Online shopping has never faced a bigger threat
The pandemic pushed every retailer online all at once and forced millions of consumers to ask themselves one question: 'Is this really better?'
Hello and welcome to I’m Late to This, a newsletter from Myles Udland about stuff I haven’t stopped thinking about.
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Today’s post marks the 38th edition of this newsletter since launching last November. More than 1,400 people received this week’s letter, a number I hope will continue to grow over the weeks, months, and years ahead.
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And now, something from the notebook.
Last week, I took a vacation.
I didn’t feel the kind of urge to unplug that has accompanied week-long summer breaks in past years. Which surprised me and my fellow vacationers.
We — meaning my fiancé and immediate family — all agreed that the lack of commuting sort of tones down the urgency to take a break. And the lack of urgency to unplug was a bit jarring considering the last six months, during which it has so often seemed to myself and so many others that a break might fix a lot of what makes it hard to sleep at night.
I suppose this means that vacations are really only serving their purpose when times are good. If things are going sideways trying to “get away” is the sort of lie you can’t really commit to telling yourself. Or so it was for me.
So but this is all to say that while my Twitter feed seems very interested in Apple’s valuation, Warren Buffett and gold, and something about threads and $100 billion that I haven’t exactly been able to put together, this week’s letter draws on some of what was left on the chopping block last week.
For new subscribers, last week’s letter looked at Shopify and its new role as what I call a “template company.”
This is a company that investors, analysts, the media can favorably compare other businesses to — “Company X wants to be the Shopify of Y” is now a thing that is going to happen the way it did for Uber, Amazon, and others in the past.
Part of what this outline assumes, however, is that eCommerce growth is going to be up and to the right for a long time.
Before I really wrote anything last week, I made the following chart and a few more that will feature later.
I am aware it is a true work of art.
This chart shows the percent of total retail sales ex-food that are attributable to nonstore retailers. As of July, nonstore retail (which, yes, includes mail order catalogs and QVC so isn’t only online sales but is, at this point, basically online sales) had 17% share of total retail sales. At its pandemic peak in April, this category’s share of total sales hit 20%.
Obviously, the biggest question going forward is: how large can this share get? We will address this in part later on.
But first I think it is worth unpacking what this chart clearly shows. Which is that there have been three major periods in the history of eCommerce and the pandemic has ushered in a fourth.
The first movement was the tech bubble. It came and went quickly. We need not dwell on this.
The second movement was the Amazon epoch. During this period, we saw the steady rise in Amazon as a default online option for many shoppers.
Amazon’s North American sales in 2003 were $3.26 billion. Eleven years later, as the eCommerce world ended its second and longest act, the company’s North American sales totaled $55.47 billion. (In 2014, its “Other” sales which includes AWS revenues were $5.4 billion, so a like-for-like comp on 2003 vs. 2014 is closer to $50 billion if you want to nitpick a touch.)
The third movement in eCommerce ran from roughly the holiday season of 2014 through the beginning of the pandemic. This is the Walmart epoch.
In 2014, Doug McMillon was named the CEO of Walmart and in his first earnings call as Walmart CEO in February 2014, McMillon said:
We also see an environment to create transformative growth in Global eCommerce and mobile commerce. Our ability to combine online and mobile with the assets of the world’s largest retailer positions us to win at the intersection of physical and digital retail, which is a competitive advantage. Over the past year in particular, we have invested more significantly to improve our customer experience and fulfillment capacity. Cycle times on e-commerce related to capital investments are much more fluid than those for stores, so we can move faster and make decisions with speed. We’ll increase our e-commerce investment as opportunities present themselves. And, we’re committed to updating you more often on this important growth area.
And while the path forward from this point wasn’t always smooth, McMillion didn’t really waver from this vision outlined almost seven years ago. The company made some big bets along the way, had some really rough quarters as well, but nothing about Walmart’s strategy right now leaves out its eCommerce ambitions.
For its fiscal year 2014, eCommerce sales at Walmart grew 30% to “more than $10 billion” (including acquisitions) for the year. In the 2013 holiday season (which covers Walmart’s 4Q14), eCommerce contributed 0.3% to Walmart’s comp sales growth. In fiscal 2020, Walmart saw eCommerce sales grow 37% and contribute 2.1% to comp sales growth. With the company not breaking out dollar amounts on eCommerce for FY2020, some estimates put it just under $22 billion. This seems low to me.
Obviously, the pandemic changes lots of things. In Walmart’s most recent quarter (2Q21 for Walmart), eCommerce sales grew 97% and contributed 6% to comp sales. This story can be repeated at thousands of businesses.
With this outline sitting in the drafts folder, I listened to Patrick O'Shaughnessy’s interview with StitchFix CEO Katrina Lake on a beach and it became clear I should not let this overview go unpublished. [1]
Lake’s vision for retail puts us at the beginning of a second wave, or in her words a second paradigm. The first paradigm was a “search and filter” model where you, the consumer, has something in mind and the internet’s job is to serve up for you a relevant result when you type something into a search bar.
