The e-commerce industry is retrenching as penetration reverts to pre-pandemic levels. During the second quarter, focus shifted from growth to survival. Below, a look at how e-commerce companies are responding to lower demand. (Here’s part one of the series.) As always, thanks for reading.
The Covid Pump Fake
It’s usually a safe bet that tomorrow will look a lot like today. But some days — December 7, 1941 or September 11, 2001 — look very different from the preceding one. As Nassim Nicholas Taleb writes, history advances more by jumps than straight lines. Extrapolation, by definition, misses turning points, which are inevitable with long time horizons (even if they’re impossible to forecast).
The Covid-19 pandemic jolted the e-commerce industry with two jumps. First, with stores closed and people stuck at home with sourdough starter kits, e-commerce penetration spiked in 2020 and 2021. Second, this trend reversed. Penetration is now reverting to its pre-pandemic trendline.
The chart below is the best way to understand the present moment for e-commerce. During the initial spike, firms reacted to surging demand by adding headcount, increasing marketing budgets, and ramping up investment. With demand waning, this is now unwinding.
Shopify CEO Tobi Lütke explained the dilemma facing operators well:
When the Covid pandemic set in, almost all retail shifted online because of shelter-in-place orders. Demand for Shopify skyrocketed…Before the pandemic, e-commerce growth had been steady and predictable. Was this surge to be a temporary effect or a new normal? And so, given what we saw, we placed another bet: We bet that the channel mix — the share of dollars that travel through e-commerce rather than physical retail — would permanently leap ahead by 5 or even 10 years. We couldn’t know for sure at the time, but we knew that if there was a chance that this was true, we would have to expand the company to match. It’s now clear that bet didn’t pay off. What we see now is the mix reverting to roughly where pre-Covid data would have suggested it should be at this point. Still growing steadily, but it wasn’t a meaningful 5-year leap ahead…Ultimately, placing this bet was my call to make and I got this wrong. Now, we…