Amazon Marketplace Program: What if Walmart steals the entire pie?

It has been a while since I posted a blog entry. A new job, a new place, a new home and several other activities has kept me away from blogging. In this article, I want to explore a nagging thought that has been in my mind for a long time. Is Amazon merely profiting from the marketplace/seller program they run or do the retailers selling on Amazon also benefit from it? What if Walmart really takes off with its very modest marketplace program and makes it “competitive” a la Walmart style?

I don’t have the insider view (and won’t use it here for Walmart) and hence can only speculate to a certain extent. I believe, Amazon is making a killing with the marketplace program at the expense of the 3P retail sellers who don’t have any other viable option to access a large customer base for boosting their sales. In today’s e-commerce world strictly limited to the US market, the bottom-line is that there is no healthy competition to Amazon on the marketplace program. While Ebay comes close with its version of a marketplace and there are a few other competitors, including Walmart, fighting in the ring, they do not come anywhere close to the size of Amazon’s program.

In this article by Scott Wingo, CEO of Channel Advisor, a beautiful analysis is done to show the prominence of the marketplace program for Amazon (http://www.amazonstrategies.com/2013/02/part-iiiii-amazons-q4-results-.html). It largely supports a view that I constantly keep sharing with office colleagues at the water cooler; Amazon is nothing once you take the marketplace program out of its business. Amazon is big today because it took several years for the competition to take note of it and initiate any serious action. Even Walmart with its deep pockets and huge resources never ventured into any serious efforts to drastically augment this business stream. Marketplace is a profit making venture. You only realize a percentage commission on the actual GMV or marketplace sale made. But, that percentage commission is pure profit after adjusting for other services you may provide at a cost to the company (for example, fulfillment). In Q3 of 2012, Amazon’s GMV from global marketplace sales was more than the sales generated from their own channel. The difference may be small but  that is also explained by the fact that Amazon’s own network sells more media than EGM. 40% of the units sold are marketplace items and the total 3P revenue (near profit) in Q312 was $2B. What is also interesting in the article is the steady gain that marketplace has had when compared with its own channel (1P) from a GMV standpoint. Amazon sells over 100 million skus largely because of its marketplace program when compared with say, Walmart.com, which sells a relatively modest number of skus.

One needs to note that the benefits accruing to a small retailer selling on Amazon vs selling on any other strong retail competitor site (say Walmart) is very minimal. Amazon provides some add-on-benefits to a retailer selling on Amazon.com when compared to selling on other networks. The biggest and only noteworthy benefit of all is the fulfillment-by-amazon (FBA) program. This helps a retailer publish their product on amazon and let Amazon fulfill customer orders, ship them out and also provide customer service capabilities. This is touted as a major benefit to sellers who want to outsource these capabilities to Amazon rather than take it up on their own. However, none of these services offered by Amazon come for free. In fact, there is a fee associated with every bit of service they provide on behalf of the retailer. Even customer service as an option is burdensome to the 3P marketplace seller as Amazon’s friendly policy towards customers never takes a friendly view on behalf of the sellers towards product returns (check forums on Amazon seller central to read more on some of these pain points). All in all, while Amazon provides these “exceptional” benefits and has worked hard over the years to make their marketplace program superior (kudos to them for this), none of these benefits they provide to the sellers is a strategic core competence, the one that cannot be replicated by the competition, especially if the competitor is someone like Walmart.

While replicating a competitor’s strategy doesn’t necessarily make you the leader or replace the market leader overnight, the beauty of the marketplace program is that you can get to cause serious disruption in a relatively easy manner. 3P sellers are not tied by any means to Amazon’s seller program if they can find an alternative and cheaper channel to sell their wares. Yes, they cannot exit the Amazon relationship completely as they have put their flesh and blood to make Amazon the giant that it is today. That in turn has made Amazon a necessary partner for them to access the huge consumer base that comes first to Amazon to find their favorite items. Similar to Google search that fed on the constant flow of advertisers and consumers reaching their site over the past several years to learn and grow its search engine, Amazon too has benefited from the fact that over the past ten years, every small retailer sold on the seller program to the point where consumers now blindly believe that Amazon has the product they want. The 3P retailer helped spin a huge consumption web for Amazon and now they are stuck to it like a fly.

All that a player like Walmart needs to do is disrupt the pay-by-service model that Amazon is making money on, offer the same items that are sold by the same marketplace partners that Amazon has and utilize the exceptional advantage of the 4000 strong Walmart store network to create a competitive advantage. Adding to that, if you take away the subscription fees of ~$40 that Amazon charges to be a premium marketplace partner, you now have a level playing field. The one thing missing still is the huge consumer base that Amazon has, again much greater than what Walmart.com can boast of. But, that game can be won over by slick marketing and a few “million” dollars spent in the right direction for a couple of years. Amazon, however, is racing towards global marketplace leadership. This is not just an investment of time or money but huge resources to move the needle and become a first mover in countries that Walmart is yet to set foot in.

If the behemoth of Bentonville can take a few longer strides against the scurrying technology rabbit (yeah, it is Amazon) that is racing fast, Walmart has a way to solve the one puzzle that has tripped it in the recent past  – how to become a leader in the e-commerce space and be ready for any other channel disruption in the future? The retail battle of the future can no longer be won alone. You have to take along willing partners and make money out of them, help them make a little on their owen, and overall make it a win-win situation.

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