August 2017
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Metals Will Be Dominated By Marketplaces, But Whose?

By Jonathan Goodwin

The market size for metals distribution in the U.S. is estimated to be $183 billion. However, this market is plagued by two characteristics that could cause unprecedented disruption: it’s both highly commoditized and highly fragmented.

Metals distribution is divided among thousands of competing firms, most of whom sell largely the same products. This fragmentation means that no one player can block a very powerful new entrant: Amazon. The e-commerce platform is best known for dominating and defining online shopping for consumers, but it has added a new focus to its portfolio in B2B distribution.

Over the last two years, Amazon Business has been making a lot of noise in adjacent verticals, like industrial, electrical, and medical supply. It captured $1 billion in sales inside its first year – with some estimates placing it now at about $3 billion per year – and it’s growing at a 20 percent month-over-month clip. It won’t be long until Amazon is selling metals at cut-rate prices.

A Marketplace for Metals
The secret to Amazon’s 23 years of success is its platform business model, specifically what we call a product marketplace. The majority of goods purchased on Amazon’s marketplace are actually sold by third parties, with Amazon simply facilitating the transaction.

This model works well because it benefits many players involved. The owner of the marketplace collects a piece of each transaction without needing to invest in additional
inventory.

Participating sellers are given access to a fresh channel for customers without spending more on marketing and sales or on fulfilling the transaction. In the metal services industry, a marketplace like Amazon Business would benefit small and midsize distributors who get access to additional customer demand at very low marginal cost.

In other words, marketplaces scale really well by removing an industry’s natural overhead costs and connecting buyers and sellers more efficiently. The marketplace provides pricing transparency and competition among suppliers to give better value to customers.

The winners in this scenario are Amazon, its third-party sellers/distributors and, most important, the end-customer. The losers are larger distributors who don’t participate, whatever the reasoning, because the market will gladly shift toward increased transparency and competitive pricing.

Ride the Disruption

Sooner or later, a marketplace will come to dominate the metal distribution industry. The industry is simply too fragmented to prevent this change. Additionally, most of its products are commoditized, which strongly favors a marketplace business model.

Since the end products, whether that’s sheet or beam or some other product, are largely the same, the race to win with a marketplace will be won by the business that makes both sides happy – the sellers and the customers – through a fair balance on price, value-added services for all parties involved and superior logistics to reduce any friction.

The path ahead for small and midsize service centers is to embrace the marketplace opportunity and seize it, whether it’s selling on Amazon Business or partnering with a different marketplace, one perhaps created by an industry incumbent or a savvy startup.

A great example of a large incumbent moving to innovate metals distribution is Kloeckner Metals. Well aware of the disruption coming its way, the company is rolling out a comprehensive digital platform strategy and is positioning itself as an innovative leader in the industry. Smaller firms should look to Kloeckner Metals and other big distributors to jointly create a marketplace for leadership against an Amazon intrusion.

In the end, the industry will be dominated by one or two winners, so it’s best to act early. Amazon captured a majority of all consumer e-commerce in 2016, and it’s determined to become the “everything store.”

Will another marketplace built by the industry rise up before it’s too late? Only time will tell, but the lesson is clear all the same: every distributor and service center will be affected by the impending marketplace disruption, and all will need to build a strategy for how to benefit from this transformation, before it’s too late.

[Jonathan Goodwin is the marketing coordinator for Applico, a New York-based platform innovation company. ]


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