Editor's note: The following is a guest post from Michelle Grant, head of retailing research at Euromonitor International.
In 2017, 40% of all digital commerce sales went through a marketplace model compared to 23% in 2013, according to Euromonitor, and Amazon Marketplace accounted for 87% of that growth. And while the title of this piece says that retailers are living in a marketplace world, the truth is that in the U.S., its Amazon Marketplace’s world.
That’s not to say Amazon is an unstoppable force. Wish burst onto the scene in 2013 and grew to $3 billion in gross merchandise value in just five years. Walmart began emphasizing its languishing marketplace in 2016, first organically and then with the acquisition of Jet.com. As a result, Walmart saw its sales through the marketplace model grow by 120% in 2017.
Retailers should have a marketplace strategy.
The marketplace model is only going to grow and retailers need to stay on top of these trends. The endless assortment and lower prices resonate with consumers and the largest retailers are responding by making their marketplaces even better. As a result, it’s important for a retailer to determine if a marketplace model makes sense and if so, what the right strategy is for that model. For example, Albertsons announced in March that it will add a marketplace for small vendors to sell directly to consumers this summer.
The other strategy is to join an existing marketplace. Lord & Taylor announced in 2017 that it will have an online flagship store on Walmart.com by this the spring. Walmart benefits from Lord & Taylor’s premium fashion inventory, while Lord & Taylor gets access to a larger customer base, presumably at lower customer acquisition costs.
But retailers can thrive without a marketplace model
For retailers that decide not to embrace the marketplace model, there are three main differentiators to remain relevant: loyalty programs, merchandising and experiences.
Retailers with successful loyalty programs are top-of-mind for their shoppers – actively keeping them from going to marketplaces to fulfill their needs. Ulta has a strong loyalty program, Ultamate Rewards, which rewards spending with points for redemption. The program also offers exclusive magazines, offers and events. Loyalty program members account for 90% of the company’s sales, spending more and visiting more than non-loyalty members.
Another strategy is to have a strong merchandising proposition that is targeted to retailers’ customers. Having product exclusives is a tactic that means shoppers can only go to that retailer for certain items. This includes having a strong private label portfolio. Private labels tend to be exclusive to the retailer, but more importantly, offer higher margins. Despite facing a competitive apparel market in the U.S., Target’s private label clothing brand for children, Cat & Jack, earned $2 billion in its first year of sales.
Retailers need to ensure that they offer a meaningful store experience for customers, especially as Amazon will likely expand its physical presence. Best Buy is a good example of a company that has reinvigorated its store experience to remain competitive. It invested in associates, training them to be knowledgeable about new product categories and was a pioneer by starting the store-within-a-store model with leading brands, such as Apple and Samsung.
A strategic crossroads
Sales through marketplaces will continue to grow. Retailers can't ignore the this trend and need to determine if the marketplace model is to be embraced — either by building or joining one. If retailers decide to sit on the marketplace sidelines, they will need to determine what differentiators to leverage to stand out against the endless assortment and lower prices inherent in the marketplace model.