Sep 29, 2020

Brands today, and for obvious reasons, are looking for ways to increase their online-retails presence. But moving from brick and mortar to more digital channels can sometimes be challenging due to a large number of options available. The two most common buckets of options are marketplaces (such as Amazon or Noon) or more direct ones like a seller’s own website.

At Shorages, we often get asked which approach is better. As part of a three-part blog, I will be listing down some of the pros and cons of each of these frameworks. The first part will cover in-depth what we have seen with marketplaces in the MENA specifically. The second part will cover direct sales channels through websites built using e-commerce platforms such as Shopify. Finally, the third part will attempt to compare the two and highlight which is better for your business.

Part 1: Marketplaces

An online marketplace is an e-commerce platform that connects third-party sellers with a consumer base that visits it. The two most popular marketplaces in the GCC being Amazon and Noon. Marketplaces have been dominating online sales in the region from when e-commerce first started and continue to do so today. This is the case since their benefits are plenty as they can offer:

• A Consumer Base: Marketplaces provide brands with a platform that connects brands with consumers without the need to splurge a large budget on marketing. By listing products on marketplaces, consumers that frequent the marketplace will be able to view a sellers’ products as they browse for options.
• Operations Support: Most marketplaces also offer solutions that help manage the logistics part of e-commerce. Their backend support often includes storage, picking, packing, and delivery of orders for items in their warehouse. They benefit from economies of scale to make the process more efficient.
• Customer Service: A point that is often overlooked, having a proper customer service team in place can be crucial for an online business. Some platforms offer better customer service offerings than others. As such, it is an important element to look-into when identifying the right marketplace for an online business.

As it stands, the appeal for e-commerce marketplaces stems from the instant accessibility sellers can get to sell online. With a marketplace, they do not need to develop their website, find payment solutions, set-up their operations, and spend on marketing. They simply must plug and play into the marketplace.

E-commerce marketplaces such as Amazon have become the new department store; selling a wide variety of consumer goods from a large range of brands. More recently, we see the rise of segment-specific marketplaces such as those that deal primarily with either children’s toys, high-end fashion, sportswear, etc. Segment-specific marketplaces allow brands to target a more specific consumer audience without getting lost in the variety of options available on more generic marketplaces.

However, as more and more sellers flock to marketplaces, it is becoming harder and harder to sell on these platforms due to the following reasons:

• Increased Competition: Marketplaces are driven to increase the number of sellers they onboard. The more sellers there are in a marketplace, the more sales a marketplace can generate. But this can damage individual sellers as this means that customers have more options to choose from in a crowded website (more than 350 million products are listed on Amazon at the time of writing).
• Price Competitiveness: On marketplaces, products from different brands are placed in direct comparison with each other. This may force brands to reduce the cost of their products and therefore reduce their margins.
• Space Limitation: With increases in demand, marketplaces are running out of warehousing space to serve their customers. As it stands, most Amazon sellers have to replenish their stock every week as they are not permitted to store more than that in Amazon’s warehouse. This has led several sellers to opt for “fulfilled by merchant” options on both Noon and Amazon by using third-party fulfillment centers.
• An abundance of Counterfeit Products: Marketplaces have been under scrutiny lately due to the abundance of counterfeit products on their platforms. They simply do not have the time and capabilities to verify the authenticity of the products that are listed. The presence of these counterfeit products has led multiple brands to drop-out of these platforms.

These issues have caused some brands such as Nike to depart from Amazon. Instead, they have opted for a more direct to consumer approach. However, not every brand has the same resources as Nike, so what alternative do smaller and more independent brands have? (More on this in Part 2).