A Brief History of Ecommerce

As a keen ecommerce industry observer, I have put together a brief history of ecommerce for those who are excited about ecommerce or just curious to know more about this growth juggernaut. I had originally presented this to MBA students at SIBM Pune. I have refined the material to answer a few of the insightful questions posed by the SIBM students. Their generous positive feedback encouraged me to share this here with my professional network.

Why should you be excited about ecommerce?

Impact

Retail accounts for 5-15% of a country’s GDP and is usually the single largest industry in a country. Retail is a daily barometer for the nation’s economy. 9 out of Fortune 100 companies are in Retail with top 2 positions being occupied by Walmart and Amazon.

Innovation

Retail industry has undergone accelerated digital transformation. The phenomenon has been referred to as retail apocalypse with the decimation of legendary retailers like Sears. Amazon became the fastest company ever to achieve $100 B revenue and it is on the verge of overtaking Walmart as the world’s largest company by revenue. It has spawned multiple innovations including the largest subscription program in the history of the world, Amazon Prime, with over 200 M subscribers. Ecommerce has also been a fertile playground for emerging technologies like Machine Learning, Artificial Intelligence and Virtual Reality.

Growth

The virtuous cycle of growth demonstrated below shows how a great customer experience can fuel exponential growth in ecommerce business. The more selection you add, the better the customer experience and this in turn brings more customers and drives higher traffic. High traffic attracts more sellers to list their selection on the ecommerce platform. This completes the virtuous cycle of growth. As the ecommerce platform grows, economies of scale help lower cost structure and thereby enable the platform to offer lower prices leading to a superior customer experience and the cycle repeats itself.

Source: rctom.hbs.org

Diversity

Ecommerce growth has presented a diverse range of problem statements from UI/UX to digital marketing to supply chain. A plethora of new business models have emerged in response to address these problem statements.?

Geographic evolution of Ecommerce Marketplaces

US has the highest per capita income while China has the largest population in the world. Even though US’s income multiplier of 6 is higher than China’s population multiplier of 5, China is the largest ecommerce market in the world. This is because the Chinese economy went through a period of rapid economic expansion with sustained double digit GDP growth during the same period when ecommerce took off in early 2000s. Ecommerce and the ecosystem it spawned was in fact as a key engine of growth for the Chinese economy. The common trend in the two largest ecommerce markets of the world, China and US, is that there are top 2-3 dominant players, all local, that account for over 70% share of ecommerce market.

In contrast, the smaller markets have witnessed a battle between local homegrown ecommerce companies and the global giants. While US ecommerce majors have created a strong presence in Europe, GCC and India, the Chinese ecommerce majors have created a strong foothold in Southeast Asia. This is explained by the fact that China has traditionally had strong trade relationship with Southeast Asia besides the geographical proximity of the region to China. In many cases, the global players have been happy to acquire local ecommerce players, examples being Walmart-Flipkart acquisition in India, Amazon-Souq acquisition in GCC and Alibaba-Lazada acquisition in SEA.

Note: Company logos sourced from respective webstores

Business Models Evolution

I will share a perspective on ecommerce business models evolution on the following five dimensions:

1. C2C vs. B2C vs. B2B
2. Retail vs. Marketplace
3. Marketplace ecosystem
4. Social Commerce
5. Omni-channel Commerce

#1. C2C vs. B2C vs. B2B

The original ecommerce platforms in US and China were C2C in nature including Ebay and Taobao. Ebay gained popularity through online auctions. Taobao gained momentum when they offered free listings to sellers to compete with Ebay who had a head start in China by acquiring the online auction leader, Eachnet.

The exponential rise of Amazon made it evident that B2C space is where the pot of gold lies. This led to a rush of players entering the B2C arena. eBay entered B2C with their own marketplace. Taobao launched Tmall as a marketplace for brands to reach out to customers.

The latest trend is the emergence of B2B marketplaces. Alibaba was a pioneer in this space though it was an exception driven by China being the factory of the world. Of late, entrepreneurs in other manufacturing sources like India and SEA have woken up to this opportunity. Udaan was borne out of the insight that there is a large SME (small and medium scale enterprises) base in India that would benefit from the opportunity to buy directly from manufacturers and brands. Udaan became the fastest startup to become a unicorn in India. Udaan’s success story inspired entrepreneurs in SEA to start Ula, another B2B marketplace that enables small businesses in Indonesia to buy directly from manufacturers and brands. Having seen the success of B2B startups, established B2C players like Flipkart and Amazon have also entered the B2B arena in India.

