In broad strategic terms, the choices facing retailers and suppliers are straightforward: join or collaborate with existing marketplaces, compete by creating one’s own marketplace or substantially expanded online presence, or try to maintain the status quo—an increasingly untenable option, in our view.
Challenges for Retailers. Joining a marketplace is more complicated than simply signing up. It requires building new capabilities in merchandising, marketing, CRM, promotions, supply chain management, and packaging. In merchandising, for example, the ability to determine the optimal product assortment for each channel (including managing overlapping SKUs in the store and online, as well as designating exclusive SKUs for the marketplace and products to withhold from the marketplace) becomes an important skill. So does setting prices for each channel, especially given the ability to adjust prices continually in the marketplace setting.
There are plenty of successful models to look to. Germany’s largest drugstore chain, dm-drogerie markt, for example, is pursuing a strategy of selling private-label products on Amazon, thereby leveraging Amazon’s core competencies in e-commerce and distribution, while continuing to operate some 1,250 brick-and-mortar stores.
For retailers, fighting—that is, creating one’s own marketplace—means expanding assortments, broadening offerings to consumers, building new capabilities, and deriving benefits of scale. It can be done only with a thorough analysis of the economics and a clear definition of the model. The former requires assessing potential sources of revenue—for example, advertising versus commission, or both; required marketing and infrastructure costs; and the costs of loyalty programs, among other factors. The latter involves determining the optimal user experience across platforms, whether other sellers complement or compete with one’s own inventory, and the best means of offering fulfillment services.
Issues for Suppliers. For consumer goods suppliers, joining a marketplace (or marketplaces) raises its own challenges with respect to channel management, particularly around pricing. In categories such as power tools, for example, marketplaces offer a fast-growing and profitable channel, but suppliers have to manage conflicts with large established brick-and-mortar retailers. Procter & Gamble has built a strong partnership with Amazon, with innovative promotions and new product formats (for example, in diapers) and packaging, allowing it to increase its market share significantly in the online world. Similarly, some apparel brands are opening boutiques on Amazon to improve control of how their brands are marketed and presented online.
For suppliers, fighting often means preventing the retailers carrying their brands from offering them on marketplaces. Adidas has recently announced that it would ban its dealers from listing its products on eBay and Amazon starting in January 2013. Issues of brand control versus potential revenue loss require careful weighing. If social networks are successful in building their own marketplaces, these issues will become even more complicated.
We believe that ignoring marketplaces is not a viable option. As the channel continues to gain prominence, suppliers will lose out either to direct competitors that decide to partner or to smaller companies that use marketplaces as a vehicle for growth. Or their assortment will end up on marketplaces anyway through third-party sellers—the worst of both worlds, since the suppliers will have forfeited their control of brand management.
Marketplaces will not be the last disruptive force to hit the consumer goods and retail industry. But for the foreseeable future, they will have an outsize impact in shaping profitable strategies for both retailers and suppliers. Those companies that figure out the best way to use this force to their advantage are most likely to prevail.
To Contact the Authors