CASE STUDY FIELD LAB
Abstract
I perform a strategic analysis of Allegro, the local competitor that was able to become the leader of the polish marketplace segment. This study revolves around how the company will behave with Amazon’s entry, as well as what it entails for the Polish market in the future, since both companies have big prospects and want to be ahead of the market. Despite Amazon being the global giant that was able to diversify its strategies and enter the Eastern European market, Allegro is not condemned in this battle for the Polish e-commerce market.
Keywords (Competitive Strategy, Value Creation, Business Model, E-commerce, Corporate Advantage, Sustainability of Competitive Advantage, Amazon, Synergies, Marketplace, Allegro)
This analysis portraits an in-depth strategic analysis of Allegro and Polish e-commerce, more specifically its marketplace segment, in the face of Amazon’s threat. It demonstrates an external assessment, with a PESTLE analysis of the e-commerce market in Poland, showing prominent economic growth and changes in habits towards online shopping. It was also performed a Porter’s Five Forces analysis showing a high competition and low switching costs for buyers.
The internal analysis illustrates Allegro’s background as well as how it was able to become the market leader in Poland by being the first player entering the market and benefiting from a strong ecosystem through synergies and corporate advantage. The main point is to understand how Amazon’s entry will affect Allegro’s dominance, by analyzing how well it is performing and what are its plans. For Now, Amazon’s entry is underwhelming with different missteps but it is believable this will change in the long-term. The discussion ends with Allegro’s recommendations and what are the company’s short and long-term goals with Amazon’s entry.
The local competitor is taking measures by initializing its expansion plan and logistics service, thus undermining Amazon’s competitive strategies.
Company overview
Allegro, with now 22 years of existence, created on the 13th of December 1999 in Poznań, western Poland, was able to become the biggest and most trusted e-commerce marketplace in Poland and the 10th most visited worldwide. It is also the only one on the list that sells solely in Europe, with 96% of its traffic coming from Poland. However, this success did not come overnight. In the beginning, and with just a few people, the company started in the basement of a computer wholesaler as an auction website for private individuals. It was created by a Dutchman called Arjan Bakker, who fell in love with the country and decided to start a business.
2 customers, which was sufficient to be acquired by the British group QXL Ricardo.1 Since then, Allegro expanded with the acquisition of a few companies, and transformed itself into an e-commerce marketplace. In 2017, Allegro was acquired by Civen, Pemira and Mid Europa which are all international investment firms that support the growth of ambitious business and turn them into industry leaders (Exhibit 1).2
Now, with Francois Nyts, a former Amazon worker that established the company in Southern Europe, as CEO,3 the company has 20 million customers each month and 117 thousand active merchants. It also has 2200 employees, 200 million offers, five offices,4 and it is the most popular product search engine in Poland as 86% of internet users in Poland state Allegro is their favorite shopping destination. They offer 14 categories, with Home & Garden being the largest in 2020 (30.9%), but not being the fastest growing one since the supermarket category grew 116%, followed by Health and Beauty with 90.6% in 2020.5 In the second half of 2020, Allegro raised around $2.3 billion in its IPO, becoming the largest ever Warsaw listing and Europe’s second biggest of the year,6 valuing Allegro at $11.2 billion. In terms of revenue, in the third quarter of 2021, Allegro had PLN 1.1234 billion (263 million euros), a growth of 32.9% YoY, with the marketplace accounting for almost 82% of the total and itself 31% higher YoY.7 Industry analysis
External environment
This section explains the industry overview starting with a general description of the ecommerce industry in Poland and subsequently the marketplace segment. It will further clarify the market boundaries and main competitors as well as the main macro trends affecting the industry.
Poland Marketplace Industry overview: Speaking in general terms, the e-commerce market in Poland has been booming over the years, with a revenue of USD 13 billion in 2020 and an
growth stage since it demonstrates a high market growth rate and large market size as newer competitors are entering. However, it has been predicted that the compound annual growth rate will be 11%, indicating a possible transition to a mature stage and a relatively flooded market.9 The following analysis is focused on the Poland marketplace segment of e-commerce where Allegro belongs. It characterises as a virtual platform for third-party sellers to sell their products to a curated customer base bringing together both parties of the transaction, sellers, and buyers.
