5 ways online retailers can weather the ecommerce slump
If the ending of pandemic restrictions has brought a general sense of relief, for ecommerce and direct-to-consumer businesses it has brought a new set of challenges
The return to normal life this year has made the ecommerce boom of the prior two years – when online buying surged – seem a distant memory, replaced by diminished sales, layoffs and reduced growth expectations.
The first half of 2022 has seen a wave of layoffs and spending cutbacks at firms that were flying high during the pandemic from Amazon to Allbirds to Wayfair. Cost-cutting measures have often been announced in connection with flat or falling year-on-year sales as people reverted to more typical shopping habits, benefiting bricks-and-mortar stores at the expense of online ones.
Writ large, online retail sales in the UK in July fell 4.3% (seasonally adjusted) from a year ago, while overall retail rose 7.8%, according to the Office for National Statistics. And the proportion of online retail, at 26.3%, is well off the peak of 37.5% in February 2021, but still above the pre-pandemic level of about 20%.
In the US, retail ecommerce in the second quarter of 2022 was up 6.8% (seasonally adjusted) from a year ago, slightly behind total retail, at 7.2%, according to US Department of Commerce data. The former figure is down from 14.2% growth in the year-earlier period, and from a pandemic spike of 44.5% in 2020.
For ecommerce and DTC players coping with the slowdown, it’s not just about retrenchment. Even as they pull back in some areas, they’re actively pursuing ways to increase revenue beyond their core online business. The following are some of the ways they’re drumming up revenue to offset the ecommerce pullback.
For DTC brands that were once internet-only, adding a physical presence has become an increasingly common strategy. The original idea was to establish a small but high-profile bricks-and-mortar footprint – think London’s Oxford Street or SoHo in New York – to serve as much as a product showroom as a sales outlet. And some, like US eyewear retailer Warby Parker, have gone beyond opening a flagship outpost.
Still, bricks-and-mortar expansion plans would seem a potential casualty of these firms’ recent efforts to pare operating costs. But it’s not playing out that way. For one thing, the stores offer a way to offset the decline in online sales following the lockdowns. It’s also part of the broader omnichannel strategy many retailers have adopted to integrate sales across online and offline venues.
“It’s essential to be everywhere your customer wants you to be,” says Peter Fader, a marketing professor at the University of Pennsylvania’s Wharton School. “It’s just plain good business.”
Take Warby Parker. The DTC eyewear brand in August announced laying off 15% of its corporate workforce and a pullback in marketing spending, citing an uncertain economic landscape. Even so, the company assured that the decision wouldn’t impact its plans to open a further 40 stores this year, on top of the 161 it already operates.
“We continue to believe that it makes sense to open up stores and it’s a good use of capital,” explained Neil Blumenthal, Warby Parker co-founder and co-CEO, in the company’s second-quarter conference call. He added that its recently opened stores were making back their capital investment within 20 months.
The shift of its business from ecommerce back toward physical stores this year--closer to pre-pandemic levels – also fuels the company’s aggressive bricks-and-mortar rollout. And because the stores themselves serve as “billboards,” they don’t require as much ad spending as its Web presence, noted Blumenthal.
In a similar vein, eco-friendly shoe-seller Allbirds in August reaffirmed its plans to open 16 to 17 stores this year, despite laying off 8% of its corporate workforce in July in response to softening retail demand this spring. The company had a net loss of $29.4m in the second quarter, up from a loss of $7.6m, in the year-ago period.
Still, Allbirds executives highlighted the benefits of a diversified retail approach in which online and physical stores reinforce each other. Allbirds co-CEO Joseph Zwillinger, for example, said on the company’s latest earnings call that up to 15% of in-store repeat customers convert to online buying, and that they’re spending 50% more than ones using only one shopping method.
“So that’s a big impact on the profitability profile of a single customer that we can acquire,” he said.
Meanwhile, home-goods internet retailer Wayfair took the offline plunge in May, opening its first physical outpost in Massachusetts under its AllModern brand, with two more speciality shops to open later this year, and a larger Wayfair store to come in 2024.
Wholesale better than no sale
The online embrace of bricks-and-mortar goes beyond bespoke stores to wholesale venues as well. Considering a central idea behind ecommerce was to cut out the wholesale ‘middle man’, that might seem an unlikely step.
Leaning into that strategy is mattress-in-a-box firm Purple, which, in addition to its ecommerce site, operates its own showrooms and sells through a dozen wholesale partners that include Macy’s, Raymour & Flanigan and HOM Furniture. Last year, about two-thirds of its net revenue came from DTC sales, and a third from wholesale.
Its latest quarter reflects the broader downturn in online shopping, with its ecommerce business down 39% from a year ago, while its wholesale sales fell 6%. And as with other home-products sellers, Purple has been hit not just by the shift away from online shopping, but from spending on physical goods to things like travel, eating out, and other services.
Still, the company this year plans to open another 14 of its own stores for a total of 54, while seeking to improve sales at its existing 3,200 wholesale locations, including 700 added in 2022.
Online fashion retailer Asos has likewise made the leap to wholesale, albeit through a much more exclusive partnership. Last year, Asos entered a joint venture with US luxury department store chain Nordstrom’s, in which the latter would become the sole bricks-and-mortar seller of the Asos Topshop and Topman brands worldwide.
