Target is taking a page out of Amazon's playbook — but it could face some challenges (TGT, AMZN)

Target

Target has started to add third-party sellers and brands to its website.
Target is building a virtual mall just like Walmart and Amazon have done. But unlike those sites, Target's version is invite-only.
The marketplace strategy comes with some huge potential downsides.

Target is jumping on the online marketplace bandwagon.

The retailer announced the launch of Target +, a third-party marketplace where it will partner with other brands, in a blog post on Monday.

Selling third-party merchandise on a retail platform is nothing new. Amazon and Walmart have been doing it for years. But, Target's approach is a little different. Instead of allowing brands and sellers to apply to be listed on the platform alongside first-party goods, Target's program is invite-only.

"This is intended to be a very curated and select group of products and brands," Target CMO and CDO Rick Gomez told CNBC. "We are reaching out to the brands we want."

Brands and sellers that have been invited so far include SVSports, Mizuno, Kaplan Early Learning Company, Serenity Health & Home Décor, and Music123. The program is still in its early days and is likely to expand.

The products will be sprinkled throughout the site, and there is no way to search specifically for Target + items, which are labeled with a "ships and sold by [seller]" marking. Customers can also return the items to Target stores and get free shipping, plus 5% off for using a Target credit card, making it similar to ordering from Target directly.

As online shopping sites mature, it’s becoming increasingly clear to retailers that it’s difficult to make money selling directly online, due to the higher costs and slimmer margins involved. Listing someone else's goods next to yours — and taking a cut off the top — offers a chance to leverage the strength of the platform to make a quick buck without the mess of shipping.

It also helps to expand selection, with the goal of having shoppers come to the same store and buy more stuff more often.

Target's model does sidestep a problem that some marketplaces have experienced, which is that it's challenging to effectively police goods sold on the website by third parties. Both Amazon and Walmart have run into problems with sellers breaking the platform's rules and selling offensive goods.

But a more central problem still remains. Regulators are increasingly keeping a close eye on companies that maintain a marketplace in addition to selling products directly.

Germany's competition watchdog — the Federal Cartel Office, or the Bundeskartellamt — announced in November that it had opened an investigation into Amazon for playing this dual role.

"Its double role as the largest retailer and largest marketplace has the potential to hinder other sellers on its platform," Andreas Mundt, the president of the FCO, said in a statement. "Because of the many complaints we have received we will examine whether Amazon is abusing its market position to the detriment of sellers active on its marketplace. We will scrutinize its terms of business and practices towards sellers."

But Germany's watchdog isn't the first to take notice of this aspect of Amazon's business and its potential anti-trust implications. The European Commission, led by Margrethe Vestager, announced in September that it had launched a preliminary investigation into whether Amazon's model has meant that its use of data has been in violation of European competition law.

"The question here is about the data," Vestager said in response to a journalist's question at a press conference in Brussels, Belgium, at the time.

Though Target does not operate in Europe, it will still need to worry. Across the Atlantic, now-presidential hopeful US Sen. Elizabeth Warren has echoed the European regulators' sentiment.

Elizabeth Warren

Speaking with The New York Times' Andrew Ross Sorkin in September, Warren centered her criticism on the dual role Amazon plays.

The problem, Warren says, is that Amazon gets the data from sales on its platform and doesn't necessarily share it. With that information, Amazon could then potentially create its own market conditions and develop a private-label brand, critics argue.

"Amazon gets this special information advantage that it [can] then exploit to wipe out [a business]," Warren told Sorkin. "That is a serious problem."

Warren said that, ultimately, Amazon should not be in both businesses.

"You got to pick one business or the other, baby," Warren said. "You want to be a competitor, be a competitor. That's great. You want to be the platform provider, that is a different function. If you're getting a huge competitive advantage from being a platform provider because of all this information you keep scraping off, then we no longer have competition going on."

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