Lately, comScore has been the bearer of a lot of bad eCommerce news. On November 18th, comScore issued a press release stating: “U.S. Retail E-Commerce Growth Slows to 1 Percent in October as Concerns about Inflation, Jobs and the Financial Markets Cause Consumers to Curb Spending.” On November 25th, they followed up with another press release that had more bad news, “comScore Forecasts Flat Growth for 2008 Holiday E-Commerce Spending.” And today, comScore’s most recent press release, “Black Friday Sees $534 Million in E-Commerce Spending, Up 1 Percent Versus Year Ago.”
After comScore’s first press release, the NYTimes followed with an article bemoaning the difficulties facing online retailers. “Internet retailers, trying to navigate what is shaping up to be the first truly dreary holiday shopping season ever on the Web, are engaging in price-cutting and discounting so aggressive that it threatens their profit margins and, in some cases, their very survival.”
The insinuation, from the NYTimes in particular, seems to be that consumer spending is so bad this season, it is putting not just brick and mortar retailers but the once unstoppable e-retailers out of business. Even Henry Blodget of Alley Insider described the comScore and NYTimes news as “frightening” and “shocking” in his post, “Depression 2.0 Comes To eCommerce”. He goes on to summarize, “The bottom line: Lots of [eCommerce] companies are toast.”
But this isn’t the full picture. Yes, many eCommerce companies will buy their last keyword this season thanks to the shopping “Depression 2.0”, but the slowdown in consumer spending is not the only market trend at work. Instead, eCommerce is going through a fundamental shift in its makeup – call it a Staples 2.0 effect.
When superstores like Walmart and “category killers” like Staples and Home Depot moved into our neighborhoods, their lean supply chains, operational efficiencies of scale, and national marketing budgets, put many mom and pop stores out of business. Now that eCommerce sites like Zappos, BlueNile, NewEgg, and others are reaching category killer scale, we’re seeing a similar thinning of mom and pop e-tailers.
So when the NYTimes highlights the experiences of e-tailers ranging from Lori Andre of Lori’s Designer Shoes, to Tony Hsieh, CEO of Zappos, they conflate two very different companies. Despite Lori’s claim, “We’ve been in business for 25 years, and never seen the bottom drop out like this,” the eCommerce sky isn’t falling. It’s no surprise that a website like Lori’s Designer Shoes, which sells designer shoes and other designer items, is struggling right now. Lori’s Shoes (11.5k uniques in October) is competing against one of the new goliaths in eCommerce, Zappos (4.5m uniques in October). That’s an uphill battle. Just take a look at their traffic:
Even on the internet, size does matter. Putting aside the traditional efficiencies that come with scale (e.g., Zappos can probably get better prices on its inventory than Lori’s can, has a more efficient warehouse, etc), there are several benefits of scale unique to e-retail:
First, because Zappos can offer such an extensive catalog of SKUs on its site, it is able to cross sell more products to each customer and drive a much higher average basket size than Lori’s Shoes. A higher basket size for each customer visit means more profit from each customer given an average marketing acquisition cost, and it also means Zappos can afford to do things like throw in free shipping (or in Zappos’ case, hassle-free returns), which subscale Lori would have more trouble doing. Moreover, because Zappos can drive better profit margins than Lori’s, it can afford to spend more money on online advertising than Lori’s.
Second, when it comes to building a successful and profitable eCommerce company, it’s all about building a brand. Once an e-retailer has the brand recognition, I don’t know how a mom and pop can compete. If someone is searching for designer shoes and sees a Zappos sponsored link or a Lori’s Shoes sponsored link, even if Lori’s was willing and able to bid more for its keywords, a consumer is more likely to click on the Zappos link than the Lori’s Shoes link because the consumer recognizes Zappos’ brand, they may have even had a friend tell them what a great experience they had ordering from Zappos. Because of the way way Google's algorithm determines sponsored link placement, Zappos' higher likelihood to convert would drive Zappos' placement up the list. Consequently, Zappos and other online retail “category killers” can acquire traffic more cheaply than Lori’s ever could.
And there's the rub. Once an e-retailer like Zappos has attained this brand recognition, price competition is the only way an e-retailer like Lori’s Shoes can hope to compete, and we all know that’s a losing proposition. Meanwhile, Zappos and other category killers continue to pick up market share of online and offline shopping dollars. This will only be helped by brick and mortar retailers like Foot Locker, Circuit City, Home Depot and others that are trying to reduce their fixed costs by shuttering retail store locations.
Sure, it's not pretty now, but I think the eCommerce category is only going to emerge stronger from this recession. Just don't expect it to look like it does now.