The marketplace segment in Poland is in its growth stage with multiple competitors entering, especially Amazon, a true competitor for Allegro's market share. Additionally, it has a high level of concentration since the largest company (Allegro) accounts for 82% of the market, being considered a monopoly.10
PESTLE: It is relevant to talk about the external macro environment of the market, which in this case is Poland. To understand its attractiveness, it is critical to do a Pestle analysis.
Political - In the 1980s, Poland lived through a significant transition from a centralized communist country to a stable democracy, with free-market systems, freedom, and liberty for citizens. Nevertheless, its political and bureaucratic structure is allegedly corrupt, which can cause barriers to foreign investment.
Economic - With a GDP of 524 billion euros in 2020, Poland is a major economic power in Europe. It was one of the least affected countries in the EU by the global lockdowns in 2020 and 2021, as e-commerce grew 35% due to the pandemic. Furthermore, it shows stable economic growth with an uninterrupted growth within the last 30 years with an average of 4%. Poland has
4 Social - Poland is a developed country with 38 million people and is the 9th largest in Europe.
The spread of covid 19 revolutionized Poles shopping habits since for safety and health reasons they began panic buying moving a substantial amount of purchases to online. This shift in preferences, generated a considerable increase in e-commerce-based stores. This is called the lockdown effect. However, they are struggling with an aging population, creating massive shortages in the labor market.12
Technological - Poland shows a significant potential to become a leading competitor in the export of new technologies. There are 18 technical universities and 50 thousand software companies, showing promising outcomes. One of the main challenges Poland is facing is to encourage engineers and IT experts to stay in the country. This is because many are leaving with the goal of finding better opportunities abroad.
Environmental - The environmental impact of e-commerce is positive. Online Shopping decreases between 1.5 and 2.9 times gas emissions than offline shopping. Additionally, Land usage is lower for e-commerce than for physical stores.13
Legal - There are no barriers to conduct e-commerce in Poland and Polish law enforcement agencies are progressively focusing on internet crime, although intellectual property infringement continues to be an issue. 1415
Competitors: Marketplaces are increasingly becoming the main selling channels for brick-and-mortar and online sellers in Poland. However, Allegro is clearly the market leader with a 33%
share of the e-commerce industry.16 There have been numerous promising players who failed to withstand the pressure and succeed within the Polish market segment. Nowadays, there are quite a few competitors in Poland, but the two main ones, where consumers, point out as the most popular, are Zalando and AliExpress, in 2020 (Exhibit 2).17 Zalando is one of the most
not only in Germany but also in Austria and Switzerland. Moreover, it distinguishes itself from Allegro since it specializes in a specific segment, which is becoming a trend in Poland to differentiate from competitors.18 AliExpress is based outside of Europe but similarly to Allegro, it is an online shopping platform where it is possible to buy anything desired. It was launched in 2010 by the Alibaba Group, it is based in China and operates not only in Europe but all around the world. The main reason why AliExpress is behind Allegro is due to poor delivery options.
To solve this problem, the company announced in October that its first independent logistics center will start operations 19(more details on Exhibit 3 and Exhibit 4).
Porter’s Five Forces: It is important to give an illustrative context of e-commerce marketplaces’ value chain before the analysis (Exhibit 5).
The Intensity of rivalry among existing competitors is high. There are various players in the marketplace industry in Poland, and only a limited number managed to succeed in the market.
However, their motivations are to grow as much as possible and establish solid footholds, which causes pressure on the market and increases rivalry. The competition is increasing, especially following the arrival of Amazon. Low switching costs and readily available substitutes also provoke tension in the players.
The Power of suppliers is low/average. Suppliers’ influence is associated with the fact that competitors would not be able to serve their customers without them. Nevertheless, the number of suppliers has increased exponentially, with a large number selling the same products. This lowers the relative power of suppliers. Moreover, some companies have strict rules and
6 The Power of buyers is high. To start, there is high competition and availability of substitutes as well as high-quality information regarding the products and services of other online platforms, which are aligned with low switching costs and make it easy for customers to switch between players.21 Furthermore, customers tend to be price sensitive, thus who offers the lowest price for the highest-quality product will win.22 Price sensitivity stimulates buyer bargaining power in a way that new entrants with cost leadership strategies might take away customers.23 The Threat of new entrants is average/high. The entry barriers are not difficult to cross over since, unlike online shops, no goods or warehouses are needed. Additionally, it is easier for outside established companies to enter the Polish market since they have the foundations and just need to adapt to the market conditions.24 On the other side, there is a high cost of brand development that weakens the influence of new entrants.25 Furthermore, there is a network externality factor that comes as a major barrier (more details in Exhibit 6).
