The Age of e-Marketplaces is here - Why this is an opportunity for retailers and how to thrive in this new world...

In 2020-21, as the pandemic surged through the world, the online marketplace (e-marketplace) has become the new buzzword in retail. Amazon in US and Alibaba in China have demonstrated the scalability and staying power of an e-marketplace business.

Offline retailers started their digital journey by digitizing their offline processes. In the second leg of their digital journey, they launched their online webstore and shopping app. Then there comes a point where their online business growth stalls. They are faced with the choice of partnering with third-party (3P) marketplace platforms to leverage their traffic or building their own marketplace to grow traffic sustainably. ?

Why marketplace transformation is imperative for retailers

Digitizing offline retail operations and taking the retail business online were both strategic initiatives but they were not a departure from the core business model of a retailer. Building and operating a marketplace is a new business model, one that retailers are neither familiar nor comfortable with. This may explain why retailers have been slow to respond to this trend.

There are 3 types of organized retailers:

• Brands that retail their own products
• Retailers that offer store brands as their core offering
• Retailers that offer products from 3P brands

Brands that retail their own products invest significantly in product innovation and brand building. They are confident of product differentiation and focus on making their products available to consumers across all relevant stores. In this context, they choose to list themselves on all marketplace platforms in addition to their owned webstores. Examples of such brands include Nike, Adidas, Apple, Samsung, etc.

Retailers that offer store brands as their primary offering have relied on their retailing efficiency and value-for-money store brands to attract customers. Such retailers would see a period of success when they launch their webstore since they have a unique selection. Then they will reach a stage where their traffic plateaus. This is when they need to make the choice between listing their selection on 3P marketplaces or transforming into a marketplace themselves. Store brands have been successful by virtue of replicating bestsellers from product brands at a more attractive price. Since the 3P marketplaces have their own retail arm that follows a similar strategy, store brand-led retailers feel their selection can be replicated and they could lose market share if they partner with 3P marketplace platforms. Store brands and direct access to customers being central to their success, they would prefer creating an owned marketplace to drive sustainable growth.

Retailers that offer products from 3P brands have a business model that resembles a marketplace. Yet they face the challenge of differentiating themselves vis-à-vis a 3P marketplace platform. Unlike brands and retailers with store brands, they don’t have a strong owned offering that gives customers a compelling reason to visit their webstore. In this context, they would need to make a choice between sticking to their existing selection and being redundant online or listing their selection on 3P marketplaces or transforming into a marketplace to expand selection and compete directly with 3P marketplaces. The scalable choice is building their own marketplace.

A vast majority of retailers (those with owned store brands and those that retail 3P brands) would do well to transform their online retail store into a marketplace to sustain growth. Their digital business growth is likely to resemble the below chart with both online webstore and store on the 3P marketplace being limited in their growth potential. A successful e-marketplace opens up other growth avenues like advertising.

The top UK fashion retailer, NEXT transformed their online store into an e-marketplace with 70% share of selection from 3P brands. NEXT summarized succinctly in their 2021 annual report why they transformed to an e-marketplace, “The business has followed the money”.

What kind of marketplace should a retailer build?

The next question to address is what would give the retailer the right to win vs. a horizontal marketplace like Amazon.

A retailer should analyze its current customer profile and its potential customer segments to decide on the selection it should carry. While a horizontal marketplace caters to all needs of all customers, a retailer must add value through curation. The following criteria could be used for curation:

• New brands => Onboard brands that do not compete directly with the retailer. A retailer could focus on brands that operate above their price point while the retailer’s store brand caters to the more affordable price point; eg. Next UK onboarded brands that operate above their price point when they created their marketplace
• New products/categories => Onboard products that the retailer does not offer in its range, yet forms a part of the customer’s consumption basket eg. A fashion-focused player could onboard fashion accessories from other sellers

Having identified the selection to onboard, the next question to answer is why customers would choose your platform. Can you offer the curated selection with a differentiated experience vs. a horizontal marketplace? In what way would the experience on your marketplace be better – easy browsing, customized filters, in-depth catalog, better quality control, faster speed of delivery, or better customer service? – Defining the USP is critical to make resource prioritization choices while building the marketplace.

How can a retailer build a successful e-marketplace?

A successful e-marketplace is a platform that brings together a demand-side and a supply-side both of which complement each other to create a flywheel effect.

On the demand side, buyers seek a wide selection, affordable price, and good service. On the supply side, sellers seek scale and growth. By design, a marketplace is attractive to sellers when there are more buyers and it is attractive to buyers when there are more sellers. In this sense, the creation of a marketplace is a classic chicken and egg problem.

A retailer starts from a position of advantage - a customer base that shops with the retailer’s online store. This is the selling point to attract sellers, brands, or other retailers to list their selection. A retailer would be successful in attracting sellers only if it has significantly higher traffic than the seller’s own webstore and hence contributes a meaningful share of the revenue. An equally important enabler is the ease of doing business on the platform. The marketplace seller experience should be as close to what they are used to with a horizontal marketplace or even simpler. Last but not the least, an e-marketplace needs a minimum scale in the supply chain to achieve profitability.

