Markets

How Marketplaces Are Disrupting Ecommerce Profitability

Man using credit card for online purchase.

The Walmart Effect — the idea that it hurts local small businesses when a Walmart opens in an area — has been well-observed. But as ecommerce continues to grow, the game keeps changing. Of course, consumers aren’t limited by what they can find locally, and marketplaces like Amazon offer almost infinite variety along with speed, affordability, and reliability.

Major retailers like Walmart and Target are opening up their own online marketplaces to remain competitive, selling independent brands alongside their own ranges. Will this diversification help them cement their position of dominance for the modern era and grow their revenue? Or could the shift away from their own products reduce their profitability? Let’s take a look at the full picture.

The rise of the online marketplace

Amazon (AMZN) has shown how successful the marketplace model can be, and it has now become one of the biggest companies in the world. Although it does have its own product ranges (such as Amazon Basics), the bulk of items on the site are from independent sellers. Other major retailers have followed Amazon’s example.

Walmart (WMT) has now established the Walmart Marketplace, while Target (TGT) has launched Target+. These marketplaces feature a much broader array of products than the shops would usually stock, including many independent sellers.

For instance, Walmart’s marketplace stocks a range of outdoor and garden items, including solar-powered solar ovens and grills. One manufacturer is the solar power portables startup GoSun, and it has been a huge success story over the last year. It recently raised $1.6 million in a crowdfunding campaign, and has enjoyed a 109% growth in revenue since its launch in 2020, when it was created from an old garage. 

This is far from an isolated story. Head to any of the product categories on the Walmart store and you’ll find many up-and-coming businesses alongside the Walmart brands. For instance, in the world of home decor, Wallniture has gone from being a business set up by friends in 2016 to stocking more than 100 items on Walmart alone. Its revenue has soared between 2020 and 2021.

But will these kinds of success stories have a positive or negative impact on Walmart’s own bottom line?

How is this affecting major retailers?

Marketplaces are a great way for retailers to bring in an additional income source when selling online. Ecommerce is known for having a small profit margin due to the money required to ship items and promise returns, and taking revenue from other sellers through marketplaces is a great way to claw some of this back. Plus, considering that younger generations are increasingly choosing small brands over big corporations, opening up a marketplace provides a compromise.

However, as smaller brands and startups start to capture more of consumers’ attention, the trend toward marketplaces and independent sellers could also hurt major retailers. For a long time, the likes of Walmart and Target have been safe bets for investors, but could this be about to change?

In Q2 2022, Amazon earned $27,376 million from third-party seller services, which is a 13% increase from the same period in the previous year. Considering the marketplace’s revenue is falling after its boom during the pandemic, this could prove to be a lifeline.

It’s true that the sales of Amazon’s product line have begun to decline recently, prompting the ecommerce giant to reduce the number of items available. There have even been rumors that it plans to cut its own-brand products entirely, but this would likely have a relatively small impact on its bottom line.

Walmart seems to be heading in a similar direction by embracing the advantages of a marketplace with third party sellers. The retailer enjoyed a 12% rise in its eCommerce sales in Q2 of 2022 compared to the previous year, although it’s unclear how much of this is from its marketplace.

Target is proceeding with more caution than Walmart. It operates an invite-only marketplace, and to this day, there are just a few hundred sellers on the program — while new sellers are constantly joining the likes of Walmart and Amazon. As a result, its marketplace would only have made a small contribution to sales over the past few years — but considering its digital sales grew 9% in Q2 of 2022, this doesn’t seem to be holding it back.

Times are changing

As the explosion of ecommerce continues, there’s a clear trend toward empowerment of younger brands and independent sellers. Although this could mean private label sales by major retailers suffer, it’s more likely that the retailers that are able to take advantage of the opportunity by supporting these small businesses on marketplaces will reap the rewards. This makes a great investing opportunity and is something to watch.

Walmart is on the forefront of this strategy, while Target still lags behind, but the next few years will determine the true verdict.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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David Cotriss

David Cotriss is an award-winning writer of over 500 news and feature articles on business and technology. His LinkedIn profile can be found at https://www.linkedin.com/in/davidcotriss.

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