5 ways online retailers can weather the ecommerce slump

Bricks-and-mortar binge

For DTC brands that were once inter­net-only, adding a phys­i­cal pres­ence has become an increas­ing­ly com­mon strat­e­gy. The orig­i­nal idea was to estab­lish a small but high-pro­­file bricks-and-mor­­tar foot­print – think London’s Oxford Street or SoHo in New York – to serve as much as a prod­uct show­room as a sales out­let. And some, like US eye­wear retail­er War­by Park­er, have gone beyond open­ing a flag­ship out­post.

Still, bricks-and-mor­­tar expan­sion plans would seem a poten­tial casu­al­ty of these firms’ recent efforts to pare oper­at­ing costs. But it’s not play­ing out that way. For one thing, the stores offer a way to off­set the decline in online sales fol­low­ing the lock­downs. It’s also part of the broad­er omnichan­nel strat­e­gy many retail­ers have adopt­ed to inte­grate sales across online and offline venues.

“It’s essen­tial to be every­where your cus­tomer wants you to be,” says Peter Fad­er, a mar­ket­ing pro­fes­sor at the Uni­ver­si­ty of Pennsylvania’s Whar­ton School. “It’s just plain good busi­ness.”

Take War­by Park­er. The  DTC eye­wear brand in August announced lay­ing off 15% of its cor­po­rate work­force and a pull­back in mar­ket­ing spend­ing, cit­ing an uncer­tain eco­nom­ic land­scape. Even so, the com­pa­ny assured that the deci­sion wouldn’t impact its plans to open a fur­ther 40 stores this year, on top of the 161 it already oper­ates.

“We con­tin­ue to believe that it makes sense to open up stores and it’s a good use of cap­i­tal,” explained Neil Blu­men­thal, War­by Park­er co-founder and co-CEO, in the company’s sec­ond-quar­ter con­fer­ence call. He added that its recent­ly opened stores were mak­ing back their cap­i­tal invest­ment with­in 20 months.

The shift of its busi­ness from ecom­merce back toward phys­i­cal stores this year–closer to pre-pan­dem­ic lev­els – also fuels the company’s aggres­sive bricks-and-mor­­tar roll­out. And because the stores them­selves serve as “bill­boards,” they don’t require as much ad spend­ing as its Web pres­ence, not­ed Blu­men­thal.

In a sim­i­lar vein, eco-friend­­ly shoe-sel­l­­er All­birds in August reaf­firmed its plans to open 16 to 17 stores this year, despite lay­ing off 8% of its cor­po­rate work­force in July in response to soft­en­ing retail demand this spring. The com­pa­ny had a net loss of $29.4m in the sec­ond quar­ter, up from a loss of $7.6m, in the year-ago peri­od.

Still, All­birds exec­u­tives high­light­ed the ben­e­fits of a diver­si­fied retail approach in which online and phys­i­cal stores rein­force each oth­er. All­birds co-CEO Joseph Zwill­inger, for exam­ple, said on the company’s lat­est earn­ings call that up to 15% of in-store repeat cus­tomers con­vert to online buy­ing, and that they’re spend­ing 50% more than ones using only one shop­ping method.

“So that’s a big impact on the prof­itabil­i­ty pro­file of a sin­gle cus­tomer that we can acquire,” he said.

Mean­while, home-goods inter­net retail­er Way­fair took the offline plunge in May, open­ing its first phys­i­cal out­post in Mass­a­chu­setts under its AllMod­ern brand, with two more spe­cial­i­ty shops to open lat­er this year, and a larg­er Way­fair store to come in 2024.

Wholesale better than no sale

The online embrace of bricks-and-mor­­tar goes beyond bespoke stores to whole­sale venues as well. Con­sid­er­ing a cen­tral idea behind ecom­merce was to cut out the whole­sale ‘mid­dle man’, that might seem an unlike­ly step.

Lean­ing into that strat­e­gy is mat­tress-in-a-box firm Pur­ple, which, in addi­tion to its ecom­merce site, oper­ates its own show­rooms and sells through a dozen whole­sale part­ners that include Macy’s, Ray­mour & Flani­gan and HOM Fur­ni­ture. Last year, about two-thirds of its net rev­enue came from DTC sales, and a third from whole­sale.

