Will the e-commerce bubble burst in 2021?

Plenty has been said about 2020 and how it has accelerated the growth in e-commerce. Our business has been caught up in the thick of it, and we've enjoyed all the challenges and opportunities that have been thrown at us. I can say with certainty that we've seen a monumental change in behaviour. Businesses with strong e-commerce foundations have reaped the rewards. The businesses who had underinvested in e-commerce scrambled to catch up as they saw their high street market disintegrate. 2020 was another reminder that you can never take a break from investment in innovation. 

2020 reminded me of the last time I experienced a seismic shift in consumer behaviour. It was 1999 and I had just started work at British Airway's newly formed e-commerce department - eba. Between 1997 & 2000, huge PE investment piled into internet ventures. Age-old business models were torn up, new competition flooded into established sectors and monolithic organisations dumped millions into new projects to re-invent themselves. It was a period of heightened creativity, the internet made everything possible, although many ideas failed because the internet was not big enough or fast enough to deliver the proposition.

At that time, many companies with no history, very low sales and nearly no profits captured billions of US$ in market capitalization. Such growth without profitability was everything but sustainable. In March 2000, the markets broke down, and the bubble that had been growing for years suddenly popped. Whilst the bubble burst, the change in consumer behaviour was permanent, and the internet became a mainstream channel for communicating and buying services.

'There are decades when nothing happens and weeks when everything happens' - Lenin

Fast forward to 2020 and we've seen similar dynamics, albeit with different triggers and different outcomes. The changes in the late 1990's were driven by advances in technology. The events of 2020 have been driven by consumer need, brought on by necessity. Whilst in 1999, we saw a shift in how we buy services, in 2020 we've seen a change in how we buy products. Most categories have seen at least a 50% increase in e-commerce sales.

Whilst the catalyst was people power, the rapid change was in the supply chain. Manufacturers and e-retailers scrambled to improve warehouse and delivery capacity at a time when supply was constrained by Covid-19 and exhausted by unpredictable demand. New workforces were created, capacity was increased and new routes to market established.

'Never let a good crisis go to waste' - Winston Churchill

If you look forward into 2021 from a consumer perspective you would expect even more e-commerce adoption. We are hooked on the speed and convenience of internet shopping. We have realised that shopping online makes more sense for most products you buy. E-retailers have used technology to make it easier to compare, contrast and visualise. And the ease and efficiency of re-purchase mechanisms compels you to do it again and again.

But if you look at it from a supply perspective, the growth of e-commerce in 2021 is less certain. Transport costs, price investments, investments in e-commerce including free one-day delivery and new digital taxes are putting pressure on retailer margin, making growth unsustainable. Manufacturers face increased supply chain costs with higher container fees and delivery charges due to demand outstripping capacity.

Furthermore, most manufacturers and retailers need to make significant investment in infrastructure. Goods are not evenly distributed and are inaccessible to their market. Most products are not designed for e-commerce and logistical processes are designed for large, infrequent and uniform orders.

Change is happening though. New distribution models have been created by businesses like Instacart, Glovo and Postmates to speed up delivery. Retailers are turning stores into Click and Collect Centres and hubs for local distribution. New marketplaces, like Wish, are renting space in newsagents to store goods to keep logistic costs down and deliver at speed. Grocers, like Morrison's, are supplying Amazon to broaden their market with low investment. Brands are starting to design products to be e-commerce friendly.

As ever, Amazon is leading the way and everyone is trying to keep up. It took Wallmart a $billion a year to catch up, but there are few businesses (outside of China) with deep enough pockets to compete in most of the world.

With these forces at play, we think 2021 will be another year of transformation and growth. E-commerce as a % of retail sales will continue to grow at a faster rate than pre-pandemic. But there are steeper climbs ahead in 2022 and beyond once supply chains have caught up with consumer behaviour and businesses have worked out how to make e-commerce profitable.