Digital-first · e-commerce · Retail

5 big myths and misunderstandings about e-commerce

Much of what gets written about the retail industry centers on the notion that e-commerce is changing everything and that traditional retailers and malls will soon be obliterated in a tsunami of disruption. Alas quite a bit of this is just flat out wrong or widely misunderstood.

The seismic forces being felt throughout most sectors of retail are undeniable. While the overall retail apocalypse narrative is nonsense, a harsh reckoning is befalling those retailers that failed to act in the face of significant change and shifting demographics. The ridiculous overbuilding of retail space during the past decade or so is finally being corrected. And, to be sure, the rapid growth of e-commerce—and Amazon in particular—continues to transform consumer behavior and wreak havoc with many legacy brands’ boring value propositions and challenged underlying economics.

It’s also true that a lot of commonly held beliefs—and what is put forth as “futurist” prognostication—ranges somewhere between rank hyperbole and outright distortion. So here’s my take on the five big things many often get wrong about e-commerce in particular—and the impact of digital disruption more broadly.

E-commerce will soon represent 50% of all retail

Forever is a long time, so it’s impossible to say definitively that e-commerce will never represent half of all industry sales. But I’m absolutely willing to take “the under” from those that are predicting it will get to 50% within the next decade. That’s not to say that certain categories won’t make it—books and music are already there. Certain retailers might grow to (or maintain) that penetration level as well; the most obvious being brands that started as pure-plays but are rapidly expanding into brick and mortar (e.g. Warby Parker, Indochino). Well differentiated brands with a strong legacy in direct-to-consumer that wisely invested ahead of the curve and that operate relatively few physical stores (e.g. Williams-Sonoma, Neiman Marcus) can get or stay there as well.

The reason it won’t happen is two-fold. First, you don’t have to be a mathematician to see that we are not on a glide-path to make it. To achieve 50% share would require a far different growth rate than current trends suggest. Rates are moderating, not accelerating. Indeed there remain large categories with comparatively low e-commerce penetration (home furnishings, grocery, home improvement, et al) but there are inherently sound reasons for this, mostly tied to the experiential nature of the vast majority of these purchases. When the customer is inclined to see, touch and feel the product, brick and mortar is likely to stay overwhelmingly favored. This is a prime (heh, heh) reason why Amazon bought Whole Foods, why Wayfair is struggling and why so many once online only brands find themselves rapidly (and rather ironically) opening stores.

It’s all about new disruptive models

With all the hype surrounding the brands the cool kids like—and the VCs seem to enjoy pouring money into with reckless abandon—you might think they are big contributors to e-commerce’s massive growth. Turns out, not so much. First of all, when we say e-commerce we mostly mean Amazon, as it accounts for nearly half the entire sector. But here are the leaders that come right behind them, in rank order: No. 2 Walmart, No. 3 Apple, No. 4 Home Depot, No. 5 Best Buy, No. 6 Macy’s, No. 7 Target, No. 8 Kohl’s, No. 9 Costco. No. 10 is Wayfair, which I doubt will stay much longer in the top ten, but that’s another story.

So despite the bright and shiny nature of the latest brand to “disrupt” the sock, lingerie or luggage market, when you add them all up they don’t account for all that much market share. Instead the $100 million plus e-commerce club is filled with old school brands like Lowe’s, Staples, Nordstrom, Neiman Marcus and (shudder) Sears.

Online shopping is easy to scale

Among the key reasons that investor dollars flooded into pure-play e-commerce over the past decade was the belief that these new and innovative brands could scale quickly and efficiently. While it’s turned out that the technology is generally quite scalable—and that impressive numbers of customers could be acquired far faster than a typical brick and mortar roll-out strategy—the path for many, if not most, has been far more difficult than anticipated. Much of this can be traced back to the ridiculously high (and generally unsustainable) costs of customer acquisition, as well as what often turn out to be expensive and/or complicated issues stemming from the high rate of customer product returns. Pure-play e-commerce can be extremely capital efficient. Until it’s not. See One Kings Lane, Gilt.com and a growing list of pure-play flameouts.

Online shopping is more profitable than brick & mortar

Amazon has barely made any money in retail in its more than 20 year history. In its most recent earning quarter report (which delivered record profits), Amazon’s margins remained below industry averages (fun fact: Apple made more money in its recent quarter than Amazon has made in its entire history, and that includes AWS). When you consider that Amazon represents nearly half of all e-commerce, and the majority of hyper-growth digitally-native brands (Wayfair, Bonobos, et al) lose money, it’s hard to believe the sector is more profitable. For traditional brick-and-mortar-dominant retailers with fast growing e-commerce businesses we can reasonably infer from publicly available information that for many the growth of e-commerce is dilutive to earnings. It’s not surprising, particularly for low average ticket online purchases, where order fulfillment costs eat up a large percentage of margins.

