Here's Why Walmart.com's Marketplace Won't Threaten Amazon

We recently argued that new “third-party marketplace” competition from Walmart and Alibaba won’t pose a threat to Amazon and eBay.

New information in the past week supports this thesis.

Walmart won’t provide fulfillment services–which Amazon does.  In an interview with Reuters, Walmart’s Chief Marketing Officer Kerry Cooper confirmed that retailers that use its marketplace will be responsible for all fulfillment processing, including shipping, customer service, and returns.  Walmart will merely enable users to post reviews about retail partners if their service is below par.

While on the surface this may seem reasonable, customer service in the e-commerce business is a large determinant of success (shoppers are only a click away from leaving the store).  A new entrant into the market will inevitably have problems if it has no control over the fulfillment process.  Shoppers will blame Walmart for problems, not the independent retailers, and the overall Walmart platform will have to address this if it wants to become a major player in the third-party business.

There is precedent for how customer experience issues can hurt a rapidly-growing e-commerce business:

Customer service and user experience was such a big problem with eBay’s auction business as it grew that the company changed its strategy to include a more direct-sales model.  eBay CEO John Donahoe explains this evolution in an interview from last week’s Shop.org conference (fast forward to 1:45):

The auction process was what eBay was built on, but after repeated customer service, usability issues, and subsequent lost market share, auctions have become less important to its business, so it can have more control over these issues.

This interview does point out that Walmart’s store has already added one million new items to its offerings, so there will presumably be some competitive pressure on the market place as more items are added.  However, as we have pointed out, overall growth in the e-commerce market will likely mitigate any pressure on sales at Amazon and eBay that increased supply at Walmart.com will cause.  Here is why:

MORE ROOM FOR E-COMMERCE ENTRANTS AS INDUSTRY GAINS OVERALL RETAIL SHARE

We believe e-commerce will continue to gain share in the overall US retail market for a long time to come and the rate at which it gains share could accelerate to resemble the rate at which online advertising has gained share of overall US advertising in recent years.   In particular, we see three drivers to increased gains in share:

  • Greater consumer comfort shopping online.
  • Improvements in technology that enables an increasing number of smaller sites to sell goods.
  • Continued growth in overall search queries driving users to e-commerce sites which increasingly use SEM efforts to drive traffic. 

This latter view is supported in part by a conversation we had today with Craig Smith, founder of leading e-commerce consulting company Trinity Insight, whose clients generate several billion dollars of e-commerce revenue annually.  Trinity’s clients’ search referrals account for about 35% to 50% of their total traffic, up from about 25% only three years ago (also up 5% to 7% in the past year). 

In addition, Smith said new open-source e-commerce software has helped make it easier for small companies to build fully functioning e-commerce solutions.  For example, OS Commerce was launched in 2003 and Magento was released in 2008 – both open source platforms for creating e-commerce stores.

Online advertising was ahead of commerce when it came to technology that improved performance and measurability for sites both large and small just as advertisers became more comfortable spending on the medium. 

The gain in share reflects this trend, as this graph demonstrates:

E-commerce has gained share of total US retail sales consistently since 2000, but as more independent sites enter the market, more consumers see the internet as a viable alternative to brick and mortar shops, and search engines drive more consumers to shopping sites, the industry could experience the kind of acceleration online advertising has seen over the past six years.  As a result, the steady line moving up and to the right below could become steeper.

 

 

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