An Open Letter: Headwinds and Hope

I am bullish on the next decade of eCommerce. Consider the history of automobile innovation and the roads needed to see the new technology thrive.

The demand for cars far outpaced the capacity of American roads. If history is any indication, upcoming innovations to a degraded and antiquated logistics infrastructure will spur more growth in the relatively nascent industry. eCommerce is overdue to correct America’s penchant for over-retail. But first, its proliferation will become public policy.

The ties between commerce, entrepreneurship, and infrastructure have always been clear. In the early 20th century, trade was hindered by poor transcontinental routing. In 1903, a Vermont doctor took the first coast-to-coast road trip across the United States, a feat of endurance at the time. During this trip, only 150 miles of road were paved. In fewer than 70 years, that 150 miles became nearly 49,000 miles of paved road. There were 4,900 automobiles in the United States in 1903. By 1956, there were 25 million cars on America’s freshly paved roads. The Federal Highway Act of 1956 accelerated road-based travel and commerce. The online retail industry is analogous to the infrastructural developments of old. 

There is good reason to be spirited if you are an operator in the direct-to-consumer industry today. Despite the supply chain crisis, there have been a record 20 companies that have gone public in the previous year. There are signs that 2022 will be an even greater breakout year for IPOs. The long-term outcome of impending changes will far outweigh the short-term discomforts currently experienced.

Yes, the near-term obstacles are substantial. November is the Super Bowl of months for the retail industry and there have never been more questions around advertising, supply chain, and shipping availability. Operators like Common Thread Collective VP of Marketing Aaron Orendorff have been pragmatic in their practical advice for upstart retailers without the war chest or market leverage to navigate the next months as they would have in previous years. Orendorff captured the spirit of 2PM’s digital supply chain essay in a recent tweet providing creative solutions to a rampant lack of SKUs:

  • personalized gift cards
  • NFTs or digital downloads
  • print on-demand merchandising
  • post-holiday incentivized gift cards (ex: worth more if purchased in the spring months)

We have never seen the trade hindrances that currently exist, though we have seen something similar some 100 years ago. Then – an international supply chain fiasco was resolved leading into the Roaring 20s of the 20th century. History doesn’t repeat but it sure does rhyme. Over the course of the 20th century, we fixed both bottlenecks (roads for the automobile and international supply chain for post-WWI America). I believe that we will resolve today’s.

In the near-term, it feels that there is no real solution to the supply chain crisis. Since the current administration announced a 24/7 operational period for the Port of Los Angeles, the number of container ships in the queue have only grown. Some reports have the numbers increasing from 56 to 77. There appears to be failure at every level: municipal, state, and federal. But it does feel like private and public companies are beginning to change public policy.

Ryan Petersen on Twitter: “In the midst of the greatest crisis of the container shipping era the local governments in California have responded with a massive tax on the victims of that crisis, American businesses. Those businesses will need to pass through the costs to you, the consumers. / Twitter”

In the midst of the greatest crisis of the container shipping era the local governments in California have responded with a massive tax on the victims of that crisis, American businesses. Those businesses will need to pass through the costs to you, the consumers.

Secretary of Transportation Pete Buttigieg recently commented on the second and third order effects of this persisting shortfall of the logistics labor force:

Look, there are so many things that are still happening in our economy — distortions, disruptions, things in our supply chain that are affecting prices that are clearly a direct consequence of the pandemic.

Yes, we are beginning to see tangible effects of this supply chain catastrophe. The GMV deceleration is astounding and not even the world’s finest retailers are immune. No, it’s not like Amazon to miss on revenue but supply chain disruptions and a labor shortage have led to a disappointing quarter. Third quarter revenue ($110.8 billion) came below expectations of $111.6 billion, while profits of $3.2 billion were down from $6.3 billion last year, and also under expectations. Where Amazon goes, other marketplaces follow.

Amazon is not immune to the broader shocks reverberating throughout the retail industry – if anything, its volume makes it a lightning rod. Costs are on the rise throughout the supply chain and more investments have been put into personnel costs and incentives. That’s happening at Amazon on a massive scale, and if it’s hurting its business, other retailers should expect to feel a similar pain.

The company’s year-over-year growth rate lands it in the middle of the herd in comparison to faster risers, Shopify and Walmart eCommerce. But even Shopify is feeling the heat. Tobi Lutke spoke to analysts on Shopify’s third-quarter earnings call:

The challenges are of course real. There are pressures in the supply chain. There are increasing logistics costs and things like this. Inflation is harder for us to judge. There are probably some inflationary things going on. We have no idea if they are shorter or long term.

Consider the following anecdote. America currently boasts an inflated 23.5 square feet of retail real estate per capita. In comparison, China, the world’s leader in online retail has just 2.8 square feet per capita. China passed the United States as the No. 1 retail market in late 2019 and a 40+% penetration rate as a % of retail. It’s no secret that America’s per capita physical retail figures are beginning to fall, it’s long been my belief that eCommerce market share will rise in its place.

In years past, an ailing eCommerce company would not have been cause for government intervention or bipartisan solution. However over the previous five years, the eCommerce industry has become essential to the lives of many Americans. More importantly, it has become an all-important asset to commercial real estate brokers looking to replace dying retail with fresh growth. And as suburban strip malls and aging retail developments pivot to warehousing and logistics hubs, the growth of this industry resembles an inflection point that is reminiscent of the shift from horse and buggy to automobiles in the early 20th century. It’s a loose parallel that gives me a bit of comfort.

We paved tens of thousands of miles of roads to aid in interstate trade, tourism, and a new retail economy. It redefined the 20th century. I am confident that governments at every level will coalesce around the realization that eCommerce infrastructure is critical to how we will live in the 21st century. Normally, national ideals turn into political action in years or decades. This current supply chain crisis will accelerate the solution to it.

We must begin viewing investments into our eCommerce infrastructure no differently than our predecessors viewed their investments into roads, bridges, and tunnels. The rest of the digital and physical economies will depend on that infrastructure: databases, financial technology, warehousing, logistics, privacy systems, and trust. Each are hallmarks of the eCommerce industry, but rarely do we consider how they can impact industries that have long been without these norms. [2PM, March 2021]

Whether the impending infrastructural fixes to ports, departing roads, and the labor force is addressed through public channels, private channels, or a joint effort by both: this will become the post-pandemic economic issue of this decade. The eCommerce industry, its many brands, technologies, and service-based companies will become the beneficiaries of these changes.

In the 20th century, we built roads to move people from state to state and city to suburb. In this decade, we will find highly efficient solutions to source, make, ship, and receive the goods made by the people that those 20th century roads served.

By Web Smith 

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