Note: Company logos sourced from respective webstores

#2. Retail vs. Marketplace

Many of the top ecommerce platforms were born as retailers including Amazon in US, Flipkart in India, and JD in China. Retail business model was instrumental to their early success as they were able to control end-to-end customer experience and generate positive word of mouth. This pattern held true even for vertical marketplaces like Myntra and Zalando that were focused on fashion, Urban Ladder that focused on furniture and BigBasket that focused on Grocery.

As the horizontal platforms scaled, they realized that it was important for them to have a marketplace to become capital efficient since the retail model required sustained investment in working capital. This prompted all horizontal platforms to create a marketplace that enabled sellers to list their selection and sell to customers via the platform. While the marketplace model brought its own unique challenges of quality management and selection ranking, it certainly helped multiply the selection availability on the platforms driving exponential growth.

The vertical platforms also realized the benefits of a marketplace, and many have complemented their retail arm with a marketplace. Verticals have been more cautious in building their marketplace since their value proposition lies in the unique experience they offer in their category. Zalando and Next were clear that they would only add brands that had a positioning higher than their private labels thus attracting more premium customers. Myntra took a more open-ended approach though they consciously kept their third-party seller commercials higher than the horizontals thereby self-selecting more premium brands to list on the platform.

Note: Company logos sourced from respective webstores

#3. Marketplace Ecosystem

As marketplaces became the engine of ecommerce growth, it spawned an ecosystem of new business models that either leveraged or supported the marketplaces.

Online D2C brands focused on reaching customers directly through their own webstore as well as 3P marketplaces. These brands were borne out of insights to cater to the gaps in online assortment and cater to customers with a uniquely online experience. Xiaomi is a D2C brand that took an online-first approach to become a top smartphone brand in China, followed by #1 position in India and of late, it has even overtaken Apple and Samsung to become the #1 smartphone brand globally. Xiaomi discovered that electronics products can be sold online with a lower cost structure as compared to the offline channel by virtue of its high value/weight ratio. This insight along with its frugal approach to product development and consumers becoming more value-conscious helped Xiaomi grow by leaps and bounds. By virtue of a single-channel approach, Xiaomi was able to design its product and packaging to optimize for online channel sales. Xiaomi offered such a compelling value proposition that its growth was fueled by customer word of mouth. Sugar cosmetics is an example of an India beauty brand that took an online-first approach to build their brand and has now built a large offline presence.

Ecommerce enablers are service providers that help simplify the process of selling on marketplaces for brands or sellers. They have operational expertise in listing products, running promotions, receiving orders and in some cases, even fulfilling orders. They offer this expertise to brands so that the latter can focus on their core competence of making good products and building their brand. Alibaba has the pioneer in creating and scaling an enabler ecosystem. The largest enabler in China, Baozun is listed on NYSE with a valuation of $3B. Shipbob is an enabler based in the US that helps small and medium scale sellers to have a plug and play fulfillment ecosystem that can take orders from multiple marketplaces and fulfill to consumers with service levels rivalling that of FBA. AceTurtle is an ecommerce enabler based in India that provides a technology platform for brands to seamlessly connect with Flipkart and Amazon marketplaces to receive and process orders.

Seller Acquirer is the latest business model that was pioneered by Thrasio in US. They identify small to medium scale FBA (Fulfilled by Amazon) sellers who have bestselling products and acquire them with the intent of amplifying these top sellers. As Amazon became more self-serve, they offer personalized assistance only to top vendors and being a seller acquirer that aggregates bestselling products, Thrasio-like players achieve scale required to interface directly with Amazon executives and scale up the business.

Note: Company logos sourced from respective webstores

#4. Social Commerce

Social media has become an integral part of our daily lives. While advertising has been the primary revenue stream for social media, commerce is emerging as the next big frontier for social media to drive revenues. While Facebook is experimenting with having a buy button on Instagram and facebook, entrepreneurs have started leveraging the power of whatsapp and wechat to drive commerce.

