Traditional retailers are waking up to marketplaces. In the past couple of years, Urban Outfitters, Office Depot, Footlocker, and Target have launched, bought, or invested in marketplaces. As retailers embrace marketplaces, a wide variety of marketplace strategies are emerging.
As we’ve written about before, a marketplace benefits from the high growth (i.e., network effects) and low marginal costs in the platform business model. However a retailer’s marketplace strategy must take into account factors that are not purely financial, but which impact the marketplace’s financial performance for better or worse. For example, a retail marketplace strategy must take into consideration the retailer’s brand, target demographic, and customer expectations.
To date, retailers’ marketplace strategies can be broken down into three categories: truly open everything stores, highly curated marketplaces, and specialized product marketplaces. Each marketplace strategy has its pros and cons. Understanding the different marketplace strategies will help retailers weighing their options.
In a truly open marketplace, any seller can join the marketplace at a low-cost with low barriers to entry, such as an online form. The marketplace retains the right to expel sellers who violate marketplace rules, but culling bad sellers happens after a seller joins the marketplace, not before. Rule-abiding vendors can sell most items, regardless of category and often regardless of quality. This is why on Amazon a chest of drawers can be as cheap as $30 or as expensive as thousands of dollars.
The benefits of a truly open marketplace are largely financial. By making it quick and easy for sellers to upload their inventory, the marketplace can quickly deliver the greatest catalog of goods, which attract more and more customers. Also, by keeping seller acquisition costs low, a truly open marketplace improves its margins by lowering operational costs.
However, the truly open strategy also requires that the retailer give up control of its catalog which may lead to brand dilution. From the purely brand-conscious perspective, it’s easy to understand why some retailers are wary of the truly open marketplace strategy. Nonetheless, moving away from a truly open market can have consequences.
Walmart’s history with marketplaces illustrates the trade-off best. Walmart was the first traditional retailer to embrace a truly open marketplace which launched in its current iteration in 2016 after its acquisition of Jet.com. While Walmart is still more curated in its marketplace than Amazon, its marketplace is much more open than most of its competitors. This approach has helped Walmart become an emerging player in eCommerce for the first time. Prior to the Jet acquisition, Walmart experimented with a curated marketplace strategy that ultimately failed due to high costs and lagging product catalogs.
Despite this history, some retailers who are fearful of losing brand control opt for the curated marketplace strategy.
Take for example Target, which, like Walmart, is also a big box retailer that sells consumer packaged goods in nearly all categories, as well as groceries. Target announced its marketplace Target + in February 2019 and detailed its highly curated approach to brand inclusion. There is no process for sellers to sign up. Instead, Target + will carefully select brands and invite them to sell on the marketplace.
The downside to this strategy is that it is slow and expensive. You also lose the product breadth and price competition that the more open approach brings. For the marketplace to be attractive to most consumers, it must offer a wide catalog comparable to Walmart and Amazon. Reaching that scale will be slow and costly as Target hires product analysts and engineers to find the right brands to invite to the marketplace.
We bet that Target already knows this and has chosen to absorb those costs in exchange for the ability to screen products for quality and brand fit. What remains to be seen is whether or not this approach will yield a positive cash flow. We’ll be watching Target + to see how it addresses the challenges Walmart’s initial curated approach failed to overcome.
Of course, not all retailers sell products across a wide variety of categories. Specialty retailers curate their marketplaces by product category.
Note that the open and curated marketplace strategies limit the catalog by placing or lifting restrictions on the type of seller. Highly specialized marketplaces limit catalogs by the type of product while placing few restrictions on sellers.
For example, Footlocker recently invested in GOAT, a secondary sneaker marketplace. On GOAT, sellers trade in luxury brand sneakers from Nike, Adidas, and others. While GOAT makes it easy for any seller to join their marketplace through their website, those sellers cannot sell any product they like. You won’t find electronics or furniture on GOAT. Their system limits the type of products that can be sold, but does not limit the type of sellers, thereby making it easy for individual collectors to monetize their shoes.
Of course, this marketplace works best for retailers who were already specialized, such as Footlocker. While a multi-department retailer like Target could attempt to operate multiple specialized marketplaces by type, the project would quickly become untenable and expensive.
Note that Footlocker did not build its own marketplace from scratch. Footlocker chose to invest in an existing startup marketplace.
Many specialized startup marketplaces exist. For retailers looking to create a specialty marketplace, these startups could be attractive acquisition targets. Combining that marketplace with the consumer demand and brand recognition of an established retailer could be a potent combination. By contrast, it is difficult to find successful startups that sell everything in all categories. At this stage in retail, Amazon and Walmart (with eBay’s growth fairly stagnant) will likely develop an effective duopoly in non-specialized marketplaces. The last successful startup that attempted to compete directly with Amazon was Jet.com, and it was acquired by Walmart.
For many retailers in areas where Amazon or other specialty marketplaces are already active, the best route may be to acquire a marketplace. By building on existing infrastructure, the retailer can leapfrog the growing pains common to new platforms as they try to grow their network of buyers and sellers.
Alternatively, for the risk averse, Footlocker provides an even more cautious model: invest now, experiment with a partnership, and (presumably) buy later.