How should the marketplace team be structured?

There are 3 functions that need to work together to build a successful e-marketplace and deliver an outstanding customer and seller experience - Business, Technology, and Operations.

The business function is responsible for the P&L of the marketplace. The business model needs to be designed to enable sellers to offer competitive prices to consumers while the platform makes revenues that cover the marketplace platform costs and achieve a target margin. This function should stay on top of the market trends and competitive dynamics and drive all commercial decisions. The business function should take the lead in attracting anchor sellers and managing key accounts.

Technology function is responsible for delivering a seamless experience for sellers and buyers on the platform. This function creates the systems that facilitate sellers to list and sell and enables customers to browse and buy. The systems should be designed to incentivize sellers to offer quality products at competitive prices. The technology platform should be designed to seamlessly integrate the marketplace system with the retailer’s existing ERP system and webstores. The technology team is the owner of the algorithms that govern search and discovery. This function should ensure that the selection brought in by sellers is sufficiently prioritized to drive revenue for sellers without compromising customer experience. The core technology systems to be built specifically for a marketplace are seller administration, product listing management, order management, seller reporting & analytics.

The operations function is responsible for delivering a seamless experience off the platform through timely and reliable pickup and delivery services as well as the resolution of issues. A retailer with an online store would have its warehousing and last-mile infrastructure in place. However, they would need to plan for higher capacity in each leg of the supply chain to handle the order volume growth that comes from 3P seller selection. This function also needs to create a first-mile infrastructure to collect order shipments from the seller’s premises. Building the first-mile infrastructure is tricky since the economics of first-mile pickups would be prohibitive at sub-scale. This is an area where sustained investment is required until the marketplace hits scale.

Partnerships to build the marketplace technology platform

The horizontal marketplaces for whom the marketplace is at the core of their business have built their own tech teams to build the marketplace systems from scratch. Retailers may choose to build an in-house team for this or they could leverage marketplace technology providers like Mirakl or Izberg. Technology providers also offer the advantage of lower capital expenditure since many of them are open to hybrid commercial models where they take a small setup cost and then charge a variable fee in the form of commission on marketplace revenues.

The decision on whether to build or buy should be dictated by the share of the revenue you expect the marketplace to contribute in 5 years. If the marketplace is expected to have a scale of over $100M and contribute more than 20% share of overall revenue, you should invest in building it on your own so that you retain the flexibility to customize it for your needs. If not, it is best to partner with an established marketplace technology provider to build on top of their platform.

When is the right time to transform an online store to a marketplace?

A retailer will see traffic growth in the first phase of opening their online retail store. This traffic growth would continue until the retailer is able to generate awareness amongst its target customer segment in a market. Beyond this point, traffic will either plateau or in some cases, even decline since the selection in the retail store would be steady. This is the ideal point of time to launch 3P sellers’ selection as you have optimized your traffic. However, it is best to build the marketplace capability ahead of this point since it could take up to 6 months to get a minimum viable marketplace product up and running.

In UK and US, many top retailers have already pivoted to e-marketplaces online while this phenomenon is yet to hit scale in India. This is a reflection of the higher online market penetration in the western markets. Tata Group’s Tata CLiQ and Reliance’s AJIO are e-marketplaces that were borne out of this insight.

To summarize the key takeaways:

• Marketplace transformation is the third leg of a retailer’s digital transformation journey. The first leg comprised digitization of offline processes and the second leg was about creating a digital presence through an online webstore
• A branded retailer that can consistently innovate on products can partner with 3P e-marketplaces to drive sustainable growth. A vast majority of retailers (those with owned store brands and those that retail 3P brands) would do well to transform their online retail store into a marketplace to sustain growth
• A retailer must create a curated marketplace with a differentiated experience to have the right to win
• Key success factors for an e-marketplace would be traffic growth, seamless seller experience, and sustained investment to achieve economies of scale in supply chain
• Business, Technology and Operations functions should work together on a shared vision to create an outstanding customer and seller experience
• Technology platform may be built in-house if it is strategic to the retailer. Alternatively, a retailer can partner with a marketplace technology provider to build it
• Last but not the least, the marketplace capability should be built in advance of when it becomes an imperative

The top 3 technology platforms in the world are all e-marketplaces. Amazon is an e-marketplace that connects consumers, sellers, and advertisers through commerce. Google is an e-marketplace that connects consumers and advertisers through search. Facebook is an e-marketplace that connects consumers, influencers, and advertisers through content.

The age of e-marketplaces is here and retailers need to change their defensive lens to see this as an opportunity. Retailers have been prisoners of their past success, clinging on to obsolete business models and hesitant to embrace the digital opportunity holistically. It is not a question of if but when retailers need to embrace e-marketplace as an opportunity. As HG Wells puts it, “Adapt or perish, now as ever, is nature’s inexorable imperative”.