Amazon promise is lowest prices, better selection, and since the launch of Prime, incredible convenience. This model worked really well, customers got what they wanted, and over time Amazon has continued to grow. They sold $79 billion worth of merchandise last year in North America alone. That is roughly 20 percent of all US online sales.
But over time Amazon has transitioned to a completely different model. They built a marketplace. Last year almost 50 percent of products sold on Amazon were from marketplace sellers. Taking into account Amazon’s retail sales, this marketplace percentage, and The Census Bureau of the Department of Commerce figures on total US e-commerce sales, I estimate that 50-60 cents of every new dollar spent in US e-commerce is spent on Amazon. Which means if the US e-commerce grows by another $60 billion this year like it did in 2016, $30 billion of that will be spent on Amazon.
No wonder everyone is trying to figure out how to beat Amazon.
The shift to the marketplace model is key, because Amazon and many others have realized that to achieve scale as an e-commerce business you need one. Product selection and best prices are much easier to achieve when you have millions of people doing it for you. Instead, Amazon went to focus on other things. And as you will learn, those other things is the key.
Many think marketplaces are e-commerce websites which allow anyone to list their products on them. This is what Amazon looks like from afar. A website with a bunch of products, and those products are sold by a few usernames. So how come everyone else trying to build one hasn’t made a dent to Amazon’s growth?
That’s because marketplaces are platforms. They are the enablers for smaller companies to start and scale. The website marketplace part is only a small part of it. This is very apparent when looking at Alibaba and all the services it has built. Alibaba doesn’t even own any warehouses, instead they focus on building the platform.
Amazon and Alibaba together are two of the largest e-commerce players in the world. So should Amazon be concerned with Alibaba ever entering the US market directly? Alibaba hasn’t so far because, again, it’s not about launching an American website, it’s about what platform they could build here. This is a much harder problem to solve.
eBay could have been there.
eBay went from being an auction website to a Amazon-like marketplace. In 2001 only 16% of products sold on Ebay were fixed-price, meaning they were auctions people had to bid on. But by the end of 2016 that number has climbed all the way to 87%. So in 15 years eBay transitioned from having their own concept, to trying to directly compete with Amazon.
I think this a missed opportunity by eBay. eBay had one of the largest peer-to-peer communities on the web. What made eBay unique and successful wasn’t the billions of listings on the site, but instead the millions of people trading products one-to-one. By now this could have grown to been so much more - Uber and AirBnB are the leaders of the peer-to-peer model now. eBay could have been there, but instead they chose the path to become more like Amazon, and so far, it has not worked out great. Their sales growth has stalled, and they have remained stuck in this transitioning period.
eBay was different and should have tried to keep at it, but instead chose to become more like Amazon. At least try it. In a conference in 2015 Devin Wenig, eBay CEO, said “I think there’s an idea that I need to be like Amazon. I don’t. The world doesn’t need an almost-as-good Amazon. They need a better eBay.” I don’t see which actions by eBay are representative of this vision.
For the last few quarters eBay has been talking about Structured Data Initiative, a process of enriching listings on eBay with semantic information. The idea is simple: when two people use eBay to sell the same thing, each in different condition and each with minor variations, eBay wants to know that they are the same product or related products. Historically eBay was a list of “listings”, there was no concept of a product being sold by multiple sellers (something Amazon and others have been doing). This is massive undertaking given how many products are listed on eBay, but it is needed to be able to deliver a modern experience and to build features like product recommendations.
Today the conversation is still around what eBay can do to compete with Amazon. But for many years this has been an irrelevant question. It’s hard to name eBay’s innovations over the last 10 years, especially when compared to all the things Amazon released. eBay has been at work reinventing the model, fixing their data and trying to reinvent their brand to attract new customers. Amazon didn’t need to do any of this, and instead focused on physical infrastructure.
Then there is Walmart.
Walmart is the 2nd largest retailer in the US, and has been more vocal about focusing on e-commerce over the last few years.
In an interview with Kara Swisher of Recode, commerce entrepreneur Ron Johnson, who had great success at Target and Apple among other things, had some great thoughts on what Walmart needs to do to grow e-commerce.
“Amazon has this program called Prime, that locks people in, and they’re adding services all the time,” he said. “That gets you such incredible loyalty, you’ll always buy from them. Imagine if Walmart had its equivalent, Walmart Prime, but it offered benefits online and in-store. Every time you come to the store, you get free food, you get a discount on your purchases, you develop all these benefits.”
