Let's go to market
Are marketplace strategies the next step for strong retail brands?
Google “Tesco launching marketplace” and you’ll find a plethora of stories from a week or 2 ago about the UK’s biggest supermarket readying the launch of it’s new initiative.
Be careful, though, because sandwiched amongst those recent articles is at least one from 2010, when they tried it last time, not to mention a few from 2018 when they finally shut that first experiment down, stating that it had no prospect of ever making any money.
So what’s the deal with marketplaces, and why are they such hot retail news? Next, after all, have followed a marketplace strategy for years and it has grown into a big and important part of their overall offering. Could one work for you, or are there lessons to be learned from Tesco’s faltering first step?
Let’s first of all consider definitions. What does it mean for a retailer to operate a marketplace? Essentially, an online marketplace means a place where you allow third party brands to sell on your platform. They provide the stock, make the pricing decisions and often do the fulfilment (although marketplace giants like Amazon often have an additional paid-for service where those third party retailers can take advantage of fulfilment and other services if they don’t have them themselves).
Why would you do that?
Operating a marketplace alongside your ‘traditional’ retail business offers both direct and indirect advantages:
your customer offering gets broader quickly without you having to invest in creating category propositions or supply chains for new sectors
there is a virtuous circle in being a marketplace (especially online) where the more brands you are selling, the more you become the default destination for both customers and search engines
if you do provide additional fulfilment services, you can end up using a lot of third party business to generate economies of scale from the logistics and warehousing operations you were running anyway
the fast growth you can create when your marketplace offering is working is attractive to investors and lenders, especially if you would otherwise be in a low-growth mature retail category.
So let’s all follow the lead set by Amazon, Next and Tesco and get our marketplaces up and running, shall we?
Hold on, like everything in life there are some downsides and traps too. A marketplace is a very different operation to retailing. In retailing you are carefully curating what you sell, your price points, the way you bundle and combine products and services together.
In a marketplace, you lose control over all of that (however much you kid yourself that your listing rules will keep everything in order) and that loss of control has consequences for your customer offering. It isn’t difficult to find product pages on any of the existing retail marketplaces where the data has been uploaded incorrectly and so products have the wrong photographs or descriptions. Even Next, for so long the titan of UK retail performance, has this problem. Variable quality, uneven delivery experiences and problems with aftersales and returns can all result in your brand being damaged by someone else’s misdeeds.
That’s fine if your customer proposition is “chaotic bazaar where you might find a bargain” but much less so if your brand is designed to mean something and earn you a price premium. That’s partly why the marketplace offering suits the Amazon brand (which has always really been a fulfilment operation rather than a retailer) much better than it sits with many retailers.
Even worse for traditional retailers is the horrid middle ground where you try to apply your existing retailing standards to the third parties who operate on your marketplace. The danger of this ‘neither fish nor fowl’ strategy is that you end up with a marketplace which is uncompetitive versus the giants but still manages to dilute and undercut your core retail offering. I suspect that’s the terrible bind that Tesco found itself in first time around - core retail teams horrified at what was going on in the marketplace, distracting them from their day jobs.
The comparison with Amazon highlights another strategic disadvantage of the marketplace strategy. Whilst it can generate scale for your operations, a marketplace also rewards scale - by and large, the biggest operator will be able to offer the lowest prices. As such, there is a danger for retailers that by moving away from the ‘careful curation generating a price premium’ model towards the ‘online free for all’ model that they are playing into the hands of Amazon, Shein and others with giant operational scale.
And by the way, even those giants are not immune from the customer-experience downsides that a free-for-all marketplace can create. I know many consumers who will now not buy branded consumer electronics from them, for example, for fear of receiving a counterfeit. I was also struck this weekend by this story about the flood of AI-written books onto the Amazon platform which will inevitably make it harder and harder to find the ‘real’ reading material that you actually want. In the end, if you create a sea of unbranded identical knock-off products on your marketplace, you will lose the ability to sell premium products and I can see that happening even to the marketplace giants.
So what’s the answer for you? Obviously, it depends where you are starting from. If your core strength is your operational excellence and the traffic your well-known brand draws to your website then a marketplace might be a high growth, low investment way of capitalising on that.
But if you are a brand-led, premium priced retail operator who prides yourself on careful range management and merchandising, then the treasure-chest of the marketplace strategy might just turn out to be Pandora’s box.