The Rise of Faux Marketplaces: How Traditional Retailers Are Fumbling the eCommerce Marketplace Model

There is a new gold rush for retailers and other traditional brick-and-mortar businesses: create an online marketplace. With global retail eCommerce sales projected to reach $3.45 trillion in 2019, companies are seeing the success of today’s mega-marketplaces and want to get in on the action.

Retailers creating these specialized marketplaces — like J. Crew and Urban Outfitters in the fashion space, Best Buy in consumer electronics, and Crate & Barrel in home furnishings — have popped up left and right in recent years.

This marketplace craze has taken hold as all of these retailers grapple with how to compete with Amazon. Amazon’s success is driven by a marketplace, so we should have one too, or so the thinking often goes. But too many big brands are failing to embrace the kind of model that made Amazon and its peers successful. They’re creating the facsimile of a marketplace without embracing the platform dynamics and value proposition that make the model worthwhile.

Given the two-decade head start and platform expertise of giants like Amazon and Alibaba, these flawed attempts inevitably fall far short of expectations.

The Faux Marketplace Trap

Too often, the new online marketplaces of large retailers trying to compete with Amazon, or at least become the “Amazon” of their particular niche, are less marketplaces than they are slightly expanded retail partnerships.

The thought process typically goes something like this: handpick a few specific, pre-approved sellers aligned with the brand to contribute inventory and dropship products via the eCommerce website, and that will expand our product range in order to attract more customers.

On the face of it, this curated partnership model might seem like a smart move for quality assurance, in terms of preserving brand integrity and the customer experience. But the “marketplaces” produced via this strategy never deliver much of an impact.

That’s what happened with Walmart’s first major foray into online retail. With the 2009 launch of Walmart Marketplace, the company announced that it was ready to compete with Amazon. However, in reality, Walmart’s new marketplace was really just a handful of carefully-selected sellers. After seven years, Walmart Marketplace had only about a thousand third-party sellers. At the time, Amazon already had a few million. Not surprisingly, Walmart Marketplace failed to make any real impact on Walmart’s eCommerce fortunes.

Fast forward to today, after Walmart’s $3.4 billion acquisition of Jet.com, and the difference in trajectory is night and day. After the big acquisition, Walmart opened up and embraced a true marketplace model. Its online inventory grew from 10 million SKUs in 2016 to more than 75 million SKUs. The tactical purchase of Flipkart, the leading marketplace in India, shows that Walmart will continue to go head-to-head with Amazon, in what appears to be shaping up as a generalized marketplace duopoly.

Despite early doubts, Walmart’s acquisitions and decision to create a true platform are clearly paying off. But other enterprises, by taking a highly-curated eCommerce approach, are repeating Walmart’s earlier mistakes. Best Buy provides another cautionary tale, as it too shuttered its “marketplace” in 2016, after operating for 5 years with little to show for it.

Missing the Marketplace Value Prop

Why didn’t Walmart and Best Buy’s early marketplace efforts work? These faux marketplaces miss out on the two major value propositions of marketplaces for the average consumer: low prices and a wide selection of products.

The sheer proliferation of sellers and low barriers to entry help drive competition that results in low product prices, as happens on Amazon. And in terms of product choice, it is hard to come even close to Amazon’s inventory of 120 million products and 375 million SKUs.

Winner-take-all platforms like Amazon benefit from network effects that create enduring value for customers and sellers. Sellers go there because that’s where the customers are, and customers go to Amazon because that’s where the sellers are – and with them the best prices and most products. With a handpicked selection of sellers, faux marketplaces fail to capture the real benefits of the marketplace model and limit their ability to build network effects.

Not surprisingly, Walmart only became a real threat to Amazon after it shifted to a real marketplace model and opened up to many more third-party sellers. But even today, Walmart is still an order of magnitude behind Amazon when it comes to product selection. Given Amazon’s 20-year head start, this difference is not surprising, and Walmart’s recent eCommerce growth is closing the gap. However, the digital “marketplaces” of J. Crew, Best Buy, and others will fail to move the needle for their respective brands unless they also pivot towards the real thing.

Choosing partners one-by-one, or putting major restrictions on third-party sellers — both top-down approaches driven by fears of hurting the brand —only serve to hamstring the kind of innovation and seller competition that make the marketplace business model work. Adding a handful of complementary products will make little difference. Consumers expect more, and if you’re not offering it, they are going to go to the marketplace that is.

Compete in eCommerce by Showing Value Upfront

These faux marketplaces are not the answer for retail. So, if you’re a retailer looking to create a true marketplace, how should you go about doing it?

The first challenge is to get the business model right. Too often retailers will focus almost exclusively on the technology side, assuming that if they launch a new marketplace app or website that sellers will come. This is rarely the case.

New marketplaces suffer from a basic economic problem: not enough initial supply to drive customer demand. And if customers cannot find what they’re looking for on the marketplace, they won’t return. They will just take their business elsewhere.

In the beginning, there is also little to attract third-party sellers. Why would a vendor sell their products through a brand new, unproven online store, in a world where Amazon, Shopify, or eBay are natural first choices? Opening up to sellers, rather than hand-picking them or setting up onerous restrictions, might help. But sellers will pass on by if they cannot see the value.

How then should an enterprise beef up supply when starting from square one? Perhaps with a bottom-up strategy that demonstrates real value to sellers. This is what Jet.com did at first, as a startup that was attempting to compete directly with Amazon.

Jet listed inventory it did not yet have but could easily get. Then, once customer orders came in, it procured the products behind the scenes and handled shipping themselves. By bringing sales to potential third-party sellers upfront and “not making a dime on transactions,” as CEO Marc Lore (now heading up Walmart eCommerce U.S.) put it, Jet created solid proof of concept for vendors. It also made sure customers could find what they wanted on Jet’s marketplace, even if those sellers weren’t officially signed up yet.

Retailers can effectively bootstrap the early phases of their eCommerce ventures by seeding their online storefronts with real value for consumers and sellers. While the “fake it ‘till you make it,” bottom-up approach isn’t the way to scale, it is a great way to get started.

As sellers sign up and contribute inventory, the supply attracts customers. Over time, heightened demand makes the platform even more attractive to sellers. By feeding supply and demand with some initial resourcefulness, a company starting out in eCommerce can get the network effect rolling and start to drive platform value and growth.

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