Profitero’s Keith Anderson attended this year’s Shop.org Summit and in this post, outlines his 5 key takeways from the event – some of which relate to the next 3 months, and others to the next 3 years: from how marketplaces ‘are eating the world’, to the massive market potential in China – where eCommerce is the main course.
Post by Keith Anderson – VP, Strategy & Insights at Profitero.
My 5 key takeways from this year’s Shop.org Summit:
1. Marketplaces are eating the world
I wish I could take credit for the clever headline, but it’s actually paraphrased from the title of a session moderated by Scot Wingo of ChannelAdvisor featuring executives from Alibaba, MercadoLivre, and Lifetime Brands.
Many people appreciate the importance of Amazon’s third-party (“3P”) marketplace to its overall business. Amazon’s 3P marketplace accounts for ~40% of total units sold according to company disclosures, and while Amazon itself doesn’t disclose the value of the merchandise sold by third-party merchants on its marketplace, Wingo estimated Amazon’s total gross merchandise value (GMV) at approximately double Amazon’s reported domestic revenue of $43.9B in 2013. (Forrester’s Sucharita Mulpuru shared an estimate pegging total GMV at ~$100B in a separate session with Brad Stone.)
Because the marginal risk and expense (for Amazon) of listing an additional product on Amazon’s 3P marketplace are essentially zero, the 10-15% “take rate” it collects from 3P merchants is essentially pure profit. Forrester’s Mulpuru estimates that ~14% of Amazon’s total revenue derives from marketplace services. No wonder Wingo calls Amazon’s 3P marketplace “jet fuel” for Amazon’s growth!
As the session continued, it became clear that successful marketplaces possess common attributes that seem to enable growth rates that outpace regional or global ecommerce growth rates:
Because they aggregate assortments from a diverse merchant base, marketplaces offer selection that is often orders of magnitude larger than brick-and-mortar or pure-play online competitors. MercadoLivre referenced its selection of “millions” of products, compared to hundreds of thousands offered by competitors like Walmart.
Successful marketplaces standardize key elements of the customer experience, including product pages, payment, and (in some cases) shipping and returns.
Successful marketplaces encourage competition, especially as it relates to price and delivery fees.
Successful marketplaces develop tools and services that help brands sell online.
At the moment, specific regions seem to be dominated by different online marketplaces. Amazon leads in the US; Taobao/Tmall in China; Rakuten in Japan; and MercadoLivre in Latin America.
But there was clearly interest in the inevitable competition between these and other marketplace operators:
Alibaba recently launched its curated marketplace in the US, and the industry is anxious to see what’s next following its IPO
Ebay announced its “conscious uncoupling” with Paypal during the event
Google continues to refine its product listing ad (PLA) strategy and is steadily expanding Google Shopping Express (GSX)
A growing number of venture-backed providers like Deliv, Instacart, Postmates, (and too many others to list) are inserting themselves between merchants and shoppers
The net effect seems to be the emergence of a “marketplace of marketplaces,” with growing competition among the various marketplace operators to offer merchants sustainable economics and value-added services. Both eBay and Alibaba already appear to be undercutting Amazon’s marketplace fees, and it looks like competition will only intensify.
The growth of marketplaces also resurfaces questions about counterfeit and gray market goods and brand owners’ ability to protect their brands online. Too big a topic to cover here, but one that was mentioned in several sessions and frequently comes up among Profitero customers that use our technology for MAP monitoring of online prices.
2. China is a massive market opportunity, and eCommerce “is the main course”
While Alibaba couldn’t say much that hadn’t already been publicly disclosed, it did share a few important highlights about its business and the role of eCommerce in China:
Over the trailing 6 months, Alibaba generated ~$300M in GMV. Those are stunning half-year results, especially when compared to similar GMV estimates for Amazon.
On an average day, Tmall and Taobao see a combined 100M unique visitors
China’s total population is approximately 1.2B. Of that 1.2B, approximately 500M are online. Of the 500M online, ~40% have made online purchases.
Alibaba estimates it has an ~80% (!) share of China’s eCommerce market
While the outlook for Alibaba’s international expansion continues to loom large, the company’s statements at the event suggested its near-term focus on retaining its dominant position in China as the market continues to grow.
John Spelich, VP of International E-Commerce Business Development for Alibaba, introduced a new program called Tmall Global, a “fast-track into China” that enables brands to drop-ship directly to customers in China or warehouse and ship inventory from a distribution center in a free-trade zone inside of China. Through the Tmall Global program, customers make payments in renminbi, but transactions are settled in the merchant’s local currency. (Previously Previously brands needed to be registered in China, keep local inventory, and accept payments in RMB to sell.)
Prior to the investment, Shoprunner was positioned to shoppers as a competitor to Amazon Prime. Shoprunner has built a network of participating merchants like Neiman Marcus, Drugstore.com, and Autozone and offers annual memberships to shoppers that resemble Prime’s 2-day shipping offer. I’ve always been skeptical of Shoprunner because the entire arrangement is on paper; there was no logistical infrastructure supporting the 2-day delivery claim the way Amazon’s fulfillment center network supports Amazon’s Prime service. They briefly piloted pick-up points, but that experiment appears to have fizzled out.