– Ron Johnson, entrepreneur
They key message is that what makes Amazon so attractive to so many people is the extra services and products they get through it. Any member of Prime membership gets free two-day shipping, access to Amazon Video, Amazon Music, etc. And Amazon keeps adding more to it. So just by being a member of a shopping website, people get new benefits virtually for-free when Amazon enables them for everyone.
Johnson also added:
“Too many people are looking internally instead of externally. They’ve been focused on, ‘I’ve gotta become an omni-channel, I’ve got to get more people to my website.’ That’s like the Warriors going to play Cleveland in the NBA finals and not caring about LeBron James, but saying, ‘Let’s improve our zone defense.’ At some point, you gotta say, ‘LeBron’s the challenge! We gotta defend LeBron!’”
– Ron Johnson, entrepreneur
What Walmart did when they decided to compete with Amazon, is to add a marketplace to their website. Now instead of just Walmart selling their own inventory on Amazon, any retailer could do it. There are now close to 10,000 of those sellers on the Walmart marketplace, but so far it hasn’t kickstarted hyper-growth for Walmart. Because what Walmart did is the first step - open up their website to others, build a marketplace. But that’s not what Amazon is or does.
This is very apparent when customers buy from Walmart.com and want to return a product. If they bought it from Walmart itself they can take it back to a store. If they bought it from one of the marketplace sellers they have to contact them (and first figure out how to do it), arrange a return approval and handle it themselves. I heard from some people handling returns at Walmart stores that as much as 50% of products they get they end up having to refuse because they are from marketplace sellers.
This is the effect of enabling a marketplace to a previously existing website. The customer experience and expectations take time to adjust, so this duality of the marketplace experience is confusing. What Walmart Prime mentioned above could be doing is facilitating this service - handle returns and customer support for marketplace sellers too.
Sellers is key.
The focus on sellers is how marketplaces grow. Yes, it’s great that marketplaces expose a retailer to a bigger audience just by joining it. But over time that’s become a given, and that’s what Amazon is really strong at. Instead, marketplaces moved to focus on external services. Providing payment, warehousing, shipping, marketing, manufacturing and other solutions. Amazon does most of these for example, and that’s a huge benefit for joining the Amazon marketplace. But Amazon is not alone.
In Latin America there is MercadoLibre, which runs MercadoPago, a safety payment system. Value of payments processed in 2016 Q3 surpassed MercadoLibre marketplace sales. Alibaba has AliPay too which has more users than PayPal. In both of these cases those services handle payments in countries where it’s not as trivial as throwing up a Stripe.com form to accept payments.
Etsy seller services revenue has been growing faster than marketplace revenue. Since 2015 Q3 Etsy generates more revenue from seller services than from the marketplace itself. This is both great for the business, but also makes the business of many of its sellers that much easier.
Meanwhile at Amazon.
Sellers have been flocking to sell on Amazon over the years, and still continue to do so. Not only because as Amazon grows they get to grow too, but because the buying experience is consistent. Especially for sellers who have decided to offload their inventory to Amazon’s Fulfillment by Amazon (FBA) service, which completely hides the marketplace aspect from buyers. Returns, shipping times, Amazon Prime access is all the same.
Amazon has been focusing on building the physical infrastructure. This means national distribution, warehouses, and lately last-mile shipping, imports from China, their own air cargo fleet, etc. Soon they might offer Manufactured by Amazon service which would allow US brands to outsource manufacturing to China, testing and importing to US. Why not. What Amazon is focused is the backbone of e-commerce - how products go from the manufacturing plant to the customer. They are putting investments in play to own as many of that pipeline as possible.
So as other retailers are fighting to fix their websites, enable marketplaces and attract new customers, Amazon is playing in a completely different game. As far as Amazon is concerned, none of those companies are competing with them.
So how can anyone beat Amazon? Realize that a marketplace is a platform. What Amazon and Alibaba did was own or control all of the steps in the retail process. All traditional US retailers simply tried to expand their website and hope that this would be enough. It didn’t work. Companies like Walmart have the benefit of brick-and-mortar stores, which they can use to develop a different experience than Amazon.
At least in the US market there is not going to be anyone to directly compete with Amazon at least for the next few years, they are too far ahead. The question is who is going to be able to carve out the 2nd place.
*all illustrations done by Frits from hikingartist.com