Marketplaces as a New Channel to Win With Consumers

The pandemic created long-term structural changes to consumer buying behavior and accelerated retail e-commerce by an estimated five years to 10 years. In a recent Alvarez & Marsal Consumer and Retail Group survey, 85 percent of consumers indicated they will maintain their shopping habits post-pandemic, which bodes well for marketplaces. Alvarez & Marsal estimates retail e-commerce will reach a staggering $5 trillion by 2025, with marketplaces representing the lion’s share of that figure. In 2020, marketplaces were greater than 50 percent of all e-commerce sales in the U.S.

A large selection of items from multiple brands, with convenience and competitive pricing, is the reason behind marketplace growth. Given the importance of marketplaces to the e-commerce landscape, most brands no longer have the option of ignoring marketplaces. So how should companies think of the marketplace as the new channel and win with consumers?

There are three key things brands should focus on in developing their marketplace strategy:

1. Build a ‘fit for purpose’ ecosystem of marketplaces and operate them as a standalone channel.

Leading brands and retailers treat marketplaces as a standalone channel, separate from their own ‘direct to consumer’ channel, with a clear role within the company's overall digital strategy. This standalone channel requires the right resources and investments behind it to make it successful. To build the right ecosystem, companies need to evaluate different marketplaces along multiple dimensions and ask themselves the following questions:

• Is the marketplace brand appropriate?
• Is the consumer base overlapping or incremental?
• Are the price points and promotions investments required to win offering a profitable business?
• How big is the marketplace and how fast is it growing?
• Is customer experience on par with our brand and the unique value proposition of the marketplace?

For example, a large national U.S. retailer operating in a commoditized category was facing years of declining store traffic. It pivoted its strategy while setting up marketplaces as an independent channel and is reducing its store footprint by ~80 percent over the next three years. Given that it operates in a commoditized category, it made sense for this retailer to partner with traditional marketplaces. This might not be the case for all retailers.

2. Design a tailored assortment by marketplace and a differentiated pricing strategy vs. other channels.

To be successful on marketplaces, where possible, companies need an assortment tailored to the marketplace to prevent pricing conflicts from other channels. There are multiple ways to do this, either by segregating specific styles/products or by having a new line or brand. However, for many product categories, think key items or established consumer packaged goods (CPG) products, it wouldn't be possible to set up differentiated pricing. Many marketplaces will insist on having the key items on their platform and will cut or match prices so they can drive eyeballs and conversion. This dilutes not just a brand’s positioning, but also chips away traffic from the retailer’s website and other channels to marketplaces.

For example, a leading global lifestyle apparel company launched a new brand extension with the marketplace of a significant retail corporation. This was more price appropriate for its consumer base, and in the process removed any assortment or pricing conflict with its direct-to-consumer and retail business.

3. Focus on the right fit operating model and invest in the capabilities required to win.

Each marketplace has a series of operating model options that brands and retailers can leverage. For example, retailers can set up their own dedicated marketplace storefront, use a wholesale model or go through a third-party reseller. Third-party resellers have seen explosive growth in the last two years to three years. This is especially due to digitally native brands leveraging their proven capabilities to scale across an ecosystem of marketplaces vs. building it in-house. Tied very closely to this decision is existing supply chain capabilities and what an operating model can support.

For example, a leading U.S. apparel company started with a third-party reseller model to begin with and scale on different marketplaces in an accelerated model. As its business grew, the company moved to an in-house model with a dedicated marketplace storefront.

Many companies are still stuck in the traditional ways of marketing rather than investing in marketplaces, marketing skills and leveraging specialized third parties that have artificial intelligence (AI)-led execution tools for marketing campaigns. Another pitfall most companies face is not putting enough emphasis on marketing investments. For example, if retailers are setting up a brand on a large online marketplace, many leading companies are willing to invest 15 percent to 20 percent or more of revenue in that upfront phase.

Brands and retailers have had a long love-hate relationship with marketplaces. The structural shifts emerging from the pandemic have made it clear that for most brands and retailers partnering with an ecosystem of marketplaces is no longer an option but a necessity.

Mohit Mohal and Abhinav Chandra are managing directors with Alvarez & Marsal’s Consumer and Retail Group (CRG). They can be reached at mohit.mohal@alvarezandmarsal.com and achandra@alavarezandmarsal.com.