The Impact of the Internet

Jan. 1, 2020
I think the aftermarket has reached the point where technology adoption is beginning to climb quickly — and with it, disintermediation.
Last month, I spoke about the issue of traditional WDs providing drop ship fulfillment for Internet retailers. This is not news — it’s been going on for years. What may be news is the trajectory of this phenomenon in the aftermarket.  Everyone knows the aftermarket has been a late adopter as far as Internet technology is concerned. More deft industries have long since faced the pricing problems inherent in disintermediation (the practice of eliminating intermediaries in a supply chain) and have seen them work themselves out. There have been huge winners and losers (Amazon and Borders come to mind). Those types of “shaking out” consequences may be inevitable in all industries, but by nature their emergence has been and will be pinned to adoption. I think the aftermarket has reached the point where adoption is beginning to climb quickly — and with it, disintermediation. The real irony of our situation, however, is that distributors may be disintermediating themselves. Let me explain why I say that.

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Intuition and a few phone calls have led me to believe that most of the WD fulfillment business is being done at exceedingly low margins. Translation: Internet fulfillment parts are being sold at price points below what is typically charged to their regular customers. Distributors who participate in this practice are effectively putting someone’s traditional core customers (jobbers) at a profound price disadvantage.

On the surface, selling around your traditional customer base at price points below what you charge them sounds like a bad strategy. But if most of the fulfillment is being done outside of your trading area, couldn’t it be a good idea? I think further analysis puts it in the former category — a bad strategy. Yet, many are pursuing this course with the justification that it is business going out of their trading area.

The challenge here is that by not engaging in the practice, a distributor lessens the margin impact on a colleague in another area, probably not diminishing the impact on his business. The reason is that Internet resellers typically look to fulfill orders from a state other than where the order was placed. The simple reason being that by doing so, they are not required to collect state tax on the transaction. And that represents a price advantage of as much as 10 percent. Hence, when the Internet reseller combines the tax advantages with the deep discount the supplying distributor agrees to and the margin that the jobber would typically receive, the price can be 15 percent to 30 percent lower than what the same parts are on a store shelf. And in an economy where everyone is seeking a deal, it is clear that more consumers (and even shops) are beginning to at least work that way.

Many manufacturers say this practice has not gone unnoticed by major retailers. Disturbed by sales they are losing, retailers are approaching their suppliers concerned about a practice they perceive is collapsing pricing in the aftermarket. Clearly manufacturers have no ability to do anything about distributors who are selling at reduced margins to Internet sellers. 

Let me be clear, the numbers of transactions being done by Internet sellers are still minuscule by comparison to the more traditional way parts are sold. But the trend warrants watching to see where it might take the aftermarket. 

There is other evidence in the marketplace that may suggest where this trend might be taking us. Case in point: Amazon discovered that the wait for delivery of the products they sell was causing them to lose sales with some customers. As such, they have recently begun same-day delivery in several large metro areas for as little as an $8.99 fee. Just this week, I heard a report about Wal-Mart. Concerned about Amazon’s move, they are testing their own same-day home delivery in several markets. When the likes of Amazon and Wal-Mart get into the same-day delivery business, we in the aftermarket would be well served to pause and reflect on how that trend might impact us.

Since this whole Internet selling issue emerged in the aftermarket more than a decade ago, most of us have held the attitude that sales via the Internet will always be a mere pittance because “cars have to be fixed today and no one will wait for a part to arrive UPS.” I’m not so certain we can stand behind that truism much longer. 

Next month, we will look at how these and other emerging trends might redefine the way we do business in the aftermarket. 

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