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These days most bricks-and-mortar business owners are aware that they need to complement their physical stores with a digital offering to stay competitive. However, many offline-only companies are oblivious to an extraordinary opportunity – extending or transforming their businesses via online marketplaces.

That doesn’t mean offline retail is dead. In-store shopping is still very much alive, despite frenzied reports of its imminent demise, which have reached a crescendo during the Covid-19 pandemic. The sobering fact is that, in the U.S. alone, 84 percent of retail sales still happen in-store. What is changing in a major way, is the rapidly evolving nature of physical retail.

Forward-thinking retailers are increasingly integrating digital platforms, such as online marketplaces, into their offline business models to enhance the customer experience and ignite scalable growth. A number of factors are behind this trend.

Increased digital adoption is driving ecommerce growth

Wider broadband penetration and growing familiarity with online transactions have given ecommerce a significant boost. This trend has been turbo-boosted by the Covid-19 pandemic, resulting in online transactions becoming the default for most people in the developed world, even in areas that used to lag in digital adoption, like education and groceries.

Although most markets are still largely offline, almost all of them are seeing rapid digital adoption.

Source: Dealroom

The rise of the marketplace business model

It may be a controversial statement, but online marketplaces constitute the most powerful business model in human history. A reputation that is built on their unrivalled scalability, customer centric ethos, and unique ability to bring order to fragmented markets. 

Where chaos reigned due to asymmetrical access, lack of transparency, and broken customer experiences, marketplaces bring universal standards, accountability, expediency, efficiency, and product diversity. They unlock value in previously non-productive assets (Airbnb with private homes, Uber with private cars) and lower the barriers to entry for suppliers.

These characteristics have fueled a veritable explosion in marketplace startups over the past ten years:

  • 57% – marketplace portion of retail e-commerce
  • $2T – spent on marketplaces in 2019
  • 306% – increase in marketplace startups on AngelList since 2015 
  • 1,400% – increase in European B2B marketplaces since 2010
  • 300% – avg growth in marketplace revenue YoY
  • 59% – European companies that rely on marketplaces for their online sales

Marketplace unicorns have grown 70% in value since Jan 2020 to more than $5 trillion, outperforming tech overall.

– Dealroom, The Future of Marketplaces Report (2021)

Despite all this growth, the biggest opportunities for online marketplaces are still ahead. The ongoing evolution of the marketplace model is making sure of that.

Established horizontal marketplaces like Amazon, eBay and Alibaba are being challenged by second, third, fourth and fifth generation marketplaces. These newer marketplace types focus on niche verticals (e.g. contemporary art), on-platform transactions (e.g. event tickets), on-demand or location based transactions (e.g. ridesharing) and value-added services (e.g. real-time real estate bids).

Even newer marketplace models target contemporary themes like the circular economy, sustainability, the passion economy and regulated services.

Omnichannel customer journeys

Over the past few years physical stores have become far more enmeshed in the customer journey than ever before. Technology and consumer expectations are driving the evolution of traditional bricks-and-mortar businesses, from mere sales locations to cross-platform brand builders, marketing channels, and providers of unique experiences.

This cross-platform evolution has been further propelled by the Covid-19 disruption of 2020, emphatically proving that bricks-and-mortar businesses that also sell their products via digital channels, such as marketplaces, perform better than those that don’t. In large part because customers have come to expect an ‘order from anywhere, fulfill from anywhere’ standard.

Omnichannel is an integrated sales approach: order from anywhere, fulfill from anywhere

Suppliers, the potential sellers for a marketplace, are also getting used to an omnichannel approach. More and more suppliers are selling their goods and services on multiple platforms. This has created a growing seller pool for marketplace owners.

Diverse technology options

Bricks-and-mortar businesses have access to a greater variety of marketplaces development options than ever before. Smaller companies can test their marketplace concept with affordable off-the-shelf marketplace templates. For larger companies with bigger budgets there are enterprise-level turnkey solutions that are more customisable and feature-rich.  

Specialist custom marketplace developers are ideal for companies that have tested their marketplace idea and would like to scale their platform. Software developers that specialise in building custom marketplaces offer a number of advantages over off-the-shelf templates and turnkey solutions. For example, the ability to accommodate advanced user flows and revenue models.

The rise of dedicated marketplace components, such as Stripe Connect’s specialised payment system, has further simplified the development process. 

Advantages over pure-play marketplace startups

There are a number of factors that favour established bricks-and-mortar businesses, that want to expand their footprint with an online marketplace, over online-only marketplace startups.

Successful offline companies with solid logistics have a nice comparative advantage. Warehouses can be used as distribution nodes for seller goods, while stores can act as pick-up locations for customers who want to save on shipping fees.

Familiarity with their market and customers should translate into better customer service. Many offline-to-online companies already have a call centre with dedicated customer service staff.

Physical stores mean better brand visibility. Leveraging existing brand recognition with cross-channel marketing can be very cost effective.

Market insights gained from in-store transactions and interactions can be used to inform the design, user experience and flow of their marketplace platform. Instead of spending time and money on external research, bricks-and-mortar companies can survey their existing customers.

Established offline businesses are able to finance marketplace expansion with existing revenue. Startups, on the other hand, have to beg, borrow or steal funding without any guarantee of future revenue.

Must your offline business be successful? It would be advantageous, but there are instances where it is not a dealbreaker. Sometimes a physical business is in the wrong location with little demand for its goods or services. An online marketplace can target those locations where there is demand. This is known as digital transformation rather than expansion.

Advantages of having a marketplace extension

Marketplace extensions offer a number of advantages to offline businesses. 

Enhanced customer experience 

Customers are offered a better customer experience due to increased convenience (24/7 availability), improved product offerings (wider range of goods), and better personalisation (based on platform data insights).

