Resetting Ecommerce Expectations – Marketplace Pulse

E-commerce was supposed to become much bigger, and so everything was supposed to become easier. But e-commerce has grown only slightly, and yet everything – from procurement to advertising – has become more difficult.

For two years, e-commerce was a dream – a hope that e-commerce would undergo a sea change over several years, growing in months what would have taken years. Annual charts show that e-commerce penetration has increased as much as in the previous ten years in a matter of weeks. It was a dream because the assumption was that e-commerce would continue to grow from this high point.

This was not the case. Instead, every quarter since then, e-commerce penetration has moved closer to the trend line it was on before the pandemic.

But e-commerce is more important than the pre-pandemic trend line would have suggested. It’s bigger in dollars spent. E-commerce is 25% above the trend line; an annualized execution rate of $975 billion instead of $780 billion. One way to measure e-commerce is its share of total retail, but it’s equally relevant to look at overall e-commerce spending. As a share of retail, e-commerce is smaller than expected by the pandemic surge, but larger than the decline in penetration implies.

However, many e-commerce companies have overstocked, overinvested, overhired, and overbuilt due to a misreading of the market. For example, Amazon said it built too many warehouses and Target had too much inventory. The zero interest rates that fueled the bear market also contributed. An investment in Amazon or Shopify stock in January 2020, months before the pandemic, would have yielded an exceptional return through the end of 2021. Since then, the stock price of Amazon or Shopify has fallen enough to make Walmart (a mortar) a stock that outperformed the two e-commerce leaders.

The growth of e-commerce has been overshadowed by sourcing, fulfillment, advertising, and other fundamental pillars becoming more expensive, slower, or less efficient. Only recently have containers from China come down ten times as expensive, but still take three times longer to import. For most of 2020 and 2021, Amazon had no warehouse space to store extra inventory for sellers, leaving them scrambling to find alternatives. And Apple made changes to the iPhone’s operating system, making mobile advertising (eg, Facebook) less effective.

Many of these challenges remain today. Importing goods is expensive and slow, and direct-to-consumer advertising is difficult. Due to the first two issues and others, margins are compressing. Many companies show stable or negative year-over-year growth. And new issues, such as rising inflation and a possible financial recession, are fueling further uncertainty.

Ultimately, e-commerce is more important, but it’s harder to find products and reach consumers. The two parts are not caused by each other but coincide. The industry went from euphoria to despair in less than two years.

At least in the short term, that means inventory forecasting, unique advertising approaches, and multi-channel reach are some of the critical areas that are more valuable than anything else. The e-commerce growth numbers are a distraction. Whether the market has grown or not solves any of the fundamental problems.

Before e-commerce reaches 25%, let alone 50%, retail sales penetration, challenges remain. The interesting questions, then, are not about e-commerce market share, but about the underlying complexities that drive it. For example, does this mean that Amazon will grow many times larger or that direct-to-consumer will drive most of this growth? If so, through what channels and at what price will they reach consumers?

Comments are closed.