Earlier this year, it built on that relationship by adding its Asos Design label clothing to 11 Nordstrom stores in the US.
Allbirds, meanwhile, struck a deal to start selling a selection of its shoes through the department store in June. That move followed closely on Allbirds announcing in May its first two third-party retail partners: Public Lands, an offshoot of Dick’s Sporting Goods, in the US, and Zalando in Europe. Taken together, the wholesale moves are aimed at building brand awareness and drawing new customers.
Putting prices up
If online has long been the land of discounting, flash sales and bargains, surging inflation has inspired a new tack among ecommerce firms: raising prices. That, in turn, can help bolster revenue and margins even as unit sales decline in the post- lockdowns slump.
DTC businesses haven’t been afraid to take that step. Even when they’re selling dog food. Sumit Singh, CEO of online pet supplier Chewy, recently said the company pre-emptively raised prices this year in anticipation of higher costs due to inflation.
“Where we’re finding the opportunity to benefit and take in margin, we’re not giving up those opportunities, whether it’s in sharper pricing or whether it’s executing sharply,” he told analysts in August. The company had a profit of $22.3m on revenue of $2.4bn in the second quarter, compared to a loss of $16.6m on sales of $2.2bn a year ago.
Even those under more pressure aren’t shying from price hikes. Allbirds, for example, which last quarter reported a loss of $29.4m on slowing sales, said price increases helped boost its average order value. Its top-end running shoes, made with bio-based ‘biofoam’, go for £150 in the UK and $160 in the US.
“This increasing consumer demand for natural and sustainable materials allows us to take price and to enhance the value for our consumers,” said Allbirds co-founder and CEO Timothy Brown, in the company’s earnings call. In other words, speciality products carry premium prices. But after going public only last November, Allbirds has a way to go to prove its business is sustainable.
For his part, Fader views DTC upstarts like Allbirds maintaining or raising prices as a welcome step, along with cost-cutting measures, to operate more efficiently after riding an early wave of venture capital funding. “They have to start running these businesses like businesses, and be accountable on those terms,” he says.
Delivering bigger fees
For the larger ecommerce players, hiking or adding fees has been another way to counter inflation and generate additional revenue. Amazon, for instance, in mid-August told third-party sellers it was raising the amount it charges for warehousing and shipping their items during the upcoming holiday season. Merchants in the US and Canada will pay an average fee of 35 cents per item sold using Amazon’s fulfilment services.
That comes on top of an added 5% “fuel and inflation” surcharge it imposed on merchants in May to minimise the impact of rising gas costs. On the consumer side, it also raised the annual fee in February for an Amazon Prime membership by $20 to $139.
For critics of the ecommerce giant, the fee increases are further evidence of Amazon holding monopoly power over the online market.
But during the company’s second-quarter earnings call in July, Amazon CFO Brian Olsavsky said Amazon added the fuel surcharge “grudgingly” to compensate for inflation. He added that neither that increase nor the Prime fee hike, “come close to covering our costs”.
In any case, Amazon isn’t the only online marketplace boosting fees. In April, Etsy raised the transaction fee for sellers on its crafts website from 5% to 6.5%. When announced earlier this year, the move provoked a week-long strike by Etsy merchants.
Etsy was a big beneficiary of the pandemic shift to at-home shopping. Its sales of face masks and home goods helped it more than double revenue in 2020 to $1.7bn.
In its latest quarterly report in July, Etsy noted that the 11% gain in its marketplace revenue was largely due to the seller fee hike. CEO Joshua Silverman added there had been no noticeable change in the seller base because of the increase, and that funds it generated had been “reinvested” in areas such as TV advertising and a new purchase insurance programme.
Retail marketplaces turn ad networks
In the quest for new revenue streams, online retailers have also jumped into the digital ad business. Specifically, they’ve started offering advertising across their own ecommerce websites and apps and, in some cases, on third-party sites as well.
Amazon has become the biggest ecommerce player in this area, emerging as a credible challenger to the Google-Facebook ad duopoly in recent years. In its latest quarter, Amazon’s advertising sales grew 18% to almost $9bn, or about 7% of overall revenue.
Competitors from Walmart to Instacart to Chewy are getting in on the act, too. “Advertising is certainly attractive as a higher margin revenue stream than retail, so it’s seen a lot of interest from retailers,” notes Kate Scott-Dawkins, head of business intelligence for WPP’s GroupM unit. And with third-party cookies going away, retail media networks are luring advertisers as sources of valuable consumer data.
For its part, Etsy in 2020 introduced a new service called Offsite Ads, which allows its sellers to run ads on other sites. Etsy pays the upfront costs for the ads but receives a fee when someone clicks on an ad, and then makes a purchase. That’s in addition to ads it runs on its own marketplace on behalf of sellers. “It’s an area where we see a long runway for continued growth,” Silverman told analysts in July.
Its ad business, along with the increased seller fee, helped the company post a 10.6% revenue gain despite a 6% drop in gross sales in its marketplace in the latest quarter compared to a year ago.
Overall spending on retail media networks this year in the US is expected to surpass $41bn this year, according to research firm eMarketer.