Why Tesco Direct shouldn’t deter UK Retailer Marketplaces

500 people working for Tesco are at risk of losing their jobs after the news that Tesco Direct is to shut down. Many of the ‘Colleagues’ as the company calls them almost certainly will as the Fenny Lock fulfilment centre is to shut down and it’s unlikely warehouse workers will easily be redeployed within the business.

Directly impacted will be suppliers to Tesco who will doubtless be seeing cancelled forward orders or at the very least expected orders not being placed. Manufacturers who factored in Tesco Direct into their supply chain planning will have to find new outlets for their goods or they too will be forced to trim costs and possibly staff.

The ramifications of the closing of Tesco Direct are much further reaching, especially in the marketplace world.

Tesco 3rd Party Merchant impact

Over the past couple of days we’ve been hearing from some of the merchants who have been trading on the Tesco Marketplace. Whilst Tesco were highly selective as to which merchants they would invite to sell on the Tesco Marketplace, but all accounts those merchants who were accepted saw strong performance and Tesco made a real difference to their businesses with a small in terms of eBay and Amazon, but still significant contribution to turnover and profits.

We’re sadly hearing of potential redundancies at some of the Tesco marketplace merchants. With the business stream gone there’s no real way to replace the sales if you’re already optimised on eBay and Amazon. Cross border sales or trying to increase your market share on the big two UK marketplaces isn’t going to replace the turnover the Tesco Marketplace provided.

There are also other industries affected – for instance consumer electronic returns from Tesco traditionally went through a fulfilment warehouse in the Midlands before being refurbished by a third party and resold on marketplaces. With the loss of Tesco Direct it’s only to be expected that returns will be significantly reduced and that puts another marketplace stream of business at risk.

The state of UK Retailer Marketplaces

So far this year, three UK Retailers who opened marketplaces have failed – Halfords, Gameseek and now Tesco Direct. Remaining are ASOS and Harvey Nichols who are lesser known as marketplace players and there’s also FarFetch (previously Style.com).

For some merchants, specialist marketplaces such as Etsy, GAME, NotOnTheHighStreet, and Yumbles are worth considering and of course Flubit, ShopTo and OnBuy shouldn’t be dismissed. But none of these marketplaces currently have the sales velocity to replace the volumes which Tesco merchants have lost.

These, although sad times for all of the businesses across the entire Tesco Direct and Tesco Marketplace supply chain, are short term effects and there could be a much more significant long term impact from the failure of Tesco Direct – deterring other retailers from opening their own marketplace.

Why we need UK Retailer Marketplaces

Currently if we step across the Channel to Europe there are any number of retailers successfully operating their own marketplaces – it’s the norm. CDiscount, Darty, ePrice, Galeries Lafayette, La Redoute, Otto, and Zalando are all retailers who have added a marketplace. Whilst the UK is ahead of just about any other country in the world in ecommerce terms, the one sector that we lag in is the selection of marketplaces on offer, largely because retailers haven’t adopted the model.

Retailers however shouldn’t look at Tesco Direct, Halfords and Gameseek and write off marketplaces as these three retailers all had inherent problems from day one. Gameseek’s issues were financial as are Tesco’s in part, but additionally Tesco and Halfords both had severely restricted marketplaces which were too protectionist and in hindsight doomed to failure. Both companies were fastidious on which merchants they’d accept with stringent vetting procedures. Then, once a merchant was accepted they’d consider product selection and often a merchant would find their best selling products weren’t accepted as the retailer-come-marketplace didn’t actually want to compete with their third party partners.

For a marketplace to flourish, a more open approach is required. The retailer needs a total mind change and to accept that being a marketplace does mean openly competing with your third party merchants. If a merchant has the same or a similar product to you at a more attractive price point or with more compelling features then that’s a better proposition for the consumer. Retailers need to accept that they may have to trim their offerings, or indeed up their product sourcing efforts, but the reward is that sales made by third party merchants are invariably more profitable than sales made by the retailer themselves. There’s no investment in stock and often no fulfilment as that’s handled by the merchant. The retailer gets to take the payment and, whilst there are payment processing fees, they get a short term positive cash flow boost until disbursements are made to third party merchants. Plus of course they get to charge the merchant fees.

That brings us back to Tesco Direct. Following so quickly on the heels of Halfords and Gameseek, our hope is that the end of Tesco marketplace doesn’t deter other retailers from launching their own marketplace. Rather than look to UK failures, retailers should look to the continent and consider the success of European retailers who have successfully transformed themselves into marketplaces. Sure there will be concerns such as product presentation and reliability of merchants, but our European cousins have crossed these hurdles and made the marketplace proposition a success.

Who will be the next UK retailer to open a marketplace? Whoever it is, they are doubtless considering the pros and cons after the recent failures, but the lessons are there to be learned. The most important takeaway from Tesco is the impact it’s having on merchants – when we see marketplace businesses contracting their staff it indicates that their turnover on the Tesco marketplace was significant. The supply chain is ready for whoever is first to move and opens a marketplace ready to embrace independent third party merchants and, with the right strategy, retailer marketplaces can be successful.