amazon bcg deck

Amazon and Wholesalers

October 11, 2012

NAW_Amazon and Wholesalers_v8.pptx 1

Today's discussion will cover

Selection

Fast

Cheap

What is so different about Amazon? How does Amazon compete? Where are you vulnerable? What will you do?


What is so different about Amazon?


What motivates Amazon? Insights from Jeff Bezos on record

There are two kinds of companies, those that work to try to charge more and those that work to charge less. We will be the second. One of the things it was obvious you could do with an online store is have a much more complete selection. If you do build a great experience, customers tell each other about that. Word of mouth is very powerful. What's dangerous is not to evolve.


Amazon at $50B and growing quickly Sales ($B USD)

50

40

30

20

10

0

+51%

Source: Amazon.com 10-K, Amazon investor presentations

What's next

? Books

CDs

Home & Garden

Apparel & Accessories

Beauty

Shoes

Digital Media

Electronics

Tools & Hardware

Baby

Toys

Sports & Outdoors

Jewelry

Personal Care

Dry Goods

Automotive

Office Supplies

Fabric

MyHabit.com (2011)

Zappos.com (2009)

Diapers.com (2010)

Android AppStore

(2011)

Audible.com (2008)

2000 2010 2015 2005 1995


Amazon: selection or fast moving business? GMROI curve shows range of business models within space

Log GM% 1.00

0.10

0.01

Log inventory turns 100 10 1

Note: Based on 2011 financial performance. All companies >$1B in revenue Source: BCG ValueScience, Compustat

Select Publicly Traded Wholesaler/Distributors with >$1B Revenues

Consumer

Metal Service Centers Industrial Supplies

Health Care, Laboratory & Pharmaceutical

Food & Grocery Electrical and Electronics

Construction Computers & Related Communications Chemical/Gas Automotive Amazon

Office Supplies

Selection businesses

Fast moving businesses


How Amazon upends the historical model


Fast moving businesses

Wide selection Low turns Higher prices

Limited selection High turns Lower prices

Wide selection Low turns with low cost Lower prices

High margin

Low margin

High margin


Amazon's cost structure advantage

Customer wins with: • Lower prices • Wide selection • Positive shopping

experience 1.00

$ (per COGS $) 2.0

1.5

1.0

0.5

0.0

AMZN

1.33 0.17 0.02

0.35

1.00

0.27

Selection

1.56

COGS SG&A D&A EBIT

Low SG&A: • No sales force,

stores • Automated, scale

fulfillment • Standard website

For every COGS dollar, AMZN earns: • $0.33 GM • $0.02 EBIT


Results in uniquely powerful business model

Source: 2011 company financials, BCG ValueScience

EV $5B

Invested capital $1.8B

NOPAT $0.3B

2.8x 17x

16%

Sales $4B

7% 2x

2017 sales: 1.5x


EV $72B

Invested capital $3.2B

NOPAT $0.7B

22x 97x

23%

Sales $48B

2% 15x

2017 sales: 4.3x


How does Amazon win?


Unmatched selection: Breadth and Depth (I)

2,000

1,000

0 United

Stationers Amazon

Mktplace* Amazon

# of Products 104,000

4,000

3,000

Labels1 Plastic Cups2 Cordless Drills3 # of Products 4,000

3,000

2,000

1,000

0 US Foods Amazon

Mktplace* Amazon

# of Products 2,000

1,500

1,000

500

0 Wesco Amazon

Mktplace* Amazon

Category Stationery Food Service Tools

1. Amazon searches restricted to "Office Products" 2. Amazon searches restricted to "Kitchen & Dining" Department 3. Amazon search limited to "Tools and home improvement" * Marketplace items may include like items sold by different third parties Source: Internet Searches, September 2012


Unmatched selection: Breadth and Depth (II)

400

# of Products

200

0

600

Fastenall Amazon Mktplace*

Amazon

Wire spool1 Solid State Hard Drive2 Wiper Blades3

# of Products 15,000

10,000

5,000

0 Insight Amazon

Mktplace* Amazon

0 Genuine

Parts Amazon

Mktplace* Amazon

# of Products 4,000

3,000

2,000

1,000

Category Electric Technology Automotive

1. Amazon searches restricted to "Tools & Home Improvement" 2. Amazon searches restricted to "Computers & Accessories" 3. Amazon searches limited to "Automotive" * Marketplace items may include like items sold by different third parties Source: Internet Searches, September 2012


Third

Top search results lead to Amazon

Category

Foodservice Office Supply Industrials Electrical Technology Automotive Healthcare

Search result

Paid

Uline

Office Depot

Lighting Direct

Automation

Direct

Tiger Direct

Home Depot

First

Sam's Club

Home Depot

SuperBright LEDs

1. Excludes informational search results (e.g., wikipedia) Source: Internet Searches, September 2012

Second

Party City

Staples

Home Depot

Southwire

Newegg

LEDtronics

Drugstore .com

Office Max

Phillips

Best Buy

Walgreens

"Keyword"

Plastic forks Legal pads Fluorescent lamps1

Copper Wire1 Solid state drive1

LED replacement bulbs Gauze pads


Lower pricing than market competitors

Avery (3000 pk)

Avery (2000 pk)

Avery (750 pk)

60

40

20

0

United Stationers

Indexed Price (%)

100

80

3M (6000 Pk)

Amazon

Amazon Mktplace

3M (750 Pk)

