Recession-proof (e-)Commerce Technologies
Investment opportunities that help merchants combat an economic downturn
Over the past 12 months, the market has experienced a significant turnaround. The western world transitioned from a period of “cheap capital,” fundraising frenzies, and war-for-talent to concerns about inflation, spiking interest rates, tumbling stock markets, and massive layoffs. One industry that has in particular been subject to this turbulence is e-commerce. While it was one of the clear beneficiaries of the pandemic, which caused a dramatic “pull-forward effect” to online shopping, the relative growth of e-commerce slowed down in 2022 as lock-down restrictions were eased, and high street stores opened up again. Nonetheless, the absolute growth of e-commerce continued to accelerate.
Despite the overall market growth, retail is traditionally a low margin business and as we are heading into a harsher economic and more uncertain geopolitical environment, merchants will need to look for ways to optimize revenues, cut costs and wisely manage working capital / cash flows. In retail and e-commerce, as in many other sectors during the last year, there has been a strategic shift towards profitability over ‘growth-at-all-costs’. This has been shown in increased prices, layoffs and hiring freezes. Many brands have even stopped the sale of products that are not contributing to their overall profitability.
However, as the saying goes, every threat provides an opportunity. This has proven to be true in every economic downturn, as some of the most valuable tech companies today were founded in a recessionary environment. This article highlights a few pockets of opportunities within the ‘Future of Commerce’ that have the potential to blossom during an anticipated economic downturn, as these products help brands and retailers become more profitable and improve cash flow.
How to increase profitability
Let’s start by going back to the basics and revisit a company’s P&L statement. In simple terms there are two ways to increase profitability: (1) increase revenues, without increasing costs at the same rate, or (2) decrease costs, without decreasing revenues at the same rate. While there are multiple ways to cut costs for the average business, there are only two ways to increase revenues: increase selling price or volume. We will get back to this rationale later.
In the short run, it is generally easier to cut costs than increase revenues, at least if the goal is to keep cash burn under control. One of the first cost cutting exercises many companies did last year, was to review the spend on software and to cancel superfluous and overlapping SaaS subscriptions. However, there are a number of interesting (e-)commerce software categories (elaborated upon below), which allow (e-commerce) merchants to increase revenues and cut costs in smart, scalable, sustainable and cost effective ways. We call these categories “recession-proof (e-)commerce tech”. Investments in those products should be a high priority on the strategic agenda of brands and retailers this year. Let’s dive into them one by one.
Inventory intelligence
42% of retailers plan to maintain lower inventory levels in 2023, making inventory management tools more important than ever. However, Inventory Management is costly and complex, and is currently still managed poorly by antiquated software. Today, demand forecasting is largely done in Excel, with a big element of guesswork to it. It is one of the biggest problems in the many commerce categories, especially those characterized by high seasonality, trend sensitivity and lots of stock keeping units (‘SKUs’) with different product attributes, such as apparel, footwear and home goods. Poorly managed inventory results in lower margins due to markdowns, as a result of overstock, and lost revenues, due to stock-outs. Cost of markdowns is one of the largest problems in the fashion industry, leading to margins evaporating from 60–70% to low single digits and low sustainability. Additionally, better managed inventory and reduced overstock enables better cash flow management as well.
Enter the next generation inventory management software providing predictive inventory intelligence powered by AI and ML. These software providers allow brands and retailers to optimize their inventory to maximize revenue and margins, and save time spent on inventory management, thus generating clear and tangible ROI. A better managed inventory can also result in reduced waste, and therefore has a positive environmental impact. We believe that a winner in this category will have a combination of superior and proprietary AI, feed their models with more internal and external data sources, and an intuitive user interface tailored to non-technical users incl. merchandisers.
Companies in this category: Syrup, Cogsy, Ventory, Inventoro, Crips
Online marketplace technologies
A dominating trend in the e-commerce market is the move towards D2C, resulting in “distributed commerce”. In this wave, marketplaces are taking over, currently counting for the majority of all e-commerce transactions. Retailers sell their goods on an average of four different channels today and 81% of retailers plan to expand the number of digital channels they sell over the next 12 months. As a consequence, a rapid fragmentation of the marketplace landscape is currently taking place (which I wrote about in a previous blog post). Retailers and social media platforms are turning into marketplaces. Brands are adding marketplace capabilities by selling complementary products D2C on their web shop without buying additional inventory, by using dropshipping platforms, such as Canal.
All these channels need to be managed and orchestrated continuously and in real time, stock needs to remain synchronized, (pricing) campaigns need to be planned, results analyzed, and forecasts are to be made etc. Whether it’s a brand adding another marketplace as a new sales channel, or a retailer adding marketplace capabilities, thus unlocking a new revenue stream, it is easiest done with the help of online marketplace technologies.
The online marketplace technology category in the context of this article is rather broad. We have included companies ranging from marketplace integrators like ChannelEngine, selling to brands and retailers that want to access and manage multiple marketplace channels, to marketplace SaaS platforms like Mirakl, selling to retailers wanting to become marketplaces. One powerful characteristic these software tools have in common though, is to enable customers to sell more (i.e. increase revenue) through the marketplace model, either by expanding their product assortment or customer reach. As mentioned earlier in this article, increasing revenue is in general harder than cutting costs, in the short run. This is why we are particularly excited about this software category.
Companies in this category: ChannelEngine, Canal, Mirakl, Nautical Commerce
Price management
As mentioned above, managing multiple sales channels has become crucial to survive in the retail market today. This leads to increased pricing complexity as it requires managing prices of millions of SKUs across all channels while maintaining consistency. With distributed commerce, selling to international markets becomes easier through global D2C channels, leading to increased competition. This in turn leads to price pressure and margin erosion. Adding to that, raising interest rates and energy prices put pressure on suppliers, resulting in increased purchase prices for brands and retailers.
As outlined earlier in this article, pricing is a key revenue driver. Managing pricing becomes crucial when margins are squeezed and competition high. However, most brands and retailers still rely on outdated and inefficient processes in doing so. It is often still done in Excel, or with help from consultancies. However, companies are increasingly facing a need to change prices more frequently, some product categories as often as on a monthly or quarterly basis.
Next generation, AI powered pricing optimization and management software are attacking this billion dollar market opportunity. Solutions in this category range from sophisticated price optimization algorithms, providing price recommendations across channels based on defined rules and competitor prices, to broader price management suites.
We believe that winners in this category will combine superb AI pricing algorithms and access to robust competitor pricing data, with scenario planning tools and actionable insights. Additionally, it should integrate seamlessly with the rest of the commerce stack and ideally cater for real-time insights.
If you are a company building products within the Future of Commerce, in particular in any of above mentioned categories, we’d love to hear from you. Feel free to get in touch with laura[@]inkef.com
