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Memo: The Rise of B2B eCommerce
Over the pandemic, businesses that sell supplies, tools, and parts to other businesses followed the consumer-facing market into eCommerce. The narrative for the consumer-facing retail (B2C) has been one of growth and contraction: “online retail is dead.” Amazon has struggled to regain its Bezonian footing and the arbiters of advertising saw their stock price plummet on news of lower-than-expected earnings. But what I’ve found is that growth is not
It seems that some pandemic-related shifts were permanent after all. This is one of them.
Consumers don’t normally think business-to-business retail market (B2B) as high growth or glamorous but that may change once pundits see the numbers. There’s a lot of growth ahead; it’s a trillion dollar industry that still feels “small.” The eCommerce slice is around 10% of the overall B2B market with sales due to grow 11.2% over the next year, totaling a mark above $1.6 trillion out of a total market of $16.3 trillion. According to Insider Intelligence:
Although macroeconomic conditions remain challenging, we expect B2B eCommerce sales to outperform the overall B2B market. That said, B2B eCommerce still plays a limited role in B2B transactions, and the room for growth is enormous.
Insider also noted that “the GDP of the entire US economy was $24.882 trillion as of Q2 2022, per the Bureau of Economic Analysis (BEA).” An eighth of the U.S. economy is B2B sales and online retail’s slice of that industry is 10% and growing. This seems like an industry that is long-overdue for the spotlight.
A recent report from Digital Commerce 360 breaks down the rise of the B2B marketplace, which it says is the fastest-growing B2B eCommerce channel over the past three years. The category has seen sales increase 5.3x between 2020 to 2022. Digital Commerce 360, whose tracking of 400 B2B marketplaces was less than 100 retailers tracked just three years ago, says this class of marketplace is expected to reach $130 billion in sales this year. That’s a growth that’s 7.2x faster than the B2B eCommerce segment of the market. And while still a small fraction of the overall $1.89 trillion B2B eCommerce sales market, that’s an increase to 6.9% of all sales in 2022 (up from 1.8% of sales in 2020).
Sales have risen. But as mentioned, competition has also increased. Digital Commerce 360 is now tracking 400 commercial and vertical marketplaces across 18 industries. The biggest in terms of funding in the last year, which tells us the industries most is transportation and logistics ($7.05 billion in funding), followed by manufacturing and industrials ($2.35 billion), labor ($2.31 billion), retail ($1.4 billion) and agriculture ($1.24 billion).
The pandemic was the catalyst behind the mass migration from physical-only to omnichannel retail sales. Buyers pivoted their businesses to source online at the height of Covid-19, which limited in-person transactions. There, they found marketplaces had more selection, making this a meaningful, long-term shift. From the report:
B2B buyers, like consumers, turned to websites to make purchases when the COVID-19 pandemic struck in early 2020, making face-to-face transactions impossible in many cases. When Digital Commerce 360 asked business buyers in March 2022 how the pandemic changed their buying behavior, the top response, selected by 52%, was that they went to “ecommerce sites as they have more selection.”
According to the report, 57% of buyers say they are purchasing more from marketplaces during the pandemic, while 35% say they do at least half of their shopping on marketplaces.
Marketplaces offer more choice to consumers and buyers in one place and an efficient means to shop for multiple categories of supplies with one single checkout workflow. This isn’t not novel but to an industry that was somewhat behind the technical curve prior to 2020, this is an innovation. B2B’s greatest innovation is that its target customers tend to have money and few need digital advertising funnels to help them close the sale.
It’s likely that we will begin to see more consumer brands using B2B marketplaces as a new sales channel. Don’t be surprised if, in just a few years, B2B is viewed as a strategic necessity for brands who have exhausted other channels to acquire customers. B2B has found itself at the center of a strategic shift for brands and sellers at the same time that customers and buyers are becoming more price sensitive and efficiency-conscious.
Of course, we cannot mention eCommerce without raising the issue of Amazon’s dominance. Does Amazon have total market domination in this sector, too? By the numbers, yes. Amazon Business is the biggest B2B marketplace, with $31.4 billion in GMV compared to $4.4 billion across the next top 10 marketplaces combined.
