[INSIGHT] The rise and rise of online marketplaces
What’s the latest with online marketplaces? What are the benefits and pitfalls? What does the future look like, and who is doing it?
By Rebecca Saunders, Managing Director, Saunders Retail
Rebecca Saunders is an independent retail consultant – formerly at John Lewis and notonthehighstreet – who works with brands, marketplaces and retailers on buying, ecommerce and strategy.
What’s going on with online marketplaces?
It seems like each week yet another retailer launches a marketplace, with Unbound (Hotter Shoes), Superdrug, Mountain Warehouse, Mango and Kingfisher announcing news of these propositions in the last few months.
I spoke to Khaled Tawfik, a Partner and Managing Director at The Boston Consulting Group, about this rapid rise: “We’ve seen this across categories and across markets – whether it’s in grocery, health and beauty, home improvement, electronics, pet, sports, and so on.”
Tawfik explains that the rise of marketplaces is a global phenomenon, and that “24 of the top 25 retailers in France have launched [a marketplace]”, implying that we’ll soon see even more marketplaces being launched in the UK.
Where – and why – are we seeing marketplaces thrive?
With new marketplaces featuring shoes to sports, health to homewares, there is huge breadth in the types of retailers that are launching this model.
Tawfik, who advises several retailers on their marketplace strategies, explains: “ultimately, a marketplace is suitable for most categories, but it’s particularly attractive where range and selection matters. The obvious [categories] are many of the general merchandise categories, e.g., homewares, DIY products and beauty products.”
In part, the rise in marketplaces is due to technical solutions that have reduced barriers to entry for retailers. As an illustration of this growth, Mirakl – the 11-year-old SaaS platform supporting many marketplaces -described in this article,- delivered transactions worth $4.3 billion in 2021.
Mirakl’s Co-Founder and CEO, Adrien Nussenbaum, explains that the company is growing rapidly, having launched 66 new marketplaces last year. He says, “new technologies like enterprise marketplace and drop ship platforms are empowering retailers to deliver what their customers expect without the risk or cost of buying more inventory”.
In an uncertain economy, reducing risk for retailers whilst simultaneously testing new categories, brands and products is extremely attractive, even if marketplaces often generate lower gross margins than historic business models.
BCG’s Tawfik confirms that launching a marketplace is “an operationally lighter way to scale and test out new markets and propositions… merchants [sellers] take on a lot of responsibility typically conducted by retailers in a 1P [first party] model”.
Nussenbaum agrees, explaining that the operational benefits to marketplaces are “particularly important in times of margin squeezes – the more shoppers move online, the more traditional retail supply chains are stressed, resulting in excess inventory, stock-outs, and a negative impact on customer experience and retail profit margins.”
For a retailer, understanding the full margin impact of their business structure is key. Launching a marketplace may require a change of thinking, particularly by buying teams who might historically have been tasked with reviewing performance at gross margin level.
Aside from launching a marketplace from scratch, acquiring an existing player is one way to gain share quickly and avoid the activities around initial set up of a marketplace. One such example is M&S, which invested in activewear platform The Sports Edit in early 2022. A representative says: “[We] identified the fast-growing online website as a complementary ecommerce platform as we continue our strategic focus on the activewear market.”
Owning The Sports Edit enables M&S to learn further about marketplace operations as well as deepening their activewear expertise. An additional benefit is the visibility and credibility The Sports Edit gives to their activewear own brand, Goodmove. The M&S spokesperson explains “Goodmove is available alongside more than 50 leading premium sports brands including Nike and Adidas, which further cements our position as market leader in women’s activewear and positions us as a credible competitor in the global athleisure market”.
Depth vs breadth
The Sports Edit’s ambition to be “Europe’s leading online destination for luxury sportswear, athleisure wear and yoga clothes” illustrates how a marketplace can deliver authority across an entire category vertical. Tawfik explains: “it’s important for a retailer to launch a set of categories where [they] capture a mission in its entirety… [they] can create a true destination, e.g., pet, home improvement, sports rather than subcategories.”
He continues “for many retailers, it’s not about building ‘another Amazon,’ but rather about making their site ‘the’ destination for the vertical they play in. To do so, it’s important to understand customer needs in that specific category vertical, and building out the marketplace proposition alongside other ecomm developments (e.g., inspiration, community) to best meet those needs.”
In many cases, this holistic approach is achieved through great curation. One such example is Friends of Joules, which launched in 2019 and now offers c.20,000 products from over 400 sellers across product including home, outdoor and garden, gifting, pets and clothing.
Emma Burrows, Head of Friends of Joules, says: “the marketplace aims to replicate and make accessible to customers the experience of walking around and exploring a bustling market town from the comfort of their own home… This has helped us to deepen our relationships with [our customers], with benefits to customer acquisition, retention and value as a result.”
What are the benefits to a retailer from launching a marketplace?
As Emma explains, there can be measurable benefits to marketplaces thanks to improvements in relationships with customers. More customer interactions generate more data, enabling further opportunities to improve UX or test new categories that should be added into the core online range, and even into stores.
