The platformisation of retail
Digital technology has opened-up a new way for businesses to adopt a platform business model which is very adaptable and incredibly scalable. Digital platform businesses can achieve spectacular growth in a relatively brief period, disrupting industries and markets, and changing the competitive landscape.
A platform connects producers with consumers in a marketplace and charges for the use of the platform. In doing so, it can create an environment for many products and services to be made available to customers without incurring the costs of doing so. It is this feature that enables it to grow incredibly quickly as well as providing consumers much wider choice. In contrast, a classic linear value chain business model, also called a pipe model, typically creates or designs products and services, manufactures the product and/or operates the service, markets and sells to customers and service customers – hopefully, adding value in each step of the value chain. This makes it less easy to grow and scale. What’s more, when a traditional pipe business model achieves a degree of scale, it relies on this to provide a barrier to entry, protecting it from new entrants. However, these ‘barriers to entry’ are swept away when competing with a platform. To support continued growth, pipe businesses need to expand their infrastructure to provide capacity, whereas platforms don’t need to do this.
Platform businesses now exist in a variety of markets. Uber is dedicated to transport, Airbnb is dedicated to hospitality, Spotify is dedicated to music, Netflix is dedicated to video entertainment, to name just a few. The list continues to grow as businesses evolve to become platforms or have platform elements. Then there are the ‘conglomerate’ platforms Amazon and Alibaba who are platforms for everything. These platforms can create truly endless aisles, leveraging a global marketplace that provides a one-stop shop where customers can buy almost anything they want.
According to Marshall W. Van Alstyne, Everett Lord Distinguished professor and chair of the information systems department at Boston University Questrom School of Business, when a platform enters a pipe firm’s market, the platform almost always wins. Furthermore, he believes that ‘firms that fail to create platforms and don’t learn the new rules of strategy will be unable to compete for long.’(1)
To explore this, let’s briefly look at the markets for household goods, furniture, apparel fashion and grocery.
Here, the undisputed winner are the large conglomerate platforms, Amazon (Marketplace) and Alibaba who are the go-to place for many consumers.
The furniture market is fiercely competitive due to the proliferation of independent furniture retailers and large corporations as well as pressure from department stores, online retailers and second-hand sellers. IKEA’s unique system, operated through a classic pipe business model is still proving very successful. They are still one the few places where customers can browse and purchase a wide range of furniture that they can take home on the same day. Wayfair, the specialist digital furniture platform is disrupting this market by catering to almost every taste, style, and budget. They have yet to dominate but they are proving to be the key threat to independent furniture retailers. Having said this, Amazon is hot on its trail having recently introduced two private label furniture brands – Stone & Beam and Rivet. With two key platforms challenging the market, it is only a matter of time before they achieve dominance.
Amazon’s fashion marketplace was very modest when it launched in 2002, only attracting a handful of well-known designer labels, like BCBG and Calvin Klein. To scale, they acquired e-commerce site Shopbop in 2006, then online footwear and clothing retailer Zappos in 2009. Despite modest beginnings, they achieved a turnover of around £4.2 billion in apparel and £2.8 billion in shoe sales in 2017. (2)
Zalando, the German e-tailer, also sees the opportunity that a platform model provides and has laid out their strategy to move from pipe to platform :
‘We are convinced that the best way for us to achieve growth and at the same time continue to drive forward digitization in the industry is with a platform-based business model. We see the Zalando platform as an operating system for the fashion world, which connects all types of fashion designers and stakeholders in various ways, while considering their individual requirements.’ (2)
Then there is the myriad of e-tailers like ASOS and ‘bricks and click’ retailers like Zara who continue to operate successfully using a classic pipe model by remaining relevant, and connected to their customers, by continually developing new ranges that it can then bring to market very quickly. (3)
Today, it’s hard to see how Amazon can create a fashion offering that would excite. Fashion is not like buying a lawnmower or a pair of headphones where specifications and customer ratings are all important in the buying decision. Selling fashion involves emotion and specific targeting. There’s also the attraction of the brand, and for now Amazon doesn’t exactly scream fashion. However, according to Morgan Stanley, the e-commerce giant will become the top player of the U.S. apparel industry in 2018, having gained 1.5 percent of market share last year. Furthermore, they believe that Amazon’s growth in apparel will be driven by their 100 million Prime members (4).
It will be interesting to see how Zalando's platform model will challenge Amazon. It has a far more compelling proposition, a recognised brand, a clear target customer and a heritage (granted not a long one) in fashion. It will also be interesting to see how ASOS will respond to this new market environment. They are doing incredibly well without a platform and continues its upward growth trajectory with superior customer targeting and engagement and a curated range that attracts customers in over 40 territories around the globe. It’s doing so well that it bagged 3 major trophies in this year’s Retail Week Awards. Perhaps they have a formula that beats the platform.
It’s still early days for the fashion platform and it’s not definite that they will win the race, but they’re in the race and they are looking very strong.
The grocery market was late to the e-commerce party and it looks like it will be late for the platform party as well. Even Amazon has abandoned its food platform, by closing its Amazon Fresh Local Market Seller initiative at the end of May. Amazon Fresh's third-party model acted as a platform for local merchants who could sell products to be delivered to members alongside their typical Fresh orders, but not anymore. (5) After a decade trying to build a platform, it has decided to buy the necessary credibility and expertise through the acquisition of Whole Foods and operate it as a classic pipe business. Amazon has been quiet about its strategy for grocery retail but I speculate that it may be adopting the same strategy they used for apparel where it initially failed to attract the scale of designer brands onto its platform but remedied that through the acquisition of Shopbop and Zappos. Perhaps the acquisition of Whole Foods provides an opportunity to really understand this business to enable it to grow through a platform model. Or perhaps, a platform just doesn’t work for the food grocery business.
The platform business model attracts both customers and suppliers. For suppliers, platforms provide access to a huge customer base which allows them to shift much higher volumes of products and services than through the classic pipe business model. Customers are attracted by the unbridled choice and the convenience of one-stop-shopping. This combination fuels a symbiotic relationship that fuels spectacular growth. The more customers spend on a platform, the less they spend elsewhere. This attracts more suppliers to provide even more choice, which in turn attracts more customers, until the platform swallows up market share and dominates the market.
However, there may be a way for classic pipe retailers to fight back by creating a truly differentiated proposition. For example, IKEA has a truly unique proposition which is hard to replicate. In apparel fashion, ASOS has established a brand with a curated range that truly connects with their target twentysomething customers. Or perhaps this is only a pipe-dream, and eventually the platforms will win.
Ken Leung is a Co-founder of Outvie Consulting and an expert in business design and transformation.
Pipelines, platforms, and the new rules of strategy, Marshall W. Van Alstyne et al, HBR, April 2016. https://hbr.org/2016/04/pipelines-platforms-and-the-new-rules-of-strategy
Amazon Posts Blockbuster Q4 — But Where Does Fashion Fit In?, Sheena Butler-Young, Footwearnews.com, February 2018. https://footwearnews.com/2018/business/retail/amazon-clothes-shoes-sales-fashion-q4-earnings-490378/
Zalando’s platform strategy, Zalando, 2018. https://corporate.zalando.com/en/company/zalandos-platform-strategy
Amazon's 100 million Prime members will help it become the No. 1 apparel retailer in the US, Lauren Thomas, CNBC, April 2018. https://www.cnbc.com/2018/04/19/amazon-to-be-the-no-1-apparel-retailer-in-the-us-morgan-stanley.html
Amazon is dropping local third-party vendors from its Fresh grocery service, Dennis Green, Business Insider, May 2018.