Retailers have been quick to adopt effective e-commerce strategies, but brands are lagging due to their antiquated approach, and the market is changing. What brands don’t realise is that the very strategies making money for retailers online, is damaging brands themselves.

Traditional models for retail consist of: brands manufacture the product, the product being sold to retailers, then to consumers. Brands would rarely engage in direct sales.

This works because retail outlets (usually) need to sell more than one brand to be successful. A single brand, would not (typically) have enough products to operate in bricks and mortar retail.

Along comes the internet…

Marketplaces, such as Amazon, eBay and Tmall, now account for much of the global B2C e-commerce trade. Anyone can list on a marketplace, so you often have multiple retailers selling the same product.

In the traditional example, it doesn’t matter that lots of retailers are selling the same product, as they are catering to only the people in the store. There are not multiple companies selling the same product in one store, just one product in each store.

Amazon, for example, is one store. Yet there are often hundreds of retailers all selling the same product on Amazon. It comes down to simple economics. There is an elevated level of supply on marketplaces. This results in a lower prices.

Marketplaces are triggering price wars between retailers listing on them. Margins and prices are being driven into the ground. For example, Company A and Company B are both retailers, selling the same product. Company A puts the product on a marketplace for £10, and begins to make money. Company B sees that this is making Company A money, so lists it for £9. Company A then reduces the price to £8, and so on until both companies are making just enough that it is worth selling the product.

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The knock-on effect is damage to the brand. If the price competition continues, the perceived value of the product will be the market price, and not the initial RRP. This is a devaluation of the brand, caused by the retailers’ strategy online (which leads to over supply).

The Solution for Brands: Restrict the Supply

Many retailers are selling through online marketplaces, why don’t brands? Traditional models require physical locations and access to customers. Marketplaces provide access to customers, and the internet has removed the need for physical stores.

If brands control the supply of product on online marketplaces (by doing it themselves) they prevent price wars and increase market price (not to mention making added margins).

Evidence shows retailers don’t stop stocking product if brands sell direct online. This is because most large retailers will have bricks and mortar sales, and their own e-commerce, that would be left completely unaffected. Retailers are not going to throw this profit away because brands are selling online. Therefore brands see incremental (and not cannibalistic) sales.

Examples of companies doing this well include:

  • Adidas: In 2016, e-commerce sales grew by 59% year on year, to €1bn. This didn’t result in a cannibalisation of existing sales, net sales increased by 18%.
  • Ted Baker: In 2015, e-commerce sales grew 64% year on year, to £22.9m. This didn’t result in a cannibalisation of existing sales, net sales increased by 25%.
  • 3m: In 2014, e-commerce sales grew 14% year on year, to $8bn. This didn’t result in a cannibalisation of existing sales, net sales increased by 3% (exactly the $1bn increase in e-commerce sales).
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A note to retailers: develop your own marketplaces

This is coming! Brands will be selling direct through marketplaces if they are not already, and they will be restricting supply and reaping the margins!

So, what can retailers do to make sure that they are not cut out of the loop? Develop marketplaces. Retailers should focus on building loyal customers in a particular niche. This will ensure that they can still provide access to customers for brands, while making margin. If retailers are competing with brands on 3rd party marketplaces, they can simply cut supply.

Why a marketplace over an e-commerce site?

You can pass on the risk. Holding stock is risky, and requires a higher upfront cost. If there is an opportunity to pass on this risk to the brand, why not? The brand must hold stock anyway, and they already have logistics set up for selling on other marketplaces. Why not operate as a marketplace and take a margin for letting brands sell through your website?

This allows retailers to hold a much larger range of products, at a lower cost. If their site is set up to encourage cross-sell, then retailers can increase customer basket size for very little money. Meaning added revenue is at very little cost.

What’s your opinion- should brands and retailers start building their own marketplaces? Tell us below or tweet us!