Its lat­est quar­ter reflects the broad­er down­turn in online shop­ping, with its ecom­merce busi­ness down 39% from a year ago, while its whole­sale sales fell 6%. And as with oth­er home-prod­ucts sell­ers, Pur­ple has been hit not just by the shift away from online shop­ping, but from spend­ing on phys­i­cal goods to things like trav­el, eat­ing out, and oth­er ser­vices.

Still, the com­pa­ny this year plans to open anoth­er 14 of its own stores for a total of 54, while seek­ing to improve sales at its exist­ing 3,200 whole­sale loca­tions, includ­ing 700 added in 2022.

Online fash­ion retail­er Asos has like­wise made the leap to whole­sale, albeit through a much more exclu­sive part­ner­ship. Last year, Asos entered a joint ven­ture with US lux­u­ry depart­ment store chain Nordstrom’s, in which the lat­ter would become the sole bricks-and-mor­­tar sell­er of the Asos Top­shop and Top­man brands world­wide.

Ear­li­er this year, it built on that rela­tion­ship by adding its Asos Design label cloth­ing to 11 Nord­strom stores in the US.

All­birds, mean­while, struck a deal to start sell­ing a selec­tion of its shoes through the depart­ment store in June. That move fol­lowed close­ly on All­birds announc­ing in May its first two third-par­­ty retail part­ners: Pub­lic Lands, an off­shoot of Dick’s Sport­ing Goods, in the US, and Zalan­do in Europe. Tak­en togeth­er, the whole­sale moves are aimed at build­ing brand aware­ness and draw­ing new cus­tomers.

Putting prices up

If online has long been the land of dis­count­ing, flash sales and bar­gains, surg­ing infla­tion has inspired a new tack among ecom­merce firms: rais­ing prices. That, in turn, can help bol­ster rev­enue and mar­gins even as unit sales decline in the post- lock­downs slump.

DTC busi­ness­es haven’t been afraid to take that step. Even when they’re sell­ing dog food. Sum­it Singh, CEO of online pet sup­pli­er Chewy, recent­ly said the com­pa­ny pre-emp­­tive­­ly raised prices this year in antic­i­pa­tion of high­er costs due to infla­tion.

“Where we’re find­ing the oppor­tu­ni­ty to ben­e­fit and take in mar­gin, we’re not giv­ing up those oppor­tu­ni­ties, whether it’s in sharp­er pric­ing or whether it’s exe­cut­ing sharply,” he told ana­lysts in August. The com­pa­ny had a prof­it of $22.3m on rev­enue of $2.4bn in the sec­ond quar­ter, com­pared to a loss of $16.6m on sales of $2.2bn a year ago.

Even those under more pres­sure aren’t shy­ing from price hikes. All­birds, for exam­ple, which last quar­ter report­ed a loss of $29.4m on slow­ing sales, said price increas­es helped boost its aver­age order val­ue. Its top-end run­ning shoes, made with bio-based ‘bio­foam’, go for £150 in the UK and $160 in the US.

“This increas­ing con­sumer demand for nat­ur­al and sus­tain­able mate­ri­als allows us to take price and to enhance the val­ue for our con­sumers,” said All­birds co-founder and CEO Tim­o­thy Brown, in the company’s earn­ings call. In oth­er words, spe­cial­i­ty prod­ucts car­ry pre­mi­um prices. But after going pub­lic only last Novem­ber, All­birds has a way to go to prove its busi­ness is sus­tain­able.

For his part, Fad­er views DTC upstarts like All­birds main­tain­ing or rais­ing prices as a wel­come step, along with cost-cut­t­ing mea­sures, to oper­ate more effi­cient­ly after rid­ing an ear­ly wave of ven­ture cap­i­tal fund­ing. “They have to start run­ning these busi­ness­es like busi­ness­es, and be account­able on those terms,” he says.

