The acquisition will add more than 300 products to L’Oreal’s lineup.
Top e-retailers have moved to open their own online marketplaces, a world dominated by Amazon and eBay. Internet Retailer looks at what is driving more retailers to try their hand at web marketplaces and what’s at stake for the new operators.
Top retailers are aggressively expanding their online product selection by developing online marketplaces, according to the upcoming January issue of Internet Retailer magazine.
Staples Inc., the second-largest e-retailer in North America by sales after Amazon.com, in October announced plans to build its own online marketplace on Staples.com and thus increase its product selection by at least 400%. Once that marketplace is up and running, five of the top 10 e-retailers in North America according to the Internet Retailer Top 500 Guide—Amazon, Staples, Wal-Mart, Best Buy and Sears—will be operating shopping portals where other retailers sell in addition to the company hosting the marketplace. That’s up from just one—Amazon—five years ago. And that doesn’t include Newegg.com Inc., No. 14 in the Internet Retailer Top 500, which launched its marketplace in 2010.
Retailers are venturing in to marketplaces for a myriad of reasons, though they tend to converge around one theme, experts say: Keeping up or better competing with Amazon.com and, to an extent, eBay Inc. 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 Channel Advisor Corp, a company that helps retailers sell through marketplaces 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 helps the reported gross margin rate, a key metric for traditional retailers,” says Matt Nemer, a Wells Fargo 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, selling more products online 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.
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 Retailers. 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, according to Top500Guide.com, while the company’s overall sales fell 1.2%. That’s a reflection of shrinking demand for products such as paper, pens 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
Meanwhile Staples and rivals like Office Depot Inc. face more competition on the web. Amazon and Wal-Mart are among the general merchandise retailers that have become more aggressive in selling office products online—driving Staples in 2013, for instance, to match Amazon prices on identical products for the holiday shopping season.
To compete online in the future, Staples is taking steps to offer more products on its e-commerce sites, without investing a lot in additional inventory. The retailer aims to increase its business-to-business and consumer product offerings to more than 1 million SKUs from about 200,000. It plans to get there via a combination of its own sourcing and fulfillment, drop-shipping by suppliers and products offered by third-party sellers through a marketplace. The marketplace will enable Staples to boost product categories where its own SKU range is shallow. For example, Niraj Shah, CEO of home furnishings and decor e-retailer Wayfair.com, says he expects to list 50,000 SKUs on the Staples marketplace this year.
“Businesses have lots of needs beyond office products, and that’s what we’re going after,” says Faisal Masud, Staples executive vice president, global e-commerce. “Businesses may need hard hats or networking technology, or products for their employee break rooms. We’ll be covering any business needs.” That will help move Staples into product categories, such as janitorial supplies and furniture, not impacted by the move to digital communication. And Staples will take a commission on marketplace sales, as all commercial marketplace operators do.
Among the biggest challenges is building the technology to support the increasing number of SKUs and product information, and enabling self-service features for third-party sellers to easily list goods on Staples’ marketplace. Staples, like Wal-Mart, is making big investments, including in developing research centers devoted to e-commerce. Staples opened the doors of its e-commerce- focused “Velocity Lab” in the Boston area in December 2012 and plans to build another in Seattle. Those centers, and the marketplace push, fold into the larger effort by Staples to reduce its retail floor space by 15% over the next three years as more consumers use the web and their mobile devices to shop.
To learn more about what’s driving the marketplace race and how it could shake out in the coming years, read the upcoming issue of Internet Retailer magazine.