The way we’ve come to understand the role of ecommerce in the broader consumer/retail economy has evolved pretty remarkably over the last ten years. In many ways, the rise of ecommerce resembles the proliferation of consumer mobile devices, a trend best described by Hemmingway: “gradually, then suddenly.”
Somewhere in the late 2000s, we went from a slow, gradual adoption of the internet to a tipping point, where we accelerated rapidly to 3+ billion people online today. A big part of that is due to the maturation and commoditization of mobile technology. More people got online to access a certain bundle of goods there: information, services and products. As those things improved in quality, it drew more people online. A virtuous cycle that happened gradually, and then suddenly. We’ve moved into the “suddenly” part now, as another billion (!!) come online in the next year or two, which is part of why Google and Facebook are investing so much money in welcoming those new users to the internet.
Ecommerce has grown tremendously, but its growth has so far been gradual. As a percentage of overall retail sales here in the U.S., it’s still in single digits – but growing at a steady clip. Yet this growth pattern drastically understates its potential. Ecommerce is quickly approaching its own “suddenly” function. And I think the day is getting closer when we’re going to see a major shakeout in retail between those companies that are prepared, and who “get it,” and those that do not.
I’ve given some thought here about what that shakeout might look like.
Much about the economics of traditional brick-and-mortar-based retail is widely known. There are heavy real estate and transport costs for brick-and-mortar retailers that also usually require lots of low-paid, sometimes seasonal labor. (I was once one of them!) The economics of ecommerce competitors are still taking form, but fundamentally benefit from not having to rent and staff expensive retail store space. Most of these ecommerce competitors, funded by VC dollars, are also expected to invest heavily in growth and distribution, however, which (in my opinion) skews the comparability between their “true” costs and those of legacy brick-and-mortar.
There are a thousand different ways to subdivide the overall retail landscape, but for my purposes here, I’m going to just make up my own retail segments defined by consumer value:
- Essentials – this is the stuff you need and which you are going to buy. Groceries, basic home goods and the like.
- Discretionary – the stuff you don’t “need” but are likely to buy if you can find the right merchandise and a good deal. A lot of clothes fit this category, as do many consumer gadgets, pet toys or hobby supplies. This is a big category.
- Specialty – this is made up of very specific items that you want but cannot substitute. Books and music are an example, as Bezos famously observed – specific book titles are not substitutes for one another. Another example are collectibles and parts, where customers want an exact item, not something like it.
- High end – this category is interesting. It’s like Discretionary, except that it conspicuously carries much higher value (real or perceived) to the customer – either in terms of its brand or quality. These are branded and strongly marketed items that are not easily substitutable – i.e. a Nexus is not an iPhone, a Gucci is not a Coach, and Whole Foods is not the Food Lion.
I’ve used this breakdown because of how I think ecommerce affects each category differently.
Essentials – most of the fundamental characteristics of this segment make it glaringly vulnerable to ecommerce competitors. Many of the goods are commodities, for one. Moreover, some of them may be immediate needs (“we need paper towels, now!”), but for many, a few days’ wait isn’t a big deal. While there may be people who do care what brand their light bulbs or tape are, and may want them on a moment’s notice rather than in 2 or 3 days, there are surely at least as many who don’t. The biggest defense against ecommerce disruption here (outside of food) is the price point. A big chunk of essential items are high-velocity, low-cost, and burdensome to search for and order separately online, making them an unattractive market for would-be ecomm players. Amazon has begun to target those pain points with its Dash Button…
Discretionary – the most interesting characteristic of this segment is the importance of product discovery. By definition, customers don’t know what they’re looking for in this category until they find it, and decide they like it enough to buy. This would seem to give an advantage to ecommerce, which literally has access to an “endless aisle” of merchandise – but physical retail has a major physical sensory advantage, which can create the sina qua non of modern retail – a superior customer experience. The best brick-and-mortar stores can curate an outstanding selection of merchandise and create an experience around it that resonates (just think of your favorite store); the big drawback, of course, being that none of that can be dynamically personalized for any individual customer (yet). Moreover, great consumer product discovery is still in its infancy online, and is still sort of a pain. I think the most interesting work being done in this area is going on at Pinterest and Etsy, though every major retailer should be thinking about it too…
Specialty – the founders of eBay wisely recognized that this was one of the first areas where the internet would quickly dominate. Two-sided internet marketplaces, where searchers for a very specific item – say, a signed White Stripes 2007 tour poster from the Savoy Theater in Nova Scotia, or a 6.5mm blue car fender metal rivet – could find sellers, are an inherently superior model than physical retail. The internet has essentially annexed this segment.
High end – ecommerce utterly changes the structure of high-end retail. This is where customer expectations for an “experience” are highest, which arguably relies on the combination known as omnichannel commerce. Physical stores exist here not merely to sell, but also to communicate and reinforce a powerful brand message. Apple understood this as well as any jewelry store does. Yet ecommerce allows new entrants into this rarified category too. What GoPro is to consumer cameras, Nest is to thermostats, or Blue Bottle is to coffee was made possible only because of an online-first (in many cases, online-only) orientation. This is part of a customer experience that, combined with high quality goods, support higher price points than those markets’ primary competitors and have driven substantial growth even in otherwise commoditized markets.
Ecommerce today is somewhere about 7.5% of total U.S. retail sales, according to the U.S. Census Bureau. Each quarter, that number inches up another point or two (YoY). Amazon is now capturing around 15% of all U.S. ecommerce sales, a figure that is likely to rise, but my sense is that much of that continued growth will come primarily at the expense of traditional brick-and-mortar, not competing ecommerce.
Ecommerce has already effectively killed a few major retail chains and forced all others paying attention into wartime reinvention – and we’re still at well less than 10% penetration of total U.S. retail. What happens at 10%? 15%? More? At those levels, I think the brick-and-mortar market starts to feel extremely squeezed, especially for those in the “Discretionary” retail category. Stores will change – both in format and in meaning. There will be far fewer of them. And I wonder whether those stores can really be engines of growth while still paying part-time workers minimum wage and no benefits. The most successful high-end retailers are already moving towards becoming ecommerce businesses with physical locations supporting. Call it “omnichannel” or not, but it’s already happening.
There’s an awful lot more to say. I have a future post brewing on distribution systems, and how Instacart, Postmates and (possibly) the newly-announced Uber for ecommerce delivery program fit into this rubric. In short, they’re potential game changers in some markets, but I question how their personal distribution model scales outside of major metro areas. Low-paid freelancers driving around delivering packages may work in high-density areas – but outside of them, they run into scale problems very fast.
Likewise, international payment mechanisms that truly permit those billion coming online to access global ecommerce are still in their infancy. It’s fascinating to think what common payment platforms could overcome the current limitations imposed by legacy systems that carry high transaction fees.
What role do ecommerce platform providers play in each segment above? Or marketplace platforms? Or retailers themselves? Is it all three? What do you think?