Memo: The eCommerce Advantage Shifts

The article’s title reads, “Why e-commerce disruptors are trading like brick and mortar dinosaurs.” Our position is that for many in retail’s old guard, life finds a way.

The dinosaur comparison is thanks to a new report from The Information, which has tracked stock prices for Farfetch, 1stDibs, The RealReal, Stitch Fix, Rent the Runway, and ThredUp, and has painted a picture of a bursting bubble, declaring “e-commerce is on sale.” Each company that The Information mentioned are digital natives that debuted on the market in the past two years and have since seen their valuations tumble and their stock prices fall. After a pandemic boom for some, many have seen growth taper off. Now, some of them are looking for the exit by seeking acquisition partners. For others, consolidation has already begun. South Korea’s Naver acquired Poshmark, which just went public in 2021. Here is a summary from The Information:

Several members of the group, including ThredUp, Poshmark, Wish and Rent the Runway, went public last year as overall market valuations were peaking. Underlying their public debuts was investor confidence that the pandemic had triggered a permanent shift in shopper behavior toward buying more online. But the timing was off. As lockdowns have eased, growth in online shopping has slowed sharply—to just 6.8% year over year in the first two quarters of this year, from the 30%-plus growth rates seen starting in the second quarter of 2020, according to the U.S. Census Bureau. Even in 2019, before Covid-19, growth rates hovered between 12% and 18%.

The advantage once maintained by retail’s newer generation of online marketplaces has subsided, at least temporarily. Many of those retailers enjoyed high-profile IPOs in the past two years (or private market, secondary rounds). Now, they are struggling to keep pace in an economy that has begun to favor brick-and-mortar retailers like Target and Walmart. In some ways, the dinosaurs are out-innovating the innovators – they are disrupting the disruptors.

It’s not just Target and Walmart. Department store-era retailers, once known for foot traffic and mall real estate, have invested heavily in e-commerce operations. This includes Macy’s, Saks, and Kohl’s. But even with improved omnichannel operations by fashion-based, traditional retailers, the inventory glut has influenced the depth of discounts and the frequency of pricing promotions seen at many of these store. These inventory overruns aren’t universal, however, for retailers that also sell appliances and consumer packaged goods, inventory is more stable than what is seen in fashion retail. It is the full marketplace that is in the better position to survive the up hill climb that seems to be ahead. In Inventory Changes, I explained:

To dig out from under the excess inventory, promotions and long-term storage of excess inventory will likely be necessary for affected retailers. This is a tough pill to swallow for big box companies. Target and Walmart can offset less in-demand sales items with consistently high performing categories like grocery and household necessities.

Emerging online marketplaces were supposed to change the way people shopped forever. I believe that they taught consumers how to interact with retailers online just as the dinosaurs became successful online retailers themselves. In a way, the new generation is at the disadvantage. Single-channel retail is nearing its extinction point for many.

It’s a turn for the worse for the modern retailers who had hoped that by doing things differently than their department store predecessors, they would write new rules to retail and tap into a newfound customer energy at the same time. But technology is expensive, especially when you factor in higher-than-average customer acquisition costs, logistics shortfalls, razor thin product margins. Profitability for these companies has been difficult to maintain. Now, they are finding themselves in a position that may appear like the dinosaurs they tried to disrupt.

Going into a volatile holiday shopping season, the “dinosaurs” are better positioned to earn more market share than the digitally-natives. Shoppers have inflation and budgetary restrictions front of mind. Traditional retailers are dealing with an inventory glut that is going to lead to deep discounts and frequent promotions. These are magnets to consumers who prefer the best deal over ease of purchase during times of distress. It’s a sign of the times for the retail industry that’s gone back to basics: availability, promotions and accessibility.

But when the inventory glut is resolved, the retailers that have invested the most in their eCommerce capabilities are positioned to succeed because omnichannel availability provides the best customer experience. Additionally, these retailers are drawing in digitally native brands who need to unlock wholesale revenue. Layer in promotions on top of that. In an early October report, we looked at how Walmart was readying its inventory levels for the upcoming holiday season, in part by cracking down on brands who couldn’t meet fulfillment requirements:

The brands have become more replaceable while the retailers have become more selective. Walmart, with its vast store network and supply chain capabilities, could become the dominant marketplace this holiday season and beyond. Brands are recognizing that they need the mass retailer to survive.

This year has reinforced Target, Walmart and Amazon’s positions as industry leaders, as already proven by DTC brands hearty embrace. Now, the modern retailers are finding themselves on the backside in the industry that they set out to disrupt. These eCommerce marketplace retailers will recover and / or live on in some form, especially as the economy recovers and consumers are less incentivized to shop promotions at retailers with inventory gluts. But Target and Walmart have become as critical to the online retail engine as Amazon appears to be. Very few predicted that in 2009 when this “DTC” era began, this present time can feel like an ice age to those who were reliant on simpler times and greener pastures.

By Web Smith | Edited by Hilary Milnes with art by Alex Remy and Christina Williams

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