Digital · e-commerce

Walmart’s E-commerce Strategy: Pure Genius Or Venture Capitalist Bailout Fund?

Some believe Walmart should be pilloried for its laggard status in e-commerce. Many of these same folks are now cheering the company’s decision to put all e-commerce under internet wunderkind Mark Lore, as well as its new aggressive strategy to acquire online brands (Jet, ModCloth, ShoeBuy, MooseJaw and–apparently any minute–Bonobos). At last, they say, the company is serious about taking on Amazon.

The contrarian view is that Walmart was right to go slow in online shopping because of how hard it is to make money, and that encouraging too much volume to shift from physical to digital channels would de-leverage brick & mortar store economics unnecessarily. Moreover, spending billions to acquire brands that seem to have little prospect of ever being cash positive may appease Wall Street, but it is throwing good money after bad. More than a few folks have also intimated that Walmart is mostly bidding against itself in these deals as the “smart money” now sees how crazy many so-called digitally-native brand valuations have become.

I tend to side with the latter camp. And, full disclosure, I’ve never understood how Jet.com could ever make any real money. I’ve also been on record for some time in my view that much of e-commerce is profit proof and that most digitally-native brands will never turn profitable. Of course, the jury is still out on most of this, but the collapse of the flash-sales market and recent big write-downs of some high-fliers should give investors pause and encourage them to see past the hype and to dig deeper.

Either way, there are a few important things to consider as Walmart’s strategy unfolds:

  • Shopping behavior is morphing dramatically. While e-commerce remains small to the total, it is growing much faster than physical store shopping. More importantly, most shopping trips start online. Any retailer that fails to have a strong digital presence and does not offer a well integrated shopping experience will be at a distinct competitive disadvantage. Walmart, like every other retailer, needs to respond to this trend aggressively even if the marginal economics aren’t always so favorable.
  • A digital-first mindset is critical. Here is where most “traditional’ brands get stuck. When a culture is rooted in the old way of doing business and holds on to product-centric thinking and siloed organizational structures, much needed innovation is thwarted and vast numbers of opportunities are missed. Arguably, the greatest value from Walmart’s new acquisition strategy is that they are injecting a new mindset into the organization and jump-starting a cultural transformation that can pay vast dividends.
  • Demographics are destiny. The core Walmart model is rapidly maturing. Walmart has never done well with more affluent consumers and they are likely not doing particularly well with acquiring increasingly important Millennial customers. One way or another, to sustain growth Walmart needs to figure this out and scale it quickly.
  • Organic growth is hard and time is not our friend. Most large companies struggle to move the needle on growth in any material way through their own internal efforts. If anything, the pace of change is accelerating. Clearly, a smart acquisition strategy is one way to address both of these challenges.
  • E-commerce valuations are mostly irrational. I have consulted to multiple investment firms and conducted due diligence on quite a few e-commerce deals–including one of the brands that Walmart acquired. In every case the prices that were being discussed at the time either proved to be ridiculously high (as evidenced by subsequent write-downs) or the company could not present a compelling roadmap to profitability. Clearly there are, and will continue to be, exceptions. But irrationality does not last forever. Bubbles eventually burst.

As skeptical as I am, Walmart needs to do something big and bold. Minimally, their culture will get shaken up, likely in a very good way. Managing a portfolio of innovative brands should give them plenty of useful learning. And, in the scheme of things, a poor ROI on a few billions dollars will hardly bring them to their knees.

Yet mostly I am struck by the words of a venture capitalist who has been struggling mightily with how he was going to salvage a multi-million dollar investment in a “disruptive” online brand that has garnered gobs of good PR but is burning through cash with no end in sight.

As he reflected on Walmart’s most recently announced acquisition he told me this: “Now I wake up every day and thank God for companies like Walmart.”

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

Customer Growth Strategy · Digital · Omni-channel · Retail

Does e-commerce suck?

Well it certainly isn’t bad for consumers. In fact, it’s been a bonanza.

The advent and enormous growth of e-commerce has dramatically expanded the availability of products, making nearly anything in the world readily accessible, 24/7. Product and pricing information that was previously scarce and unreliable is now easily obtainable. Prices are down, in many cases, dramatically. Digital tools and technologies have ushered in a new era of innovation making shopping far more convenient, easy and personalized.

For retail brands and investors the picture is much less clear and increasingly bleak. The fact is e-commerce is mostly unprofitable–and that’s not about to change anytime soon.

Amazon, which is both far bigger than any other retailer’s web business and growing faster than the overall channel, has amassed huge cumulative losses. The high cost of direct-to-consumer fulfillment and so-called omni-channel integration has made virtually every established retailer’s e-commerce business a major cash drain. And more and more, it’s becoming clear that most of the “disruptive” venture capital funded pure-plays are ticking time bombs. Quite a few major write-downs have already occurred (e.g. Trunk Club, Nasty Gal and just about every flash-sales business) and more are surely on the way (I’m looking at you Jet.com and Dollar Shave Club).

Investors have been throwing money at business models with no chance of ever making money for years. Analysts and pundits regularly excoriate traditional brands that are slow to “invest” tens of millions of dollars in all things digital and omni-channel while spewing nonsense about physical stores going away. Much of this is incredibly misguided.

