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The marketplace race

January 6, 2014 02:43 PM
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For the 2012 holiday season, Wal-Mart Stores Inc. could offer online shoppers access to fewer than 2 million products. A year later, by the time consumers put away their Halloween costumes and shifted their attention to the new holiday spending season, Walmart.com featured approximately 6 million SKUs.

The marketplace sellers Wal-Mart allows to sell on Walmart.com—sellers such as eBags Inc., Wayfair LLC, Tool King LLC, Plumstruck (part of Hayneedle Inc.), ShoeBuy.com Inc. and ProTeam (part of Fanatics Inc.) —provide roughly 80% of that expanded product selection. While Wal-Mart has developed its marketplace program slowly—until recently it had only the six sellers noted above—it has been authorizing more retailers to sell through Walmart.com and says it plans to expand its selection to "tens of millions of products" in the next few years.

"We're filling in gaps, for example, around sporting goods," Neil Ashe, Wal-Mart's global e-commerce chief, told reporters last year. "We're asking ourselves, 'What's the best possible way to get to the assortment we should have?'"

Like Wal-Mart, the No. 4 online retailer in North America, other top retailers are also aggressively expanding their online product selection by developing marketplaces. Staples Inc., the second-largest e-retailer in North America by sales after Amazon.com, in October announced plans to build an online marketplace on Staples.com and thus increase the product selection available by at least 400%. Once that marketplace is up and running, five of the top 10 e-retailers in North America—Amazon, Staples, Wal-Mart, Best Buy Co. Inc. and Sears Holdings Corp.—will be operating shopping portals where other retailers sell in addition to the host company. That's up from just one—Amazon—five years ago. And that doesn't include Newegg.com Inc., No. 14 in the Internet Retailer 2013 Top 500 Guide, which launched its marketplace in 2010, or eBay Inc., which is not ranked in the Top 500 Guide because it is not itself a retailer.

The business reasons driving marketplace development are myriad, though they tend to converge around one theme, experts say: Keeping up with Amazon.com and, to an extent, eBay. Together those two e-commerce companies account for most of the 20% to 25% of total U.S. online retail sales that go through online marketplaces, estimates Scot Wingo, CEO of ChannelAdvisor Corp, which helps retailers sell through marketplaces and other online channels. And the two marketplace veterans continue to grow: eBay in the third quarter, for example, reported that the value of merchandise sold on its U.S. marketplace, excluding vehicles, increased 15% year over year to $7.4 billion.

That's not to discount other motivating factors, such as earning commissions on marketplace sales. E-retailers take a cut of each product sold through their marketplaces; Amazon, for instance, takes 6% to 25%, depending on the product category. Those commissions may be small relative to the margins e-retailers can make on products they stock and sell themselves, but they represent "nearly 100% gross margin and therefore help the reported gross margin rate, a key metric for traditional retailers," says Matt Nemer, a Wells Fargo & Co. analyst who follows some of the largest e-commerce players. "Marketplace products are owned by a third party, so there is no inventory or markdown risk. The ROI is very high."

Additionally, he says, the expanded "product breadth" helps traditional chain retailers meet the challenges of having limited space inside stores and, apart from giants like Wal-Mart, relatively limited sources of supply, including on product categories outside their ken—issues that don't dog Amazon and eBay in similar ways.

But like so much else in e-commerce, it's the shadow of Amazon that seems to underlie much of the marketplace push.

In March, for instance, Bloomberg News reported that minutes it obtained from a meeting of Wal-Mart executives showed them talking about the savings Amazon realized from "offloading shipping costs" to marketplace sellers, and how Wal-Mart's marketplace effort could represent another arrow against its web-only rival. Wal-Mart declined to comment specifically on that report. Asked specifically about competing with Amazon, Ashe said: "We don't have perfect overlap geographically or category-wise with any of our competitors. But we recognize that we compete with pretty much everyone else, and we're comfortable with that."

The customer overlap is growing. 53% of Wal-Mart customers were expected to also be Amazon customers by the end of 2012, compared with 47% in the fourth quarter of 2011, according to research firm Kantar Media. And Amazon represents an even more direct challenge to others: 79% of eBay shoppers also patronize Amazon, as do 74% of Nordstrom customers, according to a study that measured shopping trends before the 2013 holiday season.