Marketplaces also enable a retailer to move at pace, responding to trends and testing categories quickly. Mirakl’s Nussenbaum explains: “Competitors are big and move fast. Platform giants have set a high bar and are capturing more customers by offering greater assortment, faster, through third-party sellers – a capability many incumbent retailers lack.” By launching their own marketplaces, traditional retailers become more agile and better able to compete against the likes of Amazon, Alibaba and eBay.
Finally, BCG’s Tawfik shares that marketplaces are “an economically attractive model, with good profitability potential, low capital expenditure and thus high ROCE, in addition to a negative working capital profile”: positive and opposite dynamics to growth in traditional retail.
What pitfalls should a retailer launching a marketplace consider?
There are various challenges in launching and operating a marketplace; many of these relate to the degree of curation. Procedures must be agreed for pricing, quality, product duplication, the overall customer experience and fulfilment. In addition, specialist legal advice is required to clarity liability for product faults and/or description issues.
In most cases, fulfilment takes place by the sellers themselves (although Amazon’s “FBA” service is well known, and eBay is scaling up in this area). For example, M&S confirms that “The Sports Edit currently operates independently from M&S and customer orders are fulfilled by The Sports Edit.” Without tight SLAs between buyers and sellers on a marketplace, there can be issues with customer service, fulfilment, returns and compliance with procedures.
Friends of Joules’ Burrows gives retailers the following advice, particularly relevant to curated marketplaces: “product curation and integration – both with the existing business and technically – have their challenges. It’s so important to make sure that the products being sold on the marketplace are complementary and fit with the broader proposition / other products on offer and that they serve the customer, and the shopping experience must feel as seamless as possible.”
When it comes to managing a rapidly scaling marketplace, retailers must ensure they have sufficient internal expertise. The lighter touch for account management of marketplace sellers may be difficult to manage alongside retailers’ historic relationship-led activities. It may even be necessary to create various separate teams to run the marketplace proposition effectively.
Case study: Kingfisher
B&Q’s marketplace launched in March 2022 in conjunction with Mirakl and is scaling rapidly. With 40,000 SKUs available at launch, the company is expecting to feature 100,000 by year end.
Marc Vincente, B&Q’s Marketplace Director, shared the strategy behind the launch: “Marketplaces are now the fastest growing channel in ecommerce. We launched B&Q’s marketplace to tap into the growing demand from consumers for an online platform that provides speed, convenience and choice in one place.”
Initial results are very encouraging, with site conversion increasing. Vicente also highlights that “in the home improvement sector, there is a huge amount of choice. Customers can choose from hundreds of different types of taps, for example, and want to find the one that is perfect for their bathroom. Marketplaces enable us to offer hundreds of thousands of new products via third party sellers, whilst giving customers the peace of mind that they are buying through a brand they know and trust.”
There are additional benefits to adding further categories to a marketplace: “[We] attract more new visitors online thanks to the new categories we have launched, such as Small Domestic Appliances (SDA) or Cookware” says Vicente. “DIY.com [was] the 13th most visited website in the UK in 2021. As a result, our cost of customer acquisition is relatively low compared to other online pureplay marketplaces,” which paves the way for further assortments and categories in future.
Vicente is already thinking about replicating the marketplace internationally; saying “Working alongside [the Mirakl team] has enabled Kingfisher to benefit from the platform’s scalable technology, which can be deployed in our other markets quickly and at relatively low cost.”
When it comes to the potential pitfalls described above Vicente explains “We have put measures in place to ensure that our customers get the same great experience they know from B&Q. The integration with B&Q’s network of over 300 stores nationwide means customers can conveniently return in-store items purchased from 3rd party sellers, with a Click + Collect proposition being explored for the future.”
What’s the future for marketplaces?
Marc Vicente from Kingfisher touches on the opportunity to create a multichannel marketplace proposition. Whilst some aspects of this are challenging, Click & Collect and seamless returns are a great start.
Joules has also run various pop-up shops, enabling them to “tell the story of Friends of Joules more widely, and introduce the concept to a broader audience… Through our pop-ups we also aim to offer something new and exciting [e.g., a ] workshop to demonstrate the core benefits and uniqueness of a brand or product” says Burrows, Head of Friends of Joules.
The definitions of retailers, brands and marketplaces are blending over time. For example, Joules runs its own marketplace and – as a brand – sells products via Marks & Spencer. M&S in turn sells its own brand Goodmove via marketplace The Sports Edit (which it happens to own), which also features 50 other third party brands.
M&S say that “the launch of Goodmove on The Sports Edit is part of the wider ‘Brands at M&S’ strategy, which utilises different models including wholesale agreements, exclusive collaborations, strategic acquisitions and investments”.
And in the opposite direction, the digital marketplace Farfetch recently acquired retailer Violet Grey to accelerate their beauty credentials. Going forward, I expect to see innovative brands, marketplaces and retailers evolving these boundaries still further for strategic growth.
BCG’s Tawfik says: “fundamentally [marketplaces are] an attractive model and opportunity for retailers to offer a better customer proposition and better monetise their traffic… giving a great return vs. putting investment into more traditional channels.”
We will continue to see additional retailers launching marketplaces, specifically those that are focused on a category vertical, as well as further M&A activity in the sector. The rise of marketplaces has only just started!
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