Retail viewpoint: Are marketplaces the right trick to get more treats?

October 26, 2018

The news was sweet as core retail sales in September showed a 0.4% month-over-month gain and a 4.6% year-over-year jump. August retail sales stayed flat, revised from a 0.2% surge previously reported by the Commerce Department1. But in September, many retail segments posted strong results. Sales at clothing stores rebounded 0.5% after tumbling 2.8% in August. Receipts at furniture stores increased 1.1%2. Spending in department stores fell 0.8 percent, but sales at non-store retailers were up 1.1%3.

That last statistic comes as no surprise. Online shopping is increasingly owning a large portion of overall retail sales. And now retailers are leveraging another burgeoning trend: marketplace platforms.

Creating a platform for others to sell products and services often reaps great profits. Think of Facebook charging businesses to serve up billions of ads, or Uber connecting millions of passengers to drivers and taking a cut of each fare. Retail is now bringing this concept to online shopping.

Of course, the option to open a marketplace is, in most cases, only available to retailers that already have an existing loyal and large userbase as well as operational infrastructure in place. But a marketplace that connects third-party sellers to customers is fast becoming a hot ingredient for these retailers, as it can attract investment and potentially lead to higher profits.

One recent example of the growing buzz was the Farfetch IPO in September, with investors eager to own a piece of the global platform that hosts high-end boutiques. Shares popped4 on opening day but are down since. Incredibly, though, Farfetch sold almost $900 million5 worth of luxury goods in 2017 without owning a single unit of inventory. Earlier this year, a beloved American apparel store set up a highly curated marketplace that boosts brand image and bolsters revenue. And Amazon embarked on a campaign to promote its successful marketplace as a way for small- and medium-sized businesses to reach a larger customer base.

Data tells the tale

If we follow the data, there is a strong case for the marketplace model to drive revenue, grow breadth of product assortment, and increase brand awareness. At the same time, it limits exposure to the typical retailing risks of high startup capital, inventory carrying costs, and losing margin to heavy discounting on goods that don't move.

Since 2016, the portion of Amazon's revenue from third-party selling services has increased at more than double the pace of its direct online sales in every quarter barring one (see Figure 1). And ever since Walmart got serious about its ecommerce marketplace in 2016, the number of SKUs available through the retailer's website has increased more than seven-fold (see Figure 2).

In 2017, 56%6 of all online sales in the business-to-consumer space took place on marketplaces. With the holiday season around the corner, the potential for retailers to leverage this behavior remains high. The projected 3.1-4.1% jump7 in holiday shopping this year could mean an extra $18-$24 billion in total holiday sales over last year's number of $585.5 billion8, and estimates say, as many as a third of Americans9 are planning on doing their holiday shopping online.

While consumer preferences for buying clothing, shoes, books, and media online remain strong, other products, including groceries, cleaning, and pet supplies, are picking up (see Figure 3). Marketplaces that offer these products are likely to see growth.

The right ingredients for success

While this paints a picture of great opportunity, is the marketplace model right for all retailers? Here are some things to assess before forging ahead:

  • Keep an eye on curation: Brands and products coming to the marketplace must align with the retailer's existing offering, so loyal consumers do not get confused or alienated and to avoid cannibalizing merchandise that is sold directly. Two levers to consider are merchandising and pricing. The merchandising lever could mean reviewing and approving every listed item on your marketplace and working only with trusted brands. If you're a larger marketplace, however, there might be too many listings for individual approvals, so pricing can act as a self-curation mechanism. The pay-per-listing model can create a natural cost barrier that encourages sellers to post only items that customers are likely to buy.
  • Don't forget about customer experience: Studies have shown that online shoppers prefer to purchase directly from a retailer when buying a product for the first time, then browse marketplaces for repeat purchases10, looking for the best deal. If you've already set high expectations with the first buying experience, you may lose a customer for good if you fail to meet them again on marketplace sales.
  • Study your operations: Maintain operational costs by leveraging existing infrastructure, capital and, personnel. Operating cost considerations can vary based on the desired setup and whether you are starting from scratch. Some operating costs to consider are fulfillment (shipping costs, warehousing space, systems, personnel, etc.); back-office support (customer service, vendor service, accounts payable, etc.); and marketplace website operations and maintenance.

Successful marketplaces, including Amazon, have leveraged their external brand partners to test new categories and markets, gather learnings, and assess which ones to develop or source in-house. While there is undoubtedly a world of opportunity, consider carefully if this model is the right way to go for you. It's a fine line between trick or treat, after all.

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