To the extent the newer marketplace players hope to compete by offering the kind of broad selection found on Amazon and eBay, they have a lot of catching up to do, as the two big incumbents have had years to recruit merchants and to learn how to manage them to ensure customers are satisfied with their purchases. The more than 2 million retailers on the Amazon marketplace as of January 2013 included 364 of the retailers in the Top 1000 as measured by revenue; eBay had 130 Top 1000 merchants, according to Internet Retailer's Top500Guide.com. Wal-Mart does not release how many sellers it has on its marketplace.

Retailers are reluctant to describe their marketplace moves as playing offense or defense against Amazon and eBay, but context helps in understanding how marketplaces can help. Take Staples. The chain appears well prepared for the marketplace race—and would seem to have the motivation of a merchant worrying about a shifting customer base and declining demand for its core products.

The chain took in some $10.3 billion in web sales in 2012, down 2.8% from the year before, while the company's overall sales fell 1.2%. That's a reflection of shrinking demand for products such as paper and printers as communications become electronic: U.S. office supply sales were 1.7% lower in 2012 than 2003, and down 25% when accounting for inflation.

Meanwhile Staples and rivals like Office Depot Inc. face more competition on the web. Amazon and Wal-Mart are among the general merchandise retailers that have become more aggressive in selling office products online—driving Staples in 2013, for instance, to match Amazon prices on identical product for the holiday shopping season.

To compete online in the future, Staples is taking steps to offer more products on its e-commerce sites, without investing a lot in additional inventory. The retailer aims to increase its B2B and consumer product offerings to more than 1 million SKUs from about 200,000. It plans to get there via a combination of its own sourcing and fulfillment, drop-shipping by suppliers and products offered by third-party sellers through a marketplace. The marketplace will enable Staples to boost product categories where its own SKU range is shallow. For example, Niraj Shah, CEO of home furnishings and decor e-retailer Wayfair.com, says he expects to list 50,000 SKUs on the Staples marketplace this year.

"Businesses have lots of needs beyond office products, and that's what we're going after," says Faisal Masud, Staples executive vice president, global e-commerce. "Businesses may need hard hats or networking technology, or products for their employee break rooms. We'll be covering any business needs." That will help move Staples into product categories, such as janitorial supplies, not impacted by the move to digital communication. And Staples will take a commission on marketplace sales, as all commercial marketplace operators do.

Among the biggest challenges is building the technology to support the increasing number of SKUs and product information, and enabling self-service features for third-party sellers. Staples, like Wal-Mart, is making big investments, including in developing e-commerce-focused research centers. Staples opened the doors of its "Velocity Lab" in the Boston area in December 2012 and plans to build another in Seattle. Those centers, and the marketplace push, fold into Staples' larger effort to reduce its retail floor space by 15% over the next two years as more consumers use the web and their mobile devices to shop.

No matter its size and e-commerce investment, though, Staples will still have to figure out how to get out from under the shadow of eBay and Amazon, says Retail Systems Research LLC managing partner Paula Rosenblum. She suggests Staples could better capitalize on its strong brand by selling more private-label products, rather than channeling sales by other sellers.

Andy Hoar, an analyst at Forrester Research Inc. who specializes in B2B e-commerce, says Staples will need to develop effective strategies for getting its traditional office supplies buyers and contractors to buy things like power tools, and it will need to offer a high level of customer service across its new product categories as it competes with Amazon and eBay.

While Staples benefits from a large base of business customers, small and large, 12-year-old consumer electronics e-retailer Newegg is relying on its large supplier base in Asia to offer products on its marketplace that shoppers may not find elsewhere. That's a key advantage in the online consumer electronics space, where many sellers sell the same products, producing thin profit margins. Being able to offer a wide array of differentiated product gives Newegg an advantage as it looks to expand further globally, says Soren Mills, chief marketing officer of Newegg North America.

Mills says Newegg's growth will come in part from Newegg's relationships in Asia, especially China.

"Our strong ties to Asia and to China in particular give Newegg an efficient pipeline of innovative products we can then make available to our customers at very competitive prices," he says. Among the current sellers is TV manufacturer Sichuan Changhong Electric Co., which is not currently sold by competitors like Best Buy or Sears.

Newegg won't provide dollar figures for its marketplace growth, but Mills said in early December that the gross merchandise value of products sold in its marketplace was on track to increase 109% year over year in 2013.

Newegg, which recently added features like quicker fulfillment services for sellers and more major retailers like Toys 'R' Us Inc., says having a broader selection helps introduce Newegg to new customers.

