Memo: On Paradoxes and Reading Waves


The spring months will prepare communities but the autumn will define them. I suspect that the advantage will go to the digitally-native. This is how I concluded the memo “When The Dust Settles.” Written in the first week of April, the inspiration for it was a private conversation with a large publicly-traded retailer. Their ask was simple: what metrics and indicators would you use to forecast the following fall and winter? I responded, “Wait until May and then we will know.” We will know how the United States will respond to the urges and political pressures to reignite our economy.

Scenarios A and B: A Catch-22

As I explained to them, “If we wait as long as we’re supposed to, our economy will face some hard and immediate changes in the interim. Our welfare will suffer in the short term but we will be prepared for the longer term.” This is scenario “A.” They sigh, it’s uncomfortable. “But if our state and local governments begin to signal normalcy in early May, then we’ve elected to shorten the scientifically-backed timeline. And we will see a few things that will make us uncomfortable – one now and one later.” This was scenario “B.” In Joseph Heller’s famed Catch-22, one line stood out above the rest:

The enemy is anybody who’s going to get you killed, no matter which side he’s on, and that includes Colonel Cathcart. And don’t you forget that, because the longer you remember it, the longer you might live.

A popular use of Heller’s famous title, a “Catch 22” refers to a paradox where the two sets of rules or limitations are contradictory and a success is improbable as a result.  Barring some unforeseen change in the circumstances, the individual cannot escape this scenario unscathed. This story can be useful to navigate the difficulty of decision-making in the present day.

We all want the economy reopened as soon as possible, but doing so too soon would be a big mistake. That could lead to a spike in COVID-19 cases, which would then result in another shutdown and we will be right back where we started. It makes no sense to resume business as normal if employees and customers are concerned for their safety.

At the same time, social distancing is not a sustainable strategy. We can’t keep doing this for another 12 to 18 months until a vaccine is available. When the time is right, we’re going to have to figure out a new normal to do business in a modified fashion until then. [1]

Continuing shelter-in-place policies [A] would embolden the healthcare industry, enabling the physical welfare of our communities. Reopening businesses [B] would enable the economy’s recovery – in theory. If successful, it would begin to repair the financial welfare of our communities. The welfare of our businesses and the health of our citizens are critical to society’s functioning; they both require a collective focus and participation. The difference between scenarios “A” and “B” is about 60-90 days, according to cited epidemiologists and other public health experts. As indicated by the reopening of local economies, we’ve chosen the first scenario. This is the one anticipated by Dust Settles.

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By opening the economy, we are guaranteed to see a 25%+ eCommerce penetration rate by September 2020. Conservative projections didn’t have us exceeding 25% for another 8-10 years.Spring: 11.2% to 20%Summer: 18-20% to 14%Fall: 25%+ of retail is through eCommerce channels

A collapse in our enthusiasm for social distancing implies a return to traditional retail  customs. The result will be a seasonal drop in eCommerce penetration, during the summer months, as consumers venture out to malls, restaurants, and urban retail developments. But the end of social distancing customs may likely coincide with a second wave of spread that emerges during the fall.

One of the worst cases of the 1918 epidemic occurred after Dr. William Crusen, the city’s public health director, allowed a parade to continue as scheduled despite fair warning. On September 28, 1918, that parade drew 200,000 to Philadelphia’s streets and within 72 hours, the city’s 31 hospitals were filled. Every bed was taken. The parade was called to sell war bonds. [2, 2PM Inc.]

The second wave of COVID-19 will be compounded by colder weather and a potent flu season that will undermine most of our social distancing efforts. It will cripple traditional retailers who failed to take drastic action in updating technologies, forging online communities, and developing last mile strategies. And unless we’ve mastered the medical tools that have, thus far, been in short supply – we can expect five months of the sheltering policies that were instituted as a result of the first wave.

