The New Department Store? Why Online Marketplaces are Taking Over
By Tricia McKinnon
Move over department stores, online marketplaces are here to stay. Amazon, eBay, Alibaba’s Tmall and Japan’s Rakuten are all examples of popular online marketplaces. These marketplaces allow even the smallest of merchants to sell products and services in a global marketplace. Amazon’s sales from third party sellers have been growing at an extremely fast pace. Revenue from that channel increased by 39% in 2017 and now 52% of Amazon’s total paid unit sales come from third party sellers vs. the inventory it buys and resells itself.
The lure of a bricks and mortar department store, the choice, access and ability to compare are the signature strengths of online marketplaces. Companies such as Alibaba and Amazon have effectively replicated the best of what a department store has to offer including even greater choice all in one place. According to an eMarketer report, US digital shoppers are twice as likely to prefer shopping in an online marketplace than from a retailer’s website. More than half of digital shoppers also prefer to shop within an online marketplace because of the ability to compare and find the lowest prices. Throw in free and fast shipping and it is a hard value proposition to beat. More than half (56%) of brand marketers believe that online marketplaces are redefining retail and it is easy to see why.
Retailers have no choice but to decide if they want to sell their goods on one of these sites. For smaller retailers looking to scale sites such as Amazon can provide exposure to a customer base they would not be able to access on their own. Amazon has said that there are 140,000 businesses with more than $100,000 in sales that sell on Amazon. Additionally, according to Recode more than 19% of Amazon's merchants generate more than $1 million in sales.
However the use of someone else’s platform carries risks with it. The ability to easily compare products is a dream for consumers but can be a nightmare for retailers who risk comoditizing their products. Another concern for many retailers is competition from Amazon itself. Since the beginning of 2017 Amazon has released more than 60 of its own private label brands mostly within the clothing, shoes and jewellery categories. Some retailers fear that if Amazon identifies a hot selling product it will produce the product itself in direct competition with the retailers on its platform.
The ease of becoming a marketplace seller has also enabled the proliferation of counterfeit products. In the US federal investigators reviewed 47 products sold by third party sellers on five sites: Walmart, Amazon, eBay, Sears and Newegg. Twenty of those products were deemed to be counterfeit including products claiming to be from Urban Decay and Nike. In situations such as this both the retailer and the consumer lose. A poor product experience can tarnish a retailer’s brand and the customer may not be aware that they have purchased an illegitimate product. One of the reasons Nike decided to sell directly on Amazon was because third party sellers were already selling Nike products on Amazon.
Although these marketplaces continue to grow they are still underdeveloped in Canada. According to a research report by Forrester only 38% of retailer survey respondents use marketplaces. However retailers will be playing close attention to how these marketplaces change consumer expectations for the shopping experience.