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

Memo: The DoorDash OS

DoorDash has an opportunity to power an evolved, local commerce economy where urbanization has taken a back seat to remote work, the homestead is more relevant than ever before, and the “arming of the rebels” has yet to capture the imagination of Main Street businesses. This is bigger than late night takeout: Food delivery is to DoorDash what book sales were to Amazon.

A singular failure has shaped my understanding of commerce and how digital would influence physical retail. In 2014, eCommerce accounted for just 7.7% of US retail sales, the investment into urbanization had a positive trajectory, and apps like Postmates and DoorDash had begun to eat market share of incumbents like Grubhub. With that backdrop, a close friend and I pieced together a mobile application with a simple marketplace function. It featured an open chat room to guide users through recommendations, sales, and checkout.

The experiment had one goal: To understand if eCommerce could improve the viability of local, analog retail businesses. To do so, we targeted hard goods (not food products). We built atop Uber’s then-available pricing API and enabled independent retailers to market their products within our app and ship products as far as 20 miles outside of the city. Uber’s drivers delivered the goods to their homes.

To accomplish this, we indexed the goods of independent retailers and tracked inventory with a relatively light integration that relied on imported Quickbooks data. And then each product’s corresponding image was pulled into the app through .JSON web calls. Given that the vast majority of featured stores were within a mile of us, contractors were tasked with acquiring the goods and bringing them to a central location to stage for delivery by Uber. The last shipment left by the close of business and inventory was painstakingly updated upon the completion of each business day. In just under a year, the app sold $627,000 in top line sales at an average margin of around 17%.

That’s where the positives ended. The price of doing business with Uber was costly and the fleet of drivers was subpar, causing a number of customer service issues. The demand for hard goods was outpaced by the demand for perishable goods (food). And the area’s physical retail scene was a draw, so most consumers opted to walk, drive, or bike over instead. The app eventually amounted to an expensive experiment in between jobs.

The Difference: Now and Then

The experiment wasn’t a complete failure, however. By the time that we shut the application down, we’d developed a better understanding of the intersections between real estate, retail, technology, and the limitations of small businesses. I also learned an important lesson about eCommerce adoption: 2014 was far too early. Today, the former 7.7% share of retail (in 2014) sales has tripled. Nearly one of every four dollars is spent online in 2020.

Given that our focus was on non-coastal markets and second-tier cities, the marketplace helped us understand the needs of retailers outside of the country’s main retail hubs: Los Angeles, New York, San Francisco, and so on. The app experience was nowhere near perfect, but the experiment was valuable. I went on to build DTC brands, founding 2PM Inc just a year later. That friend of mine became the founder of Loop Returns.

Fast forward and many of the retailers who once considered eCommerce a distraction have now invested heavily into building online retail as a primary channel. Consider Josh Quinn of Ohio’s Tiger Tree, a multi-million dollar independent retailer and former partner of our app experiment. Quinn recently shuttered Tiger Tree’s doors to pursue an eCommerce-first strategy. He said:

It’s an interesting example of just how fast retail has accelerated in six years. To say I don’t think my customers would have seen the utility in an on-demand delivery solution seems laughable now. But we could have been better positioned. We did so well as brick-and-mortar stores that it kept us from investing the way we should have. It hurts to think of where we’d be if we would have put the time into eCommerce back then.

Quinn is representative of a large swath of retailers who relied upon a brick-and-mortar business before the pandemic. But he won’t make the mistake again. He added: “We are in the middle of local online retail being a thing. Almost half of our eCommerce orders go to the Columbus, Ohio area.”

This is the new economy that DoorDash is primed to capture. The permanence of remote work culture and the restrictions placed on urban dining and nightlife has spawned three separate trends. There is a shift from major cities to smaller ones, urban flight to suburban “cities”, and housing to the all-encompassing homestead.

Sanitized urbanization removes the perceived risks of living in urban areas while adding the value of – what’s often – upgraded infrastructure, improved schools, and lower tax bases. [2PM, 1]

As remote work and distance learning continues to become more commonplace, entertainment, commerce, and utility will shift from physical to digital as well. There has been an extraordinary shift from thinking along the lines of office perks to thinking about optimizing the home. Consider Wayfair’s sudden shift of fortune. In 2017, the furniture reseller traded at a $5 billion market cap. Today it trades at nearly $26 billion, a growth emblematic of a boom in redesigning the home for modern needs: remote work, leisure, and comfort.

If this is any indication of how small business owners will react to these macroeconomic changes, we can expect second and third-order effects in the housing market to continue to materialize.

Inside The Home

Like Postmates, which has long tested hard goods marketplace capabilities, DoorDash’s opportunity lies with supporting the businesses of independent retailers by providing new opportunity for them. Not just by delivering the goods but by fostering a marketplace that expands their reach to wider, local audiences. By streamlining retailers as sources of goods and developing new initiatives to reach customers, their marketplace partners will be more inclined to view DoorDash as an effective customer acquisition engine.

A possible future as DoorDash embraces the shift to the homestead (and innovative demand-gen partnerships).

Success or failure will depend on growth beyond food delivery as the core model. This means that the development of efficient customer acquisition, fair and incentivized pay for its last-mile workforce, and paths to hyper growth in gross merchandising volume are key to the company’s long term viability. Consider this excerpt from a recent analysis on DoorDash:

That inability to change the business model is also likely to keep DoorDash from making any meaningful profit. Grubhub, the only US food delivery service on the stock market, recently complained that food delivery is not enough to build a sustainable and profitable business. [2]

By instituting a local marketplace model, DoorDash would encourage retailers like Quinn who find value in reaching more customers in their cities without relying upon the postal service for delivery. Quinn cited his frustration with existing local shipping models:

Independent retailers like us are facing something of a crisis with USPS shipments being delayed. Not that I am blaming them – I understand the strains on their system.

Amazon Prime has popularized next day and same day delivery. Services like HBO Max have begun to shift resources away from physical theaters and towards home-streaming models. And founded a year before our local commerce experiment, DoorDash is now trading at $55.6 billion. Like Jeff Bezos former marketplace of books, Tony Xu’s marketplace of local retailers is in its infancy. While intended for restaurants, the technology could easily be applied to retailers. And while DoorDash touts partnerships with large and sophisticated companies (Macy’s, etc), the delivery app’s real opportunity lies with locally-owned retailers who’d rely on DoorDash for the technical expertise and the audience to grow their businesses – a model that not even Shopify could compete with right now.

In its short existence, DoorDash has evolved well beyond just  delivery logistics, adding services like Storefront, which enables merchants to set up digital ordering directly from their native channels. [3]

We look at apps like DoorDash and see food delivery. Rather, view them as the last-mile enabler for businesses who are leaning into localized eCommerce. Food delivery, alone, will not justify the $50+ billion market cap but a city-by-city network of local retailers may. This is the eCommerce era now. Like every other retailer, DoorDash must learn to create new demand and service it with creative solutions. I suspect that the company’s reach will soon extend beyond your kitchen or your mobile phones. In the near future, the app may function more like a retail operating system.

By Web Smith | Editor: Hilary Milnes | Art: Alex Remy | About 2PM