Marketplace Model Vs. Dropshipping: Will Overstock, Amazon or Wayfair Win the Home Goods Battle?
Furniture World News Desk on
3/3/2017
By Adrien Nussenbaum, U.S. CEO and co-founder, Mirakl
This past week,
Overstock.com announced it is planning a “dramatic” product assortment increase. After only showing 10% total growth in 2016, Overstock is charting a new path towards growth in 2017. On their Q4 2016 earnings call, Overstock founder/CEO Patrick Byrne said “You will see radical expansion of our assortment.” The highlight of 2016 was Overstock’s 5X increase in profits which were at $12.5M in 2016 vs. $2.4M in 2015. So the growth was slow, but profit margin high.
A closer look at retailer growth and web traffic
If we look at a
head-to-head growth comparison of Amazon v. Wayfair v. Overstock in 2015, compared to the S&P 500, it is clear that Amazon and Wayfair far outperformed Overstock in the 2015 calendar year. But, As Byrne pointed out, they invested in a significant assortment increase in 2016 to drive growth, and will be doing the same in 2017.
Fast-forward to today,
we see Overstock making improvements, while Wayfair has hit some stumbling blocks. Byrne commented on Wayfair during the recent earnings call, stating Wayfair’s topline growth is faster, while Overstocks slower growth has come with profit and Wayfair continues to operate at a loss. Byrne stated that the difference largely comes down to traffic. Although Wayfair caught up to Overstock in 2016, they are paying more for traffic and in some cases three to five times what Overstock is willing to pay. Byrne believes this is a reflection of Overstock’s sound business model, conservative growth and investment strategy.
If we look at Amazon, however, we know that the 800lb gorilla is privy to free direct traffic, as 55% of online shoppers start their product searches on the site, according to a
recent BloomReach survey. Because there is little data available to showcase Amazon’s mark in the home goods realm, we did our own head-to-head digging on the basis of assortment. When we researched the terms “sofa” and “beds on Overstock, Wayfair and Amazon, these were the results:
Sofa:
Beds:
With just a couple examples, we quickly observe that assortment matters, and consequently, more assortments results in more free traffic. For Overstock, or for any pure play retailer, assortment and traffic must be a priority.
But there’s a third element not often discussed—the business model. There are clear differences between dropshipping and the marketplace model, but which one will help pure play retailers win the home goods battle?
The secret weapon: dropshipping or marketplaces?
Both dropshipping and marketplace strategies are meant to scale product assortment, but there are two main differences: Pace of scale and impact on the bottom line.
The dropship model involves complex vendor negotiations, agreeing on price and inventory, and full responsibility for customer service and communication. With the dropship model, both Overstock and Wayfair are able to recognize the full sale of the goods, but they don’t carry the cost to store and ship products. In comparison, the marketplace model is naturally more efficient and can more easily set the pace of scale. We know that
almost 50% of Amazon’s products are sold through its marketplace sellers, allowing the retailer to post new sellers and products on their site in minutes, resulting in a rapid product assortment increase that can’t be matched by dropshipping. As well, the marketplace model is much more profitable for several reasons:
- Amazon takes a commission on all marketplace sales
- They don’t have to worry about cost of goods sold since they don’t own, store or ship products
- Sellers take care of customer service unless there’s an escalated complaint to Amazon
While the dropship profitability model is higher upon start, overtime the marketplace profit margin starts to take over. It is widely known that Amazon’s move towards profitability is largely credited to its increase in sales from marketplace sellers.
Making the call: Amazon will win
Unless Wayfair and Overstock make an investment in a true marketplace strategy to scale their assortment and profit margin, Amazon will continue to dominate the battlefield. Some retailers are holding onto curation as differentiation and using that as a reason not to have a marketplace; but for Wayfair and Overstock who’ve already developed a large range – why not go all the way?
The reality is it’s not just about assortment and traffic, but a very strategic underlying business model. If Wayfair and Overstock want to survive the war with Amazon, they need to harness the business model that is the fastest way to increase assortment, gives them no-cost traffic, and is highly profitable: the marketplace model.
More about Mirakl: Mirakl gives retailers and brands the ability to quickly launch a new source of revenue with their own online marketplace. Mirakl helps multichannel retailers, pure-play e-commerce providers, and B2B organizations, build a new sales channel by deploying the marketplace model allowing companies to increase customer value by providing more products, at better prices, with first class quality; creating more opportunities to build loyalty. The MiraklMarketplace Platform automates the hard things: seller onboarding, service quality control, and order distribution; on an API-based solution that’s modular and easy to integrate. Over 100 customers operating marketplaces in 40 countries trust Mirakl’s proven expertise and technology including Best Buy Canada, Carrefour, Condé Nast, Darty, Galeries Lafayette and Halfords. Founded in 2012, Mirakl helps companies provide a better customer experience as part of their omni-channel strategy.
More about Adrien Nussenbaum: Adrien Nussenbaum is CEO of Mirakl Inc., a provider of online marketplace technology and services. He is a serial entrepreneur with more than 14 years of Entrepreneurial and Business Development experience. After completing his studies at the HEC School of management (Paris), Adrien Nussenbaum started his career with Paribas Investment in Hong-Kong. He rapidly went on to co-found All Instant in New York, an enterprise instant messaging solution that was later sold in 2003. He then joined Deloitte’s restructuring team where he advised many businesses who were in the throws of company turnarounds and transformations. Adrien co-founded Splitgames in 2006, a leading online video game Marketplace and content website acquired in 2008 by FNAC. Adrien then created and co-headed FNAC's new online marketplace business significantly impacting FNAC's overall omnichannel business. At the beginning of 2012, he left FNAC to co-found Mirakl, which has become in less than three years the leading provider of online marketplace technology.