Many have criticized brands like Walmart, Pier 1 and H&M for being slow to develop their online capabilities. And they did get some things wrong, mostly around not understanding the role of digital in the overall customer journey irrespective of the purchase channel. But it’s also likely true they were slow because they knew that given the characteristics of their product lines they were signing up for deteriorating margins.

The focus on transaction channel is important

Retail industry folks like to talk about channels. There is little evidence that customers care. Wall Street likes to know how fast e-commerce is growing and what’s going on with same-store sales. The fact is those channel-centric metrics are increasingly useless. Many retail brands are organized by channel, allocate inventory by channel and analyze customer behavior exclusively by channel. Many still have separate marketing budgets, performance indicators and incentive schemes based upon purchase channel. In almost all cases this is not only wrong but dangerously misleading as it encourages behavior that is not customer-centric, while undermining overall brand objectives.

While there are customers who are literally online-only shoppers, the vast majority of customers are regularly active in digital and physical channels. They think brand first and channel second (if at all). To them it’s all just shopping—and for brands it should be seen as all just commerce. One brand, many channels. Digital influences brick and mortar and vice versa. In fact, both Deloitte and Forrester studies indicate that digitally-influenced physical store revenues are far bigger than e-commerce sales, suggesting anyone who attributes all digital spending to online channel revenues is likely to widely miss the mark on their investment strategies. Except for the few brands that remain online only (which is a rapidly dwindling number), the focus on e-commerce versus brick and mortar is fast becoming a distinction without a difference.

Clearly shopping behavior continues to evolve rapidly. Short-term strategies that look to be burning cash today may turn out to be wildly profitable tomorrow. Amazon obviously has the potential to improve profitability if they choose to focus on margins over growth. A shakeout of profit proof business models is likely in its early days. Much more of this history is yet to be written.

Nevertheless, when we advance click-bait worthy stories as real analysis, we do a disservice. When we broad brush industry trends, rather than dig deep into the idiosyncrasies and nuance of particular sectors and categories, we are likely to miss what’s really going on. And understanding the dynamics of a complicated, ever-changing industry is hard enough to do without getting confused or distracted by the hype cycle.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.  For more on my speaking and workshops go here.

Being Remarkable · Digital-first · Omni-channel · Retail

A baker’s dozen of provocative retail predictions for 2018

2017 was one of the most transformative years for the retail industry that I can remember. 2018 is likely to be just as wild and woolly, albeit in somewhat different ways. Here’s my attempt to go beyond the obvious and go out on the limb just a bit.

