3 sectors that could fall as online marketplaces rise
As Amazon and Alibaba climb to new heights, here's who could lose out and how badly — and which retailers are holding their own despite mounting pressure.
From Amazon to Alibaba, marketplaces are helping drive e-commerce sellers to new heights even as department stores battle for relevance. As in any market shift, some will prosper and others fall by the wayside, and the new marketplace paradigm is no exception.
While eBay is having a good year so far, plotting heavy investments in tech, launching shoppable content with Mashable and even creating an AR app to help sellers find the right-sized box — the marketplace landscape is still lorded over by Amazon, which alone accounted for 44% of online sales in the U.S. last year.
Convenience is Amazon's battlefield — and blood is being spilled by just about every retailer in the U.S. that tries to compete. As with every war, there will be victors and there will be casualties — it's just a question of which side of the river you land on.
"You could write the same story every day: It's us against Amazon."
SVP of Digital Strategy at Astound Commerce
"You could write the same story every day," Lauren Freedman, senior vice president of digital strategy at Astound Commerce, told Retail Dive. "It's us against Amazon."
And if fighting Amazon is anything, it's not equitable. Here's who could get hurt the most as online marketplaces rise to the top of the retail food chain.
No retailers-at-risk story would be complete without the department store segment. In addition to siphoning off traffic from specialty segments, Amazon is gunning for this group's core specialty: apparel. The e-tailer has been growing its fashion business as well, with a study this January showing that over half of apparel customers shop on Amazon.
Not only does the e-tailer offer a huge selection of its own products and those of third-party sellers, but it also offers the convenience of free shipping that most retailers can't match. In fact, well over three fourths (88%) of Amazon shoppers say it's the promise of free shipping that attracts them to the platform.
Since department stores are generic by nature, the rise of online marketplaces like Amazon hits them particularly hard, Deborah Weinswig, founder and CEO of Coresight Research, told Retail Dive in an email.
"In theory, many mass-market retailers selling other companies' brands are vulnerable."
Founder and CEO of Coresight Research
"Department stores and other general-merchandise retailers such as Target are obvious candidates to lose to online marketplaces, as they are predicated on choice, convenience and — often — value," she said. "In theory, many mass-market retailers selling other companies' brands are vulnerable."
A recent study by the think tank supports this, showing that of the many retailers losing apparel spend to Amazon, Target (30.3%), Walmart (24.9%), Kohl's (23.5%), Macy's (23.1%) and J.C. Penney (21.1%) are at the top of the list. Losing replenishment and discount shoppers is only half of the problem, though. The other threat from players like Amazon and Alibaba is that they aren't constricted by the same limitations that traditional retailers face in terms of profit margin and revenue.
"There are a lot of advantages to being able to go after retail segments without having to play by the same retail rules," Scott Webb, president of Avionos, told Retail Dive, noting how both Alibaba and Amazon have diversified their product portfolio to much more than the traditional retailer. "That's what makes those organizations particularly unique."
That's not to say that all of apparel retail will fall victim to Amazon. Fast fashion retailers like H&M, Zara, American Eagle and others could do well against online marketplaces if they continue to offer an in-store experience predicated on differentiated merchandise and quick turnaround lines.
Freedman notes, though, that many department stores and mass merchandisers will have to take a good look at their identity and make adjustments accordingly. "Who am I? What's my role? What are people coming to me for and am I providing that? It's kind of retail 101 at the end of the day, but now you have the equivalent of this one person wreaking havoc on your life every day."
That entity wrecking havoc is the online marketplace.
Off-price merchants have been the darlings of retail in recent years, with sales outpacing department stores, from Burlington to Ross (which plans to open an additional 100 stores this year). While the sector isn't poised for quite as stellar growth as last year, the TJX's and Nordstrom Rack's have still been doing much better than their department store fellows.
Despite their success — especially against online marketplaces — the off-price sector could be headed for trouble as players like Amazon and eBay continue to grow. According to data from SimilarWeb, Amazon increased its market share by 1.75 points in 2017, which was greater than any other shopping site, and was followed by eBay (0.84 point increase) and Walmart (0.42 point increase). Those retailers also received a huge amount of holiday shopping traffic, according to Astound Commerce, with Amazon (63%) and Walmart (60%) dominating the online sphere, with eBay close behind (45%).