The Threat of substitutes is high. There is a high availability of substitutes since there are many offline stores or other type of e-commerce stores. Additionally, the low switching costs show that a customer can easily decide to buy from other retailers. In most cases products are not exclusive and can be sold in different channels so, giving the most satisfying experience is essential for the success of any player. A single negative experience will drive customers away, given the easy availability of substitutes.26
Internal Analysis
This section is composed by a thorough analysis of Allegro’s competitive and corporate strategy.
It explains what the company’s target market and competitive advantages are, as well as Allegro’s flywheel model and how synergies can create corporate advantage.
Target Market: Allegro’s target market is all Polish e-commerce users. It can be objected that such a broad group is too general to introduce a consistent strategy. However, Allegro defines about a hundred user segments with over a dozen million users of the website, and at the same time, focuses its activities on the most profitable segments of sellers.27
Value Proposition and competitive advantage: Allegro has a strong value proposition across its ecosystem. For customers, it gives the best and widest selection of products with the lowest prices in the market and a great delivery experience, with 75% of products being delivered within 48 hours. For merchants, they take advantage of the largest customer base on the market with 382 million average monthly visits in 2020 and its ease of use since they have access to a dashboard for real-time automation and monitoring.28 Regarding competitive advantage Allegro benefits from its early entry into the marketplace industry in 1999, benefiting from the first-mover advantage, and despite eBay already existed it was not yet established in Poland.
Moreover, it is a Poland based company, making it a local strong competitor, which leads to higher brand loyalty since its target market can resonate with the company. This is a unique aspect that other competitors do not have, thus not being able to fully cater to customers’ needs.
Allegro also portrays a positive brand image since one of their core values is to exceed customer expectations by anticipating customers’ needs which leads to stronger relationships. Taking a different approach and looking into Michael Porter’s generic strategies, Allegro achieves a competitive advantage by doing a geographic specialization focus since it aims all customer groups and product varieties for a given geography. Allegro highlights the importance of choosing local Polish brands by helping and investing always catering to local tastes.
Additionally, it also uses a cost leadership strategy, increasing market share by charging lower
8 Corporate Strategy
Allegro’s operations rely on a model known as the retail flywheel. Revenue for Allegro comes primarily through the marketplace (85% of Allegro’s revenue, including retail) by enabling transactions between buyers and sellers, charging merchants commissions and other fees.
However, Allegro achieves corporate advantage by taking benefit of synergies since the company is able to combine different businesses creating more value together than separately.
The company earns advertising revenue (currently 11% of Allegro’s revenue) by providing opportunities for advertisements to brands and merchants displayed in the most popular places on Allegro.30 This business has been growing the fastest with an increase of 39.5% year on year, valued at 32.1 million zlotys currently (6.8 million euros).31
Allegro also generates profit with a subscription service called Smart! that grants the customer unlimited deliveries up to 10 addresses in Poland, or thousands of InPost Parcel Lockers, one free return per order and Smart! deals where customers can buy discounted items.32 This program creates synergies by increasing 2.5 times customers’ order frequency and decreases key shopping barriers related to returns and delivery costs. In terms of delivery, they have a partnership with InPost, a logistics company, for a system of postal deposit boxes used to collect parcels 24 hours a day, usually available in convenient places such as near shops and gas stations (Exhibit 7).33 This partnership gave Allegro a corporate advantage by creating synergies and transforming the delivery experience in less than three years with a 90%-95% delivery promise accuracy as of June 2020 compared to 2017 that delivery was not promised (more details in Exhibit 8).34 Regarding payment solutions, customers are taking advantage of several forms of payment, and on July 31, 2020, Allegro created yet another form of payment called “Allegro Pay”. This method allows paying the order in 3, 5, 10, or 20 monthly repayments while not adding any interest.35 The service was achieved because of the acquisition of a fintech start-up
analysis, it is possible to visualize the different businesses Allegro operates in combining with technology and how it creates synergies to drive continuous growth and strengthen the satisfaction of all parties of a transaction. (Exhibit 10). 36
Throughout the years, Allegro was able to increase its business portfolio by doing acquisitions.
