July 17, 2023

Regardless of the outcome of the David vs. Goliath clash, the real winners in the Polish market will be Polish consumers, producers and service providers. We all gain.

Comarch’s project named was launched on June 29, 2023. Together with it, a discussion began on the potential competition for the Allegro platform, which is dominant in the Polish market. I participated in such a discussion on LinkedIn. Roman Młodkowski, a respected economic journalist, was enthusiastic about the new project, believing in its success. In turn, Anna Streżyńska, former Minister of Digitization, presented a more sceptical position, pointing to the unique features of Allegro and the fighting spirit that this company emanates. I wish Professor Janusz Filipiak success in implementing his project, but achieving it will require many years of work, commitment and significant financial resources, with no guarantee of success. In my opinion, this venture is very risky. Nevertheless, it is worth building competition for Allegro, which will benefit consumers and producers. However, Allegro’s real competitor and threat is Amazon and not the platform. As a devoted Allegro supporter, I decided to support them with a short analysis and recommendations on effectively repelling this great global player’s attack. I was inspired by the excellent material by Małgorzata Gesek, who analysed the possible scenarios for the operation of both companies on the Polish market, recommending Allegro strategies that will allow them to emerge victorious in the clash with Amazon.

The Polish market as a field for competition:

The Polish market is a tempting field for new players, so the emergence of a global giant like Amazon is a natural consequence of implementing its strategy. Regardless of how Amazon enters the market, it will undoubtedly contribute to its development and significantly increase the base of new customers. A few words about the Polish market: GMV, i.e. the total value of goods sold in a given period, has increased by 50% over the last three years, from PLN 83 to 121 billion, and is expected to grow by 15% annually in the coming years. Saturation with e-commerce services in Poland is 2.5 times lower than in Western Europe, which is considerable growth potential. The factors conducive to the development of this market include the well-developed electronic payment services in Poland. 79% of consumers use debit cards, 87% use the Internet, and 60% have used e-commerce services at least once. Allegro occupies a dominant position in our market, 45% of the market share, 20% of the market is attributed to producers, and 35% is the share of the hybrid system – platforms, shops and wholesalers. The two factors that determine the choice of customers are the low price and immediate, free delivery. Other factors such as ease of access, advertising, loyalty programs and additional services are essential, but they only support customers’ decision-making process. Under such circumstances, a quick and aggressive entry into the Polish market requires significant capital for any new player, threatening the margins and success of such a project. Finding a compelling concept that will convince producers to lower prices, accept commission payments, develop an effective supply logistics model, and optimise its costs is crucial. Hence my caution regarding the success of the Comarch project, whose main advantage is the access platform, but it is not enough for the Polish market.

Advantages of Allegro and the threat from Amazon:

So how can Amazon threaten Allegro? Amazon has several competitive advantages compared to Allegro. It has an international sales network and offers customers a much wider range of products. It also has significant financial surpluses that allow it to reduce commissions charged to producers, carry out large marketing campaigns and support sales through aggressive price promotions. Amazon is also characterised by very efficient logistics, thanks to which it can deliver products on the same or the next day. It has an effective sales platform that attracts producers by offering them low or even zero commissions. Amazon can increase sales volume and lower product prices thanks to its international network. The company’s unique organisational culture focuses on finding and retaining talent. These are strong arguments. And what advantages does Allegro have? It is a strong brand that customers positively receive. A local Polish company with a strong management team, an agile player making quick decisions and implementing them effectively. The trust of customers and producers has been built over the years of operation. Allegro Smart is a loyalty program with millions of customers. All right, business profitability developed over many years. These are also strong arguments.

Recommendations for Allegro:

Short-term actions: observe and react quickly to Amazon’s actions, avoiding price wars.

Amazon is a for-profit company and is unlikely to start a price war. First, be financially prepared for activities related to solid price promotions. Secondly, to strengthen the attractiveness of the “Allegro Smart” loyalty program by retaining existing customers and attracting new ones. Thirdly, build entry barriers for Amazon, such as a 100% delivery efficiency or money-back guarantee, introducing the Allegro Family product package with bonuses for family orders.

Long-term actions: focus on innovation and digitisation in relations with customers and producers and internal company processes.

First, look for sales in booming segments like e-groceries and e-medicines. Actively support start-ups related to new services, logistics and production by participating in joint ventures and acquisitions of such companies. Secondly, expand into foreign markets of Central and Eastern Europe through acquisitions and expansion of product groups to increase sales volume. Third, change the supply and logistics model. When customers order products from three manufacturers, they receive three different shipments. This generates costs and extends the delivery time. This is Allegro’s weakness, so it is necessary to build distribution centres to collect and package products, fulfilling bulk customer orders. This model works for Amazon. This expensive project requires significant financial outlays, estimated at PLN 250 million, but Allegro has no viable alternative and must introduce this model.

Amazon is likely to act balanced, pursuing long-term goals that focus on gradually growing the customer and manufacturer base and increasing the margin. I don’t expect aggressive actions. If we judge it expertly, Allegro’s sales margin will fall if it does not take active action, from 37% to 31% in 2023. Amazon’s margin, on the other hand, will grow and will reach 6.8% in 2023. There is still a gap in profitability, but you have to be vigilant.

Returning to expert recommendations, if Allegro took short-term actions, it could not only prevent a decline in the margin but also rebuild it by 3 percentage points in 2023, which would correspond to an increase in the customer base by 5%. One should remember the projected 15% year-on-year increase in turnover on the market. It’s a completely real job.

To sum up, Allegro has every chance to remain the leader of the Polish market and become an international company. Nothing motivates you to act like solid competition. There is a lot of work ahead of Allegro. It must be even more agile, focused on innovation and constantly searching for new talents.

Jaroslaw Andrzej Szczepek Ph.D.