Amazon and Walmart/Jet.com are dominating headlines for their eCommerce growth. This focus is understandable given Walmart's major acquisitions and that Amazon receives an estimated 43% of all digital sales. But is there room for other marketplaces? The answer is most definitely: Yes!
Network effects in industries with marketplaces create winner take all dynamics, which means only two platforms will naturally dominate their industry. Specialized marketplaces experience the same winner-take-all dynamics within their niche of eCommerce while being in a constant battle with the large, generalized marketplaces like Amazon and now Walmart/Jet.com.
This draws a similar parallel to traditional retailers over the past decades where big box, discount retailers like Walmart co-exist with specialized retailers for shoes, sporting equipment, clothes and so-on. We are seeing a similar dynamic with marketplaces except there is only room for one or two marketplaces in a given vertical. This means that consolidation is coming within specialized niches, and it also presents an opportunity for struggling retailers to own a marketplace business model of their own.
M&A in Retail
Retailers are getting pummeled in the equity markets and rightly so: they have failed to innovate or adjust their business model in the 21st century. Linear eCommerce efforts do not compare to the benefits consumers gain by shopping at a marketplace with third-party sellers, like Amazon offers. Marketplaces have the widest array of product inventory and catalog with the most competitive prices because third-party sellers are competing against each other at all times.
As we've seen with Walmart's acquisition of Jet.com being a success and subsequent doubling-down on marketplace M&A with the Flipkart deal, it seems like retailers are left with the two options: buy a specialized marketplace or retrench and shrink your traditional retail business down to its core fundamentals. The former option is for growth. The latter option is self-preservation.
Beyond Jet.com, we've seen QVC acquire Zulily and Target acquire delivery marketplace Shipt. A few specialized marketplaces have also gone public or are going public, such as CarGurus.
Learnings in B2B eCommerce
B2B distribution is 2-3 times the size of B2C retail and Amazon Business is estimated to be a top 20 distributor with over $10 billion in gross merchandise volume. The same outcome of specialization is possible in B2B within the different verticals of distribution like MRO, metal, chemicals, medical supplies, building materials and many more. Amazon Business is continuing to grow at 20% month over month and is well on track to becoming the dominant generalized marketplace in B2B. However, there is still room for a number of vertical-specific marketplaces in the $6-8 trillion mega-industry called B2B Distribution.
Since the threat is more nascent in B2B (Amazon Business started a few years ago) than in retail, incumbents still have time to build their own marketplaces from scratch like Walmart tried to do in 2009 with the Walmart Marketplace. While Walmart's initial marketplace failed, distributors today have the benefit of learning from Walmart's mistakes in their own platform innovation efforts.
Retail's Marketplace Opportunity
Unfortunately for retailers who have given Amazon a 24-year head start, the most likely option to become competitive in the digital arena is to buy their way out of the problem. And with M&A growing, venture capitalists will now have more ammunition to increase the exit multiples for their portfolio companies. So, the sooner retail businesses act, the better.
Looking at the landscape above, there are many potential niche marketplaces that are successfully developing in areas like fashion, craft goods, luxury goods, auto, art, consumer electronics and home goods, as well as used products of all kinds. Though there are many marketplaces above, the landscape includes only companies operating in the U.S. Looking abroad, there are many more examples of a similar trend. This holds true in Europe and even more true in Asia, where marketplaces have dominated eCommerce growth.
These marketplaces offer businesses that are more defensible approach against Amazon than traditional bricks-and-mortar retail - which, per Mary Meeker's 2018 Internet Trends report, saw declining growth rates once again last year. With Amazon and Walmart now making big investments in Asia, retailers will need to find answers not just at home but abroad as well. Without a marketplace approach, they will continue to struggle in ecommerce, as Walmart did for nearly two decades before acquiring Jet.
For retailers looking to compete with dominant marketplaces like Amazon and now Walmart, or even just to find new growth opportunities abroad, these vertical marketplaces represent the best opportunity. By combining the strengths of their traditional retail businesses with the scale and value proposition of a marketplace, they can create growth, access to new markets and a strong moat in eCommerce.