Everyone and their brother get a deal online. What should investors think of this?
Channels, which allow third-party sellers to list, sell, and ship items on an established retailer’s site, have a bit of time. Kroger KR grocery chain 2.31%
has one, as do clothing vendors 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 -6.70%
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 inexpensive, high-margin opportunity. There is little initial investment on the part of the retailer, who does not need to buy and hold inventory. Instead, they list items from third-party sellers 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 reach 40% for some established marketplaces that offer order processing and advertising services to their sellers.
The timing also makes sense, as the pandemic has given a boost to online sales. Walmart,
which launched its marketplace in 2009, has seen the gross volume of merchandise (total sales through its platform) double in 2020, according to estimates from Marketplace Pulse. Before the pandemic, growth was more moderate by 35%.
A calculation on the back of the envelope shows that even a modest sales volume could potentially lower the profitability of a struggling retailer. Assuming a modest 15% turnout, if Macy’s had an online marketplace in 2019, it would have had to sell around $ 108 million, or less than 2% of its digital sales that year, to increase gross margins. 0.1 percentage point. This number may be higher after taking into account the fees paid to the Mirakl platform provider, or lower if the take rates are actually higher.
Retailers have their own reasons for adopting this approach, including introducing new categories. Kroger, for example, uses a marketplace platform to sell products from Bed Bath & Beyond.
Urban Outfitters uses one to sell second-hand clothes.
In some cases, the market model can help retailers bypass difficult suppliers. Hudson’s Bay, for example, cannot get its hands on the new Louis Vuitton bags that its buyers want but is able to offer them through its resale market, explains Adrien Nussenbaum, co-founder and co-managing director. by Mirakl.
If the idea sounds too good to be true, it just might be. For retailers, there are obvious risks. The brand dilution is huge, especially for clothing. If the customer experience with the third-party seller is poor, either in terms of quality or shipping speed, it can affect the retailer’s perception.
The new generation of markets seem 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. Buyers might be frustrated if they can’t pick up and return items from the market to the store, for example.
Matt Baer, digital and customer director at Macy’s, said in an email that the department store will use the marketplace platform to “test new brands and categories” and “respond to trends in real time. “.
This has its merits, but there are also two cautious takeaways. First, that these retailers need markets to spot trends is not a resounding endorsement of their market hold.
Consider the sample of clothing vendors who have built markets: J.Crew, which launched in 2018, gave in to the pandemic last year and filed for bankruptcy. In the five years leading up to Covid-19, Express and Lands ‘End saw their total revenues decline by an average annual compound rate of 1.4%, while Urban Outfitters’ growth rate by the same measure was stable . Macy’s has rebounded in a healthier way this year compared to some of its department store peers, but is still in a recovery phase.
Another reason to be cautious is that knowing a lot about a third-party seller’s products could be tricky. Amazon has come under scrutiny for allegedly using data on independent sellers to develop competing products, for example. This is not to say that other retailers would take such action, but complications can arise even if there is 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 entering the model are hoping to strike while the iron is hot. Those with an uncertain understanding of their own market might instead end up with scorch marks.
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Write to Jinjoo Lee at [email protected]
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