You want to find something cheap, you want it delivered fast. That is exactly what that first version of internet was meant to do. But if you go back to a search-and-filter based platform, of which eCommerce is most of those, and just go and type in, jeans. You might be thinking to yourself, I need a new pair of jeans. I'm ready to wear jeans again in COVID world. The search result would literally deliver millions of pairs of jeans. Then you could sort by color, by size. The idea of going from a literal search result of over a million pairs of jeans, to trying to narrow it down to the four or five that are going to be best for you is an almost impossible task in searching and filtering.
The second paradigm must solve these problems.
And while this is a massive opportunity for StitchFix and every other online seller, we can also see that eCommerce has never faced a clearer threat. And the threat is the online shopping experience itself.
Buying almost any good online has increasingly become as chaotic and unpleasant as the in-person experience it disrupted, just for different reasons. (I think it is worth leaving aside services, which are probably 10-15 years behind goods in their online maturity.)
As OneZero’s Simon Pitt outlined last week, the actual shopping experience on Amazon is not that great. Mostly because it is hard to trust. Prices are all different. It’s unclear who is selling you something. And then many boxes arrive and it’s not clear if what’s inside is what you ordered.
I’ve written about this issue. Others have written about this, too. Many more will write more about it. And with good reason: shopping on Amazon is just not a great experience!
Jeff Bezos wrote in his 2018 annual letter to Amazon shareholders that, “We helped independent sellers compete against our first-party business by investing in and offering them the very best selling tools we could imagine and build.”
And Bezos here is clear: the priority is getting more sellers selling more stuff on Amazon. What that stuff is doesn’t matter.
So in a world where the future of eCommerce is just assumed to be “bigger” than it is today, all that matters is taking your cut. Which is what Amazon has been trending towards for sometime. Shopify is just the pure play on the thesis.
If online sales grow as a percentage of overall retail from 20% today to 30% in 2020 — as they did during the 2000s when nonstore retail grew from ~6% to ~15% of total retail — then the winners will be massive.
Amazon got dragged before Congress last month to ask why it was a monopoly. But an industry experiencing the kind of growth eCommerce has in the last 15 years will yield many winners, which is basically what Jeff Bezos argued throughout his testimony. His exact quote in prepared remarks: “Amazon accounts for less than 1% of the $25 trillion global retail market and less than 4% of retail in the U.S. Unlike industries that are winner-take-all, there’s room in retail for many winners. For example, more than 80 retailers in the U.S. alone earn over $1 billion in annual revenue.”
This is the bull case for Amazon and every one of its competitors.
But so the future of online sales seems to me to have three distinct futures (with all the requisite gray in between).
Things can either get way, way better for a long time.
We could see growth flatten in short order.
Or we can see growth enter a new steady, but faster, period of growth as a part of the overall retail pie.
I do not have a strong view on which of these arbitrary outlines hastily charted above will win out.
But a view I do strongly hold is that the challenge facing eCommerce is considerable.
In the last few months, companies moved into the eCommerce space in a panic and must now convince both themselves and their customers that this is indeed the preferable future.
I have little doubt that nonstore retail will continue to gain share as a percentage of total retail sales in the years ahead. The reason Shopify is the new template company is that Shopify is, again, not responsible for selling any one thing. Turning yourself into a Shopify-type business where you are responsible only for taking a cut of someone else’s actual product or experience and not the thing itself is where it seems our post-pandemic economy’s most lucrative opportunities lie.
But each hundred basis points of market share will make and break entire businesses that are betting on a positive resetting of our consumer expectations via the internet. And while it isn’t much of a take to note that entire industries rushing online can have very negative effects — hello media! — it seems worth highlighting the risks for eCommerce this point in the COVID shopping boom.
And so every business that has now pivoted to being an online retailer wants to make sure investors see their online channels as purely augmentative, to see their new online ambitions as mini Shopify-like kingdoms in which growing addressable markets — and rising share within these markets — only expands with an eCommerce presence.
But the challenge is that not everything is good online. Which is saying it nicely.
We could go through the challenges of buying a car, or bananas, or batteries online. There are also, of course, challenges and deep inconveniences associated with buying all of these things in physical locations.
The spread between the two, however, has narrowed, not widened.
The role that eCommerce has played in consumer habits over the last six months doesn’t really validate anyone’s eCommerce ambitions but instead creates opportunities for more customers to be exposed to janky, half-baked online selling solutions because of a pandemic. (Shopify, AGAIN, is there to make sure these experiences are not bad!)
The chances for a business to lose customers online has never been higher. And while the TAM for many businesses has expanded on paper, never have physical-turned-online sellers had so many unhappy and desperate customers sent their way.
So as the economy normalizes, we’re going to see millions of consumers faced with a simple question: do I want to go back to my old habits or keep my new ones?
The answer to this question is the biggest threat online sellers have faced.
And how consumers answer will define the next phase of eCommerce growth for better and worse.
1: I’ve written several other times about interviews on Invest Like the Best, a program I imagine many readers are listening to already. This newsletter’s platform, obviously, is far smaller than Patrick’s, but for the loyal readers making it to the footnotes who have not made this a regular part of their podcast rotation, I would encourage you to do so. Anyone who writes anything anywhere is only as good as their source material and I’m regularly drawing on the grist Patrick extracts from his guests on that program in this letter and elsewhere in my professional work.