With a distinct lack of fanfare, Tesco quietly rolled out its long-awaited marketplace last week in a move that is sure to send shivers down the spines of executives at incumbents Amazon and eBay.

Whilst Tesco is by no means the first retailer to add a marketplace offering to their existing retail website (Play.com, ASOS, Buy.com, Sears and Walmart have all done the same and many others are rumoured to be in the planning stages), they are the first to have the potential to mount a serious challenge to Amazon and eBay’s dominance in the UK and, potentially, mainland Europe.

Why is this?

There are two reasons. Clubcard and in-store delivery. Let’s take a look at each.

When Tesco rolled out its Clubcard program in the mid-1990s, few could have anticipated the ultimate impact the program would have on Tesco’s business. Over the coming years, what started as a pretty innocuous loyalty scheme grew into what many consider one of the world’s most successful customer loyalty programs. In exchange for the vast amount of data that Tesco was able to learn about its Clubcard holders’ buying habits, it passed back generous discounts and rewards to its customer base. It felt like a win-win and usage of the scheme soared.

Fast forward to 2012 and there are over 17m members of the Clubcard program in the UK and over 35m worldwide. Many of these will go to vast lengths to earn points that they can then exchange for money off products in-store, or redeem with one of Tesco’s many partners, for things like day outs and hotel stays.

Why is this relevant? Well, the new Tesco marketplace will enable shoppers to earn Clubcard points on every purchase they make, even if the product is supplied by a third party merchant. So, this will create an intriguing dynamic for a Tesco Clubcard holder that might usually buy products on a competing marketplace such as Amazon. Imagine for a minute that the same item is now available, at the same price, from a third party merchant, on Tesco and Amazon. Would the lure of earning Clubcard points convince that shopper to buy the product from Tesco instead of Amazon? Tesco is obviously banking on the answer being ‘yes’ - and I can’t say I disagree with them.

But, wait a minute. Amazon may not have Clubcard points (or indeed any noteworthy loyalty scheme), but it does have a lot of other things going for it. After all, you don’t become the retail behemoth that Amazon is without providing a lot of value for your customers. If you ask any regular Amazon shopper why they buy from Amazon you can be sure that the speed and predictability of delivery is a major contributor. Amazon has built a fulfilment beast that has redefined the ‘standard’ for retail delivery. Its ability to reliably and extremely cost-effectively deliver your order to your door (or Amazon locker) is unrivalled. Most orders are delivered the next day and in many parts of the UK Amazon now offers same-day delivery at the types of delivery charges that 2 years ago we were happy to pay for a 3-5 day delivery commitment.

So, Tesco could never compete with this, right?

Wrong. Think about it. Tesco has actually build a fulfillment operation that trumps that of Amazon in many ways. Tesco currently allows its customers to specify a 2 hour slot for delivery to the home or workplace. It also has a rather handy ‘Click & Collect’ service which enables you to place an order online and choose which store you wish to pick it up from - which is handy if you want to order online at work and pick-up on the way home. So, whilst much of this infrastructure is currently geared around its grocery products at the moment, it doesn’t take much to expand this capacity to service non-grocery products. Suddenly Amazon’s next day service doesn’t look quite so compelling.

But, it’s not quite that simple. Let’s remember that products from third party merchants aren’t going to be sitting on a shelf somewhere in a Tesco store - which means the logistics of getting those products to the shoppers is slightly more complicated.

Initially we would expect the third party sellers to simply ship products from their own warehouses directly to the buyers using their existing fulfilment partners like Royal Mail and other couriers. However, it doesn’t take too much of a stretch of the imagination to envisage how Tesco could take this to the next level.

Tesco has over 2,500 stores in the UK, ranging from its smaller Tesco Express format to the larger Tesco Extra superstores. With that sort of coverage, most people in the UK are within a mile or two of a Tesco store - and this includes the third party merchants that are selling products via the Tesco marketplace. So, it’s not inconceivable to imagine a scenario where a third party retailer receives a number of orders in a given day via the marketplace and, instead of shipping each package individually to each buyer, he instead sends the lot to his nearest Tesco store, where it gets sucked into the Tesco distribution network and ejected back out at the Tesco store nearest the buyer. Cool, eh?

But, whilst Clubcard points and Tesco’s delivery network are big reasons why we believe the new Tesco marketplace has the potential to be a viable competitor to Amazon in the UK, there are plenty of things Tesco needs to also get right for this to be a success.

Selection is its biggest challenge. Amazon has been recruiting sellers for its platform since it launched in 2002 and now has thousands of retailers selling through its marketplace. Tesco is starting from a standing start and has a lot of work to do to convince retailers to add yet another marketplace channel to their selling portfolio. However, providing Tesco can demonstrate early traction, I think retailers will quickly be convinced and be keen to tap into the buying power of Tesco’s loyal customer base.

Tesco also needs to work out how to police the marketplace and make sure it is quickly clamping down on merchants that are not providing a first-class buyer experience. It’s all too easy in the early days to compromise standards in the pursuit of aggressive growth - but such an approach is guaranteed to cause problems later on. Tesco needs to strike the right balance from the outset and ensure it does nothing that would detract from its loyal customers’ buying experience.

However, if it gets this right, then the rewards are there for the taking. There is room for another large player in the UK marketplace landscape and Tesco is ideally poised to take this slot.

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