July 26, 2023

The Rise of Ecommerce

Author: Tim Hill, Principal of Eagna Partners

Ecommerce is transforming traditional industries and is not just about competitive pricing

I have been spending some time lately thinking about ecommerce and how it’s affecting the lighting industry.

The effect of online resellers in the do-it-yourself home improvement market has been stunning. For example, in a survey by NPD Group in 2019, 85% of DIYers in the United States had purchased home improvement products from Amazon in the past year, making it the most popular online destination for home improvement shopping. In comparison, 62% had purchased from home improvement stores like Home Depot or Lowe's.

Also, as recently as 2021, a survey by CouponFollow found that 80% of DIYers had purchased home improvement products from Amazon, while 63% had purchased from Home Depot, and 49% from Lowe's. The question then becomes, when do online resellers become a significant factor in the professional space?

ARTICLE CONTINUES BELOW

Upon a casual review from an industry curmudgeon like myself, one can easily scoff at claims of Amazon making inroads into the professional space. Indeed, the traditional lighting distribution network adds significant value else it would not exist. To name a few of these value-add services:

Service and Relationship-based Purchasing: Contractors frequently, have established longstanding relationships with local suppliers. When they reach out for assistance, a known person responds with confidence and problems get solved.
Urgency and Immediate Availability: At times, all projects have tight deadlines or require immediate access to supplies. Local suppliers offer local stock with quick delivery or pickup options, ensuring that contractors can get their hands on the required items promptly sometimes within minutes.
Trade Credit and Payment Flexibility: Local suppliers, especially those with established relationships, often provide trade credit options and flexible payment terms to contractors.
Concerns about Reliability and Warranty: By relying on traditional supply channels, contractors may have more confidence in the authenticity and reliability of the products they purchase including addressing products issues when they arise.

However, a closer look at some additional data may raise an eyebrow or two. In a survey conducted by Electrical Contractor magazine in 2019, 51% of respondents said they had purchased products from Amazon for their business in the past year. Of those, 35% said they had purchased electrical products from Amazon. In addition, a survey by the National Electrical Manufacturers Association (NEMA) in 2018 found that 40% of electrical contractors had purchased electrical products from Amazon, while 83% had purchased from an electrical distributor.

In light of the unique services offered by electrical distributors, the question becomes, why would so many contractors turn to Amazon or others? A few of these factors include convenience, access to a broad range of products, competitive pricing, and fast shipping or delivery services. A deeper dive into some of these uncovers the following:

Mobile Commerce: With the increasing use of smartphones and other mobile devices, Contractors may value the ability to make purchases and access product information while on the go, making mobile-friendly ecommerce platforms an attractive option.
Product Information: Contractors emphasize the significance of detailed product information, specifications, and technical support when making purchasing decisions online. Ecommerce platforms can provide comprehensive and accurate product information accumulated in a single portal without the hassle of searching multiple manufacturer’s sites.
Accessibility: Small to mid-sized contractors, including the so called trunk slammers or tennis shoe contractors, suddenly have access to a huge selection of products at competitive prices without the hassle of wading through the complexities of the traditional channel.

One cannot have a comprehensive discussion about ecommerce versus traditional channels without wading into the quagmire of pricing.

First let us stipulate that one can always find a better price if they look for it. It is fairly straightforward, but sometimes labor intensive, to contact multiple distributors selling various manufacturers to get a cross section of pricing for a particular type of item.

Also, anyone in the industry has a story of finding a lower price “on Amazon.” While this can be true in the micro, I have found that Amazon and other ecommerce pricing to be rational in most cases. Manufacturer’s typically have a Minimum Advertised Price (MAP) pricing policy that sets a minimum price at which their products can be advertised or displayed by resellers which helps. It is important to understand that products sitting in a warehouse for an extended period of time costs money. This means very low prices that that frequently that get reported are at liquidation levels with limited stock. My advice is always, “buy the 5 that are available, as there won’t be any more at that price.”

Dumping excess stock is not unique to ecommerce, but it is highly visible. Taken on the whole, excluding liquidation pricing, sellers and resellers are motivated by profits and maintaining pricing is the biggest lever to be pulled for that. A last word on MAP pricing policies: In exuberance to protect the legacy channel, occasionally the MAP price is established at a price far exceeding market levels, which comes with its own inherent cautions and dangers.

Conclusions and Advice

History provides too many examples of companies that were resistant to change including Kodak, Polaroid, Western Union, Blockbuster, and Blackberry. These and other companies with failures in strategy highlight the importance of recognizing market changes, embracing innovation, and adapting business models to evolving consumer preferences. Companies that fail to adapt to shifting market dynamics and disruptive technologies often face significant challenges and may ultimately pay a heavy price. Having lived through what was arguably the most disruptive period in the history of artificial lighting as product portfolios and applications accepted LED technology, the fundamental question is what should the industry when faced with these fundamental shifts in the access and flow of information and trade? I think that depends greatly upon where you stand in the value chain. Here are few top-of-mind issues:

For Manufacturers: Recognize and embrace the ecommerce channel. Develop a winning strategy that accepts a significant portion of revenue in the next few years will emerge from these companies, while addressing the disruption that will occur among the traditional partners of lighting agents and electrical distributors. I’m reminded of a song from childhood, “Make new friends, but keep the old ones. One is silver and the other gold.” Manufacturers walk a very fine line trying to keep everyone happy without writing big checks, but you’ve been doing that for decades.

For Distributors: Leverage your extensive strengths in service, distribution and buying power, but recognize that large segments of the traditional model (stock, counter, runner) is being replaced by the convenience of click, buy, ship. Personally, I think the best to places for investment are: 1) Integration with Business Processes: Contractors seek ecommerce platforms that integrate smoothly with their business processes, such as seamless ordering systems, online invoicing, and tracking capabilities. 2) Mobile Commerce: Contractors value the ability to make purchases and access product information while on the go making mobile options compulsory.

For On-line Resellers: Keep doing what you’re doing baby as you have the branding and momentum to shake up the industry. Embrace the segments of the market in which you can compete. Develop sales practices that are more favorable to the professional customer such as payment terms and more favorable returns policies. Find more way to integrate back-office processes with open APIs for order placement, tracking and fulfillment.

About the Author:
Tim Hill is a lighting industry veteran executive having held marketing and product management leadership roles for such companies as Signify, Cooper Lighting, Cree Lighting and RAB Lighting. He is currently the Principal of Eagna Partners and can be reached at timothya.hill@yahoo.com