It’s time for everyone to be more clearheaded and, dare I say, responsible.

Industry analysts and the retail press need to stop with the breathless pronouncements about the demise of physical stores. They need to back off the notion that retailers can cost cut their way to prosperity. They also need to quit labeling disruptive businesses as “successful” merely based upon revenues and rapid growth and take the time to really understand the economics of e-commerce and omni-channel (hint: it’s mostly about supply chain and customer acquisition costs).

More established retailers need to stop chasing all things omni-channel and prioritize investments based upon consumer relevance, long-term competitive advantage and ROI. They also need to realize that if they feel the urge to close a lot of stores or drastically cut expenses they are probably working on the wrong problem.

Venture capital investors need to start caring more about building a business based upon fundamentals, not just pricing everyone else out of the market and/or hoping that some idiot big corporation will come along and write a huge check. Also, have we forgotten that selling at a loss and making it up on volume has never been a viable strategy?

Of course, by far the single biggest thing that would restore an element of sanity to the overall market would be if Amazon were to decide to not treat most of their e-commerce business as a loss leader. Sadly, that doesn’t seem likely to happen anytime soon.

So if you are a consumer, enjoy the ride and the subsidies.

If you are retailer, yeah, that definitely sucks.

 

Customer experience · Digital · Omni-channel · Retail

Pure play e-commerce’s fantastic (and unsustainable) consumer wealth transfer

“Retail disruption” has been a popular buzz phrase for several years now. In fact, most of the retail brands that have received out-sized mentions in the business press–and commanded the adoring attention of industry conference attendees–for the past 5 years or so are somehow or other leveraging digital innovation to fundamentally re-work the consumer experience, gobble up market share and attract truckloads of venture capital.

Amidst this transformative reshaping of the retail landscape three things are clear:

  • Consumers have benefitted substantially from the introduction of new business models through more convenience, greater product access and lower prices.
  • This profound shift in the consumer value equation has put enormous pressure on industry incumbents that lack either the cost structure or agility to respond effectively.
  • A dramatic rationalization is gaining momentum as traditional players are being forced out of business or pressured to close and or shrink the foot-print of their stores, make huge investments in “omni-channel” capabilities and lower costs across the board.

Unfortunately what is lost in tales of this evolution is that most of the “disruptive” pure-play e-commerce brands have completely unsustainable business models and mostly what is happening is that venture capitalists (and other investors) are funding a transfer of wealth to the consuming public. So, on behalf of my fellow consumers, thanks venture capitalists.

Alas, this is unlikely to last much longer.

While many people think digital retail is some sort of license to print money, it’s becoming clear that e-commerce is virtually profit proof in categories with low transaction values, owing primarily to the substantial supply chains costs (particularly when brands offer free shipping and returns). Moreover, while it can be relatively easy and cheap to build an initial following online through public relations,  social media and other forms of peer-to-peer marketing, scaling an e-commerce only brand turns out to be extremely costly. Many of the buzziest pure-plays are now investing heavily in expensive branding efforts (as well as opening their own stores) in the hopes that size engenders profitability. Accordingly, initial expectations of break-evens are now being pushed out several years.

As the ROI of these efforts starts to come into sharper relief, my bet is many funding sources will lose their patience.

I’ve been an on-the-record skeptic for several years now, going back to when I called into question the sustainability of the flash-sales market well before the meltdown. More recently, I’ve been pointing out E-commerce’s pesky little profitability problem. So I’m not suprised that recent valuations of several once high flying players have collapsed. And more folks are starting to take notice. Professional smart guy (and noted wise ass) Scott Galloway agrees and has been on the “pure play doesn’t work” train for some time. Expect more to join us.

To be clear, a few digital-first brands will likely emerge as sustainable value creators. Brands with high enough average order values to overcome high delivery costs are better positioned (though Net-a-porter’s inability to make money after all these years underscores how difficult this is). Those that deftly merge online and offline experiences–think Warby Parker and Bonobos–also improve the odds (though, side-note, don’t be misled by the high productivity of their initial locations and comparisons to other brands’ productivity stats. We need to understand the four-wall profitability of these new stores and make comparisons to traditional retailers averages in like locations, not overall chain averages).

Mostly, however, we need to be careful to declare a brand successful without defining what we mean by success. If we define success as having grown revenues quickly and having been able to raise gobs of capital from investors to enable subsidizing consumers on a massive scale, than clearly Amazon and dozens of others are wildly successful. If we define success as creating enormous pricing pressure and raising the cost of doing business so as to push traditional players into a double-bind than, yes, mission accomplished.

But if we determine success as having demonstrated the ability to deliver a new and better customer experience AND earn a risk appropriate return on capital than I’m not sure any pure-play E-commerce player of any size is yet successful.

I will go on the record as saying far more pure plays will go bust in the next three years (or get sold at valuations well below their most recent funding) than will emerge as truly successful.

Until then, enjoy the low prices and the free shipping, and if you get some time, send the nice folks funding Jet.com and others a sincere and heartfelt “thank you” note.