"That price point, above the true second hand but below traditional retail, stands to lose the most from the marketplace concept. If I'm willing to do the hunt, I'm heading online."
President of Avionos
"With a higher market share and ability to grow market share over time, these sites pose the biggest threats to other retailers," Liron Hakim-Bobrov, marketing insights manager at SimilarWeb, told Retail Dive in an email.
In the past, e-commerce hasn't had a huge impact on off-price retailers, as the category is largely based on scavenging for good deals and rare finds, which is hard to replicate in an online setting. While that advantage likely won't go away anytime soon, Webb notes that the off-price sector could lose some of its value-focused customer base to online giants going forward.
"What we see now is the growth of external entrants like Alibaba and that discount hunter is starting to make the shift to [looking] online first," he said. "That price point, above the true second hand but below traditional retail, stands to lose the most from the marketplace concept. If I'm willing to do the hunt, I'm heading online."
Indeed, while the loss at off-price retailers is less steep than at department stores and mass merchandisers, T.J. Maxx and Marshalls lost a combined 16.6% of apparel spend to Amazon, according to Coresight Research, and Ross Stores lost 9%.
While hugely successful in China (with ambitious expansion plans), Alibaba is not as of yet a serious threat to American retail. According to Weinswig, neither is eBay, except in niche categories like apparel and toys. That being said, eBay still holds 14.2% of the market share of online shopping sites, the second highest to Amazon's 35.7%, according to SimilarWeb data.
The culture around limited-edition products like sneakers already draws certain customers to eBay, and the marketplace could pose a larger threat to off-pricers if the trend Webb pointed out continues and shoppers start looking for quality brands at lower prices online instead of heading to stores.
Specialty big box stores
The range of specialty big box stores impacted by online marketplaces stretches from beauty and sports to electronics and tools. In essence, if there's a commodity item being sold, Amazon is in the game and unless you're Best Buy and have managed to build an environment around helpful store associates, you're in trouble.
That's the case for a number of retailers, past and present, Jessica Wolfe, a principal in the consumer products and retail practice of global strategy and management consulting firm A.T. Kearney told Retail Dive in an email.
"The major retailers who have fallen due in part to Amazon — e.g. Borders, Circuit City, Radio Shack — did so due to Amazon's ability to offer the same products at lower prices, with the bonus of consumer reviews to aid in the purchase decision," she said.
The threat that Amazon poses to specialty big box transcends even the popularity of a given category. Dick's Sporting Goods, for example, operates in a fairly popular sports retail sector, but the company is already witnessing the effects of brands like Nike moving their sales to Amazon.
Even beauty, which has been hugely popular as of late, is facing an ever-increasing threat from online marketplaces, which have begun to sell more beauty products as replenishment shoppers look for refills online rather than heading into stores. Still, innovative store concepts from retailers like Sephora, which are predicated on the experience, are largely safeguarding the category for now.
"You see a lot more on service … There are opportunities for a lot of retailers to do that if they're willing to make an investment."
President of Avionos
"You see a lot more on service," Webb says of the beauty sector. "Come in for foundation matching, make sure you have the right blush for your tone … There are opportunities for a lot of retailers to do that if they're willing to make an investment."
Home Depot and Lowe's are also doing a good job of holding their own against the infringement of online marketplaces. Data from SimilarWeb found that both of the retailer's e-commerce platforms increased their market share in the fourth quarter, with the former increasing share by 11% and the latter by 21%.
"While they don't compete with the big sites in terms of traffic, they are able to keep their footing in a volatile market," Hakim-Bobrov said of the home improvement retailers.
At the end of the day, the measuring stick for specialty big box success is differentiation and service, but these retailers are facing a threat that runs deeper than Amazon's low prices. The perception that Amazon has the cheapest prices — and that's not something that's easy to change.
"It's not true," Freedman says of the common belief that online marketplaces have the best deals. "Sometimes they're less, sometimes they're not, but people have the perception that: 'I'm gonna go there, it'll be less.'"
And when making a purchase is as easy as the click of a button, that's a dangerous perception for customers to have.
Follow Cara Salpini on Twitter