The marketplace brings more women to Newegg, where 60% of the shoppers are male, according to Top500Guide.com, as well as shoppers interested in more than technology products.

"Many of our new customers who find Newegg via the marketplace eventually find their way to our assortment of core tech and I.T. products," Mills says. He tells Internet Retailer that nearly half the new customers that Newegg attracts to its marketplace eventually purchase from the e-retailer's "core" technology and consumer electronics products.

Whether the new marketplace operators will be successful may well depend on how well they help their sellers get goods to customers. In that regard, they will be competing with Fulfillment by Amazon, which lets sellers on Amazon engage Amazon itself to store inventory and ship orders. Not only do the sellers benefit from Amazon's large network of distribution centers, their products can also be flagged as eligible for Amazon Prime two-day shipping, which makes them more attractive to the estimated 10 million or more Prime members. Amazon does not disclose how many consumers have signed up for Prime.

Amazon and eBay have set a high bar on fulfillment. Amazon was on track to be operating at least 100 fulfillment centers around the world by the end of 2013, roughly half of them located in the United States, including many near large cities to speed deliveries to consumers there, according to an estimate from ChannelAdvisor's Wingo.

EBay, meanwhile, in October bought same-day delivery firm Shutl Ltd. as the online marketplace expands its one-hour delivery service eBay Now to an anticipated 25 U.S. cities by the end of 2014, up from four metro areas as of late 2013. Customers pay $5 to receive items from local retailers including Toys 'R' Us and Best Buy. The acquisition reflects consumers' expectations of not only free shipping on many orders, but fast delivery, says Michael Jones, vice president of merchant development for eBay.

In response, newer marketplace operators are offering fulfillment options for sellers to make selling through their sites more attractive.

Take Sears, for instance. In March it launched Fulfilled by Sears for marketplace sellers. "We have the ability to ship orders much faster and more cost-effectively than other sellers do based on our national footprint of stores and warehouses," Imran Jooma, the chain's corporate executive vice president and president of online, marketing, pricing and financial services, said at the time.

Marketplace sellers pay fees for storage and handling. Client retailers also must cover their own costs for shipping products to Sears' fulfillment centers and from the centers to their customers' addresses, but they can ship at the volume discount rates Sears gets from carriers, the retailer-cum-marketplace operator says.

Newegg last year launched "Shipped By Newegg" in hopes of shipping 99% of orders within 24 hours of validating payments for those purchases. Shipping costs vary depending on package size and other factors—for instance, an extra $40 for TVs with screens larger than 42 inches, according to Newegg. The program also charges a monthly inventory storage fee of 43 cents per cubic foot from January through September, with that cost increasing to 57 cents from October through December, the holiday shopping season.

Wal-Mart, meanwhile, in 2013 introduced free shipping on orders over $50 on 98% of the items Wal-Mart itself sells online, but allows some orders placed with marketplace sellers to count toward the $50 minimum, which makes them more attractive to shoppers. About half of marketplace items are eligible for the free shipping program, a spokesman for the chain says.

Eric Best, CEO of Mercent Corp., which helps retailers sell on online marketplaces, says boosting fulfillment services certainly can play a role in the survival and growth of marketplaces, but that marketplaces must push themselves to do more than match Amazon and eBay. "It's not enough to be able to execute as good as Amazon has," he says. "You still have to have some unique value proposition."

And while newer marketplace operators race to develop their sites and services, Amazon and eBay are hardly standing still. Both took steps last year to make their marketplaces more attractive to sellers. Both, for example, announced programs to give marketplace sellers more access to loans, mainly to shore up inventory, and Amazon said it would expand Fulfillment by Amazon to enable marketplace merchants to sell and ship internationally. Amazon did not respond to requests to comment for this story.

EBay lately also has been pushing the message that its marketplace is more seller-friendly than Amazon's, in large part through policy and pricing changes. Those include the ability for sellers to remove poor feedback and ratings when an issue is favorably resolved, along with a revision of its fees that could lead to savings for merchants selling lower-priced items, according to experts. Plus, eBay does not sell products itself, so it does not compete with sellers the way Amazon does.

How many marketplaces can the web support? It's far too soon to say. But it's clear that the starting gun has sounded, and that, while the incumbent players are well in the lead, powerful new competitors are prepared to go the distance.

Thad@verticalwebmedia.com

@ThadRueterIR

 

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