Office labels

Source: Internet searches, September 2012

Cordless Drills Solid State

Hard Drives

Amazon

Dewalt 20V

Makita 18V

Milwaukee 18V

0

MSC

Amazon Mktplace

Indexed Price (%)

100

80

60

40

20

Dewalt 18V

Dewalt 12V

Sandisk (120 GB)

Crucial (512G)

Crucial (256G)

Crucial (128GB)

0

60

40

Insight

20

100 Amazon Mktplace

Indexed Price (%)

Sandisk (480 GB)

Amazon 80

Sandisk (240 GB)

Category Stationery Tools Technology


Real-time pricing adjusts to market (I) Example: Dewalt DC720KA Cordless 18-Volt Compact Drill / Driver

Note: Price changes from September 5, 2011 to September 5, 2012 Source: camelcamelcamel.com price tracking, September 5, 2012

Market comparables: Home Depot = $199 Grainger = $232 MSC = $229

$190 $180 $170 $160 $150 $140 $130 $120

$184.34 $179.98

Amazon 3rd Party Retailer

Amazon Price (free shipping)

Marketplace Third Party Price (shipping from

$0-40)

Amazon & Third Party match price

moves


Real-time pricing adjusts to market (II) Example: Avery Easy Peel White Mailing Labels for Laser Printers, 3000 ct


Market comparables: Staples = $26.99 United Stationers = $44.56

$24 $22 $20 $18

$14 $12 $10 $8

$16

$21.34

$14.95



Real-time pricing adjusts to market (III) Example: Crucial 256 GB m4 2.5-Inch Solid State Drive


Market comparables: Crucial.com = $211.99 TigerDirect.com = $209.99 Insight = 219.99

$100

$200

$300

$400

$500

$198 $198



Grow bundle size and per household economics Create stickiness with Amazon Prime

46

Years from Prime

Orders with negative gross margin (%)

60

40

20

0 P+2 P+1 Prime P-1 P-2

50 43

16 8 0

Years from Prime

Avg. annual GM $ per participant

400

200

331

P

202

P-1

80

+153%

P+2

293

P+1 P-2

81

Tolerate negative GM orders ... ... To grow gross profit dollars

Source: BCG analysis


Amazon introducing pick up lockers as a new last mile model in the U.S.

Amazon testing "lockers" to ensure security and simplify delivery • Amazon lockers currently available in Seattle, New York, and London • Located in other retailers, e.g., Rite Aid, D'Agostino

Items are delivered into a locker and consumer is notified that the product is available Customer picks up the item by entering a code for a given locker Products can be shipped to a locker location if: • Lockers aren't full • The product is small enough to fit • No special handling is required

Larger size lockers can fit bulky items


Entered grocery with AmazonFresh in Seattle Going offline, into cold chain

Offer Grocery and local fare • ~20k products (Produce, Bakery, Meats &

Seafood, Dairy, Beverages, Household, etc.) • Products from local merchants • Books, Movies, Music, Video Games, etc.

from Amazon.com Pricing • Comparable to other grocery deliveries

Select differences vs. Amazon • $100 minimum order size • Free delivery with min $300 / month spend • Truck delivery to home

http://fresh.amazon.com/


Recent move to explicitly target B2B Amazonsupply: "The store for business and industry"

Offer • Broad assortment displayed by product

Pricing • Competitive with market • Extended terms of net 45+ days with

qualified Amazon corporate account Select differences vs. Amazon • Navigation by product, material, brand

with clear specifications leading display • Service – free 2 day shipping with orders

over $50 • More bulk packaging available

Source: amazonsupply.com


Where are you vulnerable?


Consider your business along 2 dimensions

Economics of logistics

Value-add dimensions

Logistics needs are a prominent feature • Unique route requirements • High cost / complexity of shipping

Value-add in go-to-market model • Expertise, advice from sales force • On-site installation / service from qualified

experts • Strong incentives or functionality to be sticky


Value-add in go-to-market model


+

- - +

Where are you most at risk vs. Amazon?

Unique logistics needs (eg, cold chain)

Commoditized (eg, parcel ship)

Standard order fulfillment

Highly custom service, navigation

Higher risk

Lower risk




+

- - +

Lessons from retail: Amazon continues to push into new categories, adding service and logistics





Books Music

Electronics Baby

Tools / Hardware

Toys

Office supplies

Grocery

Shoes

Beauty / Personal

Industrial / Scientific

Computers

Video

Clothing

Gardening

Furniture

Jewelry

Musical instruments

Appliances

Designer apparel

Building supplies

Rx

Design services

DSD

Cars

Repair services




+

- - +

Where do some of your items fall?





AA batteries

Light bulbs

Large drainage pipe

Frozen foods ?

Specialty cutting tools

Diagnostic testing


What can you do?


How you can compete with Amazon and other online marketplaces – some initial ideas

Offer strategic pricing

Double-down on large, scale

customers

Invest to attract small,

infrequent customers

Offer competitive pricing vs. Amazon Be non-transparent about pricing (eg, do not publish net price on website, offer discounts to customers)

Use sales force to generate demand, provide education / training Invest in logistics to provide specialized distribution Differentiate service (eg, auto replenishment, showrooms, VMI, etc)

Offer robust online navigation infrastructure and assortment Create incentives to do business with you (eg, discount plans, shipping)


Questions?

What are you doing to compete with Amazon?

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Documents

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