Retailers are turning to online marketplaces for sales


This article is part four in an FT series examining the future of retail

Founded shortly after the Napoleonic Wars, the Debenhams department store has one of the longest retail histories in the UK. It has also seen one of the slowest deaths, with the last of its stores closing this month after two decades of tensions over high rents, excessive debt and an inability to adapt quickly enough to the web.

But the Debenhams brand will live on. Boohoo, an online fashion retailer whose market capitalization has almost increased eightfold since its launch in London in 2014, acquired it, along with its customer data, for £ 55million in January.

While the deal was touted as emblematic of the brick-and-mortar retail shift to the internet, it raised questions as to why anyone would bet a dying high street name had a digital future. .

The answer lies in so-called online marketplaces, a business model in which retailers open their own websites so that competitors and third parties can sell goods there. Boohoo plans to operate Debenhams as a large digital store, but all products will be purchased and delivered by third parties.

“Before Covid, Debenhams held 4% of the UK fashion, accessories and footwear market and was among the top three players in beauty,” said Boohoo CEO John Lyttle.

“Buying Debenhams and its customers brings us into a massive market that we have never been in before – without having to own any inventory.”

Boohoo Managing Director John Lyttle said: ‘The purchase of Debenhams and its customer base takes us into a massive market we have never been in before’ © Marco Kesseler / FT

Launched by Amazon and eBay, the business model is familiar to online retailers. However, reeling from a pandemic that has forced them to improve their online gaming, traditional retailers are rushing to launch markets.

Marks and Spencer, one of the best-known names on Britain’s high street and long regarded as a full-fledged retailer, started adding third-party brands to its website this year. Kingfisher, the £ 8 billion Anglo-French DIY conglomerate, is also planning to do so.

“[Marketplaces] are part of the world, are part of the ecosystem, so we cannot avoid the question, ”explains Thierry Garnier, CEO of Kingfisher, adding that the consumer is a winner.

“In a big box store you might have 30,000 to 60,000 product lines, but when you’re in a market you’re literally talking in the millions,” Garnier said.

For retailers who instinctively hesitate to give their competitors a platform, the model’s champions point to the similar concept behind the world’s major social networks.

Pooling products and content such as how-to guides can make marketplaces become the default choice for consumers, they argue, leaving third-party sellers with no choice but to participate.

François Nuyts, managing director of Polish marketplace Allegro – one of the biggest European stock exchanges of 2020 – said he could already see such a “flywheel effect”.

“[Online marketplaces] are gaining consumers, so the more interesting we are to sellers, ”Nuyts said. Allegro added 1.6 million buyers last year, increasing its customer base by nearly 15% as buyers migrated online during the pandemic.

FT Series: The Future of Retail

Markets generally take a percentage of the price of each product sold by a third party, rather than buying those products and then reselling them. This allows for a wide expansion of product line and inventory with relatively little investment and working capital required.

Nick Beighton, managing director of Asos, a London-listed online fashion retailer valued at nearly £ 5 billion, said the group had no choice but to embrace the model.

“There was no way a monoframe would capture enough in their twenties,” Beighton explains. “We asked our staff and no one had more than 20 percent of a brand in their wardrobe.”

But deciding to sell competitor’s merchandise on your own site is not without significant risks. This is something that Next, a British clothing retailer and one of the first to adopt the model, recognizes.

Chief Executive Simon Wolfson said that the company is introducing users to direct competition is a price it is willing to pay for faster sales growth.

After starting as a third party sportswear sales trial in 2006, its market, known as Next Label, is now the fastest growing part of the retailer’s business. Sales for the year through January 2020 – the last before the Covid disruption began – rose 22%, compared to a 4.2% increase in online sales for the company’s brand. Label now accounts for more than a third of the group’s £ 2.15 billion in online revenue.

Full-price sales increase * (%) column chart showing the rapid growth of Next Label

Exceptionally, Next holds a large portion of third-party vendor inventory in its own warehouse and takes care of shipping. Wolfson says this translates to better customer service and means he can ship his own merchandise and that of market sellers in the same shipment.

But sharing the profits with the seller cuts the margins – they’re around 18% at Next’s Label, compared to 24% in its own online operation.

While the decision to adopt the model is difficult for a traditional retailer, Europe’s largest online fashion retailer, Zalando, has come as close as any group to achieve the network effect.

Histogram of (in billions of euros) showing the expansion of the Zalando platform

Co-CEO Rubin Ritter said the Berlin-based company, whose revenues grew 23% to nearly € 8 billion last year, quickly realized that attempting to capture 5 to 10% of the continent’s fashion market alone was far too complex and risky.

“We had to source all of the items sold through our website ourselves, take pictures of each product, create all of the content,” Ritter said. “It had become unmanageable at one point.”

However, Ritter recognizes the operational and reputational risks associated with an approach in which delivery, returns and customer service are outsourced to third parties selling goods on your own site.

“If a brand promises to deliver within two days but actually only does so after a week, we’ve got a problem,” he says.

But with the Covid-19 crisis forcing surviving retailers to consider new models, the benefits will likely outweigh the risks. The upcoming rebirth of Debenhams will likely be one of many market launches in 2021.

With reports by Oliver Barnes in London and Olaf Storbeck in Frankfurt


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