Large platforms like Amazon, Zalando or Asos increasingly dominate digital distribution. Should brands be worried?
In their report The state of fashion, published in late 2017, McKinsey point out that online shopping is increasingly dominated by large platforms like Amazon, Zalando or Asos.
After reading this report, I’m surprised to not hear more reactions from the fashion industry – particularly from brands, as the report concludes that working with these platforms has become a ‘necessity’ for them.
Digital brand distribution strategy has become a critical topic that brands need to better understand. Online distribution is a complex matter as it requires looking at both wholesale and retail strategies to assess the pros and cons of running a brand’s own online shop, working with an e-commerce platform or combining both.
Are there benefits in working with platforms compared to operating your own shop?
Operating an independent online shop used to be a complicated affair. But the democratization of e-commerce technologies through players like Shopify or Salesforce has led many brands to opening their own online stores. Doing so allows them to enjoy higher margins, retain more control and access to data like customer information and preferences.
(Source: Deloitte, Going digital, going direct)
However, despite being much easier to manage than in the past, brands’ own online shops often fail to operate profitably and acquire a strong enough customer base. E-commerce retailers and marketplaces, meanwhile, have grown from small start-ups into mega platforms with millions of products and users.
The primary benefit of working with such platforms is thus the opportunity to increase sales volumes thanks to the platforms’ large audiences. These audiences are not merely attracted by the enormous selection, but also multiplied by the means of mind-boggling marketing budgets. Zalando, for example, spent €376m in marketing for revenues of €3.6bn in 2016. In comparison, GAP, one of the largest publicly traded fashion groups, spent about half as much in marketing for $15.5bn in revenues.
What are the costs of doing business with large platforms?
The cost of working with giant online retailers and marketplaces is not just of financial nature (commissions range from 10 to 50%), but also includes the risk of permanently damaging your business.
First, the digital world in general and e-commerce in particular are all about (big) data. The players who get the most data have the power to adapt to changes in real-time. This has an impact on everything from product selection, to prices, to marketing segmentation and so on. E-commerce platforms, alongside tech giants more generally, have understood the value of data very early on and have specialized on gathering enormous amounts of data that they constantly leverage.
Data is used to tweak every single detail, from user experience to product recommendations down to personalization. However, platforms usually don’t share this data with suppliers – which is essentially what brands become in this model. In a market dominated by a few players, how will brands be able to get access to this crucial data? Not only e-commerce is at stake here, but overall brand strategy. As customer journeys more and more often include the internet, not having the relevant online data can lead to a brand’s inability to adapt collections sold across all channels.
Second, some brands may even be under the impression that they are ‘partnering’ with a platform, only to learn that the platform ends up creating private labels. Labels, that is, built directly on the very customers and data of the brands the platform initially used as a way to fuel their own growth. Most platforms have already built their own brands, from Amazon to Net-a-Porter with their recent launch of Mister P.
(Source: mister-porter.com)
There are other potential sources of frustration in digital brand distribution. The recent headlines about the battle between Birkenstock and Amazon are just the tip of the iceberg. Brands complain about the loss of control over pricing and how platforms use coercive tactics to lure them in. These tactics include sourcing branded products from grey markets or unauthorized distributors, and increasingly tough commercial terms (watch while commissions increase).
Of course, a few brands, especially those with tightly controlled distribution channels like Zara, have done very well with their own e-commerce businesses. However, they may soon yield because customers frequently begin their shopping journey on an e-commerce platform (in the US, 55% start on Amazon) and are getting locked in by loyalty programs and customer services that few independent brands can afford to offer.
Even if the market weren’t in the process of solidifying around a few large platforms, brands would still find themselves at a disadvantage. When key future technologies like artificial intelligence require huge amounts of data and resources, brands will struggle to keep up with e-commerce platforms that are already built on big data.
(Source: amazon.com, photo by Manuel)
What can brands do to compete in this environment?
Based on my experience with both platforms and brands, I recommend that brands consider the following points:
Become more data-driven:
Collecting, modelling and leveraging data has to become a priority for brands. Some brands have already seized the opportunity, like Adidas, who have built a €1bn online business in 6 years thanks to a strong focus on data. They even bought the Runtastic app in 2015 to track workout habits.
Leverage your strengths:
Brands have unique strengths that they need to double-down on. Brands must be strict on Minimum Advertised Pricing (MAP) policies and optimize the available selection on each type of digital distribution channel. But they can also be more ambitious by offering product customization like Nike and Ray-Ban do, or by leveraging the unique physical proximity to customers of their brick and mortar stores for fast deliveries.
(Source: ray-ban.com)
User experience matters:
Offering free shipping and an easy checkout process are more important to users than an overly fancy website or app. Customers won’t hesitate to stray if they see the same product with a €3 shipping fee on the brand’s website and with free shipping on an e-commerce platform.
Be stronger together:
On their own, brands have limited power against platforms. But if they find a way to come together, for example to share the cost of developing new technologies, build digital expertise, share logistic resources or even to negotiate some terms with retailers and marketplaces, they can build strength in numbers.
Consider new online partners:
A new generation of online partners such as love the brands, or to some extent Farfetch for designers, specializes in leveraging the strengths of brands, bring them together and super-power them with data and services.
To conclude – yes, brands should indeed worry about the likes of Amazon and Zalando but need not despair right away. Above all, brands need to think strategically about their digital brand distribution and online channels. The short-term profits of the additional volume that platforms generate may or may not be worth the long-term challenges I’ve discussed in this post.
Returning to McKinsey’s diagnosis quoted at the outset, I don’t believe that working with platforms should currently be seen as a necessity for brands, at least not in Europe, but the clock is ticking. To stand against giant platforms, brands still have the power to offer compelling brand experiences to customers. They do, however, need to work on a fast(er) transition to a digital mindset to enable long-term online growth and maintain direct access to customers (and their data).
About the Author:
Thomas specializes in e-commerce. After a tenure at Amazon Fashion he launched his own company, love the brands, to help brands build stronger independent e-commerce businesses while keeping the connection with their customers alive and strong. Read his posts here or get in touch with Thomas via e-mail.