Delivering bigger fees

For the larg­er ecom­merce play­ers, hik­ing or adding fees has been anoth­er way to counter infla­tion and gen­er­ate addi­tion­al rev­enue. Ama­zon, for instance, in mid-August told third-par­­ty sell­ers it was rais­ing the amount it charges for ware­hous­ing and ship­ping their items dur­ing the upcom­ing hol­i­day sea­son. Mer­chants in the US and Cana­da will pay an aver­age fee of 35 cents per item sold using Amazon’s ful­fil­ment ser­vices.

That comes on top of an added 5% “fuel and infla­tion” sur­charge it imposed on mer­chants in May to min­imise the impact of ris­ing gas costs. On the con­sumer side, it also raised the annu­al fee in Feb­ru­ary for an Ama­zon Prime mem­ber­ship by $20 to $139.

For crit­ics of the ecom­merce giant, the fee increas­es are fur­ther evi­dence of Ama­zon hold­ing monop­oly pow­er over the online mar­ket.

But dur­ing the company’s sec­ond-quar­ter earn­ings call in July, Ama­zon CFO Bri­an Olsavsky said Ama­zon added the fuel sur­charge “grudg­ing­ly” to com­pen­sate for infla­tion. He added that nei­ther that increase nor the Prime fee hike, “come close to cov­er­ing our costs”.

In any case, Ama­zon isn’t the only online mar­ket­place boost­ing fees. In April, Etsy raised the trans­ac­tion fee for sell­ers on its crafts web­site from 5% to 6.5%. When announced ear­li­er this year, the move pro­voked a week-long strike by Etsy mer­chants.

Etsy was a big ben­e­fi­cia­ry of the pan­dem­ic shift to at-home shop­ping. Its sales of face masks and home goods helped it more than dou­ble rev­enue in 2020 to $1.7bn.

In its lat­est quar­ter­ly report in July, Etsy not­ed that the 11% gain in its mar­ket­place rev­enue was large­ly due to the sell­er fee hike. CEO Joshua Sil­ver­man added there had been no notice­able change in the sell­er base because of the increase, and that funds it gen­er­at­ed had been “rein­vest­ed” in areas such as TV adver­tis­ing and a new pur­chase insur­ance pro­gramme.

Retail marketplaces turn ad networks

In the quest for new rev­enue streams, online retail­ers have also jumped into the dig­i­tal ad busi­ness. Specif­i­cal­ly, they’ve start­ed offer­ing adver­tis­ing across their own ecom­merce web­sites and apps and, in some cas­es, on third-par­­ty sites as well.

Ama­zon has become the biggest ecom­merce play­er in this area, emerg­ing as a cred­i­ble chal­lenger to the Google-Face­­book ad duop­oly in recent years. In its lat­est quar­ter, Amazon’s adver­tis­ing sales grew 18% to almost $9bn, or about 7% of over­all rev­enue.

Com­peti­tors from Wal­mart to Instacart to Chewy are get­ting in on the act, too. “Adver­tis­ing is cer­tain­ly attrac­tive as a high­er mar­gin rev­enue stream than retail, so it’s seen a lot of inter­est from retail­ers,” notes Kate Scott-Dawkins, head of busi­ness intel­li­gence for WPP’s GroupM unit. And with third-par­­ty cook­ies going away, retail media net­works are lur­ing adver­tis­ers as sources of valu­able con­sumer data.

For its part, Etsy in 2020 intro­duced a new ser­vice called Off­site Ads, which allows its sell­ers to run ads on oth­er sites. Etsy pays the upfront costs for the ads but receives a fee when some­one clicks on an ad, and then makes a pur­chase. That’s in addi­tion to ads it runs on its own mar­ket­place on behalf of sell­ers. “It’s an area where we see a long run­way for con­tin­ued growth,” Sil­ver­man told ana­lysts in July.

Its ad busi­ness, along with the increased sell­er fee, helped the com­pa­ny post a 10.6% rev­enue gain despite a 6% drop in gross sales in its mar­ket­place in the lat­est quar­ter com­pared to a year ago.

Over­all spend­ing on retail media net­works this year in the US is expect­ed to sur­pass $41bn this year, accord­ing to research firm eMar­keter.