Amazon.com's Latest Business Venture: Starry-Eyed Supply?
Apr 24th 2012 7:07PM
Updated Apr 24th 2012 7:08PM
It's business as usual for Amazon.com (NAS: AMZN) , which continues to take over the world one industry at a time. On Monday, the e-tailer pulled back the curtain on its new website AmazonSupply.com. As if being the world's largest online retailer isn't enough, the company's new business-to-business website promises to up the ante for the e-commerce giant, which rang in net sales of more than $48 billion last year. But is the move naively eager for a company that's been ridiculed recently for burning through cash too quickly?
Special delivery, with love from Amazon
The new site will supply businesses and industrial customers both big and small with around 500,000 items. What's really impressive is the wide selection of products available. For example, you can get everything from office supplies like paper clips to harder-to-find equipment like a centrifuge. While no minimum order is necessary, free two-day shipping is available from Amazon Prime if you spend more than $50 on an order.
If you're not familiar with Prime, let me get you up to speed. The program entices customers to spend more (and more frequently) by offering free two-day shipping on an unlimited amount of deliveries for just $79 a year. Prime now applies to both Amazon.com and AmazonSupply.com. Whether you choose to fill your cart with at least $50 worth of merchandise or make a one-time payment for annual unlimited shipping, both seem like winning options to me.
Amazon's Prime service is costing the company money now. However, that's starting to change as the retail giant gets more subscribers hooked on the offering. You see, Prime members spend more shopping on Amazon.com than non-Prime members do. According to a Wells Fargo analyst, members spend more than three times what they would without the service. As a Prime member myself, I can attest.
Disruptive supply and demand
The new direction puts Amazon in direct competition with business-to-business heavyweight Staples (NAS: SPLS) . In fact, business-to-business currently accounts for roughly 60% of sales for the office-supply giant. The global supplier of office products is the second largest e-commerce business behind Amazon and kicked off 2012 by announcing plans for an "E-commerce Innovation Center" in Cambridge, Mass. Set to open next month, the new center is part of the company's effort to better compete with rival Amazon in the areas of online sales and information technology.
However, Staples isn't the only B2B operation that may lose customers to AmazonSupply.com. Last year, Lowe's (NYS: LOW) increased its e-commerce sales by a whopping 70%. Even so, Amazon's arrival on the scene could spell trouble for the home-improvement retailer. While Lowe's plans to double the number of items it offers online in 2012, Amazon is serving up some pretty compelling reasons to choose its online supply store, including free returns 365 days a year, a call center to place orders over the phone, and a business line of credit, which can also be used to make purchases on Amazon.com.
This is another smart play by the e-tailer. Amazon spent years fine-tuning its consumer sales model. We will have to wait and see whether Amazon can successfully apply that knowledge to the B2B world. Lisa Reisman, managing director of MetalMiner, says: "Amazon can be a strong player in smaller-sized businesses that don't have integrated processes and systems, but companies that operate fully integrated vendor replenishment businesses will not be so quick to switch to Amazon. Nonetheless, it's a disruptive offering and will be interesting to watch over the longer term."
Big growth in B2B
To give you an idea of just how quickly B2B e-commerce is growing, data from the U.S. Commerce Department indicates that online wholesale transactions increased at a compound annual growth rate (CAGR) of 34% from 2000 to 2009. This explains why retailers like Staples and Lowe's are investing heavily in their online offerings.
Another company beefing up its B2B site is industrial-supplies distributor W.W. Grainger (NYS: GWW) . While the wholesaler's catalog of nearly 900,000 items trumps the 500,000 touted by AmazonSupply.com, I wouldn't be surprised to see Amazon bulk up its product offerings once the new business is up and running.
Then again, I doubt Amazon will dethrone Grainger in the industrial space anytime soon. According to Internet Retailer, only 25% of Grainger's sales come from e-commerce. However, the company made a move to change that last month by investing $40 million to expand its online sales channel. Nevertheless, this adds another high-speed growth market to Amazon's collection.
I own shares of Amazon and plan to continue building my position in the stock going forward (once the holding period is up). The stock has been a longtime favorite of mine in Motley Fool CAPS, and I suspect that it will continue to grow in value as the company's investments start to pay off. It's important to remember that Amazon isn't the only company disrupting the industrial and manufacturing space. Get a free report from The Motley Fool titled "3 Stocks to Own For The New Industrial Revolution." In this special video report you will discover one of Jeff Bezos' pet investment projects and find out how you can get in on the action.
At the time this article was published Fool contributor Tamara Rutter owns shares of Amazon.com Follow her on Twitter, where she uses the handle @TamaraRutter, for more Foolish insights and investing advice. The Motley Fool owns shares of Amazon.com and Staples. Motley Fool newsletter services have recommended buying shares of Staples and Amazon.com and writing covered calls on Lowe's. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.