T3 years ago, it seemed like a golden age for e-commerce was dawning as lockdowns forced consumers to move much of their spending online. Optimistic investors, confident that shoppers would continue to buy goods online, drove e-commerce companies' valuations to frothy heights. Old and new retailers competed to expand their delivery networks.
Those hectic days seem like a distant memory now. Amazon, the world's largest online retailer, on August 3 reported 11% year-over-year growth in the second quarter of this year, excluding its cloud computing division. This exceeded expectations, and the company's stock price rose about 10%. But this was a fraction of the 42% sales growth Amazon reported in the same quarter of 2020, and was slower than the giant company's pre-pandemic trend. On the same day, Wayfair, an online furniture retailer that boomed during Covid-19, reported its ninth straight quarter of declining sales.
The economic slowdown is only part of the reason for the reversal. After surging in early 2020, the share of U.S. retail spending online has stagnated at about 15%, about the same as it would have been had pre-pandemic trends continued uninterrupted (see graph ). The situation is similar in the UK, France and Germany, according to statistics from market research firm Euromonitor.
In certain categories, such as clothing and furniture, e-commerce penetration in the U.S. has fallen from the peak of the pandemic, according to the report. T.D. Cowen investment bank. Consumers are returning to physical stores to check out dresses and dressers in person.
The share of online grocery shopping in the U.S. jumped from 4% in 2019 to 7% in 2020, still rising slowly, but at a more imposing pace. Last year, it reached 9%. Many shoppers still seem to value the human interaction at the register or at the butcher's counter. Few people appreciate the crushed or unripe produce that arrives in a delivery van, or the lucky replacement for out-of-stock freight they ordered. Retailers are struggling with the difficult economics of selling groceries online. According to consulting firm Bain, grocery stores are a business with razor-thin operating margins of 2% to 4%. Add in the costs of staff picking products from store shelves and drivers transporting them to customers, and it quickly becomes a money-losing endeavor. Relying on automated distribution centers instead of stores will only help you a little. Ocado, the UK online grocer that employs this strategy, has oscillated between losses and meager profits.
Bain's Stephen Cain points out that one solution is to sell advertising and make a profit. Many advertisers are willing to pay to introduce their products to e-shoppers. Last year, Amazon generated $38 billion in sales this way, about 9% of its total excluding cloud computing. But most retailers, including Amazon, rely on additional shipping fees to top up their online grocery deliveries. As a result, recruitment is delayed. A study by another consulting firm, McKinsey, found that 47% of Americans would do more of their grocery shopping online if shipping costs were lower.
So far, much of the growth in online grocery shopping has come from curbside pickup, where customers collect pre-picked items from stores to save on shipping fees, Kane said. Amazon's $14 billion acquisition of upscale supermarket Whole Foods in 2017 was an acknowledgment that brick-and-mortar stores will remain the core of the grocery business for some time to come. Brick-and-mortar retailers with vast store networks continue to dominate this category. The most powerful of these, Walmart, sells 17% of Americans' groceries, according to research firm GlobalData. Amazon's market share is less than 2%.
Meanwhile, competition in the more mature areas of e-commerce is increasing. Shein is a Chinese online fast fashion retailer popular with Gen Z Western shoppers are also branching out into items like electronics and furniture. This year, the company launched a marketplace for third-party sellers. The company's mobile app already has one-third of Amazon's monthly active users in the United States. Temu, a vine of Chinese e-commerce rising star Pinduoduo, has also grown rapidly since launching in the US last year.
Another challenge comes from TikTok, the Chinese-owned short video app beloved by young people. To monetize users' scrolling time, TikTok allows businesses to push ads and live demonstrations into their feeds and provide links to buy products without leaving the app. This model of what TikTok calls “shoppable entertainment” has fueled the success of its sister app, Douyin, in China. Douyin is currently selling more clothing and accessories. TMall is a Chinese e-commerce platform operated by local technology champion Alibaba.
TikTok has similar ambitions in the West. Last October, it was reported that the company was preparing its own fulfillment network in the United States. Rumors are flying that the company will soon begin purchasing products from China and selling them to consumers itself. Experiments are already underway in the UK. TikTok's ambitions would be thwarted if the U.S. government banned it completely on national security grounds, but that's what many politicians are calling for. In that case, Reels, a TikTok-like service from homegrown tech giant Meta, could perhaps replace the disruptor.
A final challenge for Western e-commerce incumbents is the growing desire for brands to sell directly to consumers. According to Euromonitor estimates, direct-to-consumer sales now account for 16% of e-commerce, and that share has quadrupled over the past eight years. Euromonitor's Michelle Evans says increased access to shopper data can help brands innovate faster. Eliminating the middleman often improves profit margins as well. Canadian e-commerce platform Shopify has built a fast-growing business selling tools that make it easy for businesses to build online shops. On August 2, the company reported that its second quarter year-over-year growth rate was 31%, faster than Amazon.
Famous brands such as sportswear giant Nike are among the brands that have embraced this trend. Direct-to-consumer sales have increased from 17% to 42% of total revenue over the past decade, with more than half of that occurring online. Emerging brands such as shoe and mattress makers Allbirds and Casper are also using the Web to sell directly to customers, eschewing traditional wholesale contracts. But recently, newcomers have started opening physical locations where consumers can touch and feel the products. Digitally native brands may also be preparing for a world where e-commerce is less prevalent. ■
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