Retailers are Investing in Online Marketplaces, Here’s Why
With eCommerce sales taking off during the pandemic retailers around the world are trying to figure out how to keep the momentum going. Online marketplaces are now seen as an important part of future growth. Amazon, eBay, Alibaba’s Tmall and Japan’s Rakuten are all examples of popular online marketplaces but now traditional retailers are trying to get a piece of that pie.
What’s the difference between an online marketplace and lets say shopping for goods on Sephora’s website? On an online marketplace sellers typically pay a commission on each sale made on the marketplace and the marketplace owner does not own the inventory. These sales are called third party sales. If a retailer, like Sephora, does not have third party sellers on its website then it can buy merchandise wholesale, which it then owns. After the retailer buys goods wholesale it charges customers a markup when they are sold online.
When you are shopping on Amazon you can see the subtle distinction between first party and third party sales. When you are about to make a purchase on Amazon if you look below the buy now button at times it says: “ships from and sold by” Amazon. That indicates that it is a first party sale and the goods have been purchased wholesale by Amazon. But for third party sales you will see that it says “sold by [insert name of the seller] and fulfilled by Amazon”. Amazon does not own that inventory but it will manage shipping your purchase to you.
Online marketplaces are growing in popularity for several reasons. For one, marketplace sales tend to be more profitable since there is less of an inventory risk. The retailer also doesn’t have to tie up working capital to maintain inventory levels. If you have a third party seller on your wellsite you also don’t have to worry about having to clear out end of season inventory at low prices which eat into profits. That risk sits with the seller. But inviting third party sellers onto your platform is not without risk. If the seller is responsible for customer service, shipping and returns and any of these functions are not executed properly it could ruin existing customer relationships.
Marketplaces also allow retailers to expand their reach since they don’t have to do all of the work of sourcing each and every item sold on their website. They also help retailers to offer a broader selection of merchandise. Speaking about why online clothing retailer ASOS has third party brands on its website, Nick Beighton, chief executive of ASOS, said: “there was no way that a monobrand was going to capture enough of a twenty-something audience.” “We asked our staff and no one had more than 20% of any one brand in their wardrobe.”
Throughout its 137 year history Marks & Spencer has primarily sold its own brands. But recently it opened up its website to outside apparel brands. In a small pilot last October where Marks & Spencer sold womenswear brand Nobody’s Child on its website Marks & Spencer found that close to 10% of customers who bought the brand were new to Mark’s & Spencer womenswear. With the success of that collaboration Marks & Spencer is adding even more outside brands to its website as it tries to compete better with online retailers like ASOS and Boohoo.
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Many of the largest retailers in the United States are also building out their own third party marketplaces. This is a natural fit because they already have millions of customers who visit their websites each week. Walmart is one of those retailers. Walmart has 120 million online visitors each week. To boost eCommerce sales Walmart is focusing on adding more third party sellers to its online marketplace and sees that as a “huge opportunity.”
In the second quarter of 2020 Walmart’s marketplace sales were up in the triple digits, growing faster than its first-party eCommerce business which was up 97%. Growth in marketplace sales have also had a positive impact on Walmart’s margins. Since less than 10% of Walmart’s sales are made online and its eCommerce business still isn’t profitable expanding its online marketplace is a way to achieve an important goal, profitable sales growth.
In another effort to increase marketplace sales Walmart is offering marketplace sellers services to make their job easier. One of those services is Walmart Fulfillment Services which Walmart launched last year. This service allows sellers to transfer responsibility for logistics activities like picking, packing and shipping to Walmart so they don’t have to conduct these activities themselves. This is something Amazon did over 15 years ago.
Kroger, is planning to double its eCommerce sales by 2023 and expanding the online marketplace it established last August is a critical part of its path forward. Its marketplace will allow Kroger to sell a broader range of goods online in categories such as housewares and toys.
These marketplaces are also lucrative because they provide opportunities for retailers to charge sellers advertising fees for better product placement on their websites. Advertising has played a key part in increasing Amazon’s profits. Amazon is expected to earn $23 billion in advertising revenues in 2021 up 30% from last year. Amazon has also increased the proportion of its sales that come from third party sellers over time. In 2021 it is forecasted that Amazon’s third party sales will reach $220 billion to account for 60% of Amazon’s eCommerce sales.