Firstly, the group acquired, in 2006, “Ceneo.pl”, a leading price comparison site from Poland, then several years later in 2019, the online ticket company “eBilet.pl”, where all kinds of tickets started to be sold on Allegro’s website and eBilet.pl’s users were able to use Allegro Smart!
program. Finally, in the first quarter of 2021, the group acquired “FinAi”, the fintech company that streamlines the path of obtaining short-term loans. Allegro is able to manage all parts of the value chain apart from logistics and delivery. In conclusion, Allegro has special attention to the so-called retail basics to ensure customers can access the broadest array of products at the lowest possible prices, with fast and free delivery to achieve a seamless shopping experience37.
The attack of Amazon empire on Poland's e-commerce market
Amazon officially entered the Polish market on March 1st, 2021, with the launch of a local website, being the first time Amazon entered the Central and Eastern European markets.38 There has been an Amazon presence in Poland since 2014, which created 18,000 permanent jobs with extensive infrastructure, which includes nine fulfillment centers, an Amazon web services office in Warsaw, and a development center, delivering innovative solutions, in Gdansk.39 However, facilities were used to supply markets outside Poland, more specifically Germany. Together with an economy with high growth potential, Amazon was eager to enter the market despite its
10 Amazon’s German website. Now the new website can cater directly to Poland consumers by having more detailed product information and prices expressed in Polish zloty instead of euros.40 The entry into Poland was Amazon’s biggest launch yet with more than 100 million products across 30 categories, and it offers Amazon’s devices such as international versions of Amazon Echo, Echo Dot, and Kindle Paperwhite.
In October 2021, Amazon launched the Prime service in Poland offering free delivery and video streaming services for 49 zlotys (10 euros) annually.41 Amazon will also provide Polish customers with free delivery on orders above 100 PLN (≈ 21 euros).42 The company promises quick, efficient, and error-proof in terms of delivery since they already have their fully developed warehouses. The giant has also signed a contract with the delivery company InPost for the next five years, offering deliveries also using its couriers. This becomes a severe threat to Allegro that started doing business with InPost at the beginning of the last decade, has the contract extended for seven years, and thinks about buying it in the future43.
Example - eBay failure: To better understand what Amazon will face and what differentiating factors it needs to be successful in Poland, it is pertinent to look into eBay’s case as a benchmark.
It all started in 2005 when eBay and Allegro were just auction sites, and the latter monopolized the market. It was a very anticipated launch that ended up being considered a flop since they did not approach the market in an adequate way according to the following evidence. The first mistake was to underestimate Allegro. When Poles are comfortable and know something works, they do not want to change it, especially to something that is not assured. This is an example of a network externality and switching cost. The second factor was the large number of scammers on eBay since the website was not adequately verified. This is a failure in platform governance showing that bigger is not always better with network externalities. Furthermore, eBay’s unique advantage was the absence of commissions charged to exhibitors which enabled the company
ignored.44 These factors were crucial and made eBay close all its offices in Poland in 2008, despite their native language website version still existing and being developed from the London office. As eBay spokesman Karol Świtała explained, “The company's basic error was the assumption that organic growth can be repeated any number of times at any market”. eBay currently holds a 1.3% market share in Poland.45
What Amazon will do differently: For Amazon to become successful, it needs to not make the same mistakes eBay did. Amazon’s main goal is not to monopolize Polish buyers but to do cross-border selling, attracting Polish sellers and allow them to sell to millions of customers worldwide.46 This is the differentiator factor that increases the possibility of Amazon having a successful chance on the market since it grants merchants global fulfillment and packaging services as well as Amazon’s international shoppers.47 Few competitors can offer sellers the possibility to expand quickly to other markets, and since the new player shows positive and consistent experience in other markets, it is positioning itself as the safest and easiest route to global expansion48. To back this proposition, Polish businesses would have listing tools that support the eight European sites, analytical tools, and 24/7 online assistance. In addition, it offers streaming services and products that other competitors do not, encouraging consumers to try out at least one segment of the company and then move on to other segments.49
Amazon.pl at the sixth-month mark: Despite all this anticipation and promises, the giant has been operating for six months and not much has come from it. This is because Amazon chose a strategy of organic development (the same chosen by eBay) in Poland, where its market share is not particularly dynamic and thus, falling below expectations.50 Until now, Amazon's at its