In China, Pinduoduo (PDD) has overtaken JD to become the second largest ecommerce marketplace by GMV. PDD enables manufacturers to sell direct to consumers via its platform. What makes PDD addictive is the gamification that it has built in its platform in the form of groupon style deals for bulk purchases. Wechat’s omnipresence enabled PDD to help customers aggregate orders through their wechat network and avail deals from manufacturers. This model caters to the value conscious consumers in tier 2 and tier 3 cities. The most intriguing thing about PDD is that it has been able to attract older customers and housewives who often act as the aggregator of orders. In effect, PDD has recruited an army of individuals across small towns and villages who act as sellers of products offered by manufacturers and large sellers.

In India, Meesho saw an opportunity to build a similar model leveraging whatsapp. Many ecommerce companies tried to address the bottom of the pyramid in India by offering cheaper products though what small town India needed was value-for-money products that cater to the unique requirements of tier 2 and tier 3 towns and villages. Meesho has been able to onboard manufacturers who make products specific to small-town India and onboard enterprising individuals from small towns as sellers. Meesho also focused on recruiting house wives and students as sellers. It offers a simple model where the seller gets a wholesale price on which she can add a discretionary margin that she is able to negotiate with her customers. The seller can punch in the list of orders on behalf of her customers and Meesho would ship the products from the manufacturer direct to end customers, collect payment and credit the seller’s margin. Meesho’s model received validation when it became the first startup to receive an investment from Facebook.

The success of this model rests on the seller’s deep understanding of her network’s requirements and the availability of a manufacturing ecosystem that can cater to these needs.

Note: Company logos sourced from respective webstores

#5. Omnichannel Commerce

As ecommerce penetration entered double digits, brands and retailers who were hitherto focused on offline distribution woke up its threat and its potential. This led to an omnichannel boom especially in the past 2 years with the covid pandemic accelerating this transformation. Big brands and retailers invested in a technology team that could build their ecommerce presence while the smaller retailers were left in the lurch as they did not have the resources to make the upfront capital investment.

In response to this challenge, a new breed of enablers emerged who would help you set up an online store, receive payments and ship orders while charging a nominal upfront fee and often taking a share of revenues. Shopify has been the poster boy of this trend while Magento and BigCommerce are the top two challengers.

Shopify helps shift your cost structure from upfront capital investment towards a variable fee structure that is more amenable for small and medium scale retailers. Shopify has also created an $800M ecosystem of partners that help drive traffic to Shopify stores and manage fulfillment. Shopify has 20,000+ partners including app developers for the marketplace, consultancies, and other Shopify-related services. Shopify processed $120B in GMV and generated $3B revenue last year. 1.6M live websites use Shopify, 70% of which are in US. 450M buyers place orders with Shopify merchants each year.

Source: Investorplace.com

Categories Evolution

Books was the first category launched by Amazon in 1995. The category is characterized by a long tail of selection which offers a significant advantage for an online store. Books also come in standard sizes and are easy to handle, reducing the risk of damage in transit while shipping to customers. Description and user reviews are the key inputs required for deciding on a book to purchase. The fact that books carry a low-price tag makes it easy for customers to trust an online store. Books was the first category to achieve double digit online penetration in US and India. Amazon has been successful in building near monopoly in digital books by inventing the most user-friendly e-reader. The triggers that drove online penetration in this category were large selection and intelligent recommendations.

Electronics is a head category with a sharp pareto. Besides it is a category characterized by high value to weight ratio that results in low delivery cost. Specifications and user reviews are the key inputs required for purchase decision. While all these factors make it attractive to trade electronics online, the consumer barrier to purchase was the high value of the product. Building trust was the single most important requirement to persuade consumers to buy online. Easy returns were introduced as a solution to build trust. Once customers gained trust in online channel, Electronics has witnessed explosive growth online to become the highest value contributor in ecommerce globally. As online channel became a force to reckon with, brands have adopted a different-model, different-channel (DMDC) strategy to offer a differentiated value proposition in online channel. Innovative financing schemes like No-Cost EMI and Product Exchange have been a key driver of affordability for consumers driving penetration of consumer electronics online.