Online retail will become the primary commerce channel for an even greater subset of the American consumer, as a result. Conservative estimates place eCommerce at 20% or higher penetration rate by September, a number that wasn’t to be reached for another 5-10 years. This number reflects a total addressable market (TAM) of nearly $1 trillion, a figure that represents a nearly $ 400 billion growth in eCommerce market share. This figure was $611 billion in 2019.

On Reading Waves

As the TAM has grown, you’ve likely observed a change in tone from many retail analysts. In Fall of 2019, you’d find reports on “the optimization of the CAC:LTV ratio of x brand” or “on the payback period for y retailer.” I’ve tended to avoid the analyses of minutiae.  Rather, 2PM’s reports tend to focus on larger influences. In The Netflix Boom, I explained that we were in the early stages of eCommerce as a channel:

By comparison: thousands of direct brands are competing over what amounts to just 12% of all retail volume. In this way, DTC brand retail is closer to the Blockbuster Video phase than the Netflix era that succeeded it. [3, 2PM Inc.]

Thus far, the online retail economy has been stunted by America’s over-reliance on brick and mortar retail. As our social behaviors have changed, retailers have begun to observe shifts in preferred goods, sales channels, and expectations. This tipping point is best visualized as a physical wave, consider the following analogy:

We pay instructors to teach us to stand atop of a surfboard or navigate small breaks near the beach. This is the gift of education; we can pick up the basics in just a few weekends of study. Eventually, this surfer becomes technically sound enough to pursue big waves. But to take advantage of great waves, our education has to include more than skill. It must also include foresight. This is a difference between a novice, who is training to ride small breaks, and the elite surfer that catches a big wave. One surfer [1] has novice skill, one surfer [2] has expert ability, and one surfer [3] shares that expert skill with the addition of foresight.

Right now, it is important to identify the small crests that result in big waves. As commerce begins to move into the mainstream, it will impact industries within and adjacent to retail. Addressable markets will grow for digitally-native brands and traditional companies who’ve invested in their digital futures. In a recent article, the Founder of Common Thread Collective shares insight into the second order effect of the mainstreaming of eCommerce:

Across CTC’s portfolio of more than $600M in GMV, we’ve seen revenues rise every week since the nationwide lockdown. Staggering figures to rival Black Friday, Cyber Monday. In some cases, smashing it. [4]

Similar reports have been shared by a number of retailers, indicating a directional trend. What does this growth mean for other industries? Business leaders can still be heard saying things such as direct-to-consumer isn’t our industry. This is akin to the capable-yet-novice surfer who cannot yet read waves. In non-retail industries, you’ll hear resistance from businesses who focus on their existing competencies. “The revenue isn’t a big enough opportunity, as it stands,” is one. Or, “we need to stay focused on what we’re great at.” As Taylor Holiday noted in a recent conversation:

These are quotes on tombstones of the future.

In Heller’s famed Catch 22, the protagonist was in an unsavory, paradoxical situation. Neither of Army pilot’s outcomes were plausible. And barring some unforeseen change in circumstances, he couldn’t have expected any relief. For the pilot, there was an unforeseen change in the circumstances that saved him. And though it wasn’t ideal, it was far better than the alternative.

Scenarios A and B are our own version of this paradox, neither of the outcomes are plausible. And barring some unforeseen change in the circumstances, we can’t expect any relief. But for third suffer, an unforeseen change in the circumstances was identified early. And though it wasn’t ideal, it was far better than the alternative.

There is a wave in the distance. Consumers will depend on digital commerce and community to mitigate changes in retail, events, healthcare, and gathering spaces. Economies will be required to shift to digital formats to account for these new audiences. Business that anticipate these shifts are preparing for them early. Businesses that fail to anticipate these shifts will continue to harm their prospects by prioritizing conventional methods. The “unforeseen change” will be seen by the digitally-native and those who think like them.

Think of that change as a wave to be caught.

Report by Web Smith | Edited by Hilary Milnes | About 2PM

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