridges. Even better for Amazon: Of America’s 35,000 distributors, almost all are regional, family-run companies pulling in annual revenues of $50 million or less, and only 160 have more than $1 billion in sales annually. “The industry is largely ignored,” says Dirk Van Dongen, president of the National Association of Wholesaler-Distributors. “You can go your whole life without having a single thought about it.”
Amazon, meanwhile, booked more than $74 billion in revenues last year, selling everything from beds to server time with a viruslike strategy that values opportunity and disruption above short-term profitability. Almost identical to the company’s flagship website, albeit without ads for its ubiquitous Kindle e-readers, AmazonSupply.com launched quietly in April 2012 with 500,000 items for sale.
Two years later, with the site still officially in beta, that list of products has grown to more than 2.2 million–covering 17 product categories from tools and home improvement to janitorial supplies, stocking everything from 12-packs of Hawaiian Punch to schedule-40 stainless steel pipe. If 2.2 million products doesn’t sound like a staggering figure on its own, consider that the average wholesaler sells closer to 50,000 products online.
“The question is not whether AmazonSupply will be a threat,” says Richard Balaban, who has studied the site for management consulting firm Oliver Wyman. “Rather it is which customers, purchase occasions and categories will be attacked first.”
AmazonSupply’s genesis was in 2005, with Amazon’s acquisition of SmallParts.com, an online emporium that billed itself as “the hardware store for research & development.” The purchase price was never disclosed. “It was an opportunity for us to learn more about our business customers,” says Vice President of B2B and AmazonSupply Prentis Wilson. “As we evolved our selection, we launched AmazonSupply.”
He won’t say what Amazon is spending–and likely losing–on the venture, but overall the company, despite all those billions in revenue, estimates an operating loss of up to $455 million next quarter. This aversion to profits may be starting to turn off investors (the stock is down 9% since the announcement in April, though the market capitalization remains a staggering $142 billion), but it’s helped build a 125,000-employee logistics and data powerhouse that was able to process orders on 36.8 million items during peak Cyber Monday shopping last Christmas season–a staggering 426 items per second to 185 countries.
As impressive: The company earned the top score among 230 of America’s biggest companies in the University of Michigan’s annual customer service satisfaction index and has placed in the top ten for years. “We are comfortable planting seeds and waiting for them to grow into trees,” Bezos told FORBES for a 2012 cover story. “We don’t focus on the optics of the next quarter; we focus on what is going to be good for customers.”
The development of Amazon Web Services, which Bezos launched in 2006, says a lot about Amazon’s likely ambitions for AmazonSupply. Having developed the computer infrastructure needed to run Amazon.com, Bezos set up a B2B division that allowed other companies to use Amazon’s excess computing power. Web Services now dominates the cloud computing industry, hosting customers from NASA to Pfizer and ringing up an estimated $3.2 billion in revenue last year, thanks to an even faster growth rate than Amazon’s main storefront.
“If you think about where they’re making their money right now, it’s not in shipping you and me Crest toothpaste,” says Bruce Cohen, a senior partner at management consultancy Kurt Salmon. “It’s in cloud computing. It’s these vast servers. They’re not making money on the sexy part of the business–streaming video or delivering us boxes of cool stuff.”
Wilson is Bezos’ wholesale czar. The chiseled, dark-haired 43-year-old joined Amazon in 2011 from Cisco Systems, where he was responsible for sourcing materials and overseeing suppliers at the networking and data center powerhouse. Now based in Seattle, Wilson oversees industrial and scientific supplies across the whole of Amazon, as well as this new business. He wouldn’t disclose how many Amazon employees are currently working solely for AmazonSupply, but scan the division’s recruiting website and you’ll see how lofty the e-tailer’s ambitions are for its wholesale business. Under the heading “Our goal is to supply everything needed to rebuild civilization,” some 40 jobs are listed, including software-development engineers and “brand specialists” who’ll be expected to become experts on the tools of the trade for one particular manufacturer, be it a maker of plumbing or office supplies.
It’s definitely on its way. Most of the scientific and industrial equipment AmazonSupply lists for sale, for instance–items like centrifuges, micrometers and air cylinders–would otherwise be available only from specialist distributors. But few can compete with its vast inventory, not to mention the easy-to-navigate website and 24-hour delivery, all longstanding hallmarks of Amazon’s appeal. “If you have a lab scientist, someone with a Ph.D., trying to find the next cancer drug in a capital-intensive lab, any time they spend trying to find a new product is expensive,” Wilson says.
Nor can small fry compete with AmazonSupply’s infrastructure and deep cache of consumer data. The company won’t disclose any details, saying only that AmazonSupply “utilizes all of Amazon’s fulfillment and logistics capabilities.” In the U.S. that’s a network of 40 U.S. fulfillment centers–and growing. And while retailers like Home Depot and Lowes (and Amazon in its earlier days) are loath to stock products that don’t sell quickly, to gain competitive advantage AmazonSupply, with its vast financial resources, has been more likely to take on inventory that won’t necessarily fly out the door. Industry experts estimate the company stocks more than 50% of what it offers on the site at any given time. “I encourage my clients to become third-party fulfillers to AmazonSupply,” says Dick Friedman, a consultant who helps traditional distributors develop strategies to compete with AmazonSupply. “Why not? The only trouble is if it sells well enough, AmazonSupply will stock it and cut the little guy out of the picture.”
“The challenge of distribution is to have orders big enough to make money,” says Scott Benfield, a B2B consultant who’s been following the wholesale and distribution game for 20 years. “It’s a very thin-margin business: 2% to 4% for traditional businesses in this sector.” Amazon’s scale is ideally suited to compete in this kind of high-volume, low-margin operation. A Boston Consulting Group study found AmazonSupply’s prices to be about 25% lower than the rest of the industry on common items.
To woo manufacturers the company has also built in the ability to show off products in Web videos, post downloadable CAD drawings and draw from user reviews. Buyers, from 3-D printing specialists to auto mechanics, avoid the human interactions–which can either be pesky or irreplaceable, depending on the rep–that remain a feature of most wholesale and distribution deals.
“It’s a very consistent message, versus 500 different sales reps,” says Wilson. He added that manufacturers have reported an uptick in sales of products that were not quite as popular before. “Just getting the product available on Amazon, people know it exists,” he says. “We aren’t afraid to put inventory on an item. That has a lot of value. It builds confidence.”