Fashion is characterized by a long tail of selection to cater to personalized styles and trends. Touch and feel as well as fitting are key considerations for purchase that have translated to imagery and influencer led purchase trend online. As a discretionary category that consumers love to shop for, Fashion drives engagement and high frequency of purchase. It has also become the top consumer acquisition category for horizontal ecommerce platforms. Easy returns were a key enabler in this category also since consumers were skeptical about getting the right size and fit. Fashion is a category with relatively high margin though it is plagued by the highest customer returns driven by size and fit issues. Verticals have been able to successfully differentiate on buying and merchandising to create a distinct value proposition. Large selection and easy returns were the triggers for online penetration in this category.

Home and Furniture is a category that is characterized by two different kinds of products. Furniture is a design led category with high priced products while household is a long tail category with low priced products. Imagery and specifications are key considerations in furniture purchase. Many household products are volumetric and fragile requiring specialized supply chain handling. Home & Furniture is a category that has been led by retailer labels with limited branded play, hence characterized by fragmented local and regional sellers. Verticals have been able to compete effectively in this category by building distinct merchandize and shopping experience. Retail incumbents like Ikea and HomeDepot were able to do well in this category by virtue of their scaled supply chain which was essential for furniture sales offline. Large selection and affordability levers like No-Cost EMI were the triggers for online penetration.

Beauty and personal care category is amongst the top revenue driving categories in high per capita income economies like GCC. It is also the fastest growing category in mature markets like China. Beauty combines the advantages of fashion and electronics categories. It is a high engagement consumable category that drives high frequency of purchase like Fashion. Yet it also operates at a high price point and has high value to weight ratio like electronics that makes it economical to deliver. Beauty is a category that pioneered influencer marketing and embraced live streaming commerce at scale. This trend spawned several D2C brands built through social media marketing, examples being Huda Beauty in GCC and Sugar Cosmetics in India.

Grocery is considered as the final frontier in ecommerce as it is a category characterized by everything that makes online deliveries complex. Freshness and quality are key considerations in purchase aside from the low price per item that makes delivery economics challenging. There are two kinds of grocery purchase – planned weekly / monthly purchase and unplanned top-up purchases. While the former tends to have a larger basket size and consumers are value-conscious, the latter would be small basket size though consumers may be willing to pay a premium. To cater to these diverse needs, two kinds of models have emerged in grocery – retail model that offers scheduled deliveries on a wide range of selection, and a hyperlocal model that offers express deliveries for a limited selection. Verticals have thrived in this category due to the complex and specific nature of problems to be solved, examples being Instacart in US and BigBasket in India.

Emerging Trends & Innovations

#1. Virtual Fitting Rooms using Augmented Reality

Source: Cin7

Customer returns due to size and fit issues account for as high as 25-35% in Fashion. This results in poor customer experience, higher delivery costs and higher working capital investment. While scale and familiarity have helped solve many of the teething issues in ecommerce, customer returns have only increased with scale as customers became more comfortable with the returns process. This is a structural problem because there is no standardized size and fit definition in fashion industry. The below picture relating to different fits of same size jeans from different brands highlights this issue.

Source: scarymommy.com

Ecommerce platforms have tried to address this problem by offering size charts specific to each brand or product. Verticals have gone further to incentivize customers to post their pictures wearing the product along with sharing their measurements. Despite these actions, customer returns continue unabated. In this context, virtual fitting room is likely to emerge as an alternative to simulate the offline fitting room experience. Virtual fitting rooms work using augmented reality where a webcam scans a person’s body to create a 360-degree 3D model. The selected product is then overlayed on the 3D model of the shopper to visualize what the item looks on them. Retailers are creating their own software to action this, examples being Apple’s augmented reality platform, ARKit and Amazon’s blended-reality mirror. While a few premium retailers like Gucci and Ralph Lauren have experimented with augmented reality for shopping, this technology would get democratized in the next decade.

#2. Virtual-reality shopping experience

Source: Woodworking network

Inability to visualize products in the context of their usage is a challenge that dilutes the online shopping experience for bulky items like Furniture and Large Appliances. Virtual reality offers the promise of delivering a full-fledged brick-and-mortar shopping experience online. VR offers potential for customers to virtually inspect furniture, visualize how it works in a room and swap pieces in and out of their virtual landscape with a single gesture. A strong visual and spatial experience would reduce the purchase anxiety and drive higher online conversion.

