Everyone and their brother get an online market. What should investors think?
Channels, which allow third-party sellers to list, sell, and ship items on an established retailer’s site, are having a moment. Kroger KR grocery chain -0.74%
has one, as do clothing retailers Express, Lands’ End, J.Crew and Urban Outfitters.
Hudson’s Bay, a Canadian department store, launched its online marketplace earlier this year. Macy’s M -3.73%
is the latest to jump on the bandwagon, announcing that it will launch its marketplace in the second half of 2022.
The immediate economic appeal is obvious: this is a relatively low-cost, high-margin opportunity. There is little initial investment on the part of the retailer, who does not have to buy and hold inventory. Instead, they list third-party sellers’ items on their website and take a share (usually 15%) of the seller’s revenue. According to Edward Yruma, managing director of KeyBanc Capital Markets, this rate can be as high as 40% for some established markets that offer execution services and advertising to their sellers.
The timing also makes sense, as the pandemic has given online sales a boost. walmart,
which launched its marketplace in 2009, saw its gross merchandise volume (total sales through its platform) double in 2020, according to Marketplace Pulse estimates. Before the pandemic, growth was 35%, more moderate.
A bottom-of-the-envelope calculation shows that even modest sales volume could potentially dent a struggling retailer’s profitability. Assuming a modest 15% participation rate, if Macy’s had an online market in 2019, it would have had to sell about $108 million, or less than 2% of its digital sales that year, to boost its gross margins. by 0.1 percentage point. This number could be higher after taking into account the fees paid to the platform provider Mirakl, or lower if the take rates are in fact higher.
Retailers have their own reasons for taking this approach, especially to introduce new categories. Kroger, for example, uses a marketplace platform to sell products from Bed Bath & Beyond.
Urban Outfitters uses one to sell used clothing.
In some cases, the market model can help retailers bypass difficult suppliers. Hudson’s Bay, for example, can’t get its hands on the new Louis Vuitton bags that its buyers want, but is able to offer them through its resale market, says Adrien Nussenbaum, co-founder and co-director. general of Mirakl.
If the idea sounds too good to be true, it might be. For retailers, there are obvious risks. Brand dilution is huge, especially for apparel. If the customer experience with the third-party seller is poor, either in terms of quality or shipping speed, it can hurt the perception of the retailer.
The new generation of marketplaces seems to be trying to avoid both risks by being more selective with sellers. Poor integration with in-store experiences can also hurt, notes Juozas Kaziukėnas, founder of Marketplace Pulse. Shoppers might get frustrated if they can’t pick up and return market items to the store, for example.
Matt Baer, chief digital and customer officer at Macy’s, said in an email that the department store would use the marketplace platform to “test new brands and categories” and “respond to real-time trends. “.
This has its merits, but there are also two cautious takeaways. First, the fact that these retailers need marketplaces to spot trends is not overwhelming proof of their grip on the market.
Consider the sample of apparel sellers that built markets: J.Crew, which launched in 2018, caved in the pandemic last year and filed for bankruptcy. In the five years before Covid-19, Express and Lands’ End saw their total revenues decline by a compound annual average rate of 1.4%, while Urban Outfitters’ growth rate by the same measure was flat. . Macy’s has rebounded healthier this year compared to some of its department store peers, but is still on the mend.
Another reason for caution is that knowing a lot about a third-party seller’s products could be tantamount to biting. Amazon has come under scrutiny for allegedly using data on independent sellers to develop competing products, for example. That’s not to say other retailers would take such action, but complications could arise even if there’s an appearance of conflict.
Retailers have been trying to use online marketplaces to revitalize online sales for more than a decade with very little success, according to Kaziukėnas. The new generation of retailers getting into the model are hoping to strike while the iron is hot. Those with an uncertain understanding of their own market might end up with scorch marks instead.
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