In 2022, Bank of America Securities projects Amazon Business will post $41.5 billion in gross merchandise volume. That would be up 31.7% from a projected $31.5 billion in 2022. Based on these projections, Amazon Business singlehandedly would account for 31.9% of all B2B marketplaces sales.
Retailers are not ceding ground to Amazon without a fight. In 2022, e-commerce and digital marketing were forecast to account for most business-to-business (B2B) investments by marketers in the United States. According to a survey, more than eight out of ten professionals in companies that sell their services and products to other firms would invest in the mentioned areas. According to the survey, approximately 44 percent of B2B marketers planned to invest in e-commerce platforms and site features, along with technology infrastructure.
In addition to investments in e-commerce architecture, these investments have been joined by investments in: robust site features, digital marketing strategies, customer service streamlining, supply chain efficiencies, and more efficiency in logistics. Another key area for B2B operators is the investment in offering ease in payments processing to B2B partners.
In 2020, Hal Lawton was successfully poached from Macy’s to lead Tractor Supply as its CEO and board member. Prior to that stop, Lawton left his mark at Ebay, Home Deport, and McKinsey & Company. In a recent report by StoreBrands, Lawton’s team earned another successful quarter by implementing one of the key practices found at retail marketplaces that succeed in the consumer space. Tractor Supply’s net sales increased 8.4% YoY to $3.27 billion in Q3 after the chain’s private label accounted for a reported for a substantial percentage of the retailer’s growth.
All of this is to say, as consumer brand executives struggle to acquire customers in the world of DTC and B2B retailers struggle to properly future-proof their businesses, we’re likely to see a melding of the minds. Lawton’s move from consumer-facing to B2B may serve as the model for future hires. With Amazon breathing down the necks of B2B marketplaces, their next executive hires may become their most important. But convincing consumer brand leaders to leave for greener pastures (or red tractors) will not be as difficult as it was just two years prior.
The future of eCommerce growth will belong to the B2B marketplace retailers that modernize smartly, employ best practices, and hire well.
By Web Smith | Edited by Hilary Milnes with art by Alex Remy and Christina Williams
Memo: Webvan (Again)
There is an operative sentence in the detailed report on the instant delivery industry’s current woes: “The Gopuff founders knew little of this history.” Here is a quick recap of 1998 through 2001:
Many remember the rise and fall of first-mover Webvan. At its peak it maintained a $178.5 million run rate with close to $530 million in expenses. It offered customers the ability to have orders delivered within a 30 minute window and operated in 26 markets. In 1999, a company called Kozmo maintained a run rate of $3.5 million with a net loss of $26.3 million after raising $250 million (to include $60 million from Amazon). In both cases, it was growth that hindered Webvan and Kozmo. Webvan even contracted the construction of $1 billion-plus in warehouses prior to going out of business.
In March of 2022, 3% of Gopuff’s global workforce was let go. Another 1,500 followed in July and, according to Bloomberg, Gopuff shuttered roughly 12% of its warehouse network. After the most recent layoff 0f 250 employees, reported just four days ago, the tone changed and a critical view of Gopuff’s business model resulted.
Bloomberg’s inference is that Gopuff could go the way of Webvan and Kozmo, a complete toppling of the house of cards built by instant grocery delivery startups over the past three years.
The pandemic made it seem like not only was quick-delivery grocery possible, but that it was necessary. We entitled it The Parasite Economy. A few things have happened since that 2020 report: the pandemic concluded and inflation rose. More consumers were willing to travel to stores to offset the rising costs of food and fewer Parasite Economy workers were willing to hurriedly work for an unforgiving category of professional pursuit that may no longer cover the costs of life that it once had.
Gopuff was eyeing a $40 billion valuation as recently as January. By March, investors were selling off stakes at valuations down to $15 billion. While nothing is written in stone, it is shaping up to become just one in a long list of similar startups who have seized on the opportunity to fill the supposed need for under 30-minute convenience delivery propped up by VC funding. Competitors, some of which have come and gone, include Getir, Jokr, Gorillas, Just Eat, Fridge No More, Buyk and Food Rocket.
