The Supply Side: Marketplaces present opportunities and threats to Wal-Mart suppliers

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.
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The focus by Wal-Mart Stores to gain e-commerce market share has led the retailer to work with online retailers like Wayfair, eBags, Tool King, and Zulilly to ramp up its “Marketplace” game.

Marketplaces provide a new way for retailers such as Wal-Mart – through Walmart.com – to boost sales opportunities with online consumers. Marketplaces also give Wal-Mart a much broader assortment of products without them having to take full inventory of the goods.

Marketplaces also can provide competitive prices on a wide range of online products that appeal to customers which Walmart.com might not otherwise get. For all the benefits marketplaces do provide Walmart.com, there are some risks associated with them, according Dr. Annibal Sodero, assistant professor of supply chain management at the University of Arkansas.

Sodero said marketplaces are built upon trust and retailers with strong brand names can leverage that with marketplace offerings as long as they realize consumers will likely hold the retailer accountable for the quality and timely arrival of the online order.

“This is not an easy task, but Walmart has to do it,” he said. “How can Walmart know how much inventory the marketplace sellers have and what is their capability to source the products upon demand. Inventory liquidity is essential,” Sodero said.

A recent study by Forrester found consumers are receptive to purchasing from marketplaces especially when associated with retailers they trust. The primary reason customers buy marketplace items is because of competitive pricing and they like the convenience of having a deep catalog of products from which to chose. Sodero said marketplaces are a good opportunity for Walmart, but the retailer must be vigilant in how it polices content and provides transparency to customers on the quality of the product and timeliness of the delivery option chosen by the customer.

“Through marketplace offerings competitor Amazon has 400 million products available online, that is 4,000 more items than are typically found in a supercenter. Walmart was the Google of the 1990s, when people wanted something they went to a Walmart supercenter and looked for it. By 2000 with the rise of e-commerce people then searched Google for where to find products and today Amazon has now surpassed Google in search. It is believed 60% of online product searches now originate at Amazon. Walmart is trying to catch up and marketplaces are the best way to do that,” Sodero said.

SUPPLIER OPPORTUNITY
“Marketplaces provide an invaluable opportunity for smaller suppliers who might not be able get into big box retail any other way. Listing products on a marketplace is the most cost-effective and fastest way for a small supplier or manufacturer to gain national distribution,” said Keith Anderson, senior vice president of strategy and insights for Boston-based Profitero.

For harder to find items in brick and mortar, Anderson said marketplaces give suppliers a chance to optimize search results and “punch way above their weight class.”

He said getting into Walmart U.S. stores is not for the faint of heart and many times small suppliers don’t have a sales track record to show buyers. Without a sales record indicating demand for the product it can be hard to get a buyer to gamble on the item, particularly in a crowded category.

Anderson said even larger companies that have a product not carried in a Walmart U.S. store might sell that item online by listing it with a marketplace that sells on Walmart.com. In that sense, the supplier is able to reach Walmart customers with more of its products. He did say once a sales record for the new product could be established with the marketplace it is likely more advantageous for that supplier to try and get Walmart to offer it directly.

“Small suppliers who sell through third party marketplaces have more control over the pricing of the items, but they should migrate to direct business with the retailer if and when they can do so,” he added.

He said marketplaces can also present channel conflicts for suppliers with strong brand equity and solid brick and mortar market share. Larger companies like a Procter & Gamble can sell Tide pods online at Walmart.com, Sams.com, Jet.com and Amazon with various marketplace offerings. However, algorithmic price matching can often be a race to the bottom, according to Anderson.

SUPPLIER RESISTANCE
Anderson said he understands why some suppliers are resistant to joining marketplaces and even adding more of their products online directly with Walmart.com and Jet.com. He said Walmart.com typically sets the low price but Jet and Amazon can take pricing down further to be more competitive.

“Just today we had a client who was contacted by Amazon that the price of their item was too low and the margin had been eroded. The retailer wanted to know why. The reason was because Amazon automatically lowered the price to match a Sam’s Club promotion and the items sold like hotcakes at the lower price, but there was no margin for Amazon,” Anderson said.

“We see it all the time and this is a problem for the supplier who can fall out of favor with a retailer quickly when there’s no margin in selling the product. Suppliers have to try and do a better job differentiating their products through various pack sizes and whatnot so that retailers and marketplaces can’t easily commoditize an item, eroding any premium value,”  Anderson said.

Eric Howerton, CEO of Whytespyder, said marketplaces are largely misunderstood in the local supplier community. He said marketplaces could be a threat to many medium to large suppliers with a presence in Northwest Arkansas.

“Marketplaces present competition in many categories for Walmart’s traditional suppliers with product in brick and mortar and Walmart.com. Marketplaces can undercut pricing on top branded products if they have been able to access that product somewhere else downstream.”

Howerton agreed with Anderson that suppliers who can sell directly through Walmart.com should do so because a direct relationship is typically better for both parties. Third-party marketplaces he said can threaten the biggest of brands who are lacking an online presence of their own. He said competitors who are validated by positive user reviews online and offer a similar product for a lower price through a marketplace selling on Walmart.com can rob sales from a company that has a majority marketshare in brick and mortar stores.