Retailers turn to online marketplaces in scramble for sales


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

Founded shortly after the Napoleonic wars, department store Debenhams had one of the longest histories in UK retail. It also had one of the slowest deaths, with the last of its stores closing this month after two decades straining under high rents, excessive debts and a failure to adapt to the web quickly enough.

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

While the deal was cast as emblematic of retail’s shift from bricks and mortar to the internet, it raised the question of why anyone would bet that a moribund high street name had a digital future.

The answer lies in so-called online marketplaces, a business model in which retailers throw open their own websites so that rivals and third parties can sell merchandise on them. Boohoo plans to operate Debenhams as a digital department store, but all the products will be sourced and delivered by third parties.

“Before Covid, Debenhams had a 4 per cent share of the UK fashion, accessories and footwear market and was among the top three players in beauty,” said Boohoo’s chief executive, John Lyttle.

“Buying Debenhams and its customer base takes us into massive market that we have not been in before — without us having to own any of the inventory”.

Boohoo’s chief executive, John Lyttle
Boohoo’s chief executive, John Lyttle, said ‘Buying Debenhams and its customer base takes us into massive market that we have not been in before’ © Marco Kesseler/FT

Pioneered by the likes of Amazon and eBay, the business model is familiar to online retailers. However, reeling from a pandemic that has forced them to up their game online, traditional retailers are rushing to launch marketplaces.

Marks and Spencer, one of the best-known names on the British high street and long seen as an own-label retailer, this year started adding third party brands to its website. Kingfisher, the £8bn Anglo-French DIY conglomerate, is also considering doing so.

“[Marketplaces] are part of the world, part of the ecosystem, so we cannot avoid the question,” explains Kingfisher chief executive Thierry Garnier, 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 are a marketplace you are talking about literally millions,” said Garnier.

To those retailers instinctively wary of giving competitors a platform, the model’s champions point to the similar concept that underpin the world’s major social networks.

The pooling of products and content like how-to guides can lead to marketplaces becoming the default choice for consumers, they argue, leaving third-party sellers no choice but to participate.

Francois Nuyts, chief executive of Polish marketplace Allegro — one of the biggest European stock market listings of 2020 — said he can already see such a “flywheel effect”.

“[Online marketplaces] are gaining consumers, therefore the more interesting we are to sellers,” said Nuyts. Allegro added 1.6m buyers last year, growing its customer base by nearly 15 per cent, as shoppers migrated online during the pandemic.

FT Series: Future of retail

Marketplaces typically take a percentage of the price of each product sold by a third party, rather than buying those goods and then reselling them. This allows for a large expansion in the range of products and inventory with relatively little investment and working capital needed.

Nick Beighton, the chief executive of Asos, a London-listed online fashion retailer valued at almost £5bn, said the group had no choice but to embrace the model.

“There was no way that a monobrand was going to capture enough of a twenty-something audience,” Beighton explains. “We asked our staff and no one had more than 20 per cent of any one brand in their wardrobe”.

But deciding to sell rivals’ merchandise on your own site is not without significant risks. It is something that Next, a UK clothing retailer and one of the earliest adopters of the model, acknowledges.

Chief executive Simon Wolfson said the fact the company is introducing users to direct competition is a price he is prepared to pay for faster sales growth.

Having begun as a trial selling third-party sportswear in 2006, its marketplace, known as Next Label, is now the fastest-growing part of the retailer’s business. Sales in the year to January 2020 — the last before Covid disruptions began — rose 22 per cent compared to an increase of 4.2 per cent in the company’s own-brand online sales. Label now accounts for over a third of the group’s £2.15bn of online revenue.

Column chart of Increase in full price sales* (%) showing Next Label's rapid growth

Unusually, Next holds much of the inventory from third-party sellers in its own warehouse and does shipping itself. Wolfson says this results in better customer service and means it can ship its own merchandise and that of marketplace sellers in the same delivery.

But sharing profits with the seller reduces margins — they are around 18 per cent at Next’s Label business compared with 24 per cent in its own online operation.

If the decision whether to adopt the model is a fraught one for a traditional retailer, Europe’s largest online fashion retailer, Zalando, has come as close as any group to achieving the network effect.

Column chart of (€bn) showing Zalando's platform expansion

Co-chief executive Rubin Ritter said the Berlin-based company, whose revenues grew 23 per cent to almost €8bn last year, quickly realised that attempting to capture 5 per cent to 10 per cent of the continent’s fashion market on its own was far too complex and risky.

“We had to procure all the articles sold via our website ourselves, take pictures of every single product, create all the content,” Ritter said. “That had become impossible to manage at some point”.

However, Ritter acknowledges the operational and reputational risks that come with an approach in which delivery, returns and customer service are left in the hands of third parties selling goods on your own site. 

“If a brand promises to deliver within two days but in reality only does so after a week, we do have a problem,” he says.

But with the Covid-19 crisis forcing those retailers that survived to consider new models, the benefits are likely to outweigh the risks. Debenhams’ coming rebirth is likely to be one of many marketplace launches in 2021.

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


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