This one seemed best positioned to have the chance to pull ahead. Gopuff went as far as to develop a private label brand to promote profit margin. Back in March, that was still a risky bet. What was apparent then, which 2PM reported, is that one-hour-and-under delivery is a back-breaking competitive space that’s nearly impossible to make profitable. Even Amazon relies on other business mechanics to accomplish this with Whole Foods. The infrastructure needed could sink a business. This is one advantage of traditional grocery: the technology is now the commodity and the infrastructure is the competitive advantage. Most consumers will still find that they can go pick out their groceries themselves. And grocery stores have been investing in their own technology that makes them more competitive in the next-gen retail race. We wrote in March:
Whether it is for margin protection or product availability (after publishing Consumer Trends 2022, it was noted that Gopuff sources some products through Instacart to maintain stock), big grocery’s eCommerce pioneers will be the traditional companies who’ve built the technology atop their existing storefronts. This mirrors the world’s of GPG and digitally native brands.
Now, the new report from Bloomberg puts the precarious nature of this class of startups into even clearer focus. Gopuff put a spin on the GrubHub and Instacart models to make itself more efficient by opening warehouses, stocking them, hiring people to man them as well as contractors to make those speedy deliveries. The problem is that few of these models, by all accounts, can scale profitably. Valuations have fallen across the board. Many startups have gone out of business. Instacart, which saw a pandemic-era explosion, is pivoting its model to be the technology service provider for grocery chains that want to compete on that level. The deliveries aren’t its ticket to growth. Bloomberg’s report lays out the current Gopuff situation as plainly as possible.
By their own admission, the Gopuff founders never imagined this scenario. After the company burned roughly $700 million in expansion mode in 2021, in recent months it’s laid off almost 2,000 employees, withdrawn from parts of Europe, shelved grandiose plans for new categories, raised fees on customers, and halted a planned initial public offering as its valuation has plummeted. Almost 25 years after Kozmo.com’s infamous flameout, Ilishayev and Gola are scrambling to figure out if it’s still possible to crack this particular Silicon Valley obsession. Or if the billions poured into it are destined to simply gopoof.
Gopuff appears to be heading down the path laid by its delivery service ancestors. These startups label themselves as disruptors of sleepy, wonky industries that leave something to be desired for the customer. This class of real-world technology perpetuates growth thanks to venture capital, promising category domination that would reward investors and launch a new era of business backed by technology. When that promise fails to materialize, the investment dollars grow thinner and the cost is transferred to customers. Uber rides are far more expensive than they used to be. Airbnb has received a growing swell of backlash to its mounting fees as customers have begun to question the value in the service over staying at a hotel – the establishment competitor that Airbnb set out to disrupt.
There is a limit to how much people will pay for convenience, and coupled with inflation raising prices on grocery, more will begin to consider what their time is worth versus their dollar. And it’s not just inflation and economy working against Gopuff – legislation is out for it as well. We wrote in March that Gopuff was most likely to be best positioned to stand up to legislation in New York that would crack down on “dark stores” and worker safety. It circumnavigated it by making their warehouses shoppable. From a Vice report earlier this year:
And Gopuff, in an attempt to prove its storefronts are not warehouses and avoid regulatory scrutiny, have claimed its New York locations will also sell directly to walk-in customers, although the New York Post found even such “retail” locations are unmanned and have no prices listed on items.
But now, these facilities are at risk. Gopuff, which was launched to meet the needs of college students with late-night cravings but no cars (making for a relatively niche addressable market), doesn’t have the scale of a 7-Eleven or the existing infrastructure of a grocery store. When you consider all of what the company is up against, it’s difficult to imagine that the company will maintain without some good fortune and inflation shifting towards “transitory.”
The smoke is clearing, and Bloomberg details a business running on fumes, dealing with perishables gone bad and restocking shelves by relying on Instacart’s supply chain. Consider that in New York City, Gopuff’s biggest market: orders are down 27%. PYMNT’s consumer inflation sentiment report explains the issue with fewer than 20 words:
Four in five affluent consumers are cutting back their spending, and retail purchases are taking the greatest hit.
Not all pandemic-era behaviors were ever going to become long-term consumer trends. The elusive 30-minute delivery may become one of the first to go. Gopuff will need to slim its offering, establish regional and/or national long-term grocery partnerships, and do whatever else to find the margin required to survive. Gopuff does not have to follow all of Webvan or Kozmo’s footsteps.
Read the larger picture in letter no. 886.
By Web Smith | Edited by Hilary Milnes with art by Alex Remy and Christina Williams