The Future of E-commerce Part 2
This is the second of our three-part series on E-Commerce, written by Shu Hua Wong. In our previous instalment, we looked at the brief history of E-Commerce from the dot-com era until now. In this part, we examine market tailwinds and trends we see developing in the near future.
In less than three decades, E-Commerce has blossomed from the clunky static pages of the 90s to slick e-storefronts across all our devices. To help us better understand where E-Commerce is heading, we need to get an overview of the market tailwinds and seismic shifts that are shaping it.
E-Commerce sales have skyrocketed over the last decade, and we expect its unstoppable rise to continue in the coming years due to the following factors:
1. The pandemic
The pandemic was one of the biggest accelerators of developments in E-Commerce of all time. Many retail stores had to shut and became cost centres, holding goods in urban areas while consumers were forced to go online to purchase. Orders were usually shipped from regional fulfilment centres since people were unable (or unwilling) to shop in person.
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This gave rise to the last mile delivery of groceries as many consumers became reluctant to head to grocery stores and risk exposure to the virus. While its influence has receded slightly since 2020, it has left an indelible mark on the purchasing habits and expectations of consumers.
2. The rise of social media influencers and their influence on advertising
As social media platforms have grown over the last 10 years, creators and influencers have emerged, filling the entertainment space where traditional media once stood. These platforms allowed them to build their own communities.
Brands that were eager to sell to a specific customer profile then began partnering with these creators to drive sales. Social media sites, effectively gatekeepers between creators and audiences, have also begun to tap into the money flow — Instagram has a checkout feature where users can buy products without ever leaving the app and Youtube’s Ads are now shoppable.
The Chinese market offers a window into the potential future of this space, with social e-commerce generating sales of $186bn in 2019 and accounting for 11.6% of retail e-commerce sales.
3. Generational shifts in attitudes
Millennials and Gen Z are ‘digital natives’ who grew up with the internet and spend much of their lives online. So, it makes sense that their ease and reliance on technology would impact areas of their lives such as shopping and work. With all millennials now of working age and older Gen Zs entering the workforce, they are primed to shape the way business is conducted.
There is also a growing acceptance of having side hustles among millennials and Gen Z, which can also lead to the growth of small businesses as they look to monetise their hobbies. Research by both EY and Nielsen showed that Gen Z is highly entrepreneurial — close to half of those surveyed are interested in starting their own businesses.
4. Technological and logistical developments
While this influence may not be as prominent as others mentioned here, it is worth noting that E-Commerce is a fusion of tech and logistics. E-Commerce is becoming more sophisticated thanks to Deep Tech solutions finding more commercial applications.
For example, a trend in customer personalisation in order to increase customer loyalty — made possible with machine learning solutions or auto recommendations based on past purchase history.
On the logistics end, improvements such as automated inventory management and rules-based fulfilment can help brands fulfil and ship quicker to customers, while frictionless returns logistics lead to a better customer experience.
Trends in sector
Last-mile delivery infrastructure for retail and click-and-collect options
As we saw earlier, stores were shut in our pandemic-stricken world and groceries became the latest items that were bought online. Local outlets became ghost towns overnight while regional fulfilment centres ran on full steam.
Despite the explosive arrival of last-mile delivery startups like Gorillas in recent years, the idea has actually been attempted before. The main difference today is the increased usage of smartphones and the internet which, combined with a global pandemic, has created the perfect storm for it to take off.
Consumer education on last-mile delivery for takeaway and groceries has already been done by the likes of UberEats and Deliveroo, paving the way for startups to reimagine the last mile delivery journey for retail goods. We can already see this happening with companies like our portfolio company Quiver, which is providing last-mile delivery infrastructure for retailers.
The opportunity in retail goods is slightly different from takeaway and grocery delivery as there is more possibility to batch orders, creating a different dynamic in terms of unit economics compared to the standard restaurant and grocery delivery companies that have to deliver immediately.
