Highly Scalable Ecommerce is Improbable

Nasty Gal is the latest but most certainly won’t be the last.

More will falter and many will outright fail. This isn’t doom and gloom, this is just what happens when too many companies take on too much funding and chase too much growth too fast, while having largely “unscalable” financial models in a market where the top 15 incumbents hasn’t changed in the last 15 years.

Ok, that was a mouthful.

Also, some context. I’m mostly referring to businesses where 95+% of their sales come from eCommerce. Also known as “online only” merchants in the retail world.

Allow me to just list out my main reasons for why highly scalable eCommerce is improbable:

1 — The incumbent competition is ridiculously entrenched and thus available market share to capture isn’t that significant (i.e. — Amazon accounts for 50% of every online dollar spent).

2 — The capital expenditures to operate one of these companies are borderline insane. Amazon is spending north of $5B a year on cap-ex. Sounds like a reasonable amount to compete against right?

3 — The profit margins for non-vertical businesses (aka — multi-brand merchants) are terrible.

4 — Cost of acquisition in a digital-only business model is frightful.

5 — Shipping / Logistics is not for the faint of heart.

Chris Dixon touched on this 4+ years ago. He was right then and he’s even more right now.

Andy Dunn of Bonobos wrote a great piece called Ecommerce is a Bear along this same vein as well.

Those that know me are probably scratching their heads right now. I’m known to many as an “eCommerce guy”. Except I’m not. I’m a student and enthusiast of retail that believes in a world where online and offline cannot exist independently. I believe this right down to my core.

I’ve been behind the scenes of more merchants than I care to admit to and in todays retail environment I have yet to see a merchant doing well that isn’t excelling in both online and offline. The ones that are actually profitable have more balanced online/offline ratios in the realm of 30/70.

I also believe there are only two ways you can truly approach building an eCommerce (and retail) business today.

#1. Slowly, consistently, and profitably.

#2. Fast and unsustainable (unprofitable).

Sure, there are eCommerce companies that have taken the super fast, highly scalable approach that was mostly fuelled by lots and lots of venture capital. I’m simply saying that the number of these particular companies that have found a sustainable business model is very small.

This is why I think it’s silly to raise venture capital (the traditional kind) to build eCommerce businesses. eCommerce is not a great place for venture capital, at least not right now.

Ecommerce is an amazing thing for businesses that have proprietary product and are looking to build real businesses instead of fundable businesses.