In an effort to better compete with the 800-pound gorilla of online retail, Amazon, more retailers are embracing relationships with third-party vendors.

One of the latest is Macy’s. As detailed by Digiday, the department store chain-turned-ominichannel retailer has created a program it calls “Vendor Direct” under which third-party sellers are able to offer their wares for sale through the Macy’s website and fulfill orders themselves. They can also ship products to Macy’s stores, which the company is using as click-and-collect delivery hubs.

According to Digiday, Macy’s has doubled the number of products it sells thanks to Vendor Direct and a job posting reveals that the program is “a top priority for the enterprise growth strategy” of the company.

Unlike the third-party marketplaces operated by Amazon and Walmart, Macy’s exerts a high level of control over how the products offered by sellers participating in Vendor Direct are presented to consumers. Macy’s CEO Jeff Guenette explained:

“We curate for our customer through a highly edited assortment that is localized to a specific market, using our enhanced data and analytics, we are able to efficiently influence assortment down to the store level.”

Guenette revealed that Vendor Direct has contributed to a more than 3% growth in same-store sales.

No time to lose?

If Macy’s expansion of Vendor Direct can help propel continued growth, it would be a victory as Amazon continues to gobble up more and more of the online retail market.

Consider this: by one estimate, Walmart is now the third largest online retailer in the US, eclipsing Apple this year thanks to online sales growth of nearly 40%. But even with such impressive growth, the mega-retailer still only accounts for 4% of the US online retail market compared to Amazon’s 48% share. The second largest online retailer, eBay, is expected to capture 7.2% of online sales this year.

The gap between eBay and Amazon makes Amazon’s dominance of online retail in the US clear, but it might even be more significant than market share figures suggest. Last week, The New York Times published an exposé detailing how the ecommerce giant’s sales of its own private label products appear to be far more extensive than previously thought.

Rewards and risks

If retailers like Macy’s are to keep Amazon from becoming a true retail monopoly, it would seem they need to act quickly and embracing third-party vendors would appear to be a good way to do so.

By working with third-party vendors, retailers can potentially realize a number of benefits, including:

Expanded selection. One of Amazon’s biggest advantages is that it offers shoppers just about everything under the sun. Thanks in large part to its marketplace, the retail giant is estimated to offer a mind-boggling 562-plus SKUs, more than ten times that of Walmart. while there’s still something to be
said for quality, it’s fairly clear that traditional retailers like Macy’s realistically won’t be able to thrive unless they expand their SKU count. One of the fastest ways to do that is to work with third-party vendors who can fulfill orders directly.

Attractive economics. The economics of programs like Vendor Direct can be incredibly appealing because the relationships with third-party sellers eliminate the need to buy merchandise and warehouse it before it’s sold.

Better search presence. By offering more SKUs, retailers also increase the number of product pages that can be indexed by search engines like Google. With more searchable content, retailers are better positioned to be found when shoppers search for products.

Of course, there are risks to working with third-party vendors. The biggest is that any slip-ups on the part of a third-party vendor could negatively impact customer experience. If that happens, it’s the reputation of the retailer, not the third-party seller, that will suffer.

In fact, some Amazon customers are becoming annoyed because of experiences they are having with its third-party sellers, creating a vulnerability that other retailers might be able to exploit.

This risk can theoretically be mitigated though. Unlike Amazon’s marketplace, which is effectively open to all, programs like Macy’s Vendor Direct can be limited to select vendors who meet specific criteria and agree to adhere to certain standards. With a smaller base of vendors, retailers can more easily monitor compliance on an ongoing basis and address any shortcomings or violations.

While such controls will naturally limit the scale at which programs like Vendor Direct can operate, the fact that in little more than six months, Macy’s has been able to double the number of products it offers and is seeing increased same-store sales as a result suggests that other retailers would be wise to give
this model a closer look.