  1. Physical retail isn’t dead. Boring retail is. A lot of stores closed in 2017. Often forgotten is that a lot opened as well. Many stores will close in 2018. Many will open as well. By this time next year roughly 90% of all retail will still be done in physical stores, so please can we shut up already about the “retail apocalypse.” The train left the station years ago on products that could be better delivered digitally. What’s happened most recently has everything to do with a long over-due correction of overbuilding and the collapse of irrelevant, unremarkable retail. The seismic changes in retail have laid waste to the mediocre and those that have been treading water in a sea of sameness. Great retail brands (Apple, Costco, Ulta, Sephora, TJX, etc.) continue to thrive, despite their overwhelming reliance on brick & mortar stores. Ignore the nonsense. Eschew the boring. Chase remarkable.
  2. Consolidation accelerates. In many aspects of today’s retail world, scale is more important than ever and this will continue to drive a robust pace of mergers and acquisitions. In some cases, capacity must come out of the market to create any chance for decent profits to return. The department store space is a great example. Moreover, large, well capitalized companies will take advantage of asset “fire sales” or technology plays to complement their skills and accelerate their growth.
  3. Honey, I shrunk the store. Small is the new black in many ways. Many chains will continue to right-size their store fleets to better align with future demand. Others will reformat or relocate to smaller footprints to better address the role of online shopping. We can also expect to see more small format stores as a way to cost effectively extend customer reach and further penetrate key customer segments.
  4. The difference between buying and shopping takes center stage. Buying is task-oriented, more chore than cherished, and is typically focused on seeking out great assortments, the lowest price and maximum convenience. This is where e-commerce has made the greatest inroads. Increasingly, Amazon dominates buying. Shopping is different. It’s experiential, it’s social, tactile–and the role of physical stores is often paramount. The trouble is when retail brands don’t understand the distinction and invest their energies trying to out-Amazon Amazon in a race to the bottom. And, as Seth reminds us, the problem with the race to the bottom is you might win. Or worse, finish second.
  5. Amazon doubles down on brick & mortar. For Amazon to continue it’s hyper-growth–and eventually make some decent profits–it needs to go deeper into the world of shopping vs. buying (see above). And this means greater physical store presence, particularly in some key categories like apparel and home. In addition to opening its own stores I expect at least one major acquisition of a significant “traditional” retail brand.
  6. Private brands and monobrands shine. A key part of winning in the age of Amazon and digital disruption is finding ways to amplify points of differentiation. Most often this can be done through product and experience. With the over-distribution of many national brands and the ease of price comparison, more and more smart retailers are looking for ways to differentiate on unique product. For some–including Amazon–deepening their commitment to private brands can be a source of competitive advantage. Well positioned monobrand retailers like Uniqlo, H&M, Primark and Warby Parker also will continue to steal share from less compelling multi-brand stores.
  7. Digital and analog learn to dance. As much attention as e-commerce gets it turns out digital channels’ influence on brick & mortar shopping is far more important for most brands. In fact, many retailers report that more that 60-75% of their physical store sales are influenced by a digital channel, hence the rise of the term “digital-first” retail. Side note: anyone who has adopted this term in the last 12 months has simply informed us that they were paying no attention to what has been going on in retail for nearly a decade. Regardless, clearly in-store technology must evolve to support this rapidly evolving world. Yet as much as technology can enhance the shopping experience the role of an actual human being in making the customer experience intensely relevant and remarkable should not be forgotten. Many retailers would be wise to see sales associates as assets to invest in, not expenses to be optimized.
  8. The great bifurcation widens. And it’s death in the middle. It’s been true for some time that the future of retail will not be evenly distributedWhat became abundantly clear in 2017 is how different the results have been between the industry’s have’s and have not’s. At one end of the spectrum retailers with a strong pricing story, from dollar stores to off-price to Costco and Walmart, did well. At the other end of the spectrum, many luxury brands and well focused specialty retailers continued to thrive. Meanwhile the fortunes of Sears, Macys, JC Penney and others who failed to get out of the undifferentiated and relentlessly boring middle diverged markedly. This will end badly.
  9. Omnichannel is dead. Digital-first, harmonized retail rules. Too many retailers chased being everywhere and ended up being nowhere. The search for ubiquity led to disjointed, poorly prioritized efforts that fattened the wallets of consultants but often did little to create what most customers want and value. The point is not to be everywhere, but to be relevant and remarkable where it matters, to understand the leverage in the customer journey and to root out the friction and amplify those elements of the experience that make the most difference. Most customer journeys will start in a digital channel (and more and more this means on a mobile device) and the challenge is to make all the potentially disparate elements of the shopping experience sing together as a harmonious whole.
  10. Pure plays say “buh-bye.” With rare exception, so-called “digitally native” brands were always a bad idea. Despite venture capitalists initial enthusiasm–and Walmart’s wet kiss acquisitions–only a handful of pure-play models had any chance to scale profitably. And many arrogantly declared they’d never open stores (I’m looking at you Bonobos and Everlane) when anyone who understood the high cost of returns and customer acquisition saw a physical store strategy (or bankruptcy) as inevitable. We’ve already seen some high profile blowups and more are surely on the way (Wayfair? Every meal delivery company?). This year the shakeout will continue and it will become clear that for the brands that survive most of their future growth will be driven by brick & mortar stores not e-commerce.
  11. The returns problem is ready for its close up. Product returns were the bane of direct-to-consumer brands well before e-commerce was a thing. Lands’ End, Victoria’s Secret, Neiman Marcus and many others regularly experienced return rates in excess of 30% from their catalog divisions. When you could actually charge for delivery this was a problem, but not necessarily the achilles heel. The near ubiquity of free returns & exchanges may be a consumer bonanza, but it drives a lot of expensive behavior and makes much of e-commerce unprofitable. Customers regularly order multiple colors and/or sizes of the same item hoping that one of them will fit or be to their taste. The retailer then eats the expense of some or all of the items coming back, including handling costs and often additional merchandise markdowns (which can be especially ugly for seasonal or fashion items). The disproportionate growth of e-commerce means outsized growth and expense for retailers. It’s not sustainable. Consider yourself warned.
  12. “Cool” technology underwhelms. There is plenty of incredibly useful technology that continues to transform retail, notably around mobile, predictive analytics and the like. There is also a lot that ranges between gimmicky and not yet ready for prime time. Augmented and virtual reality? Wearables? IotT? Blockchain? Digital mirrors? Someday, maybe. 2018? Not so much.
  13. The search for scarcity and the quest for remarkable ramps up. As most things came to be available to just about anyone, anytime, anywhere, anyway, access to great product was no longer scarce. As various marketplaces, peer-to-peer review sites and various forms of social media made data about product quality, reliable alternatives and pricing universally available, information was no longer scarce. As various tools emerged to put the customer in charge, the retail brand’s advantages were diminished and the power of the channel started to evaporate. It’s really hard to get folks to pay for what is widely available for free. And it turns out the moat that protected a lot of brands has dried up and been paved over. Good enough no longer is. The brands that will not only survive, but actually thrive in 2018 and beyond, will deliver consistently and remarkably on things that are highly valued by customers, can be seen as scarce and can be made proprietary to that brand. It’s not easy, but frankly, more times than not, it’s the only choice.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.  

For information on keynote speaking and workshops please go here.