Are we beginning to see a decline in E-Commerce?

The news headlines are apocalyptic. Sensational to say the least.

E-Commerce heavyweights like Amazon and Ebay losing market value.

E-com tech enablers like Shopify are in deep red in the stock markets.

Online share of retail dipping across the globe

E-Com only retailers are now investing in offline retail.

What is happening? Have we seen peak e-commerce? Has the digital commerce growth engine propelled by deep financial pockets started slowing down? Why are the traditional e-commerce companies now moving offline instead of investing in online growth?

This is like those opening movie scenes where we find the lead is facing a life or death situation and audience wonders why. Lets do a flashback and see what got our lead (e-commerce) in this place and how this is going to pan out.

The rise of e-commerce

When e-commerce was a shiny new toy for the retail world, the focus was on growing sales through aggressive acquisition of customers. The question of profitability was kept as a problem to be solved for later. The default template to grow big & fast was to aggressively acquire customers through extensive discounts, aggressive investment in infrastructure & technology and expensive marketing spends. It was typical for online businesses to record 100% revenue growth year over year. The press, unlike now, predicted the “retail apocalypse” as challenges dogged offline retail causing store closures while ecommerce continued to buck the trend and continue its aggressive growth.

With the turn of the pandemic, e-commerce rose as the knight in shining armor by driving sales for the retailers while stores remained shut or operated under heavy constraints. The NOS was switched on in the e-commerce engine. Consumers were forced to change their shopping behavior and shift online for basic necessities. The entire digital commerce ecosystem made a killing in the season. Valuations skyrocketed. Business pundits across the globe knew that a lot of the online shift that the pandemic created in the consumer shopping behavior would stick but there would be some mellowing down of the online engine.

Post pandemic challenges

Post Covid, once the relaxations started trickling in, people started stepping out with a vengeance. Offline spends shot through the roof in sectors that took a beating during Covid - like travel, fashion, experiences etc. Malls and retail stores started bustling again with footfalls and part of the purchases started moving back to offline. This shift in behavior was closely correlated to the time that consumers were spending at home.

E-Com as a share of business dropped from its peak by several percentage points. Ikea reported a de-growth of 10% in its online business while its offline sales grew by 13%. The decline in online spending was most dramatic in those economies and sectors where e-commerce was far more evolved and had a higher penetration.

Countries such as the US which had a relatively higher share of online retail saw a more dramatic drop than Brazil where penetration was low to begin with. Also sectors such as Grocery which had a much lower online penetration compared to Fashion during the pre-pandemic era saw a shallower decline post pandemic.

Apart from the headwinds of normalizing consumer behavior, the entire retail industry rode into the sandstorm of supply chain disruptions and deteriorating consumer demand.

One thing is clear - the decline that is getting reported for online is because the benchmark is the abnormal peak that was created in the pandemic. When we normalize this to include the pre-pandemic period, we find that e-commerce continues to be on a growth trajectory

Future of Ecommerce

So, where does the future take us? How does the road ahead look like for e-commerce? Why do we see some of the digital heavyweights invest in offline retail?

Building 0 to 1 in the digital space is easy. You could get your online store up and running in a few hours. With some meaningful ad spends, you can get your engine up and running with customers. But getting from 1 to 10 digitally is a tough nut to crack, even with heavy investments. The ROI of burning money to buy growth online diminishes quicker beyond a certain threshold. There is only so much that performance ads and SEO can do with all the money in the world. The rest of the growth is organic and hard fought through a solid strategy and flawless execution. In such a scenario for the online only players, offline offers a better potential to build sales momentum. Today’s business ecosystem is still dependent a lot on the offline space. Offline experience is an equally important part of acquiring customers.

E-commerce will not completely substitute offline retail in the future. But in the long run, offline will mature to be experience centers and lion’s share of business will move to the digital space.

The reason I foresee this happening is because of 2 main reasons:

Follow the money

A large share of capital that is being invested in technology is native to digital commerce than offline retail. The world is betting big on the metaverse, artificial intelligence, machine learning, virtual reality, augmented reality and more. These technologies are advancing the digital ecosystem and making them an unignorably larger part of daily life. Larger online activity means retail will need to find more share of consumer activity online rather than offline.

Unlimited free real estate

Starting an offline business is more expensive than starting digital. This disparity will only increase further in the future as physical resources will remain limited and more costly, whereas digital technology cost will approach zero. The online space will attract more startups and retail growth than offline. This becomes a flywheel as both consumers and retailers start gravitating towards online than offline.

Online penetration is still in its infancy and there is a long way to go. The NOS in the engine might have cooled down but the e-com race engine is still revving hard.

One lingering question still remains though - what about profitability? E-Commerce has been infamous for being a sink hole of investments with profitbaility being distant. In the next part of this series we will evaluate the future of profitability for ecommerce business. Follow on to keep track of the story.

(Excerpt from The Mental Clarity project @ https://ashickali.com/are-we-beginning-to-see-a-decline-in-e-commerce/)