E-Commerce Bloodbath? We’re Swimming Against the Current.
Is the U.S. e-commerce market dead, game over, with blood on the hands of Amazon? A recent article in TechCrunch declared “venture capital is terrible at online shopping.” CNBC’s article “Commerce in Chaos” points to despair in both offline retail and ecommerce. Despite raising hundreds of millions of dollars in funding, companies like Fab, Gilt Groupe, and One Kings Lane have folded or reportedly been acquired for a fraction of their former value.
Despite the carnage, we believe it’s a great time to be investing in the category, with a few caveats — outlined below. If we’re right, the prize is enormous. According to research from eMarketer, global retail sales topped $22 trillion last year, with e-commerce accounting for about $1.6 trillion. In 2020, worldwide e-commerce spend will reach $3.5 trillion. That’s $2 trillion in net new spend in just the next four years. Yes, Amazon and Alibaba will capture a lot of this spend, but not all of it — with hundreds of billions in new spend available to emerging players.
Don’t Punch Tyson in the Face
First, what we aren’t investing in: companies that are going directly head to head with Amazon. Amazon Prime, launched in 2005, has captured more than 40 million U.S. households and more than 80 million worldwide, becoming the default purchasing option for everything from flat-screen TV’s to protein shakes. By some estimates, Amazon accounts for more than 50% of all US e-commerce. Trying to “out-Amazon” Amazon is a tall task, even for a seasoned retail player like Walmart (which has notably struggled of late — see my post on this topic), much less a startup.
We’ve also steered clear of business models focused on flash sales. Demand for one-off deals from sites like Groupon, Gilt Group, and Zulily waned over time, for the same reason people tire of flea markets and garage sales — chasing deals is exhausting, and players like Amazon and Walmart have everyday low prices (EDLP) that are “close enough.” The flash sales model is also incredibly hard to execute on the supply chain side, with limited supply and challenges in planning, forecasting and inventory management.
So what have we been funding? Three keys: Mobile, Experience and Global.
The Web Game is Over
As Starbucks’ Chief Digital Officer Adam Brotman wrote recently, “Mobile is like water, but I still see it every day.” As a result, for some it’s hard to see why mobile is a game changer in a category like e-commerce — it’s happening all around us. Next-generation consumers — including 70 million millennials in the US and more than 270 million in China — won’t tolerate a clunky shopping experience on their mobile devices. The search-oriented paradigm of web shopping is too time-consuming for millennial shoppers who value simplicity, curation, and speed.
A perfect example is the local classifieds space, where mobile-first emerging players like OfferUp, WallaPop, NextDoor, VarageSale and 5Miles have collectively captured billions of dollars in consumer spend in just the last 24 months, taking share from legacy web players like eBay and Craigslist. The apps from these new players are simple, elegant and enable users to buy or sell with just a few simple steps on their mobile device. Another is Boxed Wholesale, a mobile app for bulk CPG shopping which just raised $100 million in a Series C financing. Bulk/wholesale is a $200 billion category dominated by Costco, Sam’s Club and BJ’s. It’s incredibly easy to open up the Boxed mobile app, purchase 8–10 household products (the average transaction is over $100), and get out — in less than a few minutes. Compare that to a 3 hour trip to Costco on the weekend.
In the U.S., mobile still accounts for less than 2% of total retail sales. We’re betting that number goes up. A lot.
A Truly Unique Experience
For an e-commerce startup to entice real shoppers (not just those who click on a Facebook ad), it has to offer a unique experience not found on Amazon or in a physical store (which still account for over 90% of retail sales in the U.S.). E-commerce startups with a chance at success must pick a specific category, create an experience unique to mobile, and delight customers on a regular basis.
A great example of this is Houzz, the number one mobile app for home remodeling and design. Houzz is used by tens of millions of consumers and hundreds of thousands of professionals every month. The company targets the $300 billion home improvement and remodeling industry — a category plenty large enough to support a new, independent e-commerce brand. But most importantly, the Houzz experience is truly unique. It’s highly visual, easy to navigate, and social (users and pros chat in-depth about everything from lampshades to paint colors). You can’t get the all-in-one Houzz experience by visiting Amazon, Lowes, Crate & Barrel, or Architectural Digest individually.
Better yet, the e-commerce experience on Houzz is subtle and beautifully integrated with the overall experience. In the image above from the iPad app, the green tags denote items a user can learn more about and purchase in the Houzz marketplace.
Get out Your Passport
Next generation e-commerce giants will be global from the start (see my Partner Hans Tung’s post on this topic). Building a global e-commerce company is extremely challenging and requires a shift in thinking about user experience, merchandising, and monetization — but it’s the only way to become a huge player in the years to come. In just a few years there will be 6 billion smartphone users worldwide, which means less than 5% of the smartphone population will be in the U.S. This user base requires a completely different perspective on merchandising and pricing given average income levels are far lower than in the U.S., and the user experience must be visual, social and tied into messaging platforms. It’s actually quite difficult for someone living in Palo Alto making $150,000 per year to understand the needs and interests of a millennial user in SE Asia or China making $10,000 per year.
Amazon and AliExpress are going after these global consumers — and will capture quite a bit of that new $2 trillion in spend referenced above, but so are a new class of emerging players. Wish and Xiaohongshu (aka “Red”) are two of the fastest growing e-commerce companies we’ve ever seen, and both started with global founders and operations from day one. Their teams are global, their products are global and their investor bases are global (I’m biased, but we believe that’s important as well).
We are acutely aware of the blood in the water around U.S. e-commerce and we will certainly be wrong on many fronts. However, the opportunity is massive, and a new class of companies is quietly emerging and capturing meaningful share: we estimate the 9 private companies mentioned above will generate more than $5 billion in sales (GMV) this year alone.
Stay tuned. It’s about to get interesting.