#3. Trust & Safety Analytics

Source: TeePublic

In ecommerce platforms, there has been a constant tug of war between quality and quantity of sellers. While quantity drives selection and hence growth, quality is critical to deliver great customer experience. A few rogue sellers offering fake or poor-quality products can erode customer confidence in the platform. While quality took precedence in the past, platforms have evolved to a stage where they do not have the luxury of choosing quality over quantity to sustain growth. Chasing quantity required opening the floodgates to all kinds of sellers while investing in trust & safety analytics that would help identify rogue elements before they inflict large scale customer experience impact. Traditional methods of delisting rogue elements have been unsuccessful since the same sellers would log back under another seller account name. Aside from selling fake products, sellers also resort to fake reviews and fake sales, a practice called brushing to gain prominence in search results. In response to this, ecommerce platforms have developed digital trust and safety practice that is focused on decoding the behavior of rogue sellers and preventing them from impacting customer experience.

#4. Personalization

Source: Duke University - The Fuqua School of Business

Retailers have acknowledged the fact that diverse consumers have diverse set of needs. As ecommerce platforms grow their consumer base, they also need to cater to the needs of diverse consumers who have varied preferences. While some consumers will have high affinity towards fashion, others may have high affinity towards tech gadgets and yet others may be more need-based with affinity towards daily use items and consumables. Understanding these differences in consumer affinities and personalizing shopping experience for each of these consumer segments can deliver higher engagement and conversion. Machine learning and artificial intelligence technologies are increasingly finding adoption in furthering this objective. Shein is referred to as the TikTok of ecommerce by virtue of the extent of personalization they deliver. Shein does not have a unique personality, rather it mirrors the style quotient of its audience through extensive data analysis basis consumer's browsing and shopping history. TikTok and Shein tends to be more personalized and hence more addictive the more you use it.

#5. Cross-border ecommerce

Source: pymnts.com

China has been a pioneer in cross-border ecommerce leveraging its position as the factory of the world. Shein, Wish and AliExpress have based their business model on cross-border ecommerce from China to different parts of the world. US is the single largest market for Wish, Shein and AliExpress. The success of cross-border ecommerce has so far been a function of trade barriers or the lack of it. Large markets like India and Indonesia that also has a large domestic manufacturing base have raised the trade barriers to promote domestic investment in ecommerce. Smaller markets like the GCC have encouraged cross-border ecommerce to address selection gaps and provide higher choice to consumers. As international players enter their home market, the regional retailers in geographies like GCC would seek growth through cross-border ecommerce. While price arbitrage and selection have been the drivers of cross-border ecommerce in the past, brands may see cross-border ecommerce as a valuable testing ground for entering new markets.?

#6. Social commerce reloaded

Source: HCL Technologies

Alibaba built an ecommerce ecosystem that encompasses social media and livestreaming within it. On similar lines, Myntra is building a social platform called Myntra Studio that hosts influencers to recommend products. Amazon launched its own Influencer program in 2017 targeting influencers with large fan following and enabling them to have a vanity URL that their followers can use to shop on Amazon. As ecommerce platforms wake up to extent of advertising budget they spend on social media, they are creating programs that can help house influencers within their platform or enable them to drive customers back to their platform for purchases. Social media giants like Tencent, Facebook and Google have taken note of this and have started experimenting with the idea of incorporating commerce within their ecosystem. Tencent built mini-programs in wechat to enable brands and sellers to set up shops within wechat ecosystem and sell direct to consumers. Facebook has launched Shops, an online storefront for customers to browse and purchase products directly on Facebook and Instagram. Tiktok’s parent, Douyin decided to break their strategic partnership with Alibaba to build video streaming commerce on their own. The jury is still out on which of these social commerce platforms would scale and become a challenger to the traditional ecommerce platforms.

Customers who experience the convenience of ecommerce rarely fail to go back. A combination of new customers experimenting with ecommerce and existing customers increasing their ecommerce share of wallet imply that ecommerce growth is a secular trend. It is still day 1 for ecommerce and I can’t wait to experience the next wave of innovation and growth.

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