Another alternative to instant-delivery models for last-mile deliveries is click-and-collect solutions. In addition to deliveries, retailers also offer consumers the option to buy online and collect in-store or kerbside for more flexibility.
In order to do so, however, retailers have to grow their coverage of click and collect locations. We believe the growth of E-Commerce will propel the growth in click-and-collect (hence our investment in HubBox, which gives 3PL partners such as UPS access to its click and collect network across the UK and US).
The fight between headless and simpler full-stack solutions
While the beginnings of headless solutions have taken off, we see a general tension between full-stack E-Commerce and headless solutions.
A ‘headless’ e-commerce solution is one where the front-end architecture is decoupled from the back-end, allowing developers to make changes to one without affecting the other. Full-stack, by contrast, is a more all-encompassing solution with relatively little room for modification.
Headless CMSes have many benefits, chief among them the adaptability in terms of code and storefront display. However, these developer-heavy solutions require businesses to have a big budget in order to maintain them.
We believe that the number of smaller merchants will outstrip that of bigger merchants in the coming years due to tailwinds explored earlier such as an entrepreneurial streak in Gen Z.
Given the increasing rate of tech developments and potential device touchpoints with consumers (which translates to potential points of sale), the case for having multiple storefronts becomes increasingly important. This could potentially exacerbate the need for a developer-light headless CMS solution.
Returns are a necessary evil in E-Commerce, with each return being a lossmaking transaction for retailers as they typically cover some or all of the shipping cost. Retailers have tried to reduce the cost of returns by offering exchanges or batching the delivery of returned goods. Retailers also have to determine whether returned goods can be resold or disposed of, adding an additional level of complexity and cost.
Reselling might help to recoup losses, but not all products are able to be resold at the original price (depending on the retailer’s or the sales platform’s policy), and destroying unsold goods costs money. One thing however is clear — customers value having an easy return experience. Some research shows 84% customers said a positive returns experience would make them likely to shop with a retailer again.
Another pain point that is difficult to address is refunding customers. While it is easy to return money in a very informal setting (i.e. bring the goods back to the store in good condition and get cashback immediately), most of our transactions are now card-based, which adds complexity to refunds.
Given the myriad product reviews, tutorial videos and sponsored content we’ve seen from content creators and influencers on social media, live shopping is a natural next step in the evolution of this space.
While there are live-streaming platforms emerging, we believe that network effects and communities would feature very strongly in such solutions. Big tech platforms like Instagram are well-positioned to take advantage and offer live shopping. We also see potential in tools that can assist creators to manage their businesses (see ‘Creator Economy’ below for more on creator tools).
As seen earlier, the millennials grew up with the internet and this has shaped their way of working — they are more likely to do their own research online before buying goods. This ease with technology would also spill over into their working environment — B2B commerce is starting to be more digital and automated.
We see this in the growth of niche B2B marketplaces for sourcing and supporting tools to facilitate transactions, such as B2B payment tools. Hence our investment in Sprinque — which integrates into B2B marketplaces and provides B2B payment services to both buyers and sellers on these platforms.
With the rise of social commerce, combined with a generational shift and the entrepreneurial instincts of Gen Z as explored in our previous section, a burgeoning creator economy is beginning to take shape. To be clear, we class content creators (for example, someone who creates a podcast on cryptocurrencies) and freelancers under the term “creator”.
The nascent creator scene will need tools that can help them run their business. Creators are mostly SMEs with strong B2B needs but with expectations of an easy-to-use B2C interface. Given that most of them have rather small teams, they would usually require full-stack business solutions with easy UX.
However, current tools are inadequate in serving them. For example, creators or freelancers face poor payment terms from brands and find it difficult to obtain credit. To address this, solutions such as Karat Financial and Monet have popped up to serve the needs of the creator economy.
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As we can see, there are a wide array of trends that are currently converging on the e-commerce sector, affecting how customers are able to buy and what sellers are able to offer.
Next we will look to at what comes next, examining where e-commerce is going and how the emergence of the metaverse could change things.