But after the investment, it’s clearer what’s next for Shoprunner. In a separate fireside chat, Michael Rubin, CEO of Kynetic (the parent company of RueLaLa, Fanatics, and Shoprunner), described Shoprunner’s new service linking US merchants to the market in China. Superficially, it sounds very similar to TMall Global. (I’m still digging on the details.)
Alibaba’s Spelich closed his session with a quote from Alibaba founder Jack Ma that underscored why there’s so much investment:
“In the US, eCommerce is dessert. In China, it’s the main course.”
3. Online retailers are scrambling to optimize for mobile
Another gem from the Alibaba session was that mobile accounts for ~20% of Alibaba’s transactions. None of the other presentations I attended spent much time on mobile, but I did speak with around 10 online retailers, with annual revenues ranging from under $50M to a top-10 North American online retailer.
I asked them all what percentage of their traffic came from mobile devices. Not everyone had the number on the tip of their tongue or was certain how it was calculated, but I heard figures ranging from 15-40%.
What was more striking to me was what some of them said next, without my prompting. “And our eCommerce platform isn’t optimized for mobile, so we’re looking at switching platforms.”
In another session, someone rattled off average conversion rates across devices: ~2% for desktops, ~1.5% for tablets, and sub-1% for smartphones. (Unfortunately, they didn’t cite their source, but the relative CTRs were in the same ballpark as data I’ve seen from Mobify and Statista.
On the surface, it appears that mobile’s share of total traffic and transactions is growing faster than online retailers can adapt. This sometimes prompts concern that retailers’ economics will deteriorate as overall conversion rates inevitably decline as people spend less time on better-converting desktops and more time on mobile devices.
But my guess is that a meaningful chunk of mobile traffic is incremental, representing net new opportunities to connect. Still, there is lots to learn about how to optimize for mobile–even as new device classes like wearables start to emerge.
4. Logistics are a key battleground
Another pervasive theme was learning from last year’s challenges meeting holiday demand and delivery deadlines. Though I didn’t hear many specifics, the USPS, FedEx, Google Shopping Express, and other logistics providers–along with several retailers–all referenced last year’s issues and a focus on improving things this year.
There was also a lot of discussion of flexible fulfillment options–especially same-day delivery.
Sajal Kohll, Director of Corporate Operations for McKinsey, shared some compelling arguments for investment in multichannel (or omnichannel) fulfillment:
Online is shifting sales out of stores, with serious impacts on ROIC. McKinsey estimates that a 5% shift of sales out of stores equals a 30% decline in ROIC. Flexible fulfillment options can be a way to retain some of that volume.
Multichannel fulfillment can meaningfully improve the bottom line. At retailers McKinsey has consulted, multichannel fulfillment initiatives have driven a 2% lift in revenue while decreasing working capital by 10%.
There was less conviction about the demand for and economic viability of same-day delivery.
During a session titled “Fast and Free,” Michael Burgess, President, HBC Digital for Hudson’s Bay Company, argued that “free is much more important than fast” when it comes to delivery. He acknowledged that there is likely a market willing to pay for expedited delivery, but considers it niche.
But others on the panel noted that same-day delivery is already available in 25-35 US cities, and consumer expectations are beginning to be established–just as Amazon and others previously set new expectations for free shipping.
Logistics aren’t as sexy as other aspects of eCommerce, and they’re certainly more capital-intensive. But it’s clear that retailers, carriers, and tech companies are all investing heavily in both basic blocking and tackling and innovation.
5. Many companies are under-estimating the growth potential of eCommerce
Having produced many estimates and forecasts for the market size and growth rate of online retail, I appreciate the challenges and risks inherent in attempting to predict the future.
That’s why I found McKinsey’s guidance during the session on multichannel fulfillment refreshingly candid.
McKinsey’s estimates for online retail’s share of all US retail in 2018 ranged from 12% to 35%, up from ~7% in 2014.
At the low end of the range, that’s still a near-doubling of online retail’s share of the total over the next 3 years; at the high-end, it suggests online retail sales growth actually accelerates over the next several years, even as the market’s size continues to grow.
There wasn’t much discussion of McKinsey’s rationale for the breadth of this range, but I can appreciate the hedging.
Millennials, who grew up with technology, are just beginning to form households. Their consumption will ramp up significantly over the next 5-10 years, and they’re already spending disproportionately online (19% of their total spend, according to NPD, versus the total US average of ~7%).
What’s more, traditional retailers are shifting capital from investing in new stores to developing their own eCommerce and omnichannel capabilities.
And massive but late-to-the-party categories like CPG, which currently sits at just 1% online penetration according to a joint IRI, Google, and BCG study, are “likely” to reach 5% penetration by 2018 and could reach 10% penetration shortly thereafter.
I always respect conservatism in planning for the future and structural market shifts. But I also often encounter companies that forecast an outlook that benefits the status quo as opposed to one that incorporates seemingly unlikely but possible shifts in context.
I wonder how many companies have plans in place for McKinsey’s scenario that 35% of all US retail is sold online in 2018?
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