January 6, 2014, 2:43 PM

The marketplace race

Half of the top 10 U.S. e-retailers now invite other merchants to sell through their sites. Will the strategy help rivals slow down Amazon?

Lead Photo

For the 2012 holiday season, Wal-Mart Stores Inc. could offer online shoppers access to fewer than 2 million products. A year later, by the time consumers put away their Halloween costumes and shifted their attention to the new holiday spending season, Walmart.com featured approximately 6 million SKUs.

The marketplace sellers Wal-Mart allows to sell on Walmart.com—sellers such as eBags Inc., Wayfair LLC, Tool King LLC, Plumstruck (part of Hayneedle Inc.), ShoeBuy.com Inc. and ProTeam (part of Fanatics Inc.) —provide roughly 80% of that expanded product selection. While Wal-Mart has developed its marketplace program slowly—until recently it had only the six sellers noted above—it has been authorizing more retailers to sell through Walmart.com and says it plans to expand its selection to "tens of millions of products" in the next few years.

"We're filling in gaps, for example, around sporting goods," Neil Ashe, Wal-Mart's global e-commerce chief, told reporters last year. "We're asking ourselves, 'What's the best possible way to get to the assortment we should have?'"

Like Wal-Mart, the No. 4 online retailer in North America, other top retailers are also aggressively expanding their online product selection by developing marketplaces. Staples Inc., the second-largest e-retailer in North America by sales after Amazon.com, in October announced plans to build an online marketplace on Staples.com and thus increase the product selection available by at least 400%. Once that marketplace is up and running, five of the top 10 e-retailers in North America—Amazon, Staples, Wal-Mart, Best Buy Co. Inc. and Sears Holdings Corp.—will be operating shopping portals where other retailers sell in addition to the host company. That's up from just one—Amazon—five years ago. And that doesn't include Newegg.com Inc., No. 14 in the Internet Retailer 2013 Top 500 Guide, which launched its marketplace in 2010, or eBay Inc., which is not ranked in the Top 500 Guide because it is not itself a retailer.

The business reasons driving marketplace development are myriad, though they tend to converge around one theme, experts say: Keeping up with Amazon.com and, to an extent, eBay. Together those two e-commerce companies account for most of the 20% to 25% of total U.S. online retail sales that go through online marketplaces, estimates Scot Wingo, CEO of ChannelAdvisor Corp, which helps retailers sell through marketplaces and other online channels. And the two marketplace veterans continue to grow: eBay in the third quarter, for example, reported that the value of merchandise sold on its U.S. marketplace, excluding vehicles, increased 15% year over year to $7.4 billion.

That's not to discount other motivating factors, such as earning commissions on marketplace sales. E-retailers take a cut of each product sold through their marketplaces; Amazon, for instance, takes 6% to 25%, depending on the product category. Those commissions may be small relative to the margins e-retailers can make on products they stock and sell themselves, but they represent "nearly 100% gross margin and therefore help the reported gross margin rate, a key metric for traditional retailers," says Matt Nemer, a Wells Fargo & Co. analyst who follows some of the largest e-commerce players. "Marketplace products are owned by a third party, so there is no inventory or markdown risk. The ROI is very high."

Additionally, he says, the expanded "product breadth" helps traditional chain retailers meet the challenges of having limited space inside stores and, apart from giants like Wal-Mart, relatively limited sources of supply, including on product categories outside their ken—issues that don't dog Amazon and eBay in similar ways.

But like so much else in e-commerce, it's the shadow of Amazon that seems to underlie much of the marketplace push.

In March, for instance, Bloomberg News reported that minutes it obtained from a meeting of Wal-Mart executives showed them talking about the savings Amazon realized from "offloading shipping costs" to marketplace sellers, and how Wal-Mart's marketplace effort could represent another arrow against its web-only rival. Wal-Mart declined to comment specifically on that report. Asked specifically about competing with Amazon, Ashe said: "We don't have perfect overlap geographically or category-wise with any of our competitors. But we recognize that we compete with pretty much everyone else, and we're comfortable with that."

The customer overlap is growing. 53% of Wal-Mart customers were expected to also be Amazon customers by the end of 2012, compared with 47% in the fourth quarter of 2011, according to research firm Kantar Media. And Amazon represents an even more direct challenge to others: 79% of eBay shoppers also patronize Amazon, as do 74% of Nordstrom customers, according to a study that measured shopping trends before the 2013 holiday season.

To the extent the newer marketplace players hope to compete by offering the kind of broad selection found on Amazon and eBay, they have a lot of catching up to do, as the two big incumbents have had years to recruit merchants and to learn how to manage them to ensure customers are satisfied with their purchases. The more than 2 million retailers on the Amazon marketplace as of January 2013 included 364 of the retailers in the Top 1000 as measured by revenue; eBay had 130 Top 1000 merchants, according to Internet Retailer's Top500Guide.com. Wal-Mart does not release how many sellers it has on its marketplace.

Retailers are reluctant to describe their marketplace moves as playing offense or defense against Amazon and eBay, but context helps in understanding how marketplaces can help. Take Staples. The chain appears well prepared for the marketplace race—and would seem to have the motivation of a merchant worrying about a shifting customer base and declining demand for its core products.

The chain took in some $10.3 billion in web sales in 2012, down 2.8% from the year before, while the company's overall sales fell 1.2%. That's a reflection of shrinking demand for products such as paper and printers as communications become electronic: U.S. office supply sales were 1.7% lower in 2012 than 2003, and down 25% when accounting for inflation.

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