Better conversion rates

User behaviour data gathered from online marketplaces enables you to reach targeted audiences that are searching with an intent to buy. 

Better data 

An omnichannel approach creates significant opportunities for cross-pollination. Data gathered from marketplace sales can be used to develop more personalized direct-to-consumer marketing and in-store experiences. 

Data collection is more granular allowing better personalisation based on variables such as geographical location. Data can also be tracked in real time, making it easier to address issues as they crop up.

Better shipping options

Complementary online and offline sales channels also offer advantages for last mile fulfillment. Since last-mile delivery is often more expensive than in-store pick-ups, 68 percent of U.S. consumers have used click and collect options.

Comparatively lower startup costs

£20,000 for the first iteration of a custom marketplace compares very favourably with the outlay required for a new store of modest proportions. Annual retail rent in the UK ranges from £1,030 in Cardiff to £14,355 in London’s West End. That’s between £103,000 and £1,435,500 a year for a small convenience store!

Then you have to add once-off costs like shop fitting, security systems, and POS systems, as well as recurring overheads such as staff wages, insurance, utilities and cleaning. Conversely, an online marketplace saves on storage and distribution costs as these are usually borne by your sellers.

New revenue streams

Online marketplaces can offer additional revenue streams such as subscriptions and platform advertising. Complementary services offered on the marketplace can also create new revenue streams.

Geographical reach

As long as there’s sufficient shipping and payment system support, marketplaces can operate any place in the world. This removes the significant physical barriers to entry and improves scalability.

Easier to pivot

Pivoting a digital platform is not trivial, but is still many magnitudes easier than pivoting a physical storefront. Many marketplaces have shown superb agility to pivot during the 2020/2021 pandemic.

Source: Dealroom

Notable marketplace expansion opportunities

Some business sectors and marketplace models offer clear high-growth opportunities. Here are four of them.

Retail opportunities

There are a number of advantages for established physical retail companies. First of all, it is an opportunity to expand their supply network and thus offer customers a wider variety of products.It solves the problem of shelf space by providing unlimited digital shelves.

Retail marketplaces can positively affect corporate social responsibility, by giving local producers, manufacturers and service providers a platform to sell. Existing collection points, depots, warehouses, make the logistics much easier. 

General criteria for retail suppliers include:

  • There must be customer demand for the product
  • It must be a product that the retailer would typically sell in its stores.
  • The product needs to be competitively priced
  • It must comply with regulatory requirements (quality and safety)
  • Regulations about minimum product standards, product labelling and packaging must be adhered to
  • Product pricing should be similar to or preferably better than other similar products sold by competitors

Government procurement

Online marketplaces can be used to connect state suppliers with different government and parastatal departments. This promotes transparency in the procurement process, lowers government expenditure, creates a level playing field for suppliers, and acts as an anti-corruption mechanism.

Governments that have experimented with e-procurement platforms include the USA, the UK, New Zealand, and India.

B2B marketplace extensions

Just like retail marketplace clients, corporate procurement departments can also benefit from the transparency and competition that online marketplaces offer. It is important to note that B2B marketplace development can be substantially more complex than its B2C counterart, due to the strict procurement requirements of most large companies.

Since B2B marketplaces are still in their infancy, there remains lots of first mover advantage for bricks-and-mortar companies that want to expand online. Types of B2B marketplaces range from product-focused marketplaces that sell commodities like office supplies, furniture and equipment, and packaging to Time-and-materials marketplaces that offer freight services, travel services, IT and technology, temporary labor, and facilities management, and Scope-of-work marketplaces that offer marketing, telecoms, utilities, rent and real estate, insurance, and professional (such as legal and consulting) services.

Managed marketplaces

Managed marketplaces add high levels of additional value to the client experience via added-value services, such as lightning quick inspections or valuation before finalising a sale.They tend to involve higher levels of risk, but are able to charge a premium in exchange.

Examples of successful offline to online marketplace transitions

Bricks-and-mortar retail heavyweights like Walmart and Target have taken the fight to Amazon with marketplace platforms of their own. 

One omnichannel approach is to create an umbrella marketplace for independent physical outlets. Farfetch, a fashion marketplace that connects a network of physical boutiques across the world, is a good example. It has greatly expanded the individual footprint of each boutique, given consumers access to more options, and seen Farfetch reach a $19.7 billion market capitalisation.

Some physical retailers have taken digital expansion a step further by building their own marketplace platforms to complement their in-store offerings. Affordable Art Fair’s online marketplace leverages the success they have achieved with physical art fairs in cities like New York, London, Paris, and Singapore.

CarMax is America’s largest retailer of used cars and runs one of the most well known managed marketplaces in the world. It started out as a physical car dealership group. 

Online to offline

It’s not only one-way traffic from offline to online. Some online retailers have had success with bricks and mortar additions to their core digital channel.

Checkout has become ground zero for a faster, more convenient, in-store experience. From self-checkout technology using RFID tags to Amazon Go-style automated checkout, brick-and-mortar retailers are experimenting with ways to expedite the shopping process.

Amazon Go uses computer vision and deep learning algorithms to automate the in-store checkout process. 

Conclusion

Technology is driving a growing revolution in brick-and-mortar retail. To paraphrase the Paul Drucker-ascribed cliché, when the right data gets measured, you can manage the relevance and profitability of your business. An online marketplace extension allows you to do just that.

Thinking about extending your physical footprint with an online marketplace? CobbleWeb has helped a number of offline businesses exploit the opportunities that a marketplace expansion offers. Get in touch to find out how we can help you.

Originally published July 7, 2021, updated July 8, 2021