By Mike Grillo, VP, Marketing at Ampla Technologies
At the end of September, one of the nation’s biggest department stores announced that they had officially launched their own online third-party marketplace, becoming the latest retailer to join the likes of Target, Walmart, Amazon and Saks who have been using the marketplace model to expand their assortments.
Whether or not you sell at Macy’s or have them on your short list of potential retail partners, you should take notice. The Macy’s move speaks to several macro-industry shifts that have impacted the way brands approach expanding omni-channel distribution.
Why Retailers are Turning to Marketplace Models:
We all know that retail has been challenged over the last few years, and this year specifically, managing inventory levels, controlling gross margin and fulfilling orders have all gotten more complicated. At the same time, consumers have higher expectations than ever before; they want a diverse assortment, fast shipping and competitive pricing.
For retailers like Macy’s, a third-party marketplace allows them to address all of these challenges and expectations head on:
- No inventory risk: Because the brands are owning the inventory, and simply paying Macy’s a vig to sell on their marketplace, there’s no concern of overbuying from a vendor and having excess merchandise to promote off season.
- Expanded assortment: Without inventory risk, you can add as many brands as you want to your assortment without having to worry if you have space for them in your warehouse or in-stores.
- Limited margin compression: Without inventory on hand, there’s no risk of having excess merchandise that needs to be aggressively promoted at the end of a slow selling season, helping to preserve margin.
What Does it Means for Brands?
The proliferation of marketplaces has certainly expanded the distribution channels available for brands. Across Ampla internal data, over 65% of our customers are selling as third-parties on Amazon, generating over 200 MM in sales YTD, with a smaller percentage leveraging other marketplace models. That said, as many brands desire to balance out their eComm business with wholesale strategies, the mass adoption of marketplace models by even the most high-end retailers may make this more challenging.
- Higher Margin, Lower Velocity: In these third-party marketplace models, the retailer is taking a relatively small commission on each sale to compensate for the fact that they’re not owning the inventory. Commissions can be anywhere from 10-20%, which leaves brands with a much healthier gross margin than a traditional wholesale arrangement. That said, because the retailer doesn’t own the inventory, there’s less incentive for them to help you sell it through. You won’t see any prominent placements on-site (without paying for it), or promotions that are retailer funded, and as such, your velocity may be slower.
- More Difficult to Forecast: Typically, in a wholesale arrangement, you’ll work with a buyer on a quarterly forecast based on historical sales. They manage the forecast for you, and you can use it to place inventory orders so you have enough on hand to support this channel. This doesn’t happen with most third-party marketplaces. Any forecasting will have to be done by your own team, and as such, it’s easy to get stuck in a tough inventory position for that specific channel.
- More Sustainable Growth Opportunity: While it’s amazing when a retailer automatically places a big buy with your brand straight out of the gate, the emergence of models like drop ship and marketplace are making it far less likely that you’ll get that 1 MM opening order. That said, joining a marketplace at a retailer like Macy’s is a great way to build your relationship in a more sustainable way, and ultimately convert the relationship to a more meaningful wholesale model. Here are some tips to drive value from your marketplace relationship.
- Spend time on your marketplace listings: Good photography and great copy go a long way. You should treat your marketplace listing with as much care as you’ve put into your DTC page.
- Participate in promotions, and invest in ad spend: As with any marketplace, simply having a listing isn’t enough. You’ll need to participate in and be competitive with your promotions, especially if there’s a broader category promotion going. Additionally, many of these traditional retailers are rolling out ad products alongside their marketplaces. While they’ll be nowhere near as robust as Amazon ads, tossing a few hundred dollars into the new ad product is a show of good faith to the retailer and won’t break the bank.
- Showcase growth to your buying team: Make sure to merchandise your growth to your marketplace contact and when you feel you have a case, tell them you’d like to be introduced to the category buyer for a wholesale test. If you’re a high performing brand, there’s many reasons why the retailer would want to convert you to a wholesale partner; perhaps they want you in-store, they want an exclusive SKU, or they simply want to ensure they don’t sell out of your product during peak season. Leverage these bargaining chips to get a test order, and grow from there.
The Macy’s news is just the most recent example of how retailers are approaching their relationships with emerging brands. While onboarding onto a third-party marketplace may mean side-stepping wholesale in the short-term, it allows you to demonstrate momentum that will hopefully open up a much larger relationship with the retailer over time.