News headlines have been filled with reports painting a dismal picture of the retail industry lately, whether it is coverage of stores shutting for good or plummeting sales.
The most recent BRC-KPMG retail sales monitor figures reinforced this direction of travel, with sales growth only just scraping in at 0.2% like for like in August, adding to the weak sales trend we’ve seen for months now.
Having said that, closer inspection of retail performance by channel suggests there is a hotbed of growth and innovation among online players. Outperforming the high street, online retail grew 7.5% in August, with some players growing significantly faster than this.
With two businesses recently breaking the trillion-dollar valuation barrier – Apple and Amazon – and with an increasing number of transactions in the sector, it is clear that ecommerce has moved into a different, more investable phase of its maturity. We should perhaps now be asking whether ecommerce has come of age, and if this is the new investment battleground.
“Retailers have realised their voracious and expensive race for market share was just not sustainable or profitable”
In the early years, ecommerce was a bargain-seeker’s go-to, mainly for grey-market products or for those more functional purchases. These businesses were created from bedrooms on a shoestring, with low barriers to entry. Today, it feels less like the Wild West and more like a professionalised, mature industry. So what is the winning formula?
Taking a step back, it’s clear retailers have realised their voracious and expensive race for market share – which simply hinged on acquiring the most customers – was just not sustainable or profitable.
In fact, online marketing costs have increased significantly over time, forcing online retailers to change focus to engage consumers in a way to build long-term loyalty. As retailers move in this direction, success has instead entailed orchestrating their operations in such a way that meaningfully improves the customer lifetime value-to-acquisition cost ratio.
Online retailers are by no means immune to the adverse conditions affecting their bricks-and-mortar counterparts. Just like them, they need to think on their feet, try to remain relevant in fast-moving times, and go beyond satisfying just a functional need.
Those leading the way are continuously conversing with their customers, whether it be via social media, online content or the hottest new influencer. They are attempting to tip the ratio in their favour in the most cost-effective way, hoping consumers form an emotional attachment with their brand rather than having to continually buy their loyalty.
While the balance of power is still in the hands of the customer, brand owners – who previously looked aghast at the anarchy of ecommerce – are now starting to exercise their power to ensure their chosen ecommerce partners are true custodians of their brands, to rein in online discounting excess and counter the proliferation of grey market-focused start-ups.
“Ecommerce is by no means the land of milk and honey”
This is not just an online strategy, it signals an attempt to take greater control of stock, pricing and how brands are presented, with a view to influencing the online world in the same way they have done in the physical world.
It’s a delicate balance to get right, and ecommerce is by no means the land of milk and honey. There are still significant costs in serving customers whose expectations continue to rise, and a retailer certainly cannot lose sight of its fully loaded cost-to-serve customers while it promises them gold-plated service levels.
Once the future, this online world has certainly come of age, but it too is shifting fast. Inevitably, growth rates in ecommerce will decline and as they do, online retailers will have to move their focus towards longer-term profit generation, rather than racing for market share no matter the cost.
The recent influx of brand partnerships and professional investors will hopefully improve discipline without diminishing the entrepreneurial and creative force that has